First global airline emissions scheme faces 'a litmus test' as credits run short

By Simon Jessop and Susanna Twidale

ANTALYA, Turkey, Nov 10 (Reuters) - 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 impact 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 on Monday in Antalya, Turkey, and continues for two weeks. Transport is a focus of discussions on 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," Antigua and Barbuda's UN ambassador Walton Webson told Reuters.

For well over 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 have only reported on a voluntary basis to the global Carbon Offsetting and Reduction Scheme for International Aviation.

Around 130 countries have 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, Standard Chartered's Chris Leeds, head of carbon market development, said.

Data from UN body, the 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 the most and that only 11 countries were in a position to supply credits to CORSIA.

Asked by Reuters about the implications of the supply shortage, ICAO had no immediate comment.

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Credits for offsetting airline emissions could make most difference in poorer countries when a widespread cost of living crisis and reduced development aid budgets have 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 has added to the problem of meeting growing demand.

Hannah Hauman at trading house Trafigura said only around 5% of historic credit inventories were eligible for schemes such as CORSIA that governments have made mandatory.

Adding to the shortage, some developing countries have said they are reluctant to allow too many credits to be sold too quickly in case they need them to meet their own UN climate targets to curb overall emissions.

The likelihood, analysts said, is that carbon credits, which sell for around $12 to $13 a ton, will become more expensive as the uncertainties that have made airlines hesitate to buy them are resolved.

"There is a risk that if you wait too long that you have to pay up," Marijn van Diessen, chief executive at environmental commodity trader STX Group, said.

Britain has proposed a penalty of £100 ($134) for every ton of carbon that does not comply and is seeking views. Other countries are also 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 have secured.

United Airlines said only that the availability of eligible offsets was constrained, while American Airlines AAL.O cited uncertainty over their supply and price.

Singapore Airlines SIAL.SI said it had started securing eligible units, without disclosing the volume, and Air France-KLM AIRF.PA 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-$9 billion, equivalent to around 5% to 12% of projected industry profits for 2026.

PROJECTS STRUGGLE TO DELIVER AND GOVERNMENTS HESITATE

Eligible credits need to be authorised by ICAO's technical advisory body and by national governments that have 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 UN emissions goal.

Brazil, whose rainforest could make it a major supplier of credits, told Reuters it had yet to begin authorising CORSIA projects and was finalising rules.

Major buyer Japan said administrative capacity constraints were slowing approvals in some countries that could sell credits. Its civil aviation bureau said airlines could face a fine for non-compliance, without giving details.

At 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 around 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.

($1 = 0.7475 pounds)