Delivering Results-Based Funding Through Crediting Mechanisms - Assessment of Key Design Options
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Delivering Results-Based
Funding Through Crediting
Mechanisms
Assessment of Key Design Options2 © Öko-Institut e.V. This report was funded by the German Federal Mi-
Institute for Applied Ecology nistry for the Environment, Nature Conservation,
November 2015 Building and Nuclear Safety. The report reflects the
personal views of the authors and not of the German
Authors: government or any other institution.
Lambert Schneider (Associate to Stockholm Environ-
ment Institute) Öko-Institut, Berlin office
Randall Spalding-Fecher (Carbon Limits) Schickler Strasse 5-7
Martin Cames (Öko-Institut) 10179 Berlin
m.cames@oeko.de
With contributions by Johanna Bergmann on trans- www.oeko.de
formational change
Design and layout:
Tobias Binnig, www.gestalter.de
Introductory remarks
The international carbon market under the Kyoto In addition – and this is the focus of this study – carbon
Protocol has – especially through the Clean Develop- market projects and experiences gained with them
ment Mechanism (CDM) – initiated several thousand can also play an important role in disbursing climate
mitigation projects, and helped spread the word that finance effectively, by providing ready-to-finance pro-
climate protection is a business case on the one hand jects and offering tools for monitoring, reporting and
and good for sustainable development on the other verification.
hand. It has also led to building impressive capacity in
project development as well as monitoring, reporting This study is a very helpful input for the debate on
and verification of concrete mitigation results. how carbon market projects and experiences can
be used in results-based finance. The study assesses
Due to the current lack of demand in the internatio- opportunities and advantages, but also explores li-
nal carbon market, few new projects are being deve- mitations and challenges of using carbon markets for
loped at the moment. In sectors without co-benefits climate finance. Finally, the study also examines these
that create income in addition to mitigation certifi- questions in the concrete context of five specific pro-
cates, already implemented project activities are even ject types.
being stopped.
However, the capacity and experience developed
through the carbon market is still very much needed. Berlin, November 2015
Carbon markets and pricing will have to play a deci-
sive role as an incentive, as a means of delivering miti- Silke Karcher
gation efficiently and as a way of including the private
sector and making its capital and creativity available German Federal Ministry for the Environment, Nature
for climate protection. Conservation, Building and Nuclear SafetyExecutive Summary 3
Results-based funding is increasingly being used projects that have already been implemented but
as an innovative tool to effectively disburse climate are now at risk of stopping greenhouse gas (GHG)
finance. Results-based funding links payments to abatement, and then move on to new projects that
outcomes, by disbursing funding ex-post upon the have not yet been implemented. Results-based fun-
achievement of a set of pre-defined results. Results- ding programmes should not support already imple-
based funding therefore provides strong incentives mented projects that are not at risk of stopping GHG
for the recipients of the funding to achieve the re- abatement. We further recommend purchasing only
sults. The recipients have autonomy in how to achie- credits issued for emission reductions that occur after
ve the results, which can create ownership and en- the date of contracting. In the case of new projects,
courage innovation. At the same time, the recipients results-based funding programmes should focus on
face higher risks and transaction costs, and must project types with the highest likelihood of additio-
have access to upfront capital to be able to respond nality. For project types with different technical life-
to the incentives. Results-based funding contracts times we recommend establishing specific funding
can be complex, so careful programme design, ad- windows with specific programme design. This is be-
apted to the features of the sector and mitigation cause a mismatch between the duration of payments
interventions, is important to achieve the intended and the technical lifetime of mitigation projects could
results. This is particularly true for questions of how have adverse impacts, such as projects stopping miti-
progress should be measured (emission reduc- gation once results-based payments end.
tions and/or other indicators), who should receive
the funding (governments or private entities), and Many institutions funding climate change mitigati-
at which level interventions can best achieve the on aim to achieve transformational change towards
programme‘s objectives (projects, programmes, sec- sustainable, low-carbon development. Results-ba-
tor-wide or economy-wide policies). sed funding programmes using crediting mechanis-
ms could foster or impede transformational change.
Carbon market mechanisms that credit emission They could foster innovation because they provide
reductions against a baseline – like the Clean Deve- the recipients with autonomy in how to achieve the
lopment Mechanism (CDM) – are a suitable vehicle emission reductions. However, they could impede
to disburse results-based finance for mitigation pro- transformational change if they lock-in carbon-in-
jects or programmes. This study assesses key design tensive technologies, if continued funding creates
options for programmes using crediting mechanis- disincentives for policy makers to change the under-
ms to deliver results-based funding. lying policy framework, or if they support technolo-
gies that are not in line with the priorities and vision
Crediting mechanisms could help achieve cost-ef- of the implementing country.
fectiveness because of their ability to identify untap-
ped mitigation opportunities and the competitive To support transformational change, results-based
nature of programmes purchasing emission reduc- funding programmes could require government
tion credits. Using the capacity, knowledge and in- endorsement of the interventions to ensure country
frastructure developed under existing mechanisms ownership and alignment with national priorities.
could reduce costs and considerably accelerate the They could also support the development of an
implementation of results-based funding initiatives. enabling policy and regulatory framework to ensu-
Standards for calculating emission reductions and re continued change beyond the results-based fun-
assessing additionality at project or programme le- ding programme, or require that the recipient coun-
vel are available for a broad range of technologies try commits to introducing a policy framework that
and sectors, though they are not necessarily suitable ensures long-term mitigation. Alternatively, they
for programmes targeting reductions at sectoral le- could require that the emission source be included
vel, reductions from policy interventions, or reduc- within the scope of mitigation targets by the coun-
tions from capacity building or awareness raising. try under the United Nations Framework Convention
on Climate Change (UNFCCC). In terms of technolo-
To achieve a high mitigation impact, it is crucial to gy choices, the results-based funding programme
ensure that emission reductions are additional, whi- could exclude technologies with a high risk of car-
le quantifying emission reductions conservatively bon lock-in, and consider prioritizing technologies
is less important, as long as the emission reduction with a high potential for replication and innovation,
credits are cancelled. We recommend that results- by means of positive lists, performance benchmarks,
based funding programmes focus first on mitigation or qualitative criteria.4 Results-based funding programmes should adopt
strong environmental and social safeguards, and
tools to evaluate, monitor and enforce them. We re-
commend that programmes require ex-post monito-
ring and third-party verification of compliance with
safeguards and withhold results-based payments if
safeguards criteria are not met. We also recommend
considering a risk-based approach, focusing on sa-
feguards issues that are most relevant for different
technologies and project types.
