The Pilot Auction Facility for Methane and Climate Mitigation (PAF) is an innovative climate protection scheme developed by the World Bank, in which the Climate Cent Foundation and the State Secretariat for Economic Affairs (SECO) have jointly taken a share of 2.5 million US$ each. The governments of Germany, Sweden and the US have also invested in the scheme. The fund’s total endowment is around 55 million US$.
The scheme was set up as an answer to the question of how, in view of today’s unattractive market price for CERs, it could be possible to determine a price that would be efficient from the buyer’s point of view and acceptable from the seller’s point of view. It would be advantageous if the seller of a certificate could be guaranteed a minimum price while retaining the freedom to forego the sale should the market price lie above the minimum price. The buyer who guarantees the minimum price should in turn be given the lowest offer acceptable by the seller.
These features can be realised by auctioning off put options. The buyer of the option buys the right to sell a specified amount of certificates at strike price at expiry date. He may also choose to let the option expire. When purchasing the option, he will have paid a premium, which he needs to take into account when deciding whether or not to let the option expire. Auctioning off the options makes it possible to ensure that participants will go to the limit of what constitutes an acceptable minimum price for the sale of their certificates.
The put options are issued as zero-coupon bonds and are tradable. The bonds mature after 5 years. If the holder of a bond no longer wants to operate a project or finds himself unable to do so, he may sell the bond to a third party. The PAF must set aside the funds needed to purchase the certificates until the bonds mature, without knowing for sure that certificates will indeed be delivered and the funds required.
In July 2015, the PAF organised a first auction, at which it was possible to purchase put options for the sale of CERs stemming from projects that reduce methane emissions. The option premium was set at 0.30 US$ per CER. The available auction volume of 25 million US$ 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 US$.
At a second auction, organised in May 2016, admission criteria for
projects were largely maintained (while newly also allowing the delivery of
certificates issued according to the “Verified Carbon Standard” or the “Gold
Standard”). However, this time the strike price was preset at 3.50 US$ per
certificate and the option premium was auctioned upward. 9 bidders won the
auction at a premium level of 1.41 US$ per certificate. The net price is thus 2.09
US$ per tonne and is quasi-identical to the price reached in the first auction.
Options are issued for the delivery of 5.7 million certificates, a direct
consequence of the given auction volume of 20 million US$.
I In January 2017, a third and final auction was held, which targeted projects aimed at reducing laughing gas emissions during nitric acid production. As was the case in the first auction, the option premium was set at 0.30 US$ per CER. The available auction volume was set at 13 million US$. 5 bidders won the auction; by 2020, they will deliver a total of 6.2 million certificates at a unit price of 2.10 US$ to the PAF. The net price was thus 1.80 US$ per tonne, slightly less than the net price of methane reduction projects targeted by the first two auctions.
A comparative analysis of the auctions is being carried out, as is an analysis of the way the minimum price guaranteed by the PAF impacted projects.