15 September 2014: The World Bank Group has announced the design of the Pilot Auction Facility for Methane and Climate Change Mitigation (PAF), a pay-for-performance instrument that aims to stimulate investment in projects that reduce emissions while maximizing the impact of scarce public resources and leveraging private sector financing through the use of auctions.

PAF’s resources will only be disbursed after the emission reductions have been independently verified. This results-based payment mechanism will set a floor price for future carbon credits in the form of a tradeable ‘put option,’ which permits holders to sell future emission reduction credits at a known minimum price. Put options are commonly used by commodity producers to lock in a floor price for their product without limiting price gains, and can be considered price insurance. This minimum price is backed by donor contributions to the PAF, which has a capitalization target of US$100 million and will, in its first phase, support projects that cut methane emissions at landfill, animal waste and wastewater sites.

While several hundred methane-reducing projects are at risk of being decommissioned due to low carbon prices, which has slowed green investments by the private sector, the projects could actually achieve hundreds of millions of tons of methane emission reductions if implemented. As additional revenue required is often small, these projects could deliver as much as 8,200 million tons of emission reductions at less than US$10 per ton in incremental cost financing. Co-benefits of methane emission reductions include reducing asthma-inducing air pollution and increasing crop yields.

While the pilot will only be able to support a small number of these projects, the World Bank underlines the importance of pilot auction use and put options to remove risk from climate-friendly investments at a time when the absence of a robust carbon price is slowing private sector investments. In addition, the potential for scaling up is significant. For example, in subsequent auctions, the PAF will consider other sectors and technologies, and beyond the pilot, the combination of auctions and price guarantees could also target energy access, health benefits like reducing asthma-inducing air pollution, and preventing stunted crops. It could also be scaled up through other financial institutions, such as the Green Climate Fund (GCF).

The facility’s design will be introduced on the margins of the Climate and Clean Air Coalition (CCAC) high-level ministerial meeting in New York, US, on 22 September 2014. According to the World Bank, Germany, Sweden, Switzerland and the US are considering pledges. The pilot’s auction will be the first of its kind for financing climate-friendly investments. [World Bank Press Release] [PAF Brochure] [World Bank Feature Story on the PAF] [PAF Brief] [PAF Fact Sheet]