By Jean-Philippe Brisson, Yvette D. Valdez, Michael Dreibelbis, and Jim Lambert
The UN sustainable aviation compliance program, known as CORSIA, has released its eligibility requirements for emissions units for its next phase, starting in January 2024. These updates are likely to impact global carbon markets in determining the emissions units that airlines can use for their future compliance needs. Moreover, since CORSIA’s requirements are widely considered an important benchmark of quality and integrity for voluntary offset credits, their impact is likely to extend beyond the aviation sector.
Background
The International Civil Aviation Organization (ICAO) is a UN agency that establishes standards and recommended practices for international air travel. In 2016, the member states of ICAO adopted the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) as the first and only global compliance scheme to limit emissions from an industrial sector. Once a nation commits to CORSIA, the program applies to virtually all civil flights between that nation and any other participating nation.
While nations can choose to opt in to the program prior to 2027, beginning in 2027, CORSIA will apply to international flights to or from all UN member states, with some very limited exceptions. Domestic flights are covered by the Paris Agreement. At present, 118 nations have volunteered to participate in CORSIA, including the United States and EU Member States, representing in total more than three-quarters of all international aviation activity. CORSIA is projected to drive the reduction of about 2.5 billion tons of CO2emissions globally between 2021 and 2035.
CORSIA relies on the use of “emissions units” from the carbon market to offset the amount of CO2 emissions above a baseline that cannot be reduced through the implementation of technological and operational improvements or through sustainable aviation fuels. As such, CORSIA calls the international aviation sector to offset part of its CO2 emissions by purchasing and retiring emissions units. Each emissions unit is equivalent to 1 tonne of CO2 that was mitigated and verified by an eligible program approved by ICAO.
Since CORSIA is the only UN program that establishes criteria for the use of offset credits from the voluntary carbon market, the market perceives CORSIA’s eligibility requirements as an important quality benchmark. For example, the Integrity Council for the Voluntary Carbon Market (ICVCM) recently set a global benchmark for high-integrity offset credits, incorporating certain CORSIA requirements in its program-level criteria. In addition, one of the only offset credits futures contracts available in the voluntary carbon market, the CBL Global Emissions Offset (GEO) futures contract, is pegged to CORSIA eligibility.
CORSIA Eligibility Requirements
On March 29, 2023, ICAO published the official document[1] setting forth the CORSIA’s Eligible Emissions Units for the next compliance period of the program, which spans from 2024 to 2026 (Phase 1). This document lists the offset credits programs that have been approved as meeting CORSIA’s Emissions Units Criteria[2] as well as eligibility requirements in terms of scope and timing parameters for emissions units that participating airlines may retire to help achieve their emission reduction obligations, alongside their use of sustainable aviation fuel and their implementation of carbon-friendly, fuel-efficient upgrades to technology and infrastructure.
The recently established eligibility requirements for emissions units to qualify under CORSIA during Phase 1 (2024-2026) are different in important respects and narrower in terms of eligible programs than those in effect under the current Pilot Phase of the program, which spans from 2020 to 2023. During the Pilot Phase, the approved eligible emissions units cover those issued by nine different approved offset credit “standards” (also called “registries” in the United States) with respect to specific activities. Moreover, offset credits must be from projects started after 2016 and from vintages starting in 2016 through 2020 (except for two programs approved through 2023).
The eligibility requirements for Phase 1 maintain the 2016 project start date but stipulate that only emissions units with vintages of 2021 through 2026 will be eligible. Additionally, the only two standards to receive approval thus far are Winrock International’s American Carbon Registry (ACR) and Architecture for REDD+ Transactions (ART) (ART is a program of the ACR). Thus, the emissions units eligible under ACR and ART are those issued to activities that started their first crediting period in January 2016 and in respect of emissions reductions that occurred from January 2021 through December 2026. Other globally recognized offset credit standards, such as Verra Carbon Standard (VCS), Gold Standard, the Global Carbon Council (GCC), and Climate Action Reserve (CAR), have been given “conditional eligibilities” that will require significant updates to user terms, evaluation procedures, and new or strengthened double-counting protections before they can receive approval to verify offsets under CORSIA. Other standards were denied outright.
The Phase 1 requirements represent a shift of carbon markets into the Paris Agreement era that started in 2021. Given the vintage restrictions to 2021 and later, Phase 1 eligible emissions units will require a “corresponding adjustment” to align with CORSIA’s Emissions Units Criteria and guidance under Article 6 of the Paris Agreement to avoid double counting with respect to countries’ Paris pledges, known as Nationally Defined Contributions (NDCs).[3] Corresponding adjustments were not applicable for offset credits from vintages prior to 2021 in the Pilot Phase.
Impact of the New Requirements on Carbon Markets, Including Futures Markets
CORSIA’s Phase 1 eligibility requirements are likely to impact the voluntary carbon market generally due to the use of CORSIA eligibility as an indexing tool for standardized products in the voluntary carbon market. One such product is the CME Group-listed CBL Global Emissions Offset Futures (GEO Futures) contract, which aims to “provide delivery of physical carbon offset credits that have undergone stringent screening.” According to the CME, this contract “helps the global market base access standardized and validated instruments for the emerging voluntary emissions market.”[4] “Firms taking delivery [of a GEO Futures contract] will receive an offset credit from a registry and project that meets the CORSIA criteria.”[5] To ensure delivery of high-quality offset credits, CORSIA eligibility requirements are incorporated by reference into the GEO Futures contract specifications, and the CME may restrict the contract specifications for GEO Futures beyond the CORSIA requirements.
The CME contract specifications for GEO Futures limit the offset credits that are deliverable under the GEO Futures contract to credits from three standards: ACR, CAR, and VCS, notwithstanding the fact that CORSIA accepted several other standards in the Pilot Phase. Under Phase 1 of the CORSIA eligibility requirements, ICAO’s member states have only approved ACR and ART to date. As a result, at the current time, contracts trading for delivery in December 2024 and December 2025 will only be able to deliver ACR offset credits meeting the CORSIA eligibility requirements effective on the delivery date, including vintages as of 2021 together with corresponding adjustments.
The CME rules provide that the CME may make amendments to the GEO Futures contract in order to incorporate changes in CORSIA Eligible Emissions Units as agreed by ICAO’s member states.[6] For example, the CME could expand the list of approved standards eligible for delivery under the GEO Futures contract to include ART in addition to ACR.
Latham & Watkins will continue to monitor and report on developments in this area.
This post was prepared with the assistance of Tal Carmeli in the New York office of Latham & Watkins.
Endnotes
[1] https://www.icao.int/environmental-protection/CORSIA/Pages/CORSIA-Emissions-Units.aspx.
[2] https://www.icao.int/environmental-protection/CORSIA/Documents/ICAO_Document_09.pdf.
[3] https://www.icao.int/environmental-protection/CORSIA/Documents/TAB/TAB2023/ClarificationsJan2023.pdf.
[4] https://www.cmegroup.com/markets/energy/emissions/cbl-global-emissions-offset.html.
[5] https://www.cmegroup.com/articles/2022/voluntary-emissions-offset-futures-faq.html?itm_source=cmegroup&itm_medium=cgeo_pdp_page&itm_campaign=cgeo.
[6] CME Group Rulebook, Chapter 1269, Section 1269104.