Airlines are advocating for a rule change in the global emissions reduction program set to commence next year, as they aim to modify the baseline against which their carbon emissions are measured. The industry argues that the grounding of numerous flights during the COVID-19 pandemic necessitates a revision to reflect the reduced operations in 2020. Currently, baseline emissions are calculated based on data from 2019 and 2020. This proposed adjustment would only consider 2019 as the baseline year, reducing the need for additional emission credits starting in 2021. While the industry seeks to limit costs, such a change could adversely impact investments in renewable energy projects and potentially undermine the effectiveness of the emissions program.
Baseline Adjustment Implications:
The International Air Transport Association (IATA), a leading industry group, has requested the alteration to the baseline rule, highlighting the financial strain faced by airlines, particularly in the wake of the pandemic. If the adjustment is implemented, and airline emissions remain below 2019 levels until 2023, the demand for offset credits within the planned market, known as Corsia (Carbon Offsetting and Reduction Scheme for International Aviation), may diminish significantly. This outcome would jeopardize the financing of emissions-cutting projects, as developers of renewable energy initiatives rely on the sale of carbon credits to airlines for compliance. Without demand for these credits, the market’s ability to fund projects and incentivize airlines to reduce their greenhouse gas emissions would be compromised.
Potential Consequences and Market Impact:
One program that qualifies for the market is the Clean Development Mechanism (CDM), which has already faced scarce demand and low prices. The CDM originated from the 1997 Kyoto Protocol on climate change, serving as an early form of a global carbon market. However, the European Union’s cap-and-trade system limited the use of CDM credits for compliance, leading to a decline in their popularity over the past decade. While prices for these credits have slightly increased this year, their suitability for the airline emissions market remains uncertain.
The baseline adjustment could have far-reaching consequences. Should IATA succeed in its argument, the European Union may seek alternative carbon pricing mechanisms for international flights, such as fuel taxes, potentially weakening Corsia. This, in turn, could trigger increased demand for offsets in the EU carbon market, affecting prices and potentially causing substantial value appreciation for credits. Industries outside of aviation, such as technology, palm oil, utilities, and oil companies, are also driving demand for offsets, further influencing market dynamics.
Conclusion:
The request to revise the baseline in the emissions program reflects airlines’ efforts to alleviate financial pressures resulting from the unprecedented impact of the COVID-19 pandemic. However, such a change could disrupt the offset market and impede investments in renewable energy projects. The International Civil Aviation Organization will evaluate the baseline issue at its governing council meeting in June. The outcome of this decision will have implications for the future of Corsia and the overall effectiveness of carbon reduction efforts in the aviation industry.
