Speaker 1: This is Tom Rowland's Reese and you're listening to Switched
Speaker 1: on the podcast brought to you by B and EF.
Speaker 1: Following controversies surrounding voluntary carbon credits markets, a lack of
Speaker 1: regulation and standardization has continued to prove a challenge when
Speaker 1: it comes to the use of credits as a means
Speaker 1: of decarbonization For aviation, one of the hardest to abate
Speaker 1: sectors and the only transport sector with growing oil demand.
Speaker 1: The United Nations has recently introduced the Carbon Offsetting and
Speaker 1: Reduction Scheme for International Aviation, more commonly known as CORSEA,
Speaker 1: in a bid to offer legitimacy for carbon credits to
Speaker 1: help tackle emissions at scale. With one hundred and twenty
Speaker 1: six markets currently signed up and that number set to
Speaker 1: rise to one hundred and thirty five from twenty twenty seven,
Speaker 1: CORSA boasts a truly global footprint, but with the Trump
Speaker 1: administration looking set to pull the US's involvement, the EU
Speaker 1: questioning its effectiveness and its non legally binding structure, meaning
Speaker 1: individual markets have to police themselves. Just how impactful can
Speaker 1: CORCIA really be? Today I'm joined by a member of
Speaker 1: our Environmental Markets team, Associate Leila Camphire and we discussed
Speaker 1: findings from her note aviation credits market outlook. CORSA gets
Speaker