Stephanie Rogers Latin American Carbon Forum October 20, 2017

Origins of the Pilot Auction Facility The Pilot Auction Facility (PAF) is an innovative climate finance model hosted by the World Bank to stimulate private investment in projects that reduce greenhouse gas emissions The PAF was established with inputs from a report of the Methane Finance Study Group, an international group of experts convened at the request of the G8 tasked with reviewing innovative approaches to methane abatement The PAF’s pilot phase is supported by Germany, Sweden, Switzerland, and the United States, which have contributed $53 million in total resources To date, the PAF hosted three auctions: July 2015 (methane) May 2016 (methane) January 2017 (nitrous oxide from nitric acid production) Carbon credit prices collapsed, stranding projects with no incentive to reduce emissions

Climate Auction Mechanism The PAF holds auctions in which bidders compete to purchase “put options” that guarantee a price floor for carbon credits The put options give the owner the right, but not the obligation, to sell their carbon credits to the PAF at a predetermined price in the future (the “strike price”) Auction winners purchased put options by paying an “option premium” price The PAF only pays option owners for independently verified carbon credits Auctioning ensures that least-cost climate mitigation activities are selected

= + + Core elements of climate auction model Climate auction model: A price guarantee for climate assets, in the form of tradable options contracts Maximum climate impact per dollar of public resources Results-based climate assets third-party verified Risk sharing firms pay upfront for price guarantee Auctions determine price of guarantee = + +

Contributors Fund Facility Step-by-Step Process Pre-Auction Contributors Fund Facility Set Criteria Publicize Auction Example: Bidder Perspective Apply Qualify for Auction Auction Purchase Contracts Source ERs Audits Deliver Credits Payout 1 Payouts 2-4

Auction Results Results of the pilot phase demonstrate low-cost mitigation potential Auction 1 July 2015 Auction 2 May 2016 Auction 3 January 2017 Totals Strike Price ($/tCO2e) $2.40 $3.50 $2.10 Premium Price ($/tCO2e) $0.30 $1.41 $0.30 Net Benefit ($/tCO2e) $2.10 $2.09 $1.80 Reductions (million tCO2e) 8.7 5.7 6.2 20.6 Finance Allocated (USD million) $20.9 $20.0 $13.0 $53.9 Funds Raised (USD million) $2.6 $8.0 $1.9 $12.5 Budget (USD million) $25.0 $20.0 $13.0

What has the pilot achieved? 21 MtCO2e emission reductions 4.4 million cars off the road $54 million climate finance allocated $12 million funds raised

First Redemption November 30, 2016 – First Maturity of PAFERNs Six investors submitted Final Redemption Notices 1,324,000 Eligible CERs (50,000 ineligible) US$3.1 million paid to five investors (US$2.40 / CER) 76% of PAFERNs redeemed Secondary trading between three investors CERs transferred or cancelled on behalf of Participants 1,324,000 CERs from 4 projects Jeram landfill gas recovery - Malaysia Landfill Gas to Electricity - Kamphaeng Saen West, Thailand Landfill Gas to Electricity - Kamphaeng Saen East, Thailand Central de Resíduos do Recreio Landfill Gas - Brazil

What is the potential impact? Renewable capacity added (2015) 147 GW Renewable capacity transacted via auctions (2015) 15 GW ~67 countries have used auctions for renewable energy contracts (2016), up from 6 (2005) Potential Climate Auctions Trajectories 2017 2018 2019 2020 2021 Steady Replication Large Injection(s) of Funds Widespread Country Adoption 50 100 150 200 250 USD (millions) 300 400 500 2 3 4 5 1 USD (billions) USD (millions) 2017 2018 2019 2020 2021 2017 2019 2021 2023 2025

Energy Efficiency / Green Buildings Rationale Explore opportunities for climate auctions to be used to incentivize construction of energy efficient green buildings A PAF model could offer an innovative, results-based approach to incentivizing private sector investment. Certifications like EDGE or LEED would provide a metric against which to disburse funds Report Study conducted by The Carbon Trust Phase 1 (May 2017): Landscape analysis of the potential to use the model in six different countries (Argentina, India, Indonesia, Mexico, South Africa, and Vietnam) including using different certification schemes (EDGE, LEED, etc.) and targeting different subsectors (building types, residents’ income levels) Phase 2 (July 2017): development of an auction proposal in one selected market, including a set of eligibility criteria, a list of entities to target as bidders and the expected impacts of the auction

Auction Format Lessons Learned The Auction Manager (NERA Economic Consulting) completed a report to compare and contrast the structure and results of the first two auctions The auction formats (descending vs ascending) given the bid product (strike price vs. premium) attracted different types of bidders, but both were equally effective in achieving price discovery If a primary objective is to transact for a greater quantity of potential emission reductions quicker, then the format of the first auction (descending clock using the strike price as the bid product) should be preferred If a primary objective is to maximize the allocation of the budget while keeping bidding rules simple, the format of the second auction (ascending clock using the premium as the bid product) should be preferred

Contacts: Stephanie Rogers, Tanguy de Bienassis PAF_Secretariat@worldbank.org Contacts: Stephanie Rogers, Tanguy de Bienassis