To avoid double counting of efforts with regard to
mitigation outcomes and financial contributions,
results-based funding programmes should cancel
the emission reduction credits on behalf of the pro-
gramme, and not use them for compliance purpo-
ses. Programmes should also proactively manage
the risk of double issuance of emission reduction
credits by seeking formal declarations from project
owners that they have not and will not seek credits
for the same emission reductions under another or
the same crediting mechanism.
We tested the criteria for evaluating the suitabili-
ty of technologies for programmes using crediting
mechanisms to deliver results-based funding by ap-
plying them to five diverse project types: N2O from
nitric acid, energy efficient lighting, large-scale wind
power, landfill gas flaring, and leak detection and re-
pair from oil and gas infrastructure. This analysis re-
veals important differences, including the likelihood
of additionality, the incentives for project owners to
continue abatement beyond the duration of the pro-
gramme, the regulatory framework and incentives
for policy makers to introduce policies that ensure
continued abatement, the potential for replication
and innovation, and the risks of carbon lock-in. For
results-based funding programmes to deliver on
their intended goals, therefore, they must carefully
evaluate the specific features of the funded activi-
ties and adapt the programme design accordingly.
We recommend that using crediting mechanisms for
results-based funding is explored further by piloting
credit purchases from a broader range of project ty-
pes and sectors, as well as through further in-depth
analysis of programme design options for specific
sectors and project types.Table of contents 5
1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2 Overview of results-based funding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.1 What is results-based funding? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.2 Prerequisites and challenges of results-based funding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.3 Existing initiatives for using results-based funding for climate mitigation . . . . . . . . . . . . . . . . . . 11
3 Suitability of crediting mechanisms for delivering results-based finance . . . . . . . . . . . . . . . . . . . . . . . . . . 18
3.1 Building on and strengthening existing capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
3.2 Suitability of established standards for quantification of emission reductions . . . . . . . . . . . . . . 19
3.3 Transaction costs and cost-effectiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
3.4 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
4 Achieving a high mitigation impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
4.1 Ensuring additional emission reductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
4.2 Quantifying emission reductions for RBF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
4.3 Payment structure and duration of mitigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
5 Fostering transformational change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
5.1 Transformational change in climate finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
5.2 Ensuring alignment with the transformational change agenda of implementing countries . 30
5.3 Eligibility or prioritization of technologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
6 Ensuring environmental and social safeguards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
6.1 Approaches for environmental and social safeguards in multilateral processes . . . . . . . . . . . . . 36
6.2 Environmental and social safeguards for results-based financing for mitigation . . . . . . . . . . . . 39
7 Avoiding double counting of efforts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
7.1 Accounting for mitigation action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
7.2 Accounting for climate finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
7.3 Double counting between mitigation and climate finance goals . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
8 Analysis of selected project types . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
8.1 N2O from nitric acid production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
8.2 Energy efficient lighting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
8.3 Large scale wind power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
8.4 Landfill gas flaring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
8.5 Leak detection and repair in oil and gas infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
8.6 Summary of project analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
9 Conclusions and recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
10 Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
11 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 616
1 Introduction
To limit global warming to 1.5°C or 2°C, current miti- for Development (Ci-Dev) and the Pilot Auction Fa-
gation efforts need to be strengthened significant- cility for Methane and Climate Change Mitigation
ly, both in the period up to 2020 and beyond. The (PAF), which are both operated by the World Bank
current climate actions pledged by Parties, including and use the CDM as a vehicle to monitor and verify
Intended Nationally Determined Contributions (IN- mitigation outcomes. The Warsaw Framework for re-
DCs) submitted by September 2015, will leave a miti- ducing emissions from deforestation and degradati-
gation gap of around 6-10 Gt CO2e by 2020, 12-15 Gt on (REDD+) also provides for results-based funding
CO2e by 2025, and 17-21 Gt CO2e by 2030 (Jeffery elements. Similar approaches could be employed
et al. 2015). To further facilitate mitigation and adap- by other institutions. When launching the Green
tation in developing countries, developed countries Climate Fund (GCF), Parties agreed that the fund
also pledged to mobilize USD 100 billion per year by may „employ results-based financing approaches,
2020 for climate finance. At the same time, an esti- including, in particular for incentivizing mitigation
mated USD 90 trillion in investment is likely to be in- actions, payment for verified results, where appro-
vested in infrastructure in the world’s urban, land use priate.“1
and energy systems by 2030 (New Climate Economy
2014). Infrastructure choices made over the next 15 Results-based funding provides interesting oppor-
years will determine the future of the world‘s climate tunities, but also poses a number of challenges. The
system. They will also determine how much of this study aims to explore how results-based funding
investment, in the face of the need to dramatically could be delivered effectively by using tools and
reduce emissions, will become stranded. Discussions processes of crediting mechanisms and how the
are underway on how to best disburse and leverage challenges could be addressed. The study focuses
funds for maximum effectiveness and efficiency, in on the following five areas:
which results-based funding is increasingly viewed
as one of the potential tools to achieve these aspi- 1. Suitability of using crediting mechanisms to
rations. deliver results-based funding: Existing crediting
mechanisms can provide a strong base of human
Results-based funding links payments to perfor- and institutional capacity, recognized protocols
mance or outcomes. The concept has been emplo- for assessing GHG impacts, and experience with
yed and tested in a number of sectors, including monitoring and verification. At the same time, the-
health, education and energy, and is increasingly re are potential limitations, significant transaction
considered for financing climate change mitigation. costs, and gaps that may need to be addressed
Carbon market mechanisms that credit emission re- by funders using results-based funding. The stu-
ductions against a baseline – like the Clean Develop- dy explores the conditions under which crediting
ment Mechanism (CDM) – could be considered as a mechanisms are an effective tool for delivering
form of results-based funding. They typically involve results-based funding.
