This article was written by University of Waterloo student Erin Murray on carbon offsetting and the challenges being faced by the international aviation community, specifically relating to the Carbon Offsetting & Reduction Scheme (CORSIA).
Key Messages
- In order to achieve Carbon Neutral Growth by 2020, a market-based instrument is required to bridge the gap. Current technological and operational advancements are not sufficient enough.
- The International Civil Organization of Aviation has developed a market-based approach known as the Carbon Offsetting and Reduction Scheme (CORSIA) to address global aviation CO2 emissions.
- In order for CORSIA to be effective, ICAO must address inefficiencies in the robustness, transparency, governance and enforcement of the program.
Executive Summary
In 2010, at the 37th International Civil Organization of Aviation (ICAO) Assembly, the ICAO Council adopted the goal of Carbon Neutral Growth from 2020 onward. The environmental consequences of CO2 emissions deriving from international aviation have increased drastically in comparison to 2005 baseline levels. This has encouraged a call for the implementation of market instruments to aid operational and technological advances in sustainable air travel. ICAO has developed a Carbon Offsetting and Reduction Scheme, known as CORSIA as a measure to address carbon emissions at an international level. At a global scale, the implementation of a market-based instrument, such as carbon emission trading, is very complex. Equitable distribution of costs and benefits must be effectively enforced in order for CORSIA to be successful. As ICAO is a UN agency, it holds no enforcement abilities. This lack of enforcement makes CORSIA a voluntary program, which can lead to non-compliance concerns. There are also concerns regarding the robustness, transparency, and governance of the program. There is a need for more vigorous environmental standards and sustainability criterion to create a successful environmental baseline. Implementation of an independent regulatory body to ensure compliance would aid ICAO by ensuring public trust during the execution of CORSIA. In order to be successful, ICAO must ensure that transparency and good governance is at the forefront of CORSIA.
The Problem
The aviation industry contributes close to $2.7 trillion to global gross domestic product and provides over 36 million jobs, making it a large economic driver globally. The economic gains of this industry do not come without environmental consequences. With projections of 2020 global aviation emissions at 70% higher than 2005 baseline levels, and 300- 500% higher by 2030, action must be taken. With many global discussions taking place to reduce negative environmental externalities, CO2 emissions from global aviation have become a major topic of policy conversations. Although fuel efficiency improvements have occurred, carbon intensity has only fallen 12% since 2013. This is not effective enough to offset traffic growth, which has grown almost four times faster than fuel efficiency improvements. Aviation activities account for around 2% of CO2 emissions globally, 1.3% of that is attributed solely to international aviation. Although 2% does not seem large, global aviation emissions rank higher in total emissions then some entire countries. Current technological and operational advancements are not sufficient to address the problem alone. As demonstrated in Figure 2, passenger aviation accounts for 85% of commercial aviation, and even though two-thirds of flights in 2019 were domestic, international flights still account for 60% of total CO2 emissions. Coupled with the complexities associated with managing global emissions, international aviation has become a current growing environmental concern.
Emission Offsetting Background
The Kyoto Protocol and the Paris Agreement addressed targets related to reducing emissions from transportation but lacked clear guidance on international aviation. International aviation has often been excluded in the development of carbon targets as it can be difficult to allocate emissions to particular countries. Due to this exclusion, there is also a lack of direction and experience in the implementation of a global carbon market. A key dilemma in this industry is how to equitably distribute costs globally. A market-based measure, such as carbon trading, has considerable benefits when compared to command and control. A carbon emissions trading scheme is able to guarantee a cost-effective achievement of a predefined environmental target by directly putting a price tag on emissions to incentivize operators to reduce negative externalities. It is also an effective way to set up the shift towards emission reduction as the industry continues to evolve. The International Civil Organization of Aviation (ICAO), a UN agency tasked with researching new air transport policy and standardization innovations, further outlined the need to pursue a market-based approach. At the 37th ICAO Assembly, the goal of carbon neutral growth from 2020 was adopted. There is a need to use market measures, specifically a carbon offsetting measure to reach carbon neutral growth (CNG) from 2020 onward.
As demonstrated in Figure 3, the implementation of technical and operational measures is unlikely to reach the CNG 2020 goal alone. Technological advances and operational changes should be coupled with a global market-based measure to address the gap between 2020 and 2035. ICAO has proposed a Carbon Offsetting and Reduction Scheme, commonly referred to as CORSIA. This market measure coupled with alternative fuel technology addresses the gap demonstrated in Figure 3.
