This is Tom Rowland's Reese and you're listening to Switched on the podcast brought to you by B and EF. Following controversies surrounding voluntary carbon credits markets, a lack of regulation and standardization has continued to prove a challenge when it comes to the use of credits as a means of decarbonization For aviation, one of the hardest to abate sectors and the only transport sector with growing oil demand.
The United Nations has recently introduced the Carbon Offsetting and Reduction Scheme for International Aviation, more commonly known as CORSEA, in a bid to offer legitimacy for carbon credits to
help tackle emissions at scale. With one hundred and twenty six markets currently signed up and that number set to rise to one hundred and thirty five from twenty twenty seven, CORSA boasts a truly global footprint, but with the Trump administration looking set to pull the US's involvement, the EU questioning its effectiveness and its non legally binding structure, meaning individual markets have to police themselves. Just how impactful can
CORCIA really be? Today I'm joined by a member of our Environmental Markets team, Associate Leila Camphire and we discussed findings from her note aviation credits market outlook. CORSA gets its wings, which BNAF clients can find at BNF go on the Bloomberg terminal or on BNF dot com. All right, let's get to talking about CORSEA with Leila. So, Leila, welcome to the show.
Thank you for having me.
So I'm going to confess I've always found CORSEA to be a little bit of an intimidating topic. In all the different parts of my career where I have been adjacent to or involved in carbon markets, CORSIA has been this sort of shadow lurking in the background. And the reason I'm so intimidated by it was that everything had it seemed kind of complicated, involves lots of different nations, flights going to and from one place, so which jurisdiction does it fall into? You know, is it voluntary? Is
it mandatory? But it all seemed a little bit scary to me. So I hope that today we can demystify some of this and to start with, tell us what is CORSA and how does it work well.
CORSIA stands for the carbon offsetting and Reduction scheme for international aviation.
Got it?
And that's all you need to know. No, just kidding. So this is a un governed scheme, so it is international by nature, but it's not legally binding. You've got member states to the International Civil Aviation Organization which the scheme falls under, and this is the jurisdiction or the mandate of Corsia's the member states of KAO. The scheme aims at decarbonizing international aviation for both passenger and cargo flights. And it works in different phases and it has different
ways that airlines especially can decarbonize their emissions. And it runs from twenty twenty one until twenty thirty five.
And what happens after twenty thirty five, then there'll be reconvene, there'll be a new scheme of some of.
Some it's still unclear. They could extend that, they could have a new scheme, they could redesign the scheme. It is still unclear. Coursia as it stands now is also not really set in stone. So at every three years, which is whenever a new compliance cycle starts, they'll sit together and maybe do some changes to the scheme. So who knows what will happen in twenty thirty five.
And so just understand that the history of the scheme Cossia has been in existence as a concept before. Now has it just been all talk up until now or is this just a new phase of something that has been ongoing.
No, it's not all talk. So as I mentioned earlier, it runs in three main phases, pilot phase, first phase, and second phase. The pilot and first phase are both voluntary, and the pilot phase started in twenty twenty one and it ran until twenty twenty three, so it was still running. There were still some talk around it, but it was more of a trial period, and then when we entered the first phase in twenty twenty four is when most
market players, especially airline start paying attention. I think what makes Corsia a bit of a shadow that lurks like you described it is that airlines compliance deadlines actually are like thirteen months after each compliance cycle ends, So it gives us a lot of time to contemplate and pick and choose and decide what we want to do until we have to submit our upsetting obligations under Corsia.
I mean, I'd love to have been in the meeting where they decided specifically it had to be thirteen months, so odd yeah, that really logical time period. So just to really clarify, we're now going from the pilot phase of COURSIA, which in twenty twenty three. We're in the first phase of CORSIA, and then the mandatory phase would be when.
So the second phase is mandatory for all ico member states unless they are except and that starts in twenty twenty seven. So up until now, when we say voluntary, it means that certain states have said we'll participate and we'll see how that goes. But once they do, airlines have to comply.
And so i COW, I'm sorry if you already spelled out, could you just define out ICAO and I'll be curious to know how many states are part of it?
Okay, So ICOW stands for the International Civil Aviation Organization. It's the part of the yue that runs CORSEA, and member states to ICW I believe are north of one hundred and fifty. But the ones that for sure are participating in the second phase or the mandatory phase of CORSEA, are one hundred and thirty five. Because ICOW does give out exemptions to small states or island states, et cetera.
Got it, So countries that have less alternative options to relying on aviation, I.