pay-for-performance contracts. Emission reduction
credits are awarded ex-post upon achievement and 2. Achieving a high mitigation impact: A key objec-
third party verification of mitigation outcomes. Ho- tive of results-based funding for climate mitigation
wever, emission reduction credits have mostly been is to achieve a high mitigation impact. The envi-
used for meeting mitigation commitments so far, as ronmental effectiveness of results-based funding
opposed to using them as a vehicle to deliver cli- depends on which mitigation actions are funded
mate finance. as well as the structure and duration of payments,
and how the indicators for payments are chosen.
Carbon market crediting mechanisms could support The study explores how crediting mechanisms can
the application of results-based funding for climate most effectively be used to achieve a high mitiga-
mitigation, including through the purchase and can- tion impact.
cellation of credits or by using their tools for monito-
ring, reporting and verification (MRV) of mitigation 3. Fostering transformational change: There is an
outcomes. In recent years, several initiatives have increasing trend toward funders using climate
begun using results-based approaches for financing finance to facilitate transformational change to-
climate mitigation, including the Carbon Initiative wards a low carbon economy. Using crediting me-
1 Decision 3/CP.17, paragraph 55.chanisms to disburse results-based funding could tion actions in multiple countries. The results could 7 potentially foster or impede such change, or may inform bilateral and multilateral financial institutions have no effect. For example, using results-based when implementing such programmes. approaches could provide greater incentives to actually achieve emission reductions because pay- Chapter 2 provides an overview of results-based fun- ments are linked to results and not only actions; ding. Chapters 3 to 7 explore the five thematic areas if payments are limited to measurable short-term highlighted above. Chapter 8 assesses the suitability results, however, it could also deter long-term of different project types for using crediting mecha- transformation. For example, temporary financing nisms to deliver results-based funding. Chapter 9 of specific projects or activities does not necessa- draws conclusions and provides recommendations. rily lead to long-term emission reductions: funded projects could cease operation once the climate funding stops, or new installations could use more GHG-intensive technologies if no new funding is available. The study explores whether and how programmes using crediting mechanisms to deli- ver results-based funding could be set up in ways that foster, and not impede, transformational change towards a low carbon development. 4. Ensuring environmental and social safeguards: Mitigation activities can have co-benefits with other policy objectives or affect them adversely. Financial institutions often use environmental and social safeguard criteria and stakeholder partici- pation to prevent and manage social and environ- mental risks of projects. Linking payments only to emission reductions without other safeguards po- ses the risk that the overall benefits and risks of in- vestment options are not adequately considered. The study explores how environmental and social safeguards could be considered in the context of programmes using crediting mechanisms to deli- ver results-based funding. 5. Avoiding double counting of efforts: Global action to mitigate climate change can be un- dermined if efforts are double counted. Double counting can occur in various forms, including two countries accounting for the same emission reductions towards meeting a mitigation pledge or several countries or institutions accounting for the same reductions as contributions to climate fi- nance. The study highlights how double counting could occur in the context of programmes using crediting mechanisms to deliver results-based fun- ding and how it could be addressed. The study approaches these questions from the per- spective of how programmes using crediting me- chanisms for delivering results-based funding could be designed to effectively achieve these objectives. The study aims to identify and assess concrete de- sign options for such programmes and discusses their benefits, challenges and risks. We identify and assess options from the perspective of a public cli- mate fund that intends to use crediting mechanisms to deliver results-based funding for specific mitiga-
8
2 Overview of results-based funding
2.1 What is results-based funding? of the recipient can create ownership and encoura-
ge innovation to identify barriers and experiment
Results-based funding links financial support to the with alternative interventions. This could lead to
achievement of results. Financial means are disbur- more efficient results compared to funding geared
sed ex-post upon the achievement of a set of pre- to milestones or the disbursement of upfront loans
defined results. This distinguishes it from conventi- and grants without any reference to the outcomes
onal international development cooperation, where achieved. A second benefit is that funders have more
support is provided largely upfront before any re- certainty that results will be delivered with the fun-
sults are achieved, whether this support be through ding provided, which may allow them to increase
grants, concessional loans or technical assistance. the availability of funding. A third benefit is an ove-
rall greater transparency because results are more
A variety of terms and definitions are used to descri- visible and are independently verified. This may also
be results-based funding approaches in the litera- allow increased learning about which development
ture (Clist 2014; ESMAP 2013; ESMAP 2015; Warne- approaches are most effective and in which context.
cke et al. 2015b). We define results-based funding At the same time, the level of monitoring and veri-
broadly as a modality under which incentives are fication involved in results-based funding increases
dispersed by a funder (also called the „principal“) to transaction costs and can increase the risks that the
a recipient (also called the „agent“) upon the achie- recipients face. Results-based funding also cannot
vement and independent verification of results address the need for upfront financing by the reci-
using pre-defined methods and indicators. Follow- pients, so either they must have access to capital on
ing the convention generally used in this field, we their own, or funders much create parallel financial
distinguish two forms of results-based funding: we mechanisms to provide upfront financing.
