"Aviation’s Carbon Credit Crisis: Will Rising Prices Ground Compliance?"
Aviation Emissions Scheme Faces Compliance Challenges Amid Rising Carbon Credit Prices
A pioneering initiative aimed at curbing aviation emissions is encountering significant hurdles as the cost of carbon credits escalates. The Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), established in 2016, marked a historic agreement for the aviation sector to adopt global emissions targets. Under this scheme, airlines are required to cap their emissions at 85% of 2019 levels, with any growth needing to be offset through the purchase of CORSIA-approved carbon credits.
Current Landscape of CORSIA Compliance
As the first phase of CORSIA approaches, set to run from 2024 to 2026, participating airlines from countries including the United States and various European nations are projected to need between 100 and 150 million carbon credits. This estimate comes from a recent report by Allied Offsets, a carbon markets intelligence firm. However, the report highlights a critical challenge: only 15 million credits currently meet CORSIA’s stringent eligibility criteria.
The mismatch between the demand for credits and their limited supply is expected to drive prices upward. CORSIA has established high integrity standards for eligible credits, further limiting the registries involved. Consequently, credits that meet these criteria are increasingly viewed as valuable assets, not just by airlines but across various sectors. Notably, the retirement of CORSIA credits surged by 200% annually from 2021 to 2024, with airlines accounting for a mere 6% of this total.
Rising Prices and Compliance Risks
The price trajectory of carbon credits has already shown a significant increase. For instance, a forestry project in Guyana, the only initiative to have issued CORSIA-compliant credits, made 4.6 million credits available in February 2024. The price of these credits has escalated from approximately $5 to $20. If this trend continues, airlines may perceive compliance with CORSIA as prohibitively expensive. Antonia Drummond, head of product at Allied Offsets, expressed concerns that airlines might opt out of the scheme altogether, particularly in regions where penalties for non-compliance are less stringent, such as Asia.
Conversely, compliance is expected to be more robust in countries like the U.K. and Canada, where penalties for non-compliance are firmly established. However, airlines contacted for comment on these findings did not respond.
The Challenge of Credit Eligibility
A pivotal factor in the success of CORSIA will be the ability of project developers to secure the CORSIA-eligible label. While the report suggests that the theoretical supply of credits could reach 1.8 billion by 2027, the reality is that host countries must ensure that emissions reductions from these projects do not count against their own national inventories. This is typically achieved through a “Letter of Authorization,” but many developing nations lack the capacity to formalize this process.
Despite these challenges, some experts remain optimistic. Valerio Magliulo, CEO of Abatable, noted that the financial incentives for host countries could expedite the authorization process. For example, a clean cookstoves project recently issued a Letter of Authorization by the Cambodian government is projected to generate 40 million credits. If these credits trade at $5 each, the project could yield $200 million, providing a strong incentive for swift action.
Financial Implications and Future Demand
The financial implications of the current credit squeeze are substantial. Abatable’s forecasts indicate that the aviation industry will require between 134 and 183 million credits during the initial phase of CORSIA, translating to a total cost ranging from $1.7 billion to $3.1 billion. As the scheme transitions into its second phase in 2027, with countries like China, Brazil, and India expected to join, demand for carbon credits is anticipated to rise further.
In summary, while CORSIA represents a groundbreaking effort to address aviation emissions, the rising costs of carbon credits and the complexities surrounding compliance pose significant challenges. The aviation industry, along with policymakers and project developers, will need to navigate these hurdles carefully to ensure the success of this vital environmental initiative.