Worldwide: Taking Stock Of CORSIA

CORSIA, ICAO's carbon offsetting and reduction scheme which launched in 2016, has moved from its Pilot Phase into its First Phase at the start of 2024. In this article, we look at how the scheme works, its controversies and some of the latest developments. 

Background

In 2022 ICAO announced its long-term aspirational goal for international aviation of net-zero carbon emissions by 2050. The goal relies heavily on SAF – sustainable aviation fuel – but, according to IATA, the aviation sector will not be able to completely eliminate emissions at source and will have to mitigate the remainder through offsetting – the process by which emissions are offset by financing an emission reduction elsewhere. Under CORSIA, ICAO's offsetting scheme for aviation, aircraft operators on certain international flights will be required to offset any increase in their emissions above a 2019 baseline level by purchasing CORSIA-compliant carbon credits.

CORSIA has three phases: a Pilot Phase (2021 – 2023); First Phase (2024 – 2026); and Second Phase (2027 – 2035). Although not mandatory until 2027, it is expected that 126 states will participate in the First Phase. A limited category of countries is exempted from CORSIA (including the compulsory phase from 2027) – essentially the very least developed countries and developing countries which are landlocked or are small island states.

Who does it apply to?

CO2 emissions monitoring, reporting and verification (MRV) has been mandatory for all CORSIA-regulated operators since the start of 2019. Operators are already covered by the MRV requirements (and will be by the offsetting requirements) where they produce annual CO2 emissions greater than 10,000 tonnes from the use of aeroplane(s) with a maximum certificated take-off mass greater than 5700kg conducting international flights. Starting from 2022, emission reports for the previous year are due by 30th April.

Which routes does it apply to?

Firstly, CORSIA applies to international and not domestic flights. Because the scheme takes a route-based approach, during the Pilot Phase and First Phase the MRV and offsetting obligations apply to operators flying between volunteering states irrespective of where they are registered. This means that, under CORSIA, even states not participating in the First Phase must require their aircraft operators to comply with the scheme by reporting and offsetting their emissions on relevant flights.

However, because CORSIA applies only to routes which both depart from and terminate in participating states, any flight to a non-participating state would not be required to offset even where it had departed from a participating state and vice versa. This makes the non-participation in the First Phase of five notable states - China, Russia, India, Brazil and Vietnam – significant.

Flights to or from non-participating states as well as flights between two non-participating states are however still subject to simplified reporting requirements.

What are an individual operator's offsetting obligations and how are these calculated?

An individual operator's offsetting obligations for a specified year is calculated using the following formula: 

Operator's annual CO2 offsetting obligation = Operator's annual CO2 emissions on flights covered by CORSIA x Growth Factor. 

The Growth Factor is taken against a baseline year of 2019:

• for the Pilot Phase (2021-2023), the baseline is 100% of the total CO2 emissions covered by CORSIA in 2019; 
• for the First and Second Phases (2024-2035), this is reduced to 85% of the total CO2 emissions covered by CORSIA in 2019. 

This had originally been intended to be split across 2019 and 2020, but, given the impact of the COVID Pandemic on airline operations in 2020, it was agreed that the baseline year should be moved to 2019 only, albeit with the effect that offsetting requirements during the Pilot Phase were vastly reduced as airlines recovered business. 

The changing Growth Factor

The Growth Factor evolves with time, taking into account: 

• The Sector's Growth Factor: the international aviation sector's global average growth of emissions in a given year, as calculated by ICAO; and
• The Individual Growth Factor: an individual operator's growth factor of emissions in a given year.

As a result of the delay in taking into account the Individual Growth Factor, faster-growing airlines receive an advantage, because they will be judged not on their own growth but the overall sector's growth.

What are CORSIA's compliance periods?

CORSIA has three-years compliance cycles, as set out below, although CO2 reporting is annual corresponding to calendar years:

Compliance period 1: years 2021 – 2023;

Compliance period 2: years 2024 – 2026;

Compliance period 3: years 2027 – 2029;

Compliance period 4: years 2030 – 2032;

Compliance period 5: years 2033 – 2035.

How are the emissions offset?

Under CORSIA, an operator is required to meet its obligation to offset growth in its emissions by purchasing – and cancelling – carbon credits called “CORSIA Eligible Emissions Units” (EEUs) in a quantity equal to its total final offsetting requirements for the relevant compliance period. These EEUs are calculated to equate to one tonne of CO2 emissions and are in respect of emissions-reducing projects in a variety of sectors (for example, reforestation projects) which satisfy CORSIA's eligibility requirements.

“Corresponding adjustment” to avoid double-counting

EEUs must meet the CORSIA Emissions Unit Eligibility Criteria. This includes the requirement that EEUs must not count against other emissions reductions obligations, including those of the airline's own state under international law. To avoid double-counting by countries committed to achieving their Paris Agreement greenhouse gas emission reduction pledges, Article 6 of the Paris Agreement provides for a “corresponding adjustment” - a mechanism by which the relevant country agrees not to count a credit toward its own Nationally Determined Contribution (NDC) which is also being used to achieve compliance with another scheme – here CORSIA. With various governments putting in place the procedures and infrastructure to be able to execute corresponding adjustments and other developments at COP 28 in Dubai during December 2024, this is an evolving area.