use the term results-based finance (RBF) when the
recipient is a private sector or non-governmental Establishing a results-based funding programme for
entity implementing projects or actions, as opposed climate change mitigation requires the funder to de-
to results-based aid (RBA) when the recipient of the fine ex-ante key design features, and the recipients
funding is a national or regional government. Sever- to agree to these features if they wish to participate
al results-based programmes channel funds through in the programme. Such features include, among
a government programme (e.g. national energy or others:
climate funds), but the scheme is designed to deliver t he objectives and intended results of the pro-
the funds ultimately to private sector or non-govern- gramme;
ment entities. For simplicity, we use the term results- the eligibility of countries or regions to participate
based finance throughout to cover any programme in the programme;
that ultimately engages actors outside of the go-
the eligibility or prioritization of mitigation actions
vernment.2 Finally, we discuss results-based funding
where appropriate;3
in the context of programmes that fund mitigation
actions. In chapters 3 to 9 we focus on programmes the (type of ) entities which should receive the fun-
using crediting mechanisms to disburse funding to ding;
private sector and non-governmental entities (i.e. the indicators used to measure progress towards
results-based finance), while this chapter discusses the objectives and results;
general issues of results-based funding. the baseline for the indicators against which pro-
gress is measured;
Results-based funding aims to increase the effective- the methodology used to monitor the progress;
ness of development aid by creating incentives for
and enhancing the certainty of delivering the pro- the modalities of independent verification;
gramme objectives. It provides strong incentives for the modalities for issuance, transfer, cancellation
the recipients of the funding to achieve the results. of verified/certified mitigation units, where appli-
Another key characteristic is that how the results cable;
are achieved is usually at the discretion of the reci- the contractual terms and level of incentive;
pient of the funding. The incentives and autonomy
2 O ther terms used for results-based approaches include payments by results (PBR), performance-based financing (PBF), payment for
performance (P4P), performance-based contracting (PBC), conditional cash transfers, or output-based aid (OBA).
3 In principle, results-based funding aims to provide discretion to the recipients in terms of which activities they implement to achieve
the results. However, some programmes may define which mitigation action activities are eligible.the modalities for adhering to any social and envi- I ndicators measuring progress must be reasona- 9
ronmental safeguards; ble proxies for the intended results and policy
objectives: Indicators need to be closely linked to
any provisions for dispute settlement and condi-
the policy objectives. This could be difficult if the
tions under which the agreement is open to rene-
policy objectives encompass several (qualitative)
gotiation;
aspects. For example, for a programme promoting
other (enabling) measures which the programme household electricity access, using only the per-
should pursue to achieve its objectives. centage of households with an electrical grid con-
nection may not be an appropriate indicator be-
This list suggests that results-based contracts can cause it „does not consider whether the electrical
be complex and that establishing an effective pro- grid provides high quality, reliable electrical supp-
gramme can be challenging and costly in practice. ly. It also ignores the possibility that off-grid elec-
For this reason, most existing results-based funding tricity solutions might provide a similar or better
programmes or frameworks include components, level of quality and reliability“ (ESMAP 2015). Clist
such as readiness funds, to build the necessary ca- (2014) highlights that it is not sufficient for an indi-
pacity and establish institutional frameworks, and cator to be correlated with the objective ex-ante,
some would provide some support to cover the in- but that it must also remain so ex-post. For exam-
cremental costs of monitoring, verification and re- ple, indoor air quality may be correlated ex-ante
porting of outcomes. to the number of efficient cook stoves distributed,
but might not be correlated ex-post if the cleaner
cook stoves were distributed but did not entirely
2.2 Prerequisites and challenges displace traditional stoves, if the type of cook sto-
of results-based funding ves distributed or the modalities of distribution
were different from those prior to the programme,
A number of prerequisites need to be in place for or if new technologies emerge during programme
results-based funding programmes to be effective operation. Kreibich (2014) observes for several exi-
and feasible. The available research indicates that sting results-based initiatives that the indicators
results-based funding programmes could deliver do not match their overarching goals. Initiatives
the intended results but could also perform worse may often also use climate mitigation impacts as
than traditional funding approaches, such as grants indicators while a key goal is to achieve economic
(Clist 2014; Oxman and Fretheim 2009). Two ove- and social development. Instead of using indica-
rarching lessons can be learned from the available tors that are more closely aligned to the goals, the
experience. Firstly, an effective programme design, initiatives establish eligibility criteria or safeguards
adapted to the policy objectives and specific circum- to achieve the programme objectives. Kreibich
stances of the country and sector, is key for success. (2014) concludes that this poses considerable risks,
And secondly, results-based funding should not be as experienced with the CDM where payments for
regarded as a “silver bullet”, particularly if used in iso- CERs are usually not made contingent upon achie-
lation of other financing instruments; depending on vement of sustainable development co-benefits.
the circumstances, other traditional upfront finance While the projects would need to comply with the
approaches might deliver better results. safeguards criteria required by any other deve-
lopment finance that they receive, the CDM MRV
Several factors are important for the success of a re- process does not include safeguards evaluation.
sults-based funding programme. Key factors include While the CDM has two main goals – achieving
the suitability of the indicators to measure progress GHG emission reductions and fostering sustaina-
towards the objectives, the ability of the recipients ble development – buyers of CERs mainly reward
to respond to the incentives, and the ability of the emission reductions, which in turn provides incen-
funders to commit to a results-based approach. The- tives for recipients to focus for reductions of GHG
se factors are further explored below. emissions rather than sustainable development
benefits.
2.2.1 Selecting suitable indicators to
measure progress hanges in indicators must be reasonably attri-
C
butable to the interventions: The future trajecto-
Selecting suitable indicators to measure progress ry of the indicators may be influenced not only by
towards the objectives is a key prerequisite for a the interventions from the results-based funding
results-based funding programme to deliver the in- programme, but also by other developments out-
tended outcomes. Selecting poor indicators could side the control of the recipients. This „signal-to-
lead to adverse outcomes. Identifying, monitoring noise“ problem could lead to the recipients being
and verifying the indicators can pose considerable rewarded or penalised for actions over which they
challenges, such as the following:10 had no control. For example, the amount of elec- 2.2.2 Ability of recipients to respond to
tricity produced from biomass could be a proble- incentives
matic indicator on its own for a programme pro-
moting biomass power, if biomass use strongly The ability of recipients to respond to the incentives
depends on international fuel prices, varying crop from results-based funding is another important
yields, or grid reliability. prerequisite for programmes to be effective. This in-
cludes several features:
Indicators must avoid gaming and distortion:
The recipient has economic incentives to design its The recipient must have sufficient capacity and
interventions in ways that increase performance capabilities: Recipients require considerable in-
versus the indicators. This can lead to gaming or stitutional capacity and knowledge to use the
distortions. For example, under a programme autonomy in project design and implementation
promoting the capture and flaring of landfill gas, provided by results-based funding. The available
experiences with results-based funding program-
using the amount of gas flared as an indicator
mes suggest that capacity building and technical
could lead to perverse incentives to enhance land-
support are often required and should be part of a
fill gas generation by changing the design or ope-
results-based funding package (Oxman and Fret-
ration of landfills or by prioritizing landfilling over heim 2009).
recycling, composting or waste incineration.
