About
The Pilot Auction Facility for Methane and Climate Mitigation (PAF) was an innovative climate protection scheme developed by the World Bank, in which the Climate Cent Foundation and the State Secretariat for Economic Affairs (SECO) jointly took a share of 2.5 million USD each. The governments of Germany, Sweden and the US had also invested in the scheme. The fund’s total endowment was around 55 million USD.
The PAF guaranteed sellers of certificates a minimum price while allowing them the freedom to forego the sale should the market price lie above the minimum price. The PAF was given the lowest minimum price offer possible by the seller, achieved by auctioning off put options. The buyer of the option buys the right to sell a specified amount of certificates at strike price at expiry date. He may also choose to let the option expire. When purchasing the option, he will have paid a premium, which he needs to take into account when deciding whether or not to let the option expire. Auctioning off the options makes it possible to ensure that participants will go to the limit of what constitutes an acceptable minimum price for the sale of their certificates.
The put options were issued as zero-coupon bonds and were tradable. The bonds matured after 5 years. If the holder of a bond no longer wanted to operate a project or found himself unable to do so, he could sell the bond to a third party. The PAF had to set aside the funds needed to purchase the certificates until the bonds matured, without knowing for sure that certificates would indeed be delivered and the funds required.
Outcome
In July 2015, the PAF organised a first auction, at which it was possible to purchase put options for the sale of CERs stemming from projects that reduce methane emissions. The option premium was set at 0.30 USD per CER. The available auction volume of 25 million USD was fully used up by gradually reducing the strike price. 12 bidders won the right to deliver a total of 8.7 million CERs to the PAF by 2020 at a unit price of 2.40 USD.
At a second auction, organised in May 2016, admission criteria for projects were largely maintained (while newly also allowing the delivery of certificates issued according to the “Verified Carbon Standard” or the “Gold Standard”). However, this time the strike price was preset at 3.50 USD per certificate and the option premium was auctioned upward. 9 bidders won the auction at a premium level of 1.41 USD per certificate. The net price was thus 2.09 USD per tonne and was quasi-identical to the price reached in the first auction. Options were issued for the delivery of 5.7 million certificates, a direct consequence of the given auction volume of 20 million USD.
The third auction, held in January 2017, targeted projects aimed at reducing laughing gas emissions during nitric acid production. As was the case in the first auction, the option premium was set at 0.30 USD per CER. The available auction volume was set at 13 million USD. 5 bidders won the auction; until 2020, they could deliver a total of 6.2 million certificates at a unit price of 2.10 USD to the PAF. The net price was thus 1.80 USD per tonne, slightly less than the net price of methane reduction projects targeted by the first two auctions.
In March 2020, a fourth and last auction was carried out, once more targeting methane reduction projects and similar in design to the first auction: the option premium was initially set at USD 0.30 per tonne with a strike price for the put option starting at a maximum price of USD 5 per tonne and auctioned downward. The premium was continuously integrated into the available auction budget, increasing it from initially USD 7 million to USD 8.25 million. The auction closed with a strike resp. net price of USD 1.98 per tonne, making it possible to acquire put options for the delivery of almost 4.2 million CERs. These CERs had to correspond to emission reductions generated in the period from 3 March to 31 December 2020.
In the context of the issued bonds’ total of six maturities, the Foundation received delivery of 984’400 CERs.
A first independent assessment of the PAF was finalised in April 2019. It confirmed the efficacy of the approach, while also emphasising its limited future applicability, due partly to its inherent complexity, partly to the continued uncertainty of the carbon market’s future development. Another report investigated to what extent the approach may help countries achieve their declared objectives under the Paris Agreement (NDCs). The reports are available on the PAF’s website.
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