Innovative Pilot Auction Facility Succeeds in Providing Over $3 million to Support Methane Capture Projects
Washington DC, November 30, 2016 – The redemption today of the first of a series of innovative capital markets instruments by the World Bank has succeeded in providing over $3 million to several projects that capture methane emissions at landfills in Malaysia, Thailand and Brazil.
In July 2015, the World Bank’s Pilot Auction Facility for Methane and Climate Change Mitigation (PAF) conducted an online auction of put options, which gave winning bidders the right but not the obligation to sell future carbon credits to the facility at a price determined by the auction. Winners redeem these options annually, with today’s payment representing the first redemption.
In total, 28 firms participated in the auction last year, and 12 won options to sell carbon credits to the PAF at $2.40 per carbon credit over a 5 year period. The auction provided winners with approximately $20 million in options, or about $4 million per year. Over the past 17 months, the owners of these contracts have invested in and sustained projects that reduce methane emissions, relying on the guaranteed payment for carbon credits to back their investments.
The options were structured in the form of World Bank bonds that pay zero interest and provide a final redemption amount of $2.40 per carbon credit as long as the bondholder surrenders an eligible carbon credit. Citi acts as Global Agent for the bonds.
The first tranche of the bonds matured on November 30, 2016, and five investors chose to exercise their right to redeem, receiving a total payment of $3.1 million in exchange for carbon credits, representing the equivalent of over 1.3 million metric tons of reduced carbon dioxide emissions. The carbon credits came from four projects: the Jeram landfill gas recovery project in Malaysia, the Kamphaeng Saen West and East: Landfill Gas to Electricity Projects in Bangkok Thailand, and the Central de Resíduos do Recreio Landfill Gas Project in Brazil.
“The World Bank Treasury is very pleased to see that the notes succeeded in achieving their intended purpose, to incentivize important carbon emission reduction results on the ground,” said Arunma Oteh, Vice President and Treasurer of the World Bank. “This transaction illustrates how capital markets can be used to support the fight against climate change.”
The payment represents about 75% of the value of options expiring this month. Some auction winners decided not to exercise their right to redeem credits for payment, as they may have found alternative buyers for their carbon credits or traded their contracts, a flexibility intentionally provided by the PAF’s design. The PAF is commissioning a detailed study to review the lessons from this first redemption so that best practices can be shared with governments and institutions that are contemplating the use of auctioned contracts to help meet climate mitigation targets.
“Auctions have the ability to deliver smart climate policy by maximizing the reach of limited public funding and leveraging private investments in clean technologies“, said James Close, World Bank Director for Climate Change. “Auctions to price carbon should be carefully considered by governments and institutions looking to meet mitigation goals.”
“In Thailand, the Kamphaeng Saen Saen East and West landfill gas projects greatly benefited from the PAF’s financial support to reduce methane leakage, helping instead to convert waste to clean energy powering up to 60,000 homes,” says Jay Mariyappan, Managing Director of Singapore based Sindicatum Sustainable Resources. “At the same time, we saw many other benefits to the local community, for example, improved air quality and good jobs.”
Prior to payment, projects had to demonstrate to a third party auditor that they adhered to a list of Environmental, Health and Safety (EHS) guidelines which were developed for the PAF and largely based on the World Bank Group’s Performance Standards ensuring that the projects and their host sites are well managed. KommunalKredit Public Consulting reviewed the projects’ EHS audit reports and ensured all other eligibility criteria were met.
Looking ahead, the PAF is running the final auction of its pilot phase in January 2017, this time targeting nitrous oxide emissions from the production of nitric acid.Once the results of the pilot phase have been documented and evaluated, the climate auction model intends to be replicated to scale up reductions in greenhouse gases.
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Information on World Bank bonds is available on the World Bank Treasury website: http://treasury.worldbank.org/cmd/htm.
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