The aviation industry has made steady progress on several environmental fronts over the past decades, both as a consequence of international or local regulatory approaches, as well as the constant aim of lowering aircraft operating costs. In the 1980s and 1990s the primary focus was on reducing airport and community noise. In addition, regulatory changes were made to reduce emissions, especially nitrogen oxides (NOx), but also carbon monoxide and particulates. The regulations have thus concentrated on the impact aviation has in and around airports. But concerns about global warming have led to a new focus on the overall impact that aviation has on the environment, primarily in terms of the level of carbon dioxide (CO2) emissions, where aviation contributes about 2% of the global total (1.3% from international flights).

The Kyoto Protocol of 1997 and subsequent international treaties committed signatories to limit their country’s greenhouse gas emissions. In 2005, the European Commission launched an emissions trading scheme (ETS) covering power generators and energy-intensive industries. This was extended to aviation in 2012, but proved controversial as it required airlines flying to and from Europe to participate, as well as airlines flying solely within Europe. China, the USA and others protested at the scheme and it was eventually agreed that the International Civil Aviation Organisation (ICAO) would make proposals for globally-applicable CO2 market-based measures by the time of its 39th general assembly in September 2016.

Announced on 6 October, ICAO’s agreement on the Carbon Offsetting and Reduction Scheme (CORSIA) is targeted to achieve carbon-neutral growth from 2020 on. Therefore all additional emissions post-2020 have to be offset by acquiring and handing in one offset for each tonne of CO2 emitted. CORSIA will be implemented in three phases. In the pilot phase (2021-2023) and the first phase (2024-2026), participation in the scheme is voluntary, only in the second phase (2027-2035) is participation obligatory for states with a significant share of RTKs. In all phases, only flights between two included states will be covered. The compliance obligation lies with the aviation operators, which means they are responsible for acquiring offsets to account for the increase in emissions in the aviation sector.

The map shows which 66 countries have signed up for the voluntary stage of CORSIA. The colour is proportional to the percentage of global ASKs each contributes.

The CORSIA scheme covers CO2 emissions from international passenger and cargo flights. The first table uses 2016’s scheduled passenger capacity, in terms of available seat kilometres (ASKs) to indicate the proportion of global aviation emissions that the scheme addresses. While CO2 emissions will not be exactly proportional to ASKs this gives a good approximation of today’s picture.

Firstly, domestic capacity represents 35% of the total and CORSIA does not address this, although it is assumed the European ETS scheme will cover domestic emissions within Europe (an additional 2%), and it is possible other countries may implement their own schemes. The US is the largest domestic aviation market (14% of global ASKs), but it appears unlikely to have a scheme. Secondly, CORSIA only covers international flights that both depart and arrive in countries participating in the scheme.

Therefore, if CORSIA was introduced today, it would only directly cover 3,466 billion ASKs. This is just 39% of global passenger capacity, and by approximation CO2 emissions.

The current signatory countries are primarily the more developed economies, although China, Indonesia, Turkey and the UAE have all agreed to take part. Around one-third of today’s CORSIA-included ASKs are in faster-growing developing markets, and two-thirds in developed economies. A similar pattern occurs in domestic markets. On flights from a CORSIA country to a non-CORSIA country, most capacity will involve emerging markets. The data suggests that by 2020, the reference year for CO2 emissions, the proportion covered by CORSIA will perhaps be marginally less than today’s figure.

CORSIA requires all aviation operators to offset the emissions increase post-2020. That means for each additional tonne of CO2 emissions, one offset (a specific CO2 certificate) has to be handed in. They generally result from emission reduction projects where for each tonne of CO2 emission reduced or avoided the project owner receives one offset. These offsets are then tradable instruments and can be used by companies for compliance in an ETS or in the voluntary market.

The ETS around the world have historically led to the largest demand for offsets (see graph below). Each ETS, however, has different rules on the kind and amount of offsets that companies are allowed to use. The European ETS was historically the largest source of demand for offsets, where companies could cover up to 11% of their compliance obligation with offsets. These came from the Clean Development Mechanism (CDM) and Joint Implementation (JI), international project-based mechanisms governed by the United Nations Framework – Convention on Climate Change (UNFCCC). CDM and JI projects are usually based in developing countries. In total, EU companies used 1.47 billion offsets from 2008 through 2016. However, for 2013-2020 the EU changed its rules significantly, allowing only small amounts of offsets per year and putting rigid rules on which are eligible to be used.

