The PAF is an innovative model that seeks to enable private sector investments in emission reduction projects in a cost-efficient way. It builds on the infrastructure of the Clean Development Mechanism (CDM) and takes advantage of the readily available low cost emission reduction opportunities in its pipeline. Via a competitive auction the PAF rewards the lowest bidders with a minimum price guarantee for their Certified Emission Reductions (CERs) in the form of tradable put options.
Project developers have the flexibility to exercise the option, trade it, or sell their CERs on the market in case the market price rises above the guaranteed price by the PAF. With its $100 million funding target the PAF has a pilot character and seeks to provide lessons learned for future climate finance flows including future tranches of the facility. A first auctioning round was held in July 2015 for methane-reducing CDM projects at landfills, agriculture and wastewater sites, resulting in the purchase of 8.7 million CERs for $2.40 each via tradable put options. Subsequent rounds shall upscale the reach of the auction facility, possibly including other sectors based on a criteria assessment and increased funding to substantially extend the reach of the instrument.
Shifting Paradigms is supporting Climate Focus with analysing selected industries and their suitability for PAF auctions. The assessment covers in which contexts (e.g. sectors, jurisdictions and governance, type of financial product) the use of the instrument could be expanded for efficient delivery of climate finance. The consortium will identify and elaborate a number of blueprints ready to be implemented in the short term.
With the PAF, the World Bank Group has developed an innovative, pay-for-performance mechanism which uses auctions to allocate scarce public funds and attract private sector investment to projects that reduce methane emissions.
The World Bank Group
Without extra incentives, investment in developing countries will likely be in conventional polluting technologies. Developing countries therefore need additional funding and help in leveraging their initiatives within the next years to invest in a sustainable infrastructure. While developed countries have pledged to scale up their climate finance contributions to $100 billion annually by 2020, public finance is a limited resource and small in comparison to the magnitude of investment needs. In order to realize investments at scale, private sector finance has to be