The global aviation industry is far off-course in meeting its 2050 net zero goals.
While solutions such as sustainable aviation fuel (SAF) exist, there simply isn’t enough to go around and prices remain too high for airlines to consider.
However, according to Pablo Fernandez, chief executive officer of EcoSecurities, an environmental services provider, solutions such as carbon offsets may help the aviation sector decarbonise in the meantime while waiting for alternative forms of fuel to mature, scale, and increase in supply.
This is crucial amid new regulations such as the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), which is a global initiative aimed at addressing carbon emissions that stem from international flights.
Announced in 2016 by the International Civil Aviation Organisation (ICAO), the initiative’s first phase officially kicked off this year and will run until 2026, requiring airlines operating international flights between participating states to offset any carbon emissions exceeding 85 per cent of their 2019 levels by purchasing approved carbon credits.
The initiative aims to help the aviation sector achieve net zero carbon emissions by 2050, also in line with Paris Agreement goals.
The aviation industry’s rapid growth and increasing emissions over the last two decades have added further urgency to the need to decarbonise.
For instance, between 1990 and 2019, both passenger and freight demand has quadrupled, with the aviation sector responsible for roughly 2 per cent of global carbon emissions, as of 2022. In 2019, the aviation industry reported that passengers travelled more than 8 trillion kilometres – or close to that of a light year.
Another issue is the carbon intensity of fuel. While SAF has increased in use to over 24 million gallons in 2023, it represents a mere 0.2 per cent of global jet fuel consumption, with the aviation industry still using the same standard jet fuel used in 1990. SAF also costs roughly 2.5 times more, relative to 2022 jet fuel prices.
While Corsia requirements present a means for airlines to correct course, critics have pointed to the scheme’s limited scope, which only covers international flights and excludes domestic emissions, or about a third of all aviation emissions. Observers have also questioned the quality of CORSIA-eligible carbon offsets, noting that they present risks such as offsets being double counted.
At the same time, there is hope that Article 6 of the Paris Agreement, which, while still in the negotiation phase, will provide a framework for countries to voluntarily cooperate with each other to achieve their emission reduction targets set out in their Nationally Determined Contributions (NDCs). Article 6 aims to ensure that airlines use carbon credits that are authorised under the framework and that emission reductions are accurately accounted for and traded responsibly among eligible nations.
Pablo Fernandez, chief executive officer of EcoSecurities, and Yue Huang, assistant director, Climate Policy of the International Air Transport Association (IATA), speak to Eco-Business on why carbon offsets still present a feasible solution for airlines in the meantime, and assist them in meeting CORSIA requirements.
Tune in as we discuss:
- New obligations for airline companies in light of Phase 1 of the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA)
- Why the aviation industry can utilise carbon offsets until alternative fuels, such as sustainable aviation fuel (SAF) decrease in price
- Reasons behind the widening gap between the supply and demand of CORSIA-eligible credits
- Why early commitment could help airlines to hedge investments in offsets and cut costs over time
- The interplay between CORSIA and Article 6 of the Paris Agreement
Phase 1 of the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), which kicked off this year and runs until 2026, requires airlines operating international flights between participating states to offset any carbon emissions exceeding 85 per cent of their 2019 levels by purchasing approved carbon credits.
Could you first speak on the significance of CORSIA and its impact on EcoSecurities regarding the demand for carbon offsets from airline companies?
Pablo Fernandez: I believe that CORSIA and the initiation of its first phase marks the very first genuine commitment from compliance markets.
Current estimations by IATA indicate a projected demand for [CORSIA Eligible Emission Units] ranging from 60 million to 160 million [credits] for phase one between 2024 and 2027, marking a significant initial commitment to the market.
It is important to emphasise that this first phase follows a pilot phase – the ICAO has already [initiated] CORSIA, which has gone through the monitoring, reporting, and verification (MRV) requirements. Many airlines have also participated in this process, helping them to understand how to measure and report accurately. Many airlines have already established their decarbonisation pathways and routes, and now it is a matter of executing these pathways.