For the Californian cap-and-trade programme, offsets rules were set differently. The offset limit is currently set to 8% of yearly emissions. Offset projects are mainly generated from Ozone Depleting Substance Destruction and Forestry projects based in the USA. Total demand for offsets since the start of the programme has been 13.1 million, but this is expected to increase to around 20-25 million per year by 2020. Newly developing carbon markets, such as the Chinese National Carbon market and South Korean ETS have chosen a similar route to California, by focussing on offsets generated nationally. This leads to very local demand and supply for offsets.

An additional source of demand for offsets has been the voluntary market. Individuals offsetting their flight emissions and companies promoting carbon neutral products have led to increasing demand for voluntary offsets. This market is fragmented, as there are several different offset standards and providers leading to a wide spread of prices.

Looking at offset demand over time, it shows that the EU ETS has played the main role in offset demand over several years. However, more recently, demand dropped dramatically. Demand from newer schemes is only slowly picking up, namely California and South Korea. Looking ahead, demand from California and in particular China is likely to increase. It is important to note that offsets are not interchangeable, meaning that EU ETS offset cannot be used for the compliance in California and vice versa. Generally, CORSIA is expected to support either the CDM or other standards currently used in the voluntary market.

Despite its relatively low coverage in the first years, CORSIA can change the demand structure for offsets significantly post-2020. IATA says the world’s airlines consumed 310 billion litres of jet fuel in 2015. Fuel efficiency (measured in litres/seat kilometre) has improved by 1.85% per annum since 2004, although this has slowed to 1.25% per annum since 2011. With many new and re-engined aircraft entering service in the next five years, we would expect future growth in fuel use of around 4% per year. This implies that fuel use in 2020 will be around 380 billion litres, and by 2026 fuel demand would increase to 482 billion litres. CO2 emissions would accordingly increase from 956 million tonnes to 1,209 million tonnes in 2026. With the current cover ratio of 39% of emissions, this would lead to a total offset demand of 334.8 million in the first two voluntary phases (see table). The demand would come only step by step, but will still have a significant impact on the offset market.

The higher demand for offsets in CORSIA is very good news for offset developers around the world. Most of them have been struggling with the drop in demand from the EU and the subsequent fall in offset prices, in particular for offsets generated by the CDM.

However, in its current agreement, ICAO has not yet defined which credits will be eligible to be used for CORSIA. The decision on the quality of offsets will be important to define the environmental and price impact of the new scheme. In particular the price range for available offsets will be defined by the eligibility rules. Development prices for offsets currently range between $1 and $20 per tonne of emission reduction. Cheap projects, such as large renewable energy projects, are often seen as lower quality offsets as their implementation is not clearly additional, which means they do not depend on the income coming from the sale of offsets. Higher quality offset projects usually demonstrate co-benefits for communities in developing countries. Examples of this kind of projects are cooking stove projects in Africa. These projects are significantly more complicated to implement and therefore also more expensive.

Between those two extremes, ICAO has a wide range of options on how to define its eligibility criteria. For aviation, this decision will decide the price impact of CORSIA on operating costs. The offset cost will be directly linked to the fuel cost, one of the main expenses. When oil was over $100/barrel in 2014, it was the single largest cost for most airlines, representing 31.6% of total expenses. The halving of oil prices since then has seen a decline to around 20% this year.

Based on the carbon intensity of kerosene, a $20 offset price per tonne of CO2 would result in an increase of around $8 per barrel of kerosene. Based on today’s airline cost breakdown, this would increase total costs by 2.8%. If fuel price increased to levels seen in 2014, offsets would increase total costs by a lower amount – about 2.2%. However, these percentages assume full coverage. As CORSIA only covers incremental emissions post-2020, it will only impact the cost of that additional capacity.

Therefore, in 2026, offsets would only need to be handed in for around 20% of flights, thus the average cost impact is reduced to 0.4-0.6% of total airline industry costs. Also, remember that these costs will only impact around 40% of the total ASKs flown globally.

In conclusion, the actual cost impact for the airline industry is difficult to predict, as it depends on which types of offsets are allowable within CORSIA, and the amount of supply. At the current average voluntary market price of $3.80 per tonne of CO2, the impact is negligible. With the inclusion of aviation from 2020, demand for offsets will increase, and is likely to result in some price increase for the allowable schemes. At an indicative cost of $20 per tonne, the burden on the airline industry is less than 1% of additional costs by 2026. This conclusion is perhaps a double-edged sword in that the airline industry will be able to point to progress towards carbon neutral growth, but critics will be able to say that there has been no measurable impact on traffic growth rates.

Source: Cirium Dashboard