The recipient must have access to upfront re-
I ndicators measuring progress must be measu- sources to pre-finance the intervention: A key
rable and verifiable at reasonable costs: Some feature of results-based funding programmes is
policy objectives could be difficult to translate into that payments are only disbursed ex-post upon
indicators that are easily measurable and verifia- verification of results. This requires recipients to
ble. For example, a key policy objective of an effi- have access to capital to pre-finance the interven-
cient cook stove project could be to reduce indoor tions, whether those recipients are the actual pro-
air pollution. Measuring and verifying quantifiable ject owners or intermediaries who support multi-
improvements in indoor air quality could be more ple project owners. It also requires recipients that
cumbersome and costly than just tracking the can handle considerable time gaps from planning
number of cook stoves distributed. Simpler indi- and implementing the interventions to receiving
cators, such as the number of efficient cook stoves payments. In some cases, securing a results-based
distributed, may, however, have less correlation contract may assist the agent in mobilizing project
with changes in indoor air quality. financing.
The recipient must be able to assume risks and
Selecting appropriate indicators can involve some
handle uncertainty on future performance and
trade-offs between these requirements. When it is
revenues: Compared to the upfront grants and
not possible to identify indicators which meet these concession loans of traditional official develop-
requirements, the appropriateness of results-based ment aid (ODA), results-based funding program-
funding may need to be reconsidered. Defining a mes shift risks from the funder to the recipient. Re-
single indicator could be particularly problematic cipients only receive the expected funding if the
when several policy objectives are pursued. In prac- interventions have the envisaged effects. Uncer-
tice, most existing initiatives for results-based fun- tainty about future performance and revenues
ding pursue a combination of goals (Kreibich 2014). could be significant, depending on the type of ac-
ESMAP (2015) concludes that a multi-tier framework tivity. Many potential recipients may not be able to
may be a more suitable approach when several po- handle large uncertainties. Results-based funding
licy objectives are pursued or when one objective may thus be less suitable for more experimen-
includes several intended outcomes. For example, in tal interventions for which the results are highly
a programme to promote household electricity ac- uncertain. In addition, shifting risks from funders
cess, a multi-tier framework could measure the „usa- to recipients can increase the level of payments re-
bility of electricity supply along multiple dimensions quired under results-based funding programmes
through representative household surveys“. Alter- compared to conventional ODA, because the reci-
natively, energy consumption could be considered pients must be compensated for the greater risk
that they take.
an “intermediate impact” indicator in energy access
programmes, since consumers can only utilize the
he recipient must have reasonable control on
T
source if is affordable and usable (ESMAP 2014). Indi-
the results: Recipients need a large degree of con-
cators could also be used to assess compliance with trol on the ability to achieve results. Achieving the
environmental or social safeguards and payments results should not depend on factors outside the
could be made contingent upon compliance with control of the recipients. This could present a chal-
such safeguards. lenge if, for example, a cook stove project imple-menter could only receive payments after verified other funding approaches. In summary, key questi- 11
changes in health of the stove users, when health ons for evaluating whether results-based funding is
could be impacted by many factors outside of the a suitable instrument include:
improved stove project. This issue, therefore, is Can appropriate indicators be identified which
closely linked to the appropriate selection of indi- closely align with the policy objectives, are attribu-
cators to measure progress and the way in which table to the intended interventions, avoid gaming
the financing is structured. and distortion, and are measurable and verifiable
at reasonable costs?
2.2.3 Ability of funders to commit to Are recipients available that have the appropriate
results-based funding programmes capacity to implement and pre-finance the inter-
ventions, assume the risks and uncertainty of fu-
Another important prerequisite is that funders are ture payments, and have control over the results?
able to credibly commit to results-based funding Are funders able to commit to conditional pay-
programmes. This implies that they need to be able ments over appropriate time horizons?
to withhold payments in case performance is not
What transaction costs are associated with a
met. The incentive is lost if the risk of non-payment is
results-based funding programme compared to
not credible. In practice, funders often want to make
other funding options?
sure that available funds are actually disbursed and
so could face pressure to design weaker compliance
frameworks.
2.3 Existing initiatives for using
Furthermore, funders need to commit to payments
over longer time periods. In practice, funders are so- results-based funding for
metimes only able to contract over relatively short climate mitigation
time periods (e.g. five years). This reduces the scope
and incentives of results-based funding program- Results-based funding for climate mitigation4 has
mes. A limited time horizon of results-based funding been tested and employed in several existing initi-
programmes provides incentives for recipients to atives. Table 1 provides an overview of nine existing
prioritise interventions with short-term effects over initiatives. Below we describe in more detail the two
interventions with a longer-term effect. This could initiatives that use carbon markets as a vehicle for
lead to less effective interventions and costlier out- disbursing results-based funding: the World Bank‘s
comes, in particular if interventions that require Carbon Initiative for Development (Ci-Dev) and
time to deliver results are more cost-effective and its Pilot Auction Facility for Methane and Climate
beneficial. The time horizon of results-based fun- Change Mitigation (PAF).
