The global carbon market has been in crisis for a number of years and with serious implications: the lack of demand for certificates puts current CDM projects at great risk and prevents short-term implementation of new activities despite the availability of huge emission reduction potential. Given the risk of mitigation projects in specific sectors being discontinued, the “Pilot Auction Facility for Methane and Climate Change Mitigation" (PAF) was launched in 2015 by the World Bank. The initiative targets projects which due to the low prices for emission certificates are at risk of being stalled, but need only marginal additional revenue to ensure their continuation. The aim of the PAF is to encourage investment in projects of this type by guaranteeing a minimum price for the emission certificates they generate.
To ensure the price guarantee, the World Bank provides put options. After buying a put at an auction, the owner is entitled but not obliged to sell the certificates generated by their emission reduction projects back to the PAF at the guaranteed price. The PAF thus guarantees its buyers a minimum purchase price for their certified emission reductions. To achieve the maximum climate benefit, the bonds are auctioned. The auction reveals the amount that project proponents need in order to invest in emission reduction projects. The put options are secured with funding from the countries participating in the PAF: in addition to Germany, these are Sweden, Switzerland and the US.
A first auction was conducted in July 2015 in which put options were auctioned for projects to reduce emissions of methane gas. The auction attracted 28 bidders from 17 countries worldwide and there were 11 auction rounds in total. In the end, 12 bidders were left to acquire put options covering some 8.7 million carbon credits with a value of USD 2.40 each. This first auction showed that there is already stable, competitively sound demand for the price guarantees offered via the PAF. A second auction was held in 2016 and the third (and so far the last) auction took place in January 2017. The third PAF auction was held in January 2017. With guaranties worth USD 13 million, emission reductions in the amount of up to 6.2 million tonnes CO2e can be achieved. Following the first two auctions held in 2015 and 2016 respectively, both of which focused on methane emissions from landfills, the third auction targeted projects designed to reduce emissions of nitrous oxide (N2O), which like methane is an extremely potent greenhouse gas. Its climate impact is 264 times that of CO2.