03 March 2016 08:25:18 IST

World Bank announces second auction for emission reductions

The winning bidders will secure an option to sell their carbon credits at the ‘strike rate’

World Bank will auction the right, but not the obligation, to sell emission reduction credits from methane abatement projects, on May 12. This will be the bank’s second such auction — the first was held on July 15, 2015.

Entities that put up projects which will have the effect of cutting down methane emissions can participate in the auction and buy the put-option. The winning bidders will secure an option to sell their carbon credits at the ‘strike rate’ – fixed at $3.50 a tonne of CO2 equivalent emission reduction. If the market price of carbon is higher than the strike price, the credit owners could sell their credits in the market. If the market price falls below the strike price, they have the option of selling it to the World Bank at $3.5 a tonne, or wait for a revival of the market.

World Bank will buy the credits, through its ‘pilot auction facility’, out of a fund of $100 million, created by pooling contributions from a few developed countries.

The strike price serves as a floor price, giving the option winners a safety net even if the carbon market collapses. The auctions are World Bank’s effort to revive the carbon market. Carbon prices, which once ruled around €17 a tonne, are now down to 35 euro cents.

In the first auctions of July last year, 12 companies bought the put-options at a strike price of $2.40, covering methane spews equivalent to 8.7 million tonnes of CO2 emissions. Methane is a greenhouse gas, 25 times more harmful than CO2.

A revival of carbon market is good for many companies in India, where projects registered under the ‘clean development mechanism’ will earn over 800 million certified emission reductions (CERs) by 2020. At present, Indian companies are sitting with about 200 million CERs.