ding programmes could be a particular concern for
mitigating climate change when investments in inf- All nine schemes target developing countries – five
rastructure, such as in the energy sector, have long select recipients in broader geographic regions, two
payback times but could deliver emission reductions limit recipients to participants in some initiatives
over decades. A short-term programme, e.g. limited (e.g. REDD+ and Energy+ partnership), and two focus
to five years, may mainly attract mitigation options only on a single country (i.e. Uganda and China). The
with short payback times and not provide incentives World Bank Group and the Norwegian government
to pursue investments with longer time horizons. are the most prominent agents using results-based
This also highlights the importance of a clear exit funding. The overall focus is on renewables, energy
strategy for the funder, and putting in place mecha- efficiency, forestry, and the waste sector. Some pro-
nisms to ensure the continued financial sustainabili- grammes address specific greenhouse gases, such as
ty of the programmes under implementation. the PAF addressing methane emission sources in its
first round or the NDRC programme addressing HFC-
2.2.4 Evaluating results-based funding 23 emissions. The initiatives vary with regard to how
against other funding options they define criteria for the selection of mitigation
actions and the MRV framework. Two initiatives use
The above considerations illustrate that results- CDM project registration as a pre-requisite (PAF and
based funding could be an effective tool but also po- Ci Dev), and several require compliance with susta-
ses considerable challenges. If key prerequisites are inability safeguards or performance standards (PAF,
not met, results-based funding should not be pursu- Ci-Dev, GET FiT), financial and/or technical feasibility
ed. Using results-based funding for climate finance (GET FiT and FCPF Carbon Fund), and co-benefits (Ci-
should, therefore, be carefully evaluated against Dev and FCPF Carbon Fund). The initiatives mostly
conduct upfront due diligence for project selection
4 A
lthough some of the programmes covered here may not have climate change mitigation as a primary objective, the implementati-
on of all the programmes would lead to mitigation outcomes.12 based on internal processes and criteria (Ci-Dev, En- features are more dependent on the overarching ob-
vDev, FCPF Carbon Fund, Energy+, NDRC), by inde- jective of the scheme.
pendent bodies (GET FiT), or no due diligence requi-
red (PAF, NIFCI). Alongside these specific initiatives, several global
instruments provide frameworks for using results-
The result indicators for payment are mainly based based funding for climate mitigation: Adopted at
on emissions reduction (i.e. CERs or t CO2e) and COP 19, the Warsaw Framework for REDD+ establi-
energy availability (i.e. number of people gained shes principles for reducing emissions from defore-
access, kWh generated by low carbon energy, sales station and degradation through results-based fun-
of low carbon appliances, etc.). Based on these indi- ding, including that safeguards have to be addressed
cators, pricing is set either based on auctions (PAF), and respected before developing countries can
case-by-case or bilateral negations (Ci-Dev, EnvDev, receive payments and key elements of measuring
FCPF Carbon Fund, Energy+, PBC Finance in Latin results for results-based payments for REDD+ (e.g.
America), or at a fixed rate per results (GET FiT, NIFCI, institutional arrangements, modalities for MRV, safe-
NDRC). The initiatives also use different MRV approa- guards, reference levels, and key mitigation efforts).5
ches for monitoring: they use CDM methodologies REDD+ is to be implemented as a capacity building
(PAF, Ci-Dev, NDRC), other existing methodologies and payment delivery mechanism and is divided
(FCPF Carbon Fund and Energy +) or develop own into three phases: Phase 1 focuses on technical and
methodologies for the entire program or each pro- institutional readiness, phase 2 on policy implemen-
ject (EnvDec, GET FiT, NIFCI, PBC Finance in Latin tation, and phase 3 on result-based payments and
America). In general, all schemes share one common MRV implementation.6 The Warsaw Framework also
feature: they use quantitative results as an indicator recognizes the importance of sufficient technical,
for payment or other incentive, while other design institutional and policy preparation to successful de-
5 Decision 9/CP.19
6 Decision 1/CP.16, paragraph 73.
Table 1 Overview of results-based funding related initiatives for climate mitigation
Scheme Recipient Technologies Criteria for selection
Countries
Pilot Auction Facility for Non-Annex 1st round: limited to • 1st used CERs from specified CDM
Methane and Climate I countries, landfill gas, animal methodologies with specified vin-
Change Mitigation excluding waste, wastewater tage
(PAF), World Bank China, Israel, • Environmental, health and social
South Korea performance criteria, adapted from
World Bank Performance Standard
and customised for each project
• No contract with a third-party
Carbon Initiative for Africa IDA Limited to RE with new Required:
Development (Ci-Dev), and Asia connections; and other • Development benefits/savings at
World Bank LDC under-represented household or community level
sectors with innovation • Must register as CDM
(EE, waste, other electri- • Adhere to World Bank Performance
fication) Standard (Environmental and Social
Preference for RE Safeguards)
• Include local community involve-
ment
• Project type not already successful
in region
• Small to medium scale
• CER price of less than €10
Preferences:
• Show how carbon finance benefits
the poor
• Require no additional donor
finance
• Support new methodologies that
help poor countrieslivery of results-based funding. It also highlights the of specific circumstances on a case-by-case basis“. In- 13
potential role of Green Climate Fund in delivering terestingly, the frameworks are not only applicable
result-based climate finance.5 to REDD+, but also include conservation of forest
carbon stocks, sustainable management of forests,
At COP16 in 2010, Parties decided to establish the and increased removals through enhancement of
Green Climate Fund (GCF).7 One year later, the forest carbon stocks, thereby covering all possible
fund was formally launched at COP 17, with the forest-related activities to mitigate climate change
approval of a governing instrument to guide the (GCF 2014b). The frameworks also mention expected
development of the fund.8 The governing instru- results and program outcomes, and the reporting
ment mentions RFB as an important criterion for responsibility or frequency as guidance for imple-
funds allocation and recognizes RFB as one of the menting results-based funding for REDD+ initiatives
potential financing approaches for incentivizing through the GCF. The initial logic model and PMF for
mitigation actions and payment for verified results. RBPs provide a first step for using results-based fun-
In accordance with Warsaw Framework for REDD+, ding as one of the financing tools for the GCF.
