Emissions scheme faces 'litmus test'
Carbon credits to offset greenhouse gases from airlines in short supply
BUSINESS
ANTALYA, Turkey — Airlines may struggle to settle their offset bills when the first global scheme to make them pay for their planet-warming emissions takes effect because of a lack of available carbon credits, people from the industry and analysts say.
The aviation sector is not the biggest overall emitter of greenhouse gases, but it is one of the fastest growing sources of emissions and sustainable fuel has yet to have any significant effect on curbing them.
Making it contribute more could be vital, especially for poorer nations, when finding cash for adaptation is likely to be one of the most intense debates at COP31, which began Monday in Antalya, Turkey, and continues for two weeks. Transport was a focus of discussions Tuesday.
One ambassador said next year would be "a litmus test" of whether the aviation global credits scheme can make a difference.
"This is going to be a true test of if we could make real progress," Walton Webson, Antigua and Barbuda's United Nations ambassador, told Reuters.
For more than a decade, airlines flying in European airspace have had to pay to pollute under the European Union's Emissions Trading System, but so far they only reported on a voluntary basis to the global Carbon Offsetting and Reduction Scheme for International Aviation.
About 130 countries signed up to a broad mandatory phase 1 of CORSIA from January 2024 until the end of this year. Airlines under the jurisdiction of the signatory countries will have to buy credits by the end of January 2028 or face penalties.
The first phase is expected to create demand for credits to cover up to 200 million metric tons of carbon, said Chris Leeds, Standard Chartered's head of carbon market development.
Data from the U.N.'s International Civil Aviation Organization and more than two dozen people with knowledge of the sector who spoke to Reuters estimated the amount of credits available for the first mandatory phase would supply a quarter of demand at most and only 11 countries were in a position to supply credits to CORSIA.
An ICAO spokesperson said via email the implementation of CORSIA by ICAO Member States is on track and it will continue to support governments to accelerate the availability of credits. The group does not comment on speculative scenarios, the spokesperson said.
Credits for offsetting airline emissions could make the biggest difference in poorer countries where a widespread cost of living crisis and reduced development aid budgets made governments reluctant to promise help.
"Carbon markets will be ever more important in the future," Panamanian environment minister Juan Carlos Navarro told Reuters.
Typical offsetting projects include substituting polluting fuels used for cooking stoves in developing countries with cleaner alternatives or preventing deforestation.
Following scandals over fraudulent schemes, CORSIA has strict rules on what qualifies as a legitimate carbon offset, and that added to the problem of meeting growing demand.
Hannah Hauman at trading house Trafigura said only about 5% of historic credit inventories were eligible for schemes, such as CORSIA, that governments made mandatory.
Adding to the shortage, some developing countries said they are reluctant to allow too many credits to be sold too quickly in case they need them to meet their own U.N. climate targets to curb overall emissions.
The likelihood, analysts said, is that carbon credits — which sell for about $12 to $13 a ton — will become more expensive as the uncertainties that made airlines hesitate to buy them are resolved.
"There is a risk that if you wait too long that you have to pay up," said Marijn van Diessen, chief executive at environmental commodity trader STX Group.
Britain proposed a penalty of $134 for every ton of carbon that does not comply. Other countries also are developing rules.
A Reuters analysis of filings and sustainability reports from 10 leading airline groups found most did not disclose how many CORSIA credits they expected to need or how many they secured.
United Airlines said only that the availability of eligible offsets was constrained, while American Airlines cited uncertainty over their supply and price.
Singapore Airlines said it started securing eligible units. without disclosing the volume. Air France-KLM said it had not yet purchased credits.
Assuming prices of $20 to $50 for each credit, consultancy Roland Berger said compliance could cost airlines $3.6 billion to $9 billion — equivalent to about 5% to 12% of projected industry profits for 2026.
Eligible credits need to be authorized by ICAO's technical advisory body and by national governments that agreed to the scheme.
The host government has to agree the permits can be used internationally and ensure there is no double counting of emissions to guarantee compliance with the national U.N. emissions goal.
Brazil, whose rainforest could make it a major supplier of credits, told Reuters it had yet to begin authorizing CORSIA projects and was finalizing rules.
Major buyer Japan said administrative capacity constraints slow approvals in some countries that could sell credits. Its civil aviation bureau said airlines could face a fine for noncompliance, without giving details.
At the project level, one of Africa's first potential CORSIA schemes is among those struggling to deliver promised benefits.
After ICAO's advisory body raised technical concerns, CORSIA has yet to accept credits from Zimbabwe-based cookstove developer Cicada, which said it had buyers lined up for about 1 million credits.
Cicada Commercial Director Karen Jiri said some potential buyers were no longer willing to buy the credits, meaning Cicada would have to sell on the voluntary market, where prices are lower.
"We've had to restructure the whole operation," Jiri said, adding many households that should have received cleaner stoves are still waiting.
