1. Stephanie Rogers
Latin American Carbon Forum
October 20, 2017

2. 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

3. 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

4. = + + 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 = + +

5. 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

6. 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

7. 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

8. 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

9. 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
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)

10. 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

11. 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

12. Contacts: Stephanie Rogers, Tanguy de Bienassis
Contacts: Stephanie Rogers, Tanguy de Bienassis