the GCF board developed an initial logic model and
performance measurement framework (PMF) for ex- Finally, crediting mechanisms, and in particular the
post REDD+ result-based payments (RBPs) as part of CDM, can be seen as instruments for disbursing re-
the financing logic of the fund (GCF 2014b, Annexes sults-based funding, as payments are made for deli-
X and XI). Both frameworks use the verified emission very of CERs (Neeff et al. 2014; Warnecke 2015b). The
reductions and increased removals as a results in- use of crediting mechanisms to deliver results-based
dicator for payments, noting that REDD+ program- funding is further explored in chapter 3.
mes supported by the fund „can identify additional
indicators that are relevant and compelling in light
7 Decision 1/CP.16, paragraph 102.
8 Decision 3/CP.17.
Upfront evaluation Results used for pay- Pricing approach MRV
ments
No upfront due dili- 1st round used CERs; Reverse auction of put 1st round: CDM MRV for
gence on project, only future rounds could use options of CERs CERs, plus an Environ-
evaluated when put other MRV standards mental, Health & Safety
option is redeemed; and Social (EHS) audit,
bidders screen for repu- and Integrity report
tational issues from a Designated Ope-
rational Entity (DOE)
Due diligence and quali- CERs, plus additional Bilateral negotiations, CDM MRV for CERs;
tative assessment by agreed Results Indica- based on financial ana- Ongoing dialogue with
Ci-DEV staff and other tors lysis of programmes partners, with stan-
World Bank experts dard WB evaluation
process, but not linked
to payments and no
formal MRV of non-GHG
impacts14 Scheme Recipient Technologies Criteria for selection
Countries
RBF facility within the Africa, Asia Grid connections, No predefined criteria for individual
Energising Develop- and Latin mini-grids (solar, hydro, facility; only require recipients to be
ment (EnDev) Pro- America biogas), and off-grid capable of marketing products and
gramme technologies (stoves) solutions
Global Energy Transfer Uganda Small-scale RE (small • Financial and economic viability
Feed-in Tariffs (GET hydro, cogeneration • Technical feasibility
FiT) Premium Payment and biogas) • Compliance with IFC Performance
Mechanism, Deutsche Standards (ESG)
Bank
Forest Carbon Partner- REDD+ REDD+ policies and • Political commitment and readi-
ship Facility (FCPF) Car- developing measures ness progress
bon Fund, World Bank countries • Potential to generate emission
reductions at scale
• Technical soundness
• Stakeholder participation
• Non-carbon benefits
Norwegian Internatio- Brazil, Ethio- MRV for REDD, capacity • Bilateral agreements with no speci-
nal Climate and Forest pia, Guyana, building, and forest fic criteria
Initiative (NIFCI) Indonesia, conservation • Brazil: Projects are selected by the
Mexico, Amazon Fund based on compli-
Tanzania ance with certain national sustai-
and Vietnam nable development aspects
International Energy Kenya, RE and EE No particular criteria but countries
and Climate Initiative Bhutan, have to complete Phase I (strategy
Energy+, Norway Liberia, development, technical and institu-
Ethiopia, tional capacity building ) and Phase
Maldives, II (institutional capacity building, po-
Senegal, licy and legal reform, MRV) in order
Morocco, to participate in Phase III (scale-up RE
Tanzania, and EE implementation)
Nepal, Mali,
Grenada,
Mozam-
bique
Facility for Performance Latin Ame- Renewable power No information
Based Climate (PBC) rica generation, energy effi-
Finance in Latin America ciency, municipal solid
waste management and
transportation
NDRC HFC-23 subsidy China Incineration, transfor- Projects are required to submit
program mation and utilization disposal status report and third party
of HFC-23 verification report to be considered15
Upfront evaluation Results used for Pricing approach MRV
payments
Internal selection Sales of low carbon Bilateral negotiations, Scheme-specific MRV;
process among EnDev’s energy appliances or based on benchmark of no programme-wide
local project offices and the number of people maximum 20 EUR per MRV requirements
selected partner organi- connected to low car- person gained access to
sations bon mini grid energy
Upfront due diligence kWh fed into national Fixed FiT per RE techno- Methodology develo-
by independent experts grid logy over 20 years ped by Uganda Energy
Transmission Company
Limited
Due diligence by World Tons of emission reduc- Project-specific negati- Developed internally
Bank on project app- tions on; pricing criteria to be specifically for this
raisal and safeguards determined facility
assessment
No upfront due tCO2 reduced against a Brazil: Fixed price of 5 National MRV ap-
diligence – bilateral deforestation baseline USD / tCO2 proaches
agreement
Case-by-case selection (Phase III only) Access Case-by-case determi- Global Tracking Frame-
to sustainable energy nation work by Sustainable
services and emission Energy for All (SE4all)
reductions from RE and
EE
No information Verified CO2 emission Depending on the type Own MRV system
reductions of technology imple-
mented
Expert review meeting t CO2e Investment subsidy MRV methodology de-
to examine disposal capped at 15 and 10 veloped by the NDRC
status report and third million Yuan for incine-
party verification report ration capacity of 1200
and 600 tons of HFC-23
respectively for new
HCFC-22 plants that are
not eligible under the
CDM; annual declining
operation subsidy from
4 to 1 Yuan per t CO2e16 2.3.1 World Bank: Carbon Initiative for technology and country focus rather than being an
Development additional outcome that must be monitored and ve-
rified. However, Ci-Dev does have a monitoring and
The Carbon Initiative for Development (Ci-Dev) was evaluation process, which incorporates indicators
established by the World Bank’s Climate and Carbon beyond GHG emissions reductions, but it is part of
Finance Unit in December 2011 and became opera- an ongoing dialogue with the recipient of the funds
tional in April 2014, to „build capacity and develop and is not directly tied to the results-based pay-
tools and methodologies to help the world’s poorest ments.