Would say so. Also, to clarify, one hundred and twenty six markets volunteer to participate in CORSEA in twenty twenty four, that's the beginning of the first phase, and then three additional markets joined in twenty twenty five, So now we're up to one hundred and twenty nine for phase one, and then in phase two, which in twenty twenty seven, around one hundred and thirty five markets are expected to join.
So when we get into the mandatory part of phase one, it's actually not going to be that big a difference in terms of the number of countries participating. The majority of countries that are part of AIKAO have already opted in.
That is true. However, the ones that are joining in phase two are Russia and China and India and Brazil, and those are big markets that would impact the emissions covered under CRISTIAS, So those emissions would actually go up by around fifty percent in twenty twenty seven relative to twenty twenty six.
Okay, wo wow, that's a pretty big difference. Okay, cool, So I think I've I've got a good understanding certainly compared to where I was five minutes ago on you know what COURSEA is and the sort of the scope and and the sort of trajectory of it. So then the next big question is is what options do the airlines actually have to reduce their emissions under this scheme.
So airlines have two options. They can either use carbon credits, which is why I'm on the podcast to begin with, and those are CORSIA eligible carbon credits, or they can use CORSIA eligible fuels and those include saff or sustainable aviation fuels or lower carbon aviation fuels, and they to meet Corsia's criteria, a fuels life cycle emissions must be at least ten percent lower than those of conventional jet fuel.
As for the CORSIA eligible credits, they need to also be approved by ICO, they need to meet certain eligibility criteria. But there's an additional layer of complication, which is that these credits need to be approved by their host countries such that these governments apply corresponding adjustments so they don't double count the emission reductions when they're accounting for their NDCs.
For example, Got it, so the emissions reductions take place under ICO, you're saying is that can't count towards the country's DC emissions target. Correct, And so these when we're talking about eligible offsets and eligible fuels, is that all determined by ICO?
Then yes, more or less. So for fuels, ICOW does provide airlines with a set of fuels that are eligible and then there's a bunch of documentation airlines need to submit to ICO for it to count. And the same goes for credits. But the thing with course eligible credits is that you don't have new credits that come from a special ICO registry that's reserved for the use of airlines.
They're actually borrowed from the existing voluntary carbon market, which we know and we've discussed before, even on this podcast last year. It's a very troubled market and it's bruised. So that adds a layer of complexity to what CORSEA or ICO in general has to do to make sure that those credits are legitimate and have high environmental impact.
Right. So that's part of the issue then, is that the voluntary markets at the moment have too many low quality credits, and that is why EIKAW has kind of created its own specifications, but those same high quality credits are still available to other sectors, which airlines will have to compete with those other sectors as well.
Exactly, Yeah, exactly.
So whenever we're looking at an emissions reduction scheme, particularly one which is as maybe complex isn't the word, but it's sort of so multilateral, let's say, between nations, the question always comes is is doesn't really have teeth? Obviously, the first phase is voluntary, although let's assume that all of the countries involved have good enough intentions that they have volunteered seriously, and then it's mandatory after twenty twenty seven.
But what happens when these targets aren't met? I mean who's on the hook? Firstly? Is it the airlines specifically, or is it the countries or is it sort of the airlines are on the hook to the countries and the countries are on the hook to the scheme? Yeah, what is the What are the mechanisms that really ensure that this doesn't turn into sort of you know, I mentioned earlier all talk. How do we ensure that this isn't all talk?
It's honestly down to the participating member states and governments to determine this. So this scheme, or at least the responsibility to decarbonize falls on airlines. But airlines are on the hook to the countries, like you explained, So some countries or some governments like Canada and the UK, did incorporate CORSIA into their national laws, so they have monetary penalties for airlines that fail to comply. The UK has
a pretty significant one. So if I'm an airline and I'm operating my flight between the UK and another member state and I don't comply with CORSIA, then I will have to pay around two thousand pounds a day, so that will force me to go and those credits rather than pay that fine. But for other governments that don't have any penalties in place, they don't really enforce CORSIA
international law. There is nothing really binding those airlines to comply unless out of the good of their hearts they want to, or if they want to avoid also reputational risk that comes with not decarbonizing, which they're already sort of under.
And just one more question, and this this is not so much about enforcement. You know, whenever I, as an individual go and book a flight, I do always have the option as a consumer to buy offset credits to offset my flight. So can airlines also claim those as reduced emissions or is that sort of is the emissions that they reductions they have to make in addition to whatever offsets consumers taking.
