Aviation carbon emissions are on an upward trajectory, leading regulators to face mounting pressure to address their impact on global warming. Various regional trading schemes, such as the EU Emissions Trading System (ETS), aim to cap aviation emissions, while international flights will fall under the International Civil Aviation Authority’s Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA).
Here’s what has been agreed upon so far:
By 2019, countries and their national airlines will need to monitor their emissions from international aviation activities to establish the CORSIA baseline.
The pilot phase of CORSIA will run from 2021 to 2023, during which all ICAO member countries must track their aggregated emissions, regardless of their participation in the scheme. CORSIA remains voluntary until 2027.
By November 2024, operators will verify emissions data from 2021 to 2023 and determine the total amount of offsets they need to purchase for the pilot phase.
Offset cancellation for the pilot phase is required by January 31, 2025, through the ICAO registry.
Regarding the eligibility of carbon credits as offsets, no definitive decision has been made yet. It is expected that the ICAO’s Emissions Unit Criteria (EUC) working group will present its final recommendations on offset eligibility at the Global Aviation Security Symposium in September 2017. Early indications suggest that Clean Development Mechanism (CDM) projects’ CER credits, issued after January 1, 2013, are likely to meet CORSIA’s offset criteria.
The offset demand under CORSIA is estimated to reach 2.7 billion tonnes of CO2 between 2021 and 2035, with the pilot phase and first phase accounting for 380 Mt and the second phase covering 2,320 Mt.
During the pilot and first phases, compliance costs are expected to be minimal if medium-quality CER prices remain as they are. However, the strictness of offset eligibility criteria and limited supply could drive up costs. As demand increases towards the second phase, CORSIA is expected to become a more significant concern for airlines, as the offset shortfall and potential carbon price increase may have a financial impact.
Redshaw Advisors believes that the financial risk posed by the EU ETS to the aviation sector will outweigh the risk of CORSIA for the next five years.
To address carbon risk, airlines should strive to understand their emissions, stay informed about evolving regulations, and monitor carbon price developments. For CORSIA, the crucial factor to watch in 2017 is the offset eligibility criteria, which will determine supply availability and price levels.
The EU ETS poses a risk mainly in the cost of EU Allowances, with the Market Stability Reserve and Phase IV reforms expected to drive compliance costs significantly higher.
