Read more in the December 6 edition of Invert Insights.
With the voluntary Phase I (compliance is mandatory for all international flights between participating countries) and mandatory Phase II of the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) coming into effect in 2024 and 2027, respectively, the International Civil Aviation Organization’s (ICAO) ambitions for reducing global aviation emissions are fully entering into force. A pivotal initiative aimed at addressing emissions from international air travel, CORSIA will offset any growth in C02 emissions above 85% of 2019 levels while other mitigation measures related to technology, operations, and infrastructure are concurrently scaled. While its goals align with global climate ambitions, CORSIA introduces a mix of operational, financial, and market dynamics for airlines and the general carbon market.
A new report from MSCI, CORSIA: Costs and Implications for the Airline Industry, highlights how increasing demand and a limited supply of eligible credits could impact airline profits, consumer costs, and the broader voluntary carbon market. Based on a bottom-up demand methodology that accounts for the published list of countries participating in the voluntary Phase I and a range of participation forecasts for Phase II, the report defines three demand scenarios and their anticipated impacts.
Although ICAO has granted full eligibility to a number of carbon credit standards, including ACR, ART TREES, Verra, Gold Standard, Climate Action Reserve (CAR), and the Global Carbon Council (GCC), only 7 MtCO2e of issued credits currently meet all eligibility requirements for use in Phase I; the main reason for the shortfall being that the majority of credits issued by these registries have not yet been issued with a Letter of Authorization (LoA) by their host-country governments. The lack of LoAs is expected to continue to constrain short-term supply.
Cost Implications
During Phase I (2024-2026), airlines will require carbon credits to offset 106-137 MtCO2e, costing the industry between USD 1.9 billion and USD 7 billion. These costs are projected to escalate during Phase II (2027-2035), with offset requirements reaching 502-1,299 MtCO2e and associated costs ballooning to as high as USD 109 billion. This represents an incremental cost of up to USD 5 per ticket by the latter stages of Phase II.
Operational and Strategic Adjustments
Airlines are likely to pursue a mix of strategies to absorb or pass on these costs. For instance:
Furthermore, major airlines like Lufthansa and Virgin Atlantic have already begun introducing environmental surcharges to account for the rising costs of decarbonization.
Supply Constraints and Pricing Pressure
The demand for CORSIA-eligible credits will outstrip supply, especially given the stringent requirements, including corresponding adjustments to avoid double-counting under the Paris Agreement. In Phase I, supply could fall short by up to 43 MtCO2e under tight scenarios, pushing credit prices to USD 18-51 per tonne. By the later stages of Phase II, prices could climb to USD 27-91 per tonne, depending on supply-demand dynamics.
Unlocking Credit Supply
Recent approvals of standards such as Verra and Gold Standard expand potential supply, but readiness challenges in issuing corresponding adjustments persist, particularly in low- and middle-income countries. With a minimum number of issued credits currently meeting all CORSIA eligibility criteria, the urgency for governments to establish the necessary infrastructure to increase supply is paramount.
Market Growth and Innovation
CORSIA is expected to catalyze growth in the voluntary carbon market, potentially making it a USD 66 billion industry by 2035. The scheme’s demand for high-integrity credits could set a benchmark for other sectors, enhancing the credibility and robustness of the carbon market.
Incentivizing Decarbonization Technologies
CORSIA’s credit pricing dynamics may incentivize investments in sustainable aviation fuels (SAFs) and next-generation aircraft. However, the limited adoption of SAFs (currently 0.2% of total aviation fuel) and delays in technological advancements remain key hurdles.
Invert Insights.
💡 CORSIA is poised to reshape the aviation sector’s approach to emissions management and the carbon market’s trajectory. For airlines, the challenge lies in balancing compliance costs with operational efficiency and customer expectations.
💡 For the carbon market, CORSIA underscores the importance of scaling supply while maintaining credit integrity. Stakeholders across the aviation and carbon sectors must collaborate to navigate these complexities, ensuring that environmental and economic objectives are aligned.
💡The growing shortage of eligible credits presents significant challenges. This scarcity could drive up the cost of compliance as demand outpaces supply, particularly as the scheme scales up in 2027. The shortage also underscores the urgency for airlines to diversify their strategies, such as investing in Sustainable Aviation Fuel (SAF), adopting fleet modernization, and collaborating on new carbon projects to secure future credit streams. Proactively engaging in the carbon market with partners like Invert and supporting the development of high-integrity credits could not only mitigate financial risk but also bolster airlines’ sustainability narratives, aligning them with increasingly climate-conscious travelers and investors.
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