countries access carbon finance, mainly in the area of
energy access“.9 The facility disburses performance- The due diligence process for Ci-Dev proposals fo-
based payments for emission reductions on the ba- cuses on the business model of the programmatic
sis of an Emissions Reduction Purchase Agreement activity, not only to understand how carbon reve-
(ERPA), with a focus on household-level clean tech- nues leverage private financing and drive innova-
nologies in low-income countries. The objectives of tion, but also to ensure that the programmes are
Ci-Dev are shown in Box 1 below, and include not sustainable over the long run – even beyond the ex-
only emissions reductions but also the evolution of piration of the ERPA. By reducing the initial barriers
carbon market mechanisms, results-based finance to investment and promoting innovative business
and other climate finance mechanisms in a way that models, Ci-Dev aims to transform these markets so
benefits the poorest countries. that the mitigation activities can continue beyond
the life of the carbon revenue stream. Again, this is
To implement these objectives, Ci-Dev uses a fo- possible, in part, due to the choice of technology
cused country and technology strategy, as shown areas, which offer the potential for significant cost
in Table 1. In other words, in addition to conducting reductions over time, as well as increased efficien-
a detailed, quantitative assessment of proposals to cy of the delivery systems for energy access. Ci-Dev
determine whether they meet the overall goals of Ci- is also piloting innovative monitoring approaches
Dev and the other criteria, the fund uses an internal, using, for example, cellular technology and payment
qualitative assessment process involving sectoral control systems, to track non-GHG metrics of project
experts to identify business models with potential- performance, even if they are not yet directly linked
ly transformative potential and impact on develop- to payments.
ment. The development benefits are driven by the
Box 1 Objectives of the Carbon Initiative for Development (Ci-Dev)
To demonstrate that performance-based pay- To support low income countries in developing
ments for the purchase of certified carbon emissi- standardized baselines and establishing “sup-
on reductions (CERs) can lead to a successful and pressed demand” accounting standards in key are-
viable business model that promotes increased as such as rural electrification, household energy
private sector participation, and share lessons for access and energy efficiency.
replication.
To contribute proposals to further improve and ex-
To influence future carbon market mechanisms tend the scope of the Clean Development Mecha-
so that low income countries, and especially least nism (CDM) for use by least developed countries
developed ones, receive a greater and fairer share (LDCs), in particular for Programmes of Activities
of carbon finance, resulting in high development (POA).
benefits that avoid carbon emissions.
Source: Ci-Dev website
9 http://www.ci-dev.org2.3.2 World Bank: Pilot Auction Facility 2013). In an important departure from other carbon 17
for Methane and Climate Change funds, the PAF evaluation process for proposals will
Mitigation happen almost entirely at the time of redemption of
the options, not upfront. While there are participati-
The Pilot Auction Facility for Methane and Climate on criteria for bidders, and participants are informed
Change Mitigation (PAF) was launched by the World of any PAF restrictions on country, technology and
Bank in September 2014 as a pilot pay-for-perfor- project type, the due diligence for projects will only
mance facility that would purchase emissions red- happen when the successful bidders try to redeem
uctions through auctions. The objective of the PAF their options. Each project will have to comply with
is to “demonstrate a new, cost-effective climate fi- a customized set of environmental, health and so-
nance mechanism that incentivizes private sector cial performance criteria, established by the PAF on
investment in climate change mitigation in develo- a project-specific basis, and which will be evaluated
ping countries.” Rather than following the traditional by a third party auditor at the same time that the
route of calling for project proposals, conducting GHG emissions reductions are evaluated (and most
due diligence, and then signing ERPAs with selected likely by the same company). The environmental,
mitigation projects, the PAF will use auctioning of health and safety (EHS) audit used for projects in the
options to provide project owners with price secu- first round was based on an assessment of the risks
rity while aiming that the PAF’s funds are used effici- of the particular project types – future rounds with
ently (i.e. achieving the highest mitigation per dollar different sectors might use different approaches.
invested). Mitigation project developers must bid to The performance-based payment will only be dis-
have access to a price guarantee, and the PAF will se- bursed if all the agreed performance criteria are met
lect projects up to the amount of funding available (i.e. GHG mitigation and other criteria as well). Note
for each auction. that the tradability of the options means that a pro-
ject owner who realises that they may not be able
The first round of auction, held in July 2015, was to meet the agreed criteria can still sell the options
a “reverse auction” of “put options”. A put option to a project owner who can meet them. In its first
is an option for the owner to sell a product at an auction, bidders bought put options for 8.7 million
agreed price in the future, which they may or may CERs at a strike price of USD 2.40 per CER - a price
not choose to exercise. In a reverse auction, the auc- well above current spot prices for CERs at around
tion manager sets a fixed option premium (i.e. the USD 0.50. The auction attracted 28 bidders from 17
cost of securing an option to sell at a fixed price in countries, of which 12 companies were selected as
the future) in advance, which auction winners must winners.
purchase. The bidding then focuses on what the ac-
tual future guaranteed price will be, which is called
the “strike price”. In other words, bidders compete
by reducing the strike price they will accept – hence
the name “reverse auction” – so that the bidders that
can still be profitable with the lowest carbon pri-
ce will win the auction. The final strike price is the
same for all bidders, and is the price at which the
desired amount of emissions reductions for the ove-
rall round can be contracted. Future rounds of the
PAF may use a “forward auction”, whereby the strike
price is fixed but the premium is bid up by the parti-
cipants in the auction. In either case, the PAF options
(i.e. the right to sell at fixed price in the future) will be
denominated as a World Bank bond that is tradable,
so even if a project owner decides not to use them,
they can sell them to another potential project ow-
ner, who would then be guaranteed the same price
and volume (assuming they could meet the eligibi-
lity criteria established in advance by the PAF for all
option redemptions).
The first auction of the PAF covered three areas of
methane mitigation – landfill gas, wastewater and
animal waste – which were selected in large part
based on an underlying study (Cantor and QuesnelYou can also read