Those flights a buying, So it's a bit more complicated. So when you go as a consumer and you go buy a ticket and some offsets on top of it to offset your emissions, airlines used out more or less like a marketing strategy, and you often end up buying very cheap credits that do have questionable environmental impacts, and if they are questionable, then they are likely not eligible
to be used towards CORSIA regardless. The way this works, or at least the way airlines submit their emissions or account for their emissions for CORSIA, is that they count how many emissions they have at the end of every year, and then they compare that with a preset baseline for that year, and for CORSIA, it's the twenty nineteen emission levels, and then my total emissions is an airline for that year needs to be below that twenty nineteen baseline, and
the difference is what you need to reduce using credits or eligible.
Fuels, so those consumer offset credits are irrelevant both to CORSA and ultimately to how many emissions are made overall. In effect, if there's such poor quality, let's move on to talking about the sort of the geopolitics of this. You know, you've talked a little bit about the challenges of you know, maybe different degrees of commitment to enforcing this. The UK and Canada have turned it into law, maybe some other countries will, I mean, is that something that
we see happening? Yeah, how does this all play into the relationships between all the different countries involved?
More or less, the relationships between countries don't seem to be affected as much if they're all operating under an international scheme that they've signed to do, signed up to do. When we talk about geopolitics and Christia, I think the main question that arises is will the US actually participate in Courstia given the Trump administration and their view on
climate policies in general. But the relationships between countries themselves, having them governed by as scheme like Cristia actually protects them from any tension, which is a solution that we see to other compliance carbon schemes trying to expand to international aviation but could not because of these issues and these complexities.
So Leila, we've kind of established a little bit about the qualitatively how CORSEA works. But you are a BNF analyst and a very fine one, indeed, which means that you presumably have somewhere a spreadsheet where you've crunched the numbers and figured out what all of this means, and you've put it into a report which BNF clients can access at BNF dot com or on the terminal via BNF Go. But you will have created a forecast, I presume, of what all of this means. So talk us through
the numbers. How much demand is there going to be for either emissions reductions or offsets because of the phase of CORSEA that we're currently in.
Yeah, that's what she did. Give me a lot of headaches, but it's done and it's out now and it looks beautiful. So for the report that we're talking about, there are several scenarios that we run. The base case scenario just assumes business as usual in we have a total of one hundred and twenty nine participating markets in Phase two we have one hundred and thirty five. I will just preface this and point out that Corsia credits are available
to everyone and not just airlines. But our forecast and our scenarios are based completely on what airlines will have to offset or reduce emissions, and that is what drives demand, or at least the main driver of demand for Corsia credits. So in Phase one we estimate that the airlines offsetting requirements will total one hundred and fifty million tons by twenty twenty six, and then they will climb to a total of one point two three billion tons by end
of phase two. Now, Phase two is three times as long as Phase one, but also, as we mentioned, it does include the major or big markets that operate a lot of the flight routes, like Brazil and Russia and China and India.
So just to clarify these numbers, you're saying these accumulative, you know it is not per year, it's for the entire phase, Yes, got it.
The annual demand for CHRISTI eligible credits would peak in twenty thirty five at around one hundred and sixty one million tons of CO two.
And when you say it peaks, that's that's the last year of Phase two, so presumably something is coming after. So it's not like it's going to peak and go down necessarily, it's just that's the end of the runway.
So it will reach one hundred and sixty one million tons of CO two in twenty thirty five. One last thing I'd like to note is that apart from passenger flights,
we also account for cargo flights. Now in phase one, which is now they are very little, they account for an additional two percent of emissions that say, but once we have China and Russia in Phase two, cargo flights will account for around nine percent of total emissions, so they will also contribute with that additional demand or jump in demand that we see in phase two.
I mean, I'm going to ask a really really stupid question.
No stupid questions.
Well, you haven't had my question yet. Is this a lot?
This is actually a great question. If you compare Christia with the wider ol global carbon credits market, where it's very massy, it's oversupplied, everyone and anyone can buy a credit that's actually very little. And even if you compare that with the demand for credits from corporates that we go over. In our long term carbon credits demand outlook that my colleague Kyle published a couple months back, it's twenty two point five times higher than airlines demand for
Christia in twenty thirty five. But if you look at airlines on their own, it is a lot for airlines. So since twenty fifteen, we tracked the buying activity of credits for airlines and that amounted to around thirty six million tons, and that's only twenty four percent of airlines offset requirements in Phase one alone.
