The World Bank is piloting an innovative, $100m (€77.3bn) methane auction facility that it hopes will help curb the impact of the potent but short-lived greenhouse gas.
The test – officially the ‘Pilot Auction Facility for Methane and Climate Change Mitigation’ – is a pay-for-performance instrument that will use auctions “to maximize the use of limited public resources for climate change mitigation while leveraging private sector financing”.
In its first phase, the facility will focus on methane reducing projects and buyers will bid to receive a tradable put option for a guaranteed floor price for each independently verified ton of methane emissions cut at sources such as landfill, animal waste, and wastewater projects.
A put option is a market device which gives the right, but not the obligation, to sell an underlying asset, at a specified ‘strike’ price to a given party. They are typically used to protect against a price falling below a specified price.
The World Bank says this price guarantee provides private investors with a financial incentive to fund projects, using the competitive nature of the auction to determine the value of the guarantee.
Emission reductions will be retired and not used as offsets in what the bank is calling a “quick win” to cut methane emissions. The competitive nature of the auction will reveal the minimum price required bythe private sector to make such investments, the bank hopes. The facility will first target the 1,200 methane reducing projects which are at risk of decommissioning due to low carbon credit prices.
“We hope this pilot auction facility will be an efficient way to reduce emissions and price carbon,” said Rachel Kyte, the World Bank Group Vice President and Special Envoy for Climate Change. “This novel approach could be replicated for use with other pollutants or via other financial institutions, such as the Green Climate Fund, and has the potential for significant scale up.”
The World Bank is targeting capitalization at $100m and says several donors are considering pledges, including Germany, Sweden, Switzerland and the US. More details will be unveiled at the Climate and Clean Air Coalition high-level ministerial meeting in New York on September 22.
Methane’s role as a greenhouse gas has attracted greater investor attention recently. In January this year, three investor climate change bodies, representing more than 200 institutional investors with $20trn in assets in total under management, called for oil and gas companies to commit to a new United Nations methane body called the Climate and Clean Air Coalition’s (CCAC) Oil and Gas Methane Partnership. Methane emissions have also been the focus of investor resolutions at company annual meetings in the past few years, driven by the growth of fracking. World Bank briefing note