CORSIA - Demand Dynamics

Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) has been a principle talking point in the market since the graduation of the pilot phase, and the launch of phase 1 at the start of this year. CORSIA is a compliance carbon scheme with the intention of reducing emissions from international aviation, overseen by the International Civil Aviation Organization (ICAO), by offsetting residual CO2 emissions which cannot be reduced by operational or technological improvements, or sustainable aviation fuel (SAF).

The pilot phase, which represented a soft launch for CORSIA using vintage 2016 to 2020 renewables with a sustainable development goal (SDG) has been a focus of trading over the last few years both on futures and physical markets, and OI remains strong in the contract on the futures. That being said, there is less demand for the contract now entities are looking towards the phase 1 contract instead. Currently the phase 1 has approved only architecture for REDD+ transactions (ART) and American carbon registry (ACR) registries from vintage 2021 to 2026. The pilot phase is still a good benchmark for buyers, serving quality renewables with an SDG of recent enough vintages that would adequately service many retirements. In fact, a lot of the pilot phase eligible volumes have indeed been cleared out through retirement, especially on the older vintages, such that they are not common now on the secondary market.

Phase 1 takes the market into the compliance phase, but as yet has not experienced the immediate interest that some expected. The price currently is still ranging, with not enough liquidity to determine a real value. ICE launched the first of the futures contracts, which at the time of writing only supports ACR. These futures (code CP1) had been gradually trending down, until a short squeeze in July24 rocketed the Dec24 price, before the contract was eventually de-listed altogether, presumably on account of lack of eligible supply. Physically aligned projects, especially those under Verra (which at the point of writing this article is still not approved), have too struggled for bids more widely.  

This could be because the deadline for Phase 1 is not until January 2028. As a result, buyers may see no urgency to buy now, especially if they anticipate good supply coming online over the next few years. One could argue this is a somewhat short-sighted view, as buyers will likely arrive on scene quickly and simultaneously, which will only drive price up as the scheme nears compliance deadline. Furthermore, speculative buyers will likely catch wind and also be on the buy side in the lead up, only exacerbating the rally.

Secondly, the lack of immediate interest could be to do with airlines themselves. Airlines have notoriously weak balance sheets, therefore not really having the capacity to warehouse the units until they are required in 2028. This is where banks or other intermediaries could step in, whom have both the balance sheet and cheaper cost of capital to provide this function. Valitera too has the balance sheet to offer this structure to compliance buyers. Another option is for aircraft leasing companies themselves to ready themselves with offsets, thereby offering structures to airlines with offsets already attached. Internal capacity within airlines may also be strained post COVID, wherein many sustainability teams were either furloughed or lost entirely. Speak to Valitera for assistance with navigating the CORSIA landscape from a compliance perspective, as we have the capacity and knowledge to provide this missing piece.

Outside of the airline’s control is the guidance by ICAO requiring eligible projects to have corresponding adjustments (CA), rather than just letters of authorisation (LOAs).  An LOA is achievable in the short term, but the CA will require the host country to submit its nationally determined contribution (NDC) for confirmation. Not just a risk, this is also a slight unknown, with many market participants still trying to understand the mechanism, costs associated and chance of losing out to the CA at the eleventh hour.

Ultimately, for future eligibility of non-ART TREE projects, there are a few considerations:

1. Registry – currently only ACR and ART Trees are approved registries. There is a reasonable degree of confidence in VERRA and Gold Standard for example, but ultimately until these are confirmed, they are not CORSIA Phase 1.
2. Vintage – will need to lie 2021+ for Phase 1.
3. LOA/CAs – projects will ultimately need a corresponding adjustment (CA) to be eligible. A Letter of Authorisation (LOA) from the host country is the best indication today that the CA will be granted when the country submits its Nationally Determined Contributions (NDCs).
4. Pilot phase eligibility – another indication of future eligibility could be a projects eligibility under the CORSIA pilot phase, though note here that the specifications of Phase 1 are different to the pilot phase.

Examples in practice:

• ACR USA foam v2021: eligible standard, fitting vintage, though no LOA in place. Note these volumes are deliverable under the ICE exchange “CP1” contract, though this does not mean delivery accepted into Phase 1 CORSIA until CA is granted.
• ART TREE Guyana JREDD v2021: fully eligible project for phase 1 CORSIA (registry, vintage, LOA all present).
• VCS India wind v2021: project may have been eligible in v2016-20 under CORSIA pilot phase and therefore is aligned with v2021 volumes, but VERRA not yet approved as registry under phase 1, regardless would be subject to LOA by Indian government.

CORSIA represents an exciting new phase for VCM, not least because it brings with it a wave of compliance buyers. The reality is the phase 1 price has not yet been realised, owed to lacking market liquidity and no time constraints.