In some instances, new methodologies and technologies may be necessary, indicating that decarbonisation will progress over time. In such cases, offsets are available as an option to promote climate action.
These are some of the initial obligations for both global and regional APAC airlines now have during the pilot phase of CORSIA.
What are some of the obligations that both global and regional Asia Pacific airlines now have during the pilot phase of CORSIA?
Pablo Fernandez: As mentioned, airlines are obligated to measure their emissions, monitor them, and undergo an auditing process to ensure the consistency and quality of their emission-related data. This obligation applies to international flights only, with national flights still excluded.
Although many countries are considering expanding carbon pricing schemes to cover domestic and local aviation, Europe serves as a prime example of this trend. Airlines must comply with these regulations. If their emissions increase over time, they are required to offset these emissions.
CORSIA does not operate as a cap-and-trade system where airlines can purchase allowances on the market. Instead, it offers two options: either internally decarbonise their emissions through various means such as renewable fuels and aircraft efficiency improvements or opt for offsets.
From the perspective of the International Air Transport Association, can you provide an overview of CORSIA and why it has been implemented as a tool to help the aviation sector decarbonise?
Yue Huang: Let’s start with a broader picture of the industry’s commitment to long-term mitigation targets.
Back in 2021, the entire aviation industry pledged to achieve net zero carbon emissions by 2050. To reach this ambitious goal, various levers – primarily technological advancements – have been identified.
Pablo highlighted the importance of enhancing fuel efficiency across the flight fleet, alongside the introduction of technologies like electric and hydrogen-powered aircraft.
Operational measures, infrastructure improvements, and streamlining flight routes from point A to B, as managed by air navigation service providers, are also key levers in this journey. SAF also stands out as a readily available option among these sector-specific measures.
However, within the decarbonisation roadmaps outlined by different organisations, there are still residual emissions, which present a challenge that cannot be fully addressed through sector-specific measures and require additional efforts.
Within this context, CORSIA emerges as a critical out-of-sector measure capable of addressing these residual emissions.
When initially proposed, CORSIA served as the sole global market measure to tackle international aviation emissions – which is quite a task considering the fragmented landscape of carbon pricing instruments at national and regional levels, notably exemplified by the EU ETS.
States under the ICAO have adopted CORSIA as a tool to manage international aviation emissions. Originally envisioned to achieve carbon-neutral growth by 2020, this target has since been revised to 85 per cent of 2019 emissions due to the disruptions caused by the COVID-19 pandemic. So CORSIA aims to address all international aviation emissions exceeding this baseline.
In the mid to long term, CORSIA will play a very important role in bridging the emissions gap and reducing international aviation emissions.
Pablo Fernandez: As previously discussed, there is a notable aspect regarding the demand for compliance markets, particularly at a global scale. Currently, there exists a patchwork of over 80 carbon pricing schemes worldwide, as highlighted in the World Bank report. These schemes are largely disparate and often rely solely on local instruments and offsets, resulting in a fragmented landscape.
CORSIA is the first compliance market to address this global demand.
While the voluntary carbon market also caters to a global demand for offsets, it operates on a voluntary basis. This uniqueness is why phase one of CORSIA is important for the market.
It is hoped that other sectors and countries will view this as a model to replicate, prompting an increase in global demand for offsets rather than the prevailing regional and local focus.
What are the main opportunities and challenges airlines could face as they transition from CORSIA’s pilot phase to its mandatory phase in 2027?
Yue Huang: One of the biggest challenges we are observing today is the huge gap between supply and demand, a point underscored by Pablo’s projection indicating a potential first-phase compliance demand of up to 160 million tonnes of offsetting credits. However, the current supply of valid CORSIA-eligible emission units on the market stands at a mere 4.6 million tonnes, highlighting a big gap that poses a major challenge.
