The global carbon market has had a volatile history. After having reached its peak performance in 2012, the CDM experienced a turndown. CDM prices crashed when the EU decided not to increase the contingent of eligible certificates for the third trading period of the European emission trading system (EU ETS) starting in 2013 - the EU ETS being the most important source of demand for CDM credits.
With the lack of demand for certificates putting ongoing CDM projects at great risk of being discontinued, the “Pilot Auction Facility for Methane and Climate Change Mitigation” (PAF) was launched in 2015 by the World Bank. The BMU-supported 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 PAF uses a particularly innovative approach: it buys CERs from projects at guaranteed prices by offering put options at competitive auctions. Having obtained a put, the successful bidder then has the right to sell certificates to the PAF at the price set by the auction. By auctioning the puts, it is possible to determine the amount of funding project developers need to continue their climate change mitigation activities, guaranteeing maximum climate benefit as a result.
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. 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. After a second auction in May 2016, the approach was extended to include N2O emission reduction projects from nitric acid production at a further auction in January 2017. The fourth auction took place in March 2020. A total of 21 companies participated in this auction and guarantees totaling USD 8.25 million were auctioned. Eligible projects will reduce methane emissions from waste management including landfills, wastewater and agricultural waste.
Since its inception, four successful auctions have been held confirming the efficacy of the approach. In these four auctions a total of up to USD 62 million has been allocated - with a total reduction potential of 24.8 tCO2e.
The experience gained from these auctions is compiled in the form of reports which are made available on the PAF website, allowing for a better understanding of the approach. In addition, PAF is investigating the further application of the auctioning approach in other areas. For example, a report published in January 2019 examines to what extent the auctioning approach can assist countries in achieving their NDCs under the Paris Agreement. Another report sets out in which sectors and under which conditions climate auctions work most effectively.