New CORSIA Updates Will Impact More Than Just Airlines

Managed by the International Civil Aviation Organization (ICAO), CORSIA requires airlines that meet certain qualifying criteria to monitor and report their emissions while also purchasing emission reduction units (from projects generated in other sectors) when these emissions exceed a predetermined baseline.

CORSIA, naturally, has a significant impact on the airlines that are subject to its requirements. However, given the high volume of emissions generated by the airline industry, CORSIA can also have a significant impact on the voluntary carbon market itself. By specifying which credits are eligible for its programme, it can offer signals to the broader carbon credit market on which credits it considers “quality" as well as where large purchases may take place in the future.

So, what is CORSIA signalling to the market and what are the impacts? And how should airlines and other carbon market participants respond?

Recent activity & expected impacts

In March, CORSIA's Technical Advisory Body (TAB) made public its recommendations for reassessing the standards that were eligible under CORSIA's pilot phase to decide whether or not they would be eligible under CORSIA's first phase.

Upon the adoption of the TAB's recommendations by the ICAO Council, Winrock International's American Carbon Registry (ACR) and Architecture for REDD+ Transactions (ART) were both approved to supply credits for the first phase, with no project-type exclusions. Meanwhile, the Climate Action Reserve (CAR), the Global Carbon Council (GCC), the Gold Standard, and Verra's VCS programme were only conditionally approved. Lastly, although previously approved under the Pilot Phase, CDM was not deemed eligible to supply credits for Phase I.

Additionally (pending future decisions by the ICAO Council), only credits with 2021 vintages and above, accompanied by a corresponding adjustment, will be eligible for this phase of the programme. A corresponding adjustment is a mechanism under Article 6 of the Paris Agreement that ensures emission reductions are not double counted. Countries that are seeking to achieve their Paris Agreement greenhouse gas emission reduction pledge may have activities which generate credits that could be sold under CORSIA. However, if the same credit were to be counted toward a country's Nationally Determined Contribution (NDC) and used to achieve compliance with CORSIA, the credit would have been double counted. The corresponding adjustment mechanism ensures that the allocation of these credits aligns with on-the-ground activity and sales, increasing integrity in the market. At the time of publishing, it is critical to note that no correspondingly adjusted credits currently exist in the market; many governments, however, are putting in place the procedures and infrastructure to be able to execute corresponding adjustments.

In addition to this reassessment, in the coming months TAB will also be assessing any new applications for standards that hadn't already been approved to supply credits to the first phase. This fall, the ICAO Council will formally consider the recommendations from the TAB following its assessment of new credit standard applications (whereas the review and recommendation of units approved under the Pilot Phase needs no further approval from ICAO).

TAB's recommendations and the ICAO Council's review will have a significant influence on the market. First, it will drive up demand for the credits available under the approved standards as, in phases one and two of CORSIA, airlines will be expected to purchase them in large volumes. Additionally, it may signal to non-airline buyers that these are considered “best-in-class" and drive up demand from non-airline credit purchasers too. While in the short term, this will only affect the credits currently available on the market under these standards, as post credits with post-2021 reductions, we can also expect the same drive in demand for those credits as well. (That said, it is worth noting that there are certain credits that are considered high-quality, such as some ICROA endorsed credits, that are not accepted under CORSIA's because they haven't applied for eligibility.)

What does this mean for airlines?

Airlines gearing up for the upcoming CORSIA phases should consider structuring their credit strategy around these TAB recommendations and timelines in order to ensure compliance. Not only are airlines expected to make CORSIA-compliant purchases, they must do so in line with CORSIA true-up deadlines.

For compliance with CORSIA's pilot phase (2021–2023), airlines don't need to demonstrate compliance until 31 January 2025. For phase I (2024–2026), this deadline is 31 January 2028.. Given that airlines will need to procure large volumes of eligible credits to meet these deadlines, and that demand will be very high as a result, they should aim to purchase credits well in advance of the cut-off dates to avoid procurement risk.

Given the multi-year obligations of CORSIA requirements, airlines may consider multi-year purchasing agreements (such as a fill-order) to secure their credits. If such a deal spans the reporting obligations of the pilot phase and phase I, airlines should make sure that the standards included in the purchase are aligned with both phases. Under such an approach, it should be noted that despite the CAR, the GCC, the GS, and the VCS only being conditionally approved for phase I, it is likely that they will receive full approval.