COVID-19 Implications
Many airline operators have called for a pause on the implementation of CORSIA in order to recover costs due to record drops in business. The impacts of COVID-19 has also led to calls for rewrites on many aspects of CORSIA. If IACO allows for the rewrite, offsetting regulations could be delayed 3-5 years allowing airlines to continue to pollute. CORSIA does have some flexibility to lower airlines’ offset obligations for the first three years, which could allow for the model to remain unchanged and effective. On the other hand, COVID-19 could be used as an opportunity to rebuild a low carbon intensity industry and the aviation industry could make major changes in wake of the pandemic.
The Carbon Offsetting & Reduction Scheme
CORSIA is planned to be introduced in phases; the pilot phase will be conducted from 2021- 2023 and the first phase from 2024-2026, with the initial phases a being based on voluntary opt in with 81 nations currently registered. This phase implementation is expected to cover 77% of anticipated emission growth between 2021 to 2023. The second from 2027 to 2035 will require all states with an individual share of international aviation activities above 0.5% of total or a cumulative share reaching 90% of total to participate. The emission offsetting scheme will be based on flight routes. Only emissions from international flights between two states, where both states are members of the ICAO and a part of the scheme are eligible. Once participation and coverage of air routes between states is known, states will calculate their offsetting requirement yearly. This requirement is based off operator’s annual fuel consumptions from CORSIA routes, estimated CO2 emissions and reports to natural authority of state. ICAO will collect these details and estimate the sectoral growth of emissions which then can be multiplied by operator’s emissions to create the offsetting emissions. Operators may then purchase the required number of emissions units. To ensure stringency of offset quality, a technical advisory board has been implemented to develop offset quality criteria, such as additionality, permanence, and transparency. An operator may also reduce their CORSIA required offsets by claiming emission reductions from the use of one of the CORISA eligible alternative fuels. The alternative fuels eligible are based on life cycle emission values, the amount of emissions generated in the life cycle of the fuel.
Cost Analysis
Investors are concerned about climate risks effect’s on airline valuations, as climate-related financial disclosures become more prominent. Based on a cost analysis completed by IATA, offsetting costs related to the implementation of CORSIA are anticipated to have a lesser impact on international aviation than the impact of fuel price volatility. The estimated offsetting cost for 2030 is equal to a 2.6 USD increase in jet fuel ppb. This suggests that an extra 10 USD per barrel of jet fuel would cost the industry around four times the estimated offsets cost. To place this in scope, the standard deviation of the annual jet fuel price has been almost 40 USD per barrel, demonstrating that the airline industry has coped with oil price volatility greater than 15 times the size of the estimated offsetting cost in 2030. Based on a range of carbon prices from a low assumption and a high assumption, the estimated cost of CORSIA range from 1.5 to 6.2 billion USD in 2025; and 5.3 to 23.9 billion USD in 2035. The analysis also shows that carbon offsetting for airline operators would range from 0.2 to 0.6 percent of total revenues from international aviation in 2025; and 0.5 to 1.4 per cent total revenues in 2035. This makes the carbon trading model cost efficient in comparison to current price volatility of fuel.
Critique of CORSIA
Carbon offsetting has been criticized for having varying complexities. Authorities must take into account intricacies such as the capabilities of developing countries, realizations of states to achieve targeted goals based on capabilities, maturity of aviation markets and the ability to take more ambitious action. The purchase of carbon credits has the fundamental flaw of not being the same form of commodity as other products traded and purchased in the market. This makes calculations involved in carbon trading tedious and convoluted. Another area of concern relates to the stringency of carbon offsetting accounting. A lack of rigorous accounting has existed in many carbon offsetting systems where countries or airlines used a reduction to offset an increase in emissions, subsequently the host countries were also counting that reduction towards their climate action goals. Poor offsetting accounting can also lead to parties creating weak targets, which allows for overachievement and the sale of that overachievement as an offset. There are also arguments raised on equitable distribution of benefits and costs. The majority of carbon credits have been accumulated in the developing world as the Kyoto protocol allowed industrialized countries to purchase their credits from developing countries. Furthermore, only a small percentage of projects targeting climate change exist in these developing countries heavily impacted by climate change. Carbon credits also have the potential to flood the market and drown out projects and products; carbon credits that used to have a high of $20 USD have almost no market value now. Governance and transparency, as well as environmental and social safeguards will be integral to adjust the status quo.
ICAO’s Carbon Offsetting and Reduction Scheme has been specifically targeted for its voluntary nature and lack of enforcement and transparency. CORSIA has been introduced through a Standards and Recommended Practice meaning even though they claim the program is mandatory by 2027, ICAO does not have the ability to force participation. CORSIA has also been criticized for its technical advisory boards refusal to operate transparently and share offsetting criteria. This has caused significant trepidation given the challenges related to creating a robust offsetting criterion to ensure environmental effectiveness. Another area of concern is the ability for airline operators to reduce their offsetting requirement by purchasing alternative fuels, deemed eligible by CORSIA. The main issue with these eligible fuels is that some alternative fuels have shown to be even higher in emissions than traditional fuel if emissions from indirect land use changes aren’t properly accounted for. Another letdown of CORSIA lies in the absence of sustainability criteria for alternative fuels. Many experts have compiled such criteria, but ICAO has declined to accept any other measurement besides GHG reduction. Many stakeholders have brought up the concerns mentioned above to ICAO to mitigate before implementation occurs.