What are the controversies around CORSIA?

The stated goal of CORSIA is that it offers a harmonised approach to carbon reduction that minimises market distortion. However, in practice it will still affect operators quite differently.

International flights only

• The most obvious significant issue is that CORSIA only applies to international flights. For UK or EU-based carriers this may be all their flights. For countries with extensive domestic networks, such as China and the US, CORSIA will cover a much smaller proportion of carriers' flights. As a result, the overall burden of CORSIA will be much lower for carriers based in those countries, and this may affect pricing and competitiveness.

Impact of Growth Factor calculations

• The Growth Factor calculations will also impact carriers differently. Until 2033, because the Growth Factor will be based entirely on the sector's growth and not an individual carrier's growth, by design this will favour the airlines that grow more - helping new carriers and those expanding in developing markets, to the detriment of incumbent carriers in more developed markets.

Sanctions for non-compliance?

• Much is left to national aviation authorities, including compliance. Sanctions for non-compliance are likely to differ between countries, which will go to the value of the scheme itself. From a UK perspective, the feared ‘fleet lien' which applies in respect of Eurocontrol fees and did apply under the UK's implementation of the EU Emissions Trading Scheme (ETS), does not apply under UK ETS. There are also concerns amongst lessors that, due to the relatively long three-year reporting cycle, operators may accumulate significant liabilities and therefore increase the credit exposure of those financing or leasing to them.

Transparency

• An increasing desire for transparency, especially within the EU, leaves no place to hide in terms of scrutiny. The EU currently published the details of flights covered by the EU ETS, but it will also soon publish emissions data under CORSIA. In doing so, the EU hopes to encourage more transparency in other jurisdictions, but it remains to be seen whether this will be the case.

Integrity/green-washing risks

• Other limitations of CORSIA go to the integrity of the scheme itself – something airlines are currently very concerned about given the risks of being accused of green-washing.
  • Unlike the EU ETS and other emissions trading schemes, CORSIA isn't a cap but an offset, requiring airlines to offset emissions over a defined baseline, which is currently is a high threshold.
  • Secondly, it only addresses CO2 emissions and not other emissions, and it doesn't take account of others factors specific to aviation, such as the level CO2 emissions are being released into the atmosphere, which magnifies their impact, or, for example, the impact of contrails.
  • Thirdly, the purchase of SAF will in practice form a central part of CORSIA compliance. It has distinct advantages over traditional jet kerosene as a renewable resource and with lower overall lifecycle emissions. However, there are concerns that the CORSIA compliance calculations effectively assume that SAF doesn't produce any CO2 emissions, which of course it still does – SAF has to have largely the same physical and chemical properties as kerosene jet fuel.

This means that CORSIA is no panacea, but it is, in principle, a concerted effort to support a crucially important industry which, because of its very nature, is very difficult to decarbonise.

Because of this, careful communication by airlines about exactly what they mean by decarbonisation and what they are achieving will be crucial in managing risks associated with decarbonisation claims and products. 

Recent developments in eligibility of offsets

In 2019, the ICAO Council, charged with developing and updating the criteria for EEUs, set up the ICAO Technical Advisory Body (TAB) to assess and provide recommendations as to the eligibility of EEUs proposed by programs applying to supply CORSIA-compliant credits. In November 2023 the TAB recommended the immediate approval of two carbon standards to supply credits for the Pilot Phase (2021-2023) and recommended five others conditionally for the First Phase (2024-2026).

This is a fast-evolving area with the TAB's recommendations likely to affect airlines' purchasing plans with demand for credits sold under the approved standards significantly increasing as airlines are expected to buy them in large volumes. The TAB's recommendations may also influence the wider voluntary carbon market - by specifying which credits are eligible under CORSIA, this may have an impact on which carbon credits are seen to be the highest quality and may affect the future purchasing plans of players outside of the aviation sector. Prices for credits under approved standards are likely to increase, although this may be moderated as additional standards are approved, as expected. 

Compliance Deadlines

Operators are required to report to their relevant state authorities the cancellation of CORSIA EEUs to meet their offsetting requirements for a given compliance period by submitting their verified EEU Cancellation Report and associated Verification Report.

The first deadline for reporting EEU cancellations is not until 30 April 2025 for the Pilot Phase (2021-2023) and 2028 for the First Phase (2024–2026). However, demand for eligible credits will be high and, given that airlines will need to procure significant volumes of credits by each deadline, this will require organisation. 

Conclusion

Against a background of lack of optimism about whether CORSIA would ever get off the ground, the scheme is making rapid progress as it moves onto its First Phase in 2024.

Significantly, the EU's decision to give CORSIA time to develop by restricting the EU ETS to intra-EU flights will be reassessed in 2026, with the EU Commission carrying out an assessment of CORSIA as to whether it is delivering on the goals of the Paris Agreement. Subject to the outcome of this assessment, the Commission will make a legislative proposal, which could extend the scope of EU ETS to 'departing extra-European flights' if CORSIA is not considered to be sufficiently aligned with the Paris Agreement. In the meantime, the devil is in the detail and all eyes are likely to be on the EU in 2026.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.