This week, the World Bank made a bond payment worth $14 million to 21 projects that reduced greenhouse gases (GHG) emissions from methane and nitrous oxide around the world.
The funds, which have been committed through three auctions of the Pilot Auction Facility for Methane and Climate Change Mitigation (PAF), provide financial support towards GHG abatement in landfills, wastewater treatment, biogas utilization and nitric acid plants. To get paid, companies delivered over five million tons worth of eligible carbon credits, representing the amount of harmful gases they have prevented from being released in the atmosphere.
This year’s payment marks the final maturity of the bonds issued from the first three auctions held between 2015 and 2017. These online auctions were hosted to help overcome the collapse of the price of carbon credits in international markets. Companies competed by bidding on the lowest incentives they needed to make climate-friendly investments and reduce emissions. The winners of the auctions took home a price guarantee, giving them the right but not the obligation to sell carbon credits to the PAF in the future. This reliable revenue stream and access to financing enabled them to confidently continue operations. As prices for carbon credits under carbon markets remain low, all investors have chosen to exercise their right to sell carbon credits to the facility.
The price guarantee is delivered through a World Bank bond that investors can redeem only after achieving verified results, investors can receive payments annually in exchange for eligible carbon credits. Since the start of the program in 2015, $51.5 million have been paid to investors in exchange for carbon credits representing 19.7 million tons of CO2 prevented from being released in the atmosphere, equivalent to the annual emissions of Kenya. The mechanism also offers flexibility: should investors have fewer credits to redeem than allowed by the bond, they can sell the bonds to other firms.
The PAF received funding from Germany, Sweden, Switzerland and the United States.
“With its fifth redemption the PAF continues to demonstrate how capital markets are being used to catalyze the private sector for climate action,” says Michael Bennett, Head of Market Solutions and Structured Finance, World Bank Treasury. “As policy makers and financial institutions look for opportunities to channel resources to projects with positive ESG impacts such as reductions in greenhouse gasses, de-risking instruments like the PAF provide flexible and transparent platforms to target their funding.”
Both methane and nitrous oxide are highly potent greenhouse gases that, if not captured, endanger air and water quality and contribute significantly to global warming. However, their abatement is fairly inexpensive and yields many benefits. For instance, methane from landfills can be converted into energy and provide electricity to local communities. A filter installed on a nitric acid plant instantly removes most of its nitrous oxide emissions.
“The PAF supports projects which reduce GHG emissions quickly and at scale” says Wendy Hughes, Practice Manager in the Carbon Markets and Innovation unit of the World Bank. “It provides an example of how innovative and tailored financial instruments, paired with carbon markets infrastructure can be used to efficiently contribute to delivering net zero commitments. And the approach can be used by governments or other institutions and can be replicated in other sectors as we are exploring to address emissions from buildings and to further nitrous oxide abatement in emerging economies.”
The PAF will make a final payment in 2021 as part of the maturity of bonds issued after the 4th auction held in March 2020. The payment will be made to investors in exchange for emission reductions occurring from the auction date through 2020.
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