Study: The EU Emission Trading System
The EU is the most successful example of an international emissions trading scheme. Developed in 2005, it has successfully lowered emissions 21% and has led the way on research into compatible emission trading systems. The EU Emission Trading System (ETF) successfully identifies conditions for linking trading schemes through system compatibility (i.e. each system must have the same basic environmental integrity), mandatory participation, and an absolute cap must exist on emissions. The EU ETS operates in all European Union countries as well as Iceland, Liechtenstein and Norway. With ambitious goals to cut 2005 levels 43% by 2030, the EU system has the more aggressive targets than CORSIA. Although the EU ETS moved to include all flights to, from and within Europe, they were met with strong international and industry backlash, forcing them to limit the system to only flights operating within Europe. This accounts for approximately 39% of European aviation emissions in 2017. The EU justified this action with hopes of a more comprehensive scheme to be created by ICAO.
European authorities have stressed they would be willing to join a broader international scheme, but only if it aligned with their degree of environmental integrity. As of current, CORSIA has not yet met that integrity requirement. An analysis conducted by the EU ETS determined that dropping their system in lieu of CORSIA could lead to 683.8Mtonnes of CO2 being released (see figure 4). As CORSIA continues to address concerns, it is still unknown if the EU will join CORSIA or not, there are arguments that joining will undermine existing EU legislation and climate ambition.
Carbon Tax
Although CORSIA has been agreed upon by members of ICAO, some economists argue that a better path forward would be a carbon tax. Implementing a tax that rises contingent on emissions generated addresses damage done by countries or operators. A global tax on international air travel also promotes innovation to reduce emissions and tax paid in the congested market. Furthermore, income generated through this tax could be allocated towards research and innovation in green technologies. It could also be used to compensate the developing world, who has historically faced larger impacts of climate change despite being some of the smallest emitters.
Solutions & Recommendations
In order for the Carbon Offsetting and Reduction Scheme to be implemented successfully they must commit to transparency and good governance in a variety of areas; offsetting and alternative fuels criterion require more robust coverage and risk of
non-compliance requires significant consideration. The success of CORSIA will depend on the effectiveness of the offsets chosen; despite ICAO’s refute to operate their technical advisory board transparently they would benefit from ensuring that their appointed board makes their decisions and criterion visible to stakeholders. In order to ensure that the alternative fuels program is a success, CORSIA needs to implement and share sustainability criterion to account for impacts such as water rights, biodiversity, and food security instead of only greenhouse gas emissions. This would allow for direct land use changes to be accounted for and the estimate of GHG emissions to be accurately estimated.
Non-compliance is a major risk with the implementation of a Standard and Recommended Practice as ICAO as a UN Agency Body has no authority to enforce compliance. Global carbon markets are inherently complex; major areas of compliance risk lie with ineffective offsets and alternative fuels. In order for CORSIA to have the needed effect, an independent regulatory body should be implemented. This would allow for the facilitation of CORSIA in a transparent manner which is key to developing global confidence and commitment to the scheme. A strong, independent regulator would also aid in host engagement by ensuring host countries remain educated and involved in decision making processes and by ensuring equitable distribution of offset benefits. According to the Environmental Defense Fund, the regulator would aid in ensuring carbon credits are equally distributed through benefits and costs to countries. They would also ensure effective regulation of implemented sustainability criterion and ensure offsets are appropriately accounted for. CORSIA has the opportunity to advance the international aviation industry towards a carbon neutral future, if it can guarantee transparency, good governance and accountability for all parties involved in the scheme.
Conclusion
International aviation has seen rapid traffic growth in the past decade and large increases in CO2 emissions. A market-based approach is the necessary path forward to bridge the gap between current sustainability practices and the goal of CHG 2020. An emission offsetting scheme is most adoptable practice as the aviation industry aims to negate negative environmental externalities. Although complex, this market measure sets up the framework for emissions reductions and could allow for the effective shift towards emission reduction, and a low carbon intensive industry. If CORSIA can be enforced as a mandatory regulation through an independent regulator they can ensure rigorous environmental integrity is at the forefront of the program. The Carbon Offsetting and Reduction Scheme has the ability to address these targets if they can guarantee transparency and good governance.
The Sustainable Switch 
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