So this is I mean, you know, to my question, is this a lot? It's a big deal for airlines, it's not as much a big deal for carbon markets. Is that a fair framing?
Not really, because it's a little more nuanced than that. It's a big deal for airlines, definitely, because it's going to be because they need to buy them, they're obliged to, and they're expensive.
So I was half right, half right.
But if you want to talk about whider carbon credits and markets, COURSA is the closest thing carbon credits or vulntary carbon markets have gotten to standardization or legitimacy. And because you have that, you and stamp of approval on that carbon credit. Everyone is attracted to it and wants to buy it because that helps them hedge against reputational risk. But the quantity of it, it's another issue, and that's something we go over in our supply outlook in the report.
So this is a big deal for airlines. We agreed on that, and then it might not be quite as big a deal for sort of maybe the poor quality carbon offset markets, but it is a big deal for this idea of like higher quality offsets. It's something like to what you're describing is almost like it might crystallize the creation of a a sort of a higher tier of offset and solve some of these problems that the
broader market has suffered from. Is that what you're saying? Yes, well, that's quite exciting because this is this quality issue has been some people I've been talking about for a long time, so I'm really happy to hear about this. So anyway, you were just about to talk about the supply of these high quality credits and of course direct emissions reductions, so I'm sure in your spreadsheet you calculated that as well. So what did the spreadsheet tell us?
So the question of supply in Christia is even trickier than demand. So i COOW decides whether a credit is eligible or not, and they publish this document at the beginning of every phase telling us what we can buy and what we cannot buy for it to count towards CORSIA.
But then they also add another layer and they say that credit needs to be approved by your host country and corresponding adjustments must be applied so that we don't double count, and that does enforce or reinforce the environmental impact of coursia. But then we know governments, and we know the Yuan, and we know that they're slow and bureaucratic, and because of that, right now we only have fifteen million credits that are available for airlines to use towards
their offsetting obligations, and frankly, that's nothing. These fifteen million tons come from a forestry project in Guyana that the government has approved, but all the other projects and credits that are eligible for cristia are still waiting approval from their host countries, and their host countries still need to go through a bit of a process to submit their corresponding adjustments and the requirements and so on, so it might take some time, and that makes apply very very uncertain.
In our outlook, we estimate that supply could reach three hundred and six million in phase one and one point five to three billion in phase two. That's also cumulative, and it surpasses offsetting requirements in each phase. But that happening is contingent on governments getting those approvals in place.
I mean, this is I mean it kind of comes back to the previous point, doesn't it that this whole thing is a forcing mechanism for governments that are interested in offset markets to kind of get their act together in actually defining what good is, enforcing what good is in order to enable that to happen. Yeah.
Correct, And that is a double edged toward, I would say, because on one hand, yes, you have some enforcement and some policy mechanism, but then if you leave it completely up to governments without any overarching standards between them, it could create some inconsistencies.
And so final question about your spreadsheet, You've looked at demand, you've looked supply. So the inevitable question that follows is what did your spreadsheet tell us about the price.
So in my spreadsheet, when I put those demand in supply balances against each other, we estimated the average price for Corsia credits in phase one to be sixteen point seven dollars briton and an average of forty nine point
four dollars priton in phase two. Right now, the auctioned price of Corsia credits is around twenty one point seven dollars priton, and that actually decreases in twenty twenty six to twelve point four dollars priton because in Phase one demand is so little, it's comfortably below available supply if
like we said, governments approve those credits. But then as soon as we enter phase two, which is in twenty twenty seven, I mentioned that offsetting requirements jump by around fifty percent, and suddenly you have that spike in demand and you're sort of scrambling to get enough credits to cover that, and more expensive credits come in and they set the price at ninety six point five dollars per toon in twenty twenty seven, and that's the peak price.
The year after the market is still slightly oversupplied and prices fault around forty dollars peron.
Okay, so these are you know, maybe these prices in the early phases of the scheme are you know, in terms of the big picture of carbon markets, that's quite cheap, but it gets to being pretty meaningful by the end of the scheme.
Yeah, they do so, even frankly, even at the beginning of the scheme. I know that twelve and sixteen dollars perton might sound cheap, but if you compare that to the wider voluntary carbon market prices, these are pretty decent because low integrity credits or low quality credits that are flooding the market right now trade at below three dollars perton.
So the current voluntary phase you mentioned, there's four major markets that run involved India, China, Brazil, Russia, and they're going to be joining in the next phase. But given the current state of global politics, and in particularly US politics, it's not to me outside the realms of possibilities that the US might not be willing to participate, just given the political narratives we've seen recently. Is this something that people are talking about as a realistic possibility.
