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  • Writer's pictureAndreas Hardeman

CORSIA – The Magic Carpet Ride

(Originally published on 12 September 2018)


The successful adoption of ICAO’s Carbon Offset and Reduction Scheme for International Aviation (CORSIA) at the end of 2016 was a great example of how business participation enhances international rulemaking. Support from industry in ICAO was predicated, however, on a number of incentives for aircraft operators, including equal treatment, and predictability and cost-effectiveness of CORSIA rules. Having spent the best part of a decade analyzing, negotiating and finally agreeing on the design and implementation of a global carbon offsetting scheme, the international aviation sector may yet see the rug pulled from under its feet.


It seemed a good idea at the time: giving CORSIA participants access to Certified Emissions Reductions (CERs) from the Clean Development Mechanism (CDM) under the UNFCCC’s 1997 Kyoto Protocol. After all, CDM had long been the belle of the ball in carbon land, touted as “increasing the diversity of low-cost compliance options” and improving market liquidity. As carbon markets have matured, however, they have begun to shun CDM for being inefficient, too cheap and lacking quality. It is rumored that the largest market, the EU ETS, may ban CERs from its system altogether as from 2021.


CDM was originally conceived to assist developing countries to achieve sustainable development and developed countries to comply with their emissions obligations. While still enjoying the support of many developing nations – and the UNFCCC itself (link: https://unfccc.int/news/cdm-value-clear-future-cloudy) – CDM’s future remains uncertain as new international cooperation mechanisms are being developed under the 2015 Paris Agreement, including a Sustainable Mitigation Mechanism (SMM).


Under the heading of “Market and Non-market Approaches”, some in the UNFCCC negotiations argue that the continuity of CDM units and methodologies post-2020 would undermine Parties’ commitments (known as NDCs) under the Paris Agreement. Others argue that such a transitioning of CDM would help to maintain private sector trust and confidence (read: investments). The latter option could also allow for pre-2020 CERs to be used towards achieving international mitigation targets after 2020, such as NDCs and, indeed, CORSIA.


Having hitched its wagon to the CDM as a principal source of offsets under CORSIA, ICAO may wish to investigate how the transformation or demise of the CDM would affect emissions unit availability, price and compliance cost under CORSIA, specifically affecting those at the bottom of the CORSIA food chain, namely the airlines and, ultimately, consumers.


Estimates by climate NGOs and others show that demand for emissions units under CORSIA (2.7 bn) could account for over 50% of total projected CER supply (5.0 bn) between 2020 and 2035. (Side note: Probably an important reason why many developing states support CORSIA in the first place. This, plus the fact that many of their airlines are simply too small to face any carbon offset obligations under CORSIA to begin with.) While this may seem to create some sense of comfort regarding offset availability for aviation, it is a cold comfort since it doesn’t account for at least three important factors that may dramatically change the picture.


First, a number of NGOs are working extremely hard to have many types of CDM projects and units disqualified on sustainability grounds, something that may significantly limit available offset supplies for international aviation. [link: https://carbonmarketwatch.org/wp-content/uploads/2018/02/ICSA-Report_A4.pdf] If so-called “contentious project types” are excluded, CER supply would only be sufficient to cover demand from aviation during the first five years of CORSIA operation – and that assumes that no one else will want to buy those same CERs. [ref Oko report: https://www.oeko.de/oekodoc/2394/2015-552-en.pdf] In addition, due to the uncertainties surrounding the new mechanisms, many existing CDM projects may be at risk of being discontinued for financial reasons. (link: https://newclimate.org/wp-content/uploads/2017/05/summary_vulnerability_of_cdm_projects_internet1.pdf)


Second, the potential demand from countries that intend to use CERs towards achieving NDCs is not yet known. This could remove a very sizeable portion of units

from the pool of available CERs for aviation. For the same reason, relying on the new Paris mechanisms like the SMM may be equally tricky for aviation as, again, states may prefer to use mitigation outcomes to meet their own voluntary commitments. At most, airlines might be able to use the secondary market but of course that would be entirely at the whims and fancies of state authorities, removing any certainty and predictability from the equation.


Third, the dogged pursuit of ever-increasing climate ambition towards the arbitrary temperature limit of 2oC , and now 1.5oC, has proven to be an effective cudgel to beat policymakers into submission. At the same time, it serves as one of the few ways to artificially (artfully?) drive up the global offset demand and prices thus creating much-coveted “price signals”. And no doubt we will start to see demands in the not too distant future for ambition to go beyond 1.5oC and aim for 1oC.


Where does all this leave aviation? Well, the good news is that mechanisms in multinational frameworks have a habit of being layered rather than replaced, suggesting that CDM is probably likely to survive in some shape or form.[link: https://unfccc.int/news/forum-calls-for-clarity-on-future-of-clean-development-mechanism-under-paris-agreement] The less good news is that this may not matter for aviation if it is confronted with CER supply shortages and steadily rising prices that would multiply the already significant compliance cost for its emissions growth year-on-year. To top it all off, it doesn’t take too much imagination to foresee calls for the gradual lowering of the CORSIA baseline as soon as the scheme is up and running, reminiscent of what happened under the EU ETS.


To sum up, calling for carbon offset obligations without the certainty of a sufficient supply of affordable offsets was a bold move by airlines. It is also one that is starting to look increasingly risky.


As Steppenwolf famously sang way back in 1968, “you don’t know what we can find, on a magic carpet ride”. CORSIA has been a fun ride so far, but participants should prepare for some unfavorable winds - if not a perfect storm - caused by high and rising compliance costs and regulatory uncertainty. Unable to plan for all eventualities in the CORSIA design, at least ICAO had the wisdom to agree on a periodical review of CORSIA’s functionality. If the international community wishes for the magic carpet ride to continue, it should use these reviews wisely to ensure that industry support won’t be lost on the way. The upcoming ICAO discussions on emissions unit eligibility during the 215th Council Session starting on September 17th could be a good place to start.


 

About the author: Andreas Hardeman (The Hague, 1967) is an internationally experienced air transportation lawyer and an acclaimed aviation writer and commentator on current industry trends. Opinions in this blog are exclusively those of the author and do not necessarily reflect those of his business associates or clients. He can be contacted directly at info@astraworx.com

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