OREANDA-NEWS. September 19, 2014. The World Bank Group together with several partners announced the design of the Pilot Auction Facility for Methane and Climate Change Mitigation (PAF), an innovative pay-for-performance instrument that will use auctions to maximize the use of limited public resources for climate change mitigation while leveraging private sector financing. 

In its first phase, the facility will focus on methane reducing projects and buyers will bid to receive a tradable put option for a guaranteed price for each ton of methane emissions that such projects reduce at key sources, possibly including landfill, animal waste, and wastewater projects.

This price guarantee provides private investors with a financial incentive to fund projects, using the competitive nature of the auction to determine the value of the guarantee, maximizing the efficient use and impact of public funds.

“We hope this pilot auction facility will be an efficient way to reduce emissions and price carbon. If so, it will be the latest example of the kind of financial innovation needed to spur the private sector investment for scaled up climate action,” said Rachel Kyte, World Bank Group Vice President and Special Envoy for Climate Change.

The facility will produce real results on the ground by paying for mitigation only after emission reductions are independently verified.  This novel approach could be replicated for use with other pollutants or via other financial institutions, such as the Green Climate Fund, and has the potential for significant scale up.
   
“This facility will pioneer an innovative climate finance model with the potential to mobilize private sector resources to cut harmful methane emissions – a clear win for climate action. The U.S. is proud to have driven this forward from the time of our G8 presidency in 2012 to its announcement by the World Bank today," said Todd Stern, Special Envoy for Climate Change, United States.

Several hundred methane reducing projects are currently at risk of shutting down due to the low price of carbon credits.  If implemented, these projects could achieve the equivalent of hundreds of millions of tons of methane emission reductions. Reducing methane emissions combines an immediate and significant impact on global warming with benefits to the local environment, such as reducing asthma-inducing air pollution and increasing crop yields.

“Achieving results for the climate is going to take tremendous resources that must come from a coordinated flow of public and private finance. The auctions being piloted test a new approach that has the potential for significant scale-up to help meet this need,” said Swedish Minister for Environment Lena Ek.

The facility’s design will be introduced on the margins of the Climate and Clean Air Coalition high level ministerial meeting in New York on September 22, and is targeting capitalization at USD100 million in total resources. Several donors are considering pledges, including Germany, Sweden, Switzerland and the United States.

“By using the robust accounting tools developed by carbon markets for the monitoring, reporting and verification of results, the PAF is a model of how climate finance can be scaled to deliver the mitigation needed,” said German Federal Minister for the Environment Barbara Hendricks. 

The World Bank Group continues to lead development of innovative financial instruments that mitigate climate change.  The pilot’s auction will be the first of its kind for financing climate-friendly investments.