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World Bank fund to buy emission reductions using options

A planned World Bank fund will employ options to spur climate-protection investment using rules created by carbon markets.

The Pilot Auction Facility for Methane and Climate Change Mitigation will use auctions “to maximize the use of limited public resources,” the Washington-based bank said today in an e-mailed statement. Investors will bid for tradable put options giving the right to sell emission reductions to the fund at guaranteed prices.

The approach could be used in the future for greenhouse gases other than methane and may attract investment from other institutions including the United Nations Green Climate Fund, which is raising about $10 billion. There’s less incentive to build carbon-reduction projects after the value of UN Certified Emission Reductions plunged 99 per cent in the past six years, according to data from ICE Futures Europe in London.

“Hats off to them for testing an innovative approach,” Ash Sharma, vice president of the Nordic Environment Finance Corp in Helsinki, said by phone. “No one facility can mop up all these credits. There are a lot of projects out there that need support.”

German contribution

Several donors are considering pledges to the facility, including Germany, Sweden, Switzerland and the US, the bank said. Germany will contribute as much as 15 million euros ($19 million) to the fund, the country’s Environment Ministry said today in an e-mailed statement.

Funds amounting to about half of the targeted $100 million have been promised, Rachel Kyte, special envoy for climate change at the World Bank, said today on a conference call with reporters.

Carbon projects from China would be excluded initially from the bank’s reverse auctions because the nation has rules setting a floor price for emission credits, Vikram Widge, manager of the lender’s climate and carbon-finance unit, said on the call.

Natural gas flaring and coal-mine methane projects also would be excluded from the first sale, planned for “early” next year, though they may be allowed later, Widge said.

He declined to specify rules on which Clean Development Mechanism projects may be eligible to participate in the first reverse auction. The CDM was created under the 1997 Kyoto Protocol and allows companies and richer nations to cut emissions in poorer countries to generate CERs.

“As long as you can measure it and validate it, we hope that this design, once proven through a few of these auctions, can be replicated for many different sectors,” Widge said. “If this design is successful and we can demonstrate it, we’d be more than happy to share the technical underpinnings” with other banks.

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