Two primary reasons come to light. Firstly, to provide CORSIA credits, programmes must receive approval from ICAO through a rigorous assessment process. Presently, only two programmes – the American Carbon registry and the ART (Architecture for REDD+ Transactions) TREE (The REDD+ Environmental Excellence Standard) credits – are recognised as CORSIA eligible. While additional programmes may receive approval in the upcoming round by the ICAO Council in Q4, the current scarcity of approved programmes contributes to the supply-demand mismatch.
Secondly, institutional barriers constrain supply due to specific criteria outlined in the CORSIA eligible emission unit guidelines. One crucial requirement mandates the host country to sign a Letter of Authorisation (LOA) to prevent the double counting of credits, ensuring transparency in how credits are allocated. However, many countries seem unaware of these requirements and lack the infrastructure to obtain the LOA or any corresponding adjustments operationalised, which may explain the huge gap in supply and demand.
As we progress into 2024, airlines are already confronting the actual offsetting requirements, heightening concerns and challenges as the supply fails to meet the escalating demand. So that’s a challenge at the moment.
CORSIA has seen some scrutiny, including from environmental groups noting that it may not reduce demand for jet fuel, focuses a bit too much on emissions trading and could allow an arguably “business-as-usual” approach for airlines, with the addition of required offsets.
What are your thoughts on these criticisms, and how is EcoSecurities supporting airlines in meeting their CORSIA obligations and that its offsets will lead to measurable, tangible and equivalent reductions in carbon via its projects?
Pablo Fernandez: Let me divide my answer into two parts. Firstly, as you mentioned, there’s discussion about airlines taking action. While airlines have committed to decarbonisation, the challenge lies in how quickly new technologies can be adopted.
For example, with every airplane crash, safety concerns are raised. The development of new turbines, fuels, and other technologies requires maturation. Are these technologies readily available in the market today? No, they are not. But is the population still willing to fly? Yes.
Until these technologies are ready, the aviation sector needs to find ways to support emissions reductions in other sectors where technologies are more advanced and require support for deployment, and this is where offset schemes come into play. We have to understand why there’s a gap between technology readiness and the current call for action within the aviation sector.
Also, offsets are usually linked to projects in sectors entirely different from aviation.
Yue mentioned the challenges airlines face in finding approvals and projects. However, there are companies – like EcoSecurities – that specialise in project development; overcoming design challenges; project structuring; meeting common and regulatory requirements; and obtaining approvals such as letters of approvals from governing bodies.
So, we aim to support airlines by becoming their execution partners. What we require from airlines is a pricing signal and a commitment to support projects at different stages.
The earlier the stage of involvement, the greater the opportunity for airlines to potentially secure price discounts on credits as they share risks with other investors. Waiting to purchase ready and risk-free credits from the market may result in higher costs compared to engaging in early-stage projects.
As a climate company, we can assist airlines with monitoring, reporting, and verifying their emissions, as well as developing strategies. Our primary focus is on designing and executing transitional projects across different sectors and geographies globally.
With this increased demand for carbon offsets due to CORSIA, how can airline companies mitigate the risk of a supply crunch in eligible carbon credits?
Pablo Fernandez: So you have a demand [for CORSIA Eligible Emission Units] ranging from 60 to 160 million tons, assuming that the aviation sector will grow as expected. Currently, there is only a net supply of five million tons, indicating a potential price crunch. A price crunch implies that prices will rise. To keep costs under control, airlines need to start implementing “hedging” strategies.
These hedging strategies can be linked to the fact that there is a limited supply of financial tools available today, although there are carbon exchanges without future contracts.
One effective method to hedge your prices is by engaging in projects at an early stage and securing agreements, such as fixed prices. By doing so, airlines can minimise their exposure to fluctuating carbon prices in the future.
In terms of hedging strategies, there is a wide array of tools and options available. The key main piece of advice is that if there is a limited supply range, prices are likely to go up, so airline companies must look into hedging strategies.
Yue Huang: Since IATA is an industry association, we cannot comment much on individual airlines’ compliance strategy, so whether they opt for the spot price or develop a hedging strategy.