Yes, definitely. The US leaving seems more and more of like a reality to Christia. Now, like we mentioned before, Cristia is actually not legally binding and there are no consequences for any government to leave, and the US has the option to do so, and we did model that.
So if the US drops out of the aviation decarbonization scheme, it could reduce demand for Christia credits by three million tons in phase one that's two percent of the base case demand, and one hundred and eighty four million tons in phase two or fifteen percent of the base case.
And in that scenario, because you have less demand and the market is still oversupplied, credit prices don't there are no dramatic peaks and price it reaches an all time law of twelve dollars per ton in twenty twenty six, and then they will gradually rise and peak at forty four point four dollars perton in twenty thirty.
And so if the US pulls out, would international flights coming in and out of the US two countries that are participating in CORSEA, they would still be subject to CORSEA right No, So.
For a route to be covered under CORSA, both of its departing and arrival markets need to be member states or at least ones that are participating in CORSEA. So if the US drops out, all international flights coming out or into the US won't count, and that actually alleviates a lot of the responsibility from US based airlines, seeing that ninety nine percent of their emissions come from flights that operate either in or out of the US.
Wow. Okay, so that would be a major impact, although in the prices of the scheme you still see some pretty robust pricing, but just in terms of the total emissions coverage, that would be a pretty major And I suppose, as with all carbon schemes, if the US pulls out, they'll it'll leave a lot of other countries asking themselves, well, why should we stay in if the US is pulling out? Which kind of leads me on to something else which is touched on in your note, is the EU potentially
dropping out? Is that tell us a little bit more about that.
It's pretty ironic, isn't it That the US and the U might pull out, but for completely different reasons. So the US could drop out because they don't like decarbonization, but the EU might drop out because it loves decarbonization and CRISIA might not be as effective. So the EU will decide on whether CORSA is effective or not. In twenty twenty six, If it is not, then the EU ETS or the Compliance Carbon Scheme for the U would
expand its Monday took cover international aviation emissions. But as it stands now, CORSA actually could be ineffective, seeing that even if airlines comply, their emissions for intra EU flights would still surpass the cap that is set by the EUTS or aviation. The EU is known to be more stringent when it comes to de carbonization policies, and Corsia can be deemed ineffective by the EU. They will decide
on that in twenty twenty six. If Corsia's design remains unchanged, the EU is likely to deem the scheme ineffective because emissions from EU departing flights would still surpass the annual emissions cap set by the EU ETS, which is the compliance carbon scheme in the EU for aviation.
Got it, so for their own rules they need something more stringent than CORSEA, and that's the sort of the problem that they face at the moment. There's so much interesting stuff we've discussed today, but one of the really interesting things about this was this idea that CORSA beyond aviation can have this impact of being a force for bringing integrity to voluntary carbon markets, which has always been
the challenge there. The last sort of two questions we discussed is, you know, what could be the impact of the US dropping out? What could be the impact of the EU dropping out, albeit for very different reasons. If that happens, Would that diminish the power of CORSEA to have that broad impact?
Yes, because the effectiveness of Coursia relies entirely on the fact that airlines and governments will comply by the scheme, and it would have like that would have a ripple effect on other crabin markets. So when we look at CORSA and whether it is necessary or not, there are
two lenses. One is decribinizing the aviation sector, which is hard to abate, and this is something compliance schemes have failed to do because it's a big and international problem and you can step on other jurisdiction's feet when you're trying to decribinize aviation. And the other one that you've talked about is legitimizing the voluntary carbon market. Now that markets has been on a journey of hardship and media scrutiny, and COURSIA does provide a way out where it finally
legitimizes the use of carbon credits. It tells everyone that actually, carbon credits are a real way for you to decarbonize your emissions and meet your targets. So if the scheme fails, that's just another pain point, another obstacle that the VCM has to overcome.
Wow, I can hear the pain in your voice when you say that, Leila, Thank you so much for joining us today.
Thank you for having me.
Today's episode of Switched On was produced by Cam Gray with production assistance from Kamala Shelling. Bloomberg NEF is a service provided by Bloomberg Finance LP and its affiliates. This recording does not constitute, nor should it be construed as investment advice, investment recommendations, or a recommendation as to an investment or other strategy.
Bloomberg ANIAF should not be considered as information sufficient upon which to base an investment decision. Neither Bloomberg Finance LP nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the information contained in this recording, and any liability as a result of this recording is expressly disclaimed,