Methane Finance Study Group: pay-for-performance approaches to addressing methane

A report by the Methane Finance Study Group looked at how public funds, utilizing pay-for-performance mechanisms, may be used to incentivize reductions of methane emissions. Reducing methane can be achieved in a range of sectors, including oil and gas production and natural gas processing, transmission, and distribution; coal mine methane; solid waste and wastewater management, and agriculture. Across these sectors, the study group found that a large and growing number of abatement opportunities have been identified in developing countries, but in many cases,  these were not implemented due to financial and other barriers. Pay-for-performance mechanisms disburse cash on the delivery of pre-determined and independently verified results. This makes them attractive instruments for governments facing expanding funding needs and scrutiny on achievements. Importantly, pay-for-performance mechanisms can be designed to directly incentivize private investment through allocation methods that maximize public value for money. The Methane Finance Study group recommended the establishment of a finance facility.

The World Bank Group used the study findings to develop the Pilot Auction Facility for Methane and Climate Change Mitigation (PAF). The Climate and Clean Air Coalition supported the design and development phase of the facility. The PAF is an innovative, pay-for-performance mechanism to stimulate investment in projects that reduce greenhouse gas emissions while maximizing the impact of public funds and leveraging private sector financing.

The key objective of the PAF is to demonstrate a new, cost-effective, and results-based climate finance mechanism that incentivizes private sector investment and action on climate change in developing countries by providing a guaranteed floor price on emission reductions in the form of carbon credits.

The PAF auctions are supported by Germany, Sweden, Switzerland (through a joint contribution of the State Secretariat of Economic Affairs (SECO) and the Climate Cent Foundation), and the United States. Since the establishment of the facility, the Coalition has served as an observer to the participants’ committee meetings.

The facility completed three auctions and allocated a total to USD 54 million to projects representing 20.6 million tons of CO2 equivalent.

Two auctions targeted the waste sector and resulted in methane reductions of 20.6 million tCO2eq through initiative like the Kampheang Saen Landfill Gas to Energy project – a first of its kind in Thailand.

The PAF was awarded Environmental Finance’s Carbon Deal of the Year 2016.