However, I do want to highlight that airlines have various channels through which they can acquire carbon credits with CORSIA eligibility. One of these channels is quite straightforward – you can simply acquire them as a spot commodity.
Additionally, there is the option of hedging in the futures market – something we are hoping to achieve through our platform called Aviation Carbon Exchange (ACE), which facilitates carbon credit trading.
Aside from carbon credits, what role do technologies such as green hydrogen and Sustainable Aviation Fuels (SAF) play in helping airlines meet their CORSIA obligations?
Yue Huang: Speaking of SAF and green hydrogen, I believe we have just described the full long-term net-zero carbon emission scenario, right? SAF and green hydrogen each play a distinct role in helping the aviation industry achieve this goal. But I’d like to emphasise two key points:
Firstly, SAF serves as a ready-to-go option, acting as a drop-in fuel without requirements for aircraft engine modifications or additional airport infrastructure. While it is a viable option, it is currently quite expensive and available in limited volumes on the market.
On the other hand, green hydrogen can be viewed from two perspectives. In the immediate future, SAF is mainly produced from Hydrotreated Esters and Fatty Acids (HEFA) pathways using feedstocks like used cooking oil. Looking ahead, there are “power-to-liquid” SAF pathways, generating SAF from HEFA. Green hydrogen can serve as a feedstock to generate power, contributing to SAF production via power-to-liquid (PTL) pathways.
There are also considerations for green hydrogen-powered aircraft, although this may take more time since the technology isn’t mature yet and the long certification process for aircraft airworthiness.
In summary, SAF is likely to be the more immediate option, while green hydrogen, whether as a feedstock or for green hydrogen-powered aircraft, may take longer to become prominent within this framework.
When considering CORSIA, airlines have two primary means to meet their obligations. The conventional approach involves purchasing carbon offsets. However, utilising CORSIA-eligible SAF in aircraft uplift can allow for the consideration of the SAF’s lifecycle emissions, reducing the need for further offsetting requirements. In short, this is how SAF can work under CORSIA.
Looking ahead over the next five years, the availability of SAF may remain limited. Therefore, airlines may continue to rely on carbon offsets for CORSIA compliance purposes.
Pablo Fernandez: To expand on that point – SAF represents a new technology where no changes are required for aircraft, but big changes are necessary in the supply chain for fuel production and manufacturing.
Because this technology is still new, prices are notably high, but there is the potential for a future decrease in costs – a typical trend for new technologies.
In contrast, carbon offsets present a different strategy. Initiatives typically start by targeting the cheapest abatement options available in the market – essentially picking the low-hanging fruit first. As these options are developed and used, the focus gradually shifts towards more expensive ones over time.
Looking ahead, SAF, while currently scarce and expensive, could become more affordable and widely accessible over time, whereas carbon offsets tend to become more expensive over time.
So when airlines design a hedging strategy, they must consider whether to invest in offsets or SAF. Timing is an important element, as there’s no way for airlines to achieve their decarbonisation goals via SAF today due to the lack of an established SAF supply chain.
With Article 6 allowing countries to cooperate on reducing emissions through carbon markets and the trading of emissions reductions, what are the main challenges host countries face in implementing Article 6? How can airlines support these efforts to ensure future compliance with CORSIA?
Pablo Fernandez: Under the Paris Agreement, all countries now have emissions reduction obligations, with many nations, particularly the least developed and poorest ones, requiring external support to fulfill these commitments.
These countries are also more open to exporting their emission reductions in exchange for international assistance. However, this export of emission reductions can initially make it more challenging for them to reduce their emissions.
In general, these countries must analyse their decarbonisation pathways, their NDCs, and determine which emissions reductions they intend to keep as part of their own strategies and which ones they are keen to export. This requires them to do a certain analysis and create procedures to signal to the market which sectors they are keen to adjust correspondingly for potential export of emissions.
Today we are working a lot with governments in designing strategies, regulations, and market signals for emission reduction exports. This includes working on procedures to identify which countries are willing to export emissions and which projects will receive LOAs for export rights.
CORSIA can help airlines to potentially import such emission reductions, presenting another challenge. We are working with organisations like the Asian Development Bank and other stakeholders to design regulations and guidelines for countries such as the Philippines and East Timor.
Yue Huang: Because airlines are the end users of the operational rules of Article 6 in the regulated carbon market, we believe it is important for the parties under the United Nations Framework Convention on Climate Change (UNFCCC), particularly under Subsidiary Body for Scientific and Technological Advice (SBSTA), to finalise all the rules, modalities, and procedures required for Article 6.
Our survey indicates that many countries are delaying action on signing LOAs as they await the finalisation of these operational rules.
More importantly, some notable provisions, such as the revocation provision and the conditions under which states can replicate LOA credits, are left open. This uncertainty could have a tangible price impact on airlines.
To manage this regulatory risk, prices are likely to be affected, leading to various initiatives like the World Bank’s Multilateral Investment Guarantee Agency (MIGA) initiative and private insurance offerings designed to guarantee the non-replication of units. These measures are expected to be reflected in a premium added to carbon pricing and offsets and credits, which may not be favourable for airlines.
In short, we’d like to see all those regulatory certainties under Article 6 as soon as possible. But Guyana, for example, has already demonstrated that the current rules are workable, so we are encouraging more host countries to join that journey and offer us more certainty and more supply of CORSIA.
What advice would you give APAC-based carriers on how they can comply with CORSIA, given the unique decarbonisation challenges in the region?
Yue Huang: I have three suggestions to offer. Firstly, budgeting is important from an operational perspective, especially with the initiation of CORSIA this year. While airlines won’t need to submit their emission unit cancellation report until early 2028, budgeting exercises must factor in potential price fluctuations along the way. It’s important to leave enough of a buffer to accommodate these fluctuations.
Secondly is the quality control for carbon offsets and SAF. This is of paramount importance as because no one wants to buy something, and not be able to cancel that purchase because of compliance purposes.
Lastly, maintaining close communication with your administrative authorities is key. In most cases, this would involve either the Department of Transportation (DOT) or the Civil Aviation Authorities (CAAs), as they are responsible for ensuring that all your data is properly submitted to the ICAO central platform for compliance purposes.
Pablo Fernandez: There is currently a “mega” trend in society where carbon pricing has expanded across various sectors and geographies. While CORSIA predominantly covers international aviation, it’s important to be prepared. There could be potential inclusion of regional flights in a future carbon pricing scheme, be it through an Emissions Trading Scheme (ETS) or a carbon tax.
As a company, you must be ready and prepared to deal with such costs within your sector or segment. This means that when you introduce a carbon price, you are incorporating this externality into your business activities. You need to manage this cost – carbon credits are commodities that fluctuate over time.
This trend is here to stay and companies must be ready. This means having all your MRV processes in place, establishing a decarbonisation and hedging strategy, and specifically paying attention to offsets. Know that there are companies that can help you to source high-quality offsets at reasonable prices.
By coming together, we can send important pricing signals to society regarding carbon credits, which can mobilise capital for this decarbonisation journey.
Is there anything else you would like to add?
Pablo Fernandez: I would like to thank both of you for the opportunity and this conversation and interview. I believe there were very interesting insights from you and IATA regarding the decarbonisation pathways they are working on, ensuring the establishment of infrastructure like the ACE to aid companies in designing and executing a decarbonisation strategy.
I want to emphasise that EcoSecurities is a pioneer in the carbon market, with over 27 years of experience. We hope to work even more closely with airlines to assist them in executing these decarbonisation strategies, whether through internal emission reductions or by developing and sourcing offset projects.
Yue Huang: Yes, likewise, I would like to thank you again for organising this podcast. Personally, I found a lot of inspiration in the comments from Pablo, and we are certainly eager to establish this close partnership with you to ensure that airlines’ journey toward CORSIA compliance progresses as smoothly as possible as we move forward. Thank you very much.
The transcript has been edited for brevity and clarity.