That said, it is essential to note that credits that meet the criteria of post-2021 reductions are not currently on the market. While airlines are still able to meet pilot phase purchasing requirements under the agreed standards, they will need to wait for credits eligible for phase I to hit the market. Any fill orders or multi-year deals should be structured with these considerations in mind, and those specifications should be included for the qualifying years.

For effective implementation of any credit purchasing strategy, communication and internal education will be essential. Especially given the nuances of phase I unit availability, airlines will need to communicate expectations to their teams that there will be delays on when these credits become available. Specifically, it is not likely that these credits will be available in a meaningful volume until 2024 at the earliest. Additionally, it is important to note that CORSIA eligibility rules will drive up demand for these credits, which may also increase prices for these units. Airlines should plan to appropriately budget for these increases well in advance.

What does this mean for non-airline credit buyers?

Even though this is a programme aimed at airlines, non-airline credit buyers will also be influenced by these activities. As airlines rush to snap up these credits, demand will increase for these units on an already limited market. Furthermore, players in the voluntary market may see TAB recommendations as an indicator of what is considered “quality", further driving up demand for CORSIA-eligible credits, as well as the price of such units.

If an entity has structured a carbon strategy that includes CORSIA-eligible credit types, it would be prudent for them to keep an eye on these expected market forces so that they can plan accordingly (adjusting budgetary expectations, communicating updates to stakeholders, and procuring credits well in advance of true-up deadlines).

That said, as mentioned there are quality*-certified credits not considered eligible under CORSIA. In fact, in its recently released guidance on its Core Carbon Principles the Integrity Council for the Voluntary Carbon Market (ICVCM) noted that, while CORSIA-eligible credits already meet some of its qualifications, CORSIA credits will still need to demonstrate compliance with certain requirements.

Balancing a carbon portfolio with quality non-CORSIA-eligible credits (e.g. Plan Vivo or Puro.earth issued credits) in a portfolio can help buyers weather the budgetary and availability impacts of CORSIA. Namely, planning for the purchase of such credits can enable a buyer to more reliably predict availability and be less affected by price fluctuations.

Similarly, stakeholders for non-airline buyers may have identified CORSIA-eligible credits as a priority for their portfolio for a variety of reasons (e.g. they appreciate the branding, they desired the credits for other reasons but they also happen to be CORSIA-eligible, etc.) If this is the case, strategies may be employed to soften the aforementioned impacts of CORSIA. As mentioned, CORSIA credits may be assessed** under the ICVCM Core Carbon Principles. CORSIA credits that align with the Core Carbon Principles are likely to be more in demand as they have received this additional label. As a result, this may potentially decrease their availability and increase their price. If a buyer is looking to include CORSIA credits in their portfolio – for whatever reason – then proactively procuring these credits while they are still being assessed by ICVCM could help prevent the impacts on demand that alignment with the principles may have. This is especially the case given that ICVCM is still relatively new – we don't currently know how selective it will be when it comes to CORSIA credits and how it will inform the discussion on credit quality.

Ultimately, credit buyers should have a discussion with their key stakeholders on how they view CORSIA and what it signals to the market about credit quality. Entities with stakeholders who take cues from CORSIA on what to buy should get ahead of the market, and avoid purchasing CDM credits to align with stakeholder preferences. Stakeholders that have a less rigid view on CORSIA signalling should consider increasing the amount of non-CORSIA eligible credits in their portfolio to limit procurement risk.

Final thoughts

We can expect to see shifts in the credit market as these TAB recommendations take hold, and both airline and non-airline credit buyers will be affected by the impacts this guidance has on the market. For further support on navigating this market, or aligning with CORSIA in the long term, reach out to South Pole's bespoke carbon credit advisory team, or book onto one of our CORSIA workshops.

*South Pole considers standards that are ICROA-endorsed to be considered best-in-class.

**The ICVCM Core Carbon Principles are still relatively new. As the initiative is rolled out, more information will become available on how stringent the framework is and how often CORSIA credits are aligned under the framework.