1.1 What is the Pilot Auction Facility?
The PAF is an innovative climate finance model developed by the World Bank Group to stimulate private investment in projects that reduce greenhouse gas emissions, while maximizing the impact of public funds. The key objective of the PAF is to demonstrate a new, cost-effective climate finance mechanism by providing a guaranteed floor price on emission reductions.
1.2 What type of financial incentive does the PAF offer?
The PAF offers tradeable put options that provide holders the right but not the obligation to sell future emission reductions to the PAF at a pre-determined price (the option “strike price”). If carbon market prices rise above the strike price, owners of the put options could benefit by choosing to sell to other buyers in the carbon market rather than to the PAF. If market prices fall below the strike price, the put option owner has the right to sell emission reductions to the PAF at the strike price. The PAF’s put options are tradable, enabling holders to transfer ownership and maximize the likelihood that the PAF achieves emission reductions.
1.3 How does the PAF determine the value of price guarantees?
The PAF uses online auctions as a competitive and transparent means of determining the value of price guarantees. In the first auction of the PAF, participants bid in a reverse auction, whereas the second auction used a forward auction. The third auction will be a reverse auction (see Auction Format). The competitive nature of the auction reveals the minimum price required by the private sector to make emission reduction investments.
1.4 How was the PAF developed?
At the request of the G8, the World Bank in 2012 convened an international group of experts, the Methane Finance Study Group, to identify innovative pay-for-performance mechanisms that would incentivize investment in methane mitigation projects. In 2013, the Study Group issued a report recommending the creation of a methane abatement facility that would auction put options to guarantee a price floor on independently verified emission reductions. Following this recommendation, the World Bank, with the early encouragement of Sweden and the United States as well as several members of the Climate and Clean Air Coalition, began developing the Pilot Auction Facility.
1.5 How is the PAF governed?
The PAF governance body comprises the PAF Contributors, the World Bank, and the Climate and Clean Air Coalition Secretariat as an observer. The PAF Contributors consist of the German Federal Ministry for the Environment, Nature Conservation, Building and Nuclear Safety (BMUB); the Swedish Energy Agency; Climate Cent Foundation (Switzerland); Swiss State Secretariat for Economic Affairs (SECO); and the United States Department of State. The World Bank designs and runs the auctions, issues the put options to the winners, and manages the redemption.
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This page is for information only. Please see the disclaimer:
THE FOLLOWING IS A SUMMARY OF THE WORLD BANK’S PROPOSED PLAN TO ISSUE PILOT AUCTION FACILITY EMISSION REDUCTIONS NOTES (“PAFERNS”). IT IS NOT AN OFFER TO SELL PAFERNS OR AN INVITATION TO OFFER TO BUY PAFERNS. THIS SUMMARY IS SEPARATE FROM, AND SHOULD NOT BE READ IN COMBINATION WITH, ANY FUTURE OFFER OR SALE OF PAFERNS, WHICH WILL BE MADE IN COMPLIANCE WITH APPLICABLE LAWS AND UNDER ENTIRELY SEPARATE LEGAL DOCUMENTATION AND OFFERING MATERIALS. THIS SUMMARY IS VERY HIGH LEVEL FOR SIMPLICITY AND LEAVES OUT MATERIAL INFORMATION AND THE LEGAL DOCUMENTATION THAT IS EXPECTED TO GOVERN THE PAFERNS. FURTHER, IT IS CURRENT ONLY AS OF THE DATE OF POSTING TO THIS WEBSITE AND IS LIKELY TO BECOME OUTDATED AS THE PAFERNS LEGAL DOCUMENTATION IS DEVELOPED. THE STRUCTURE, TIMING AND MECHANICS OF THE ACTUAL PAFERNS, IF AND WHEN THEY ARE ISSUED, ARE SUBJECT TO CHANGE. POTENTIAL INVESTORS MUST OBTAIN A COPY OF THE COMPLETE LEGAL DOCUMENTATION PURSUANT TO WHICH THE PAFERNS WILL BE ISSUED, INCLUDING THE WORLD BANK’S MAY 2008 PROSPECTUS RELATING TO ITS GLOBAL DEBT ISSUANCE FACILITY AND THE FINAL TERMS FOR ANY ISSUANCE OF PAFERNS. POTENTIAL INVESTORS SHOULD NOT RELY ON THIS SUMMARY. BEFORE MAKING ANY INVESTMENT DECISION, POTENTIAL INVESTORS MUST REVIEW THE COMPLETE LEGAL DOCUMENTATION (ONCE AVAILABLE).