About the PAF

The Pilot Auction Facility for Methane and Climate Change Mitigation (PAF) is an innovative, pay-for-performance mechanism developed by the World Bank Group to stimulate investment in projects that reduce greenhouse gas emissions while maximizing the impact of public funds and leveraging private sector financing.

  • The key objective of the PAF is to demonstrate a new, cost-effective, and results-based climate finance mechanism that incentivizes private sector investment and action on climate change in developing countries by providing a guaranteed floor price on emission reductions in the form of carbon credits.

  • In 2013, the G8 requested for innovative pay-for-performance approaches to addressing methane. A report by the Methane Finance Study Group supported the establishment of the facility. In its design and development phase, the facility benefited from the support of the Climate and Clean Air Coalition.

  • The PAF auctions are supported by Germany, Sweden, Switzerland (through a joint contribution of the State Secretariat of Economic Affairs (SECO) and the Climate Cent Foundation), and the United States.

The PAF completed three auctions to allocate a guaranteed price for future carbon credits in the form of a tradable put option.

  • Two auctions (July 2015 and May 2016) addressed methane abatement from landfill, animal waste, and wastewater sites, and one auction (January 2017) addressed nitrous oxide emissions from nitric acid (not adipic acid) production.

  • The three auctions allocate up to $54 million with the potential to abate 20.6 million metric tons of CO2equivalent.

  • The put options give owners the right, but not the obligation, to sell the emission reductions achieved by underlying abatement projects to the PAF at a pre-agreed price, the option “strike” price.

  • To purchase the put options, auction winners pay an option “premium” price upfront.

  • The put options are embedded into puttable bonds issued by the World Bank.

  • The World Bank’s obligation under the bonds will is backed by the PAF and supported by funding from the PAF Participants, listed above.

The PAF makes results-based payments for carbon credits.

  • The carbon credits eligible for the PAF are based on the Clean Development Mechanism (CDM), Verified Carbon Standard (VCS), and Gold Standard infrastructures already in place for project implementation.

  • The nature of the put option means that the facility’s resources are only disbursed after the emission reductions underlying the carbon credits have been independently verified, making the PAF a “pay-for-performance” facility.

The climate finance model developed by the PAF auctions is the “Climate Auction Model”, which includes the following elements:

  • The competitive nature of the auction used to allocate the put options reveals the minimum price required by the private sector to make such investments.

  • The pay-for-performance feature is attractive for public funders facing expanding funding needs and scrutiny on achievements.

  • The model requires risk-sharing between the public and private sectors. Private sector companies or individuals must pay a premium to purchase the put options, and in exchange they receive price guarantees from public funders, which allow the companies to make green investments with confidence.

These elements of the Climate Auction Model combine to maximize the impact of public funds and achieve the highest volume of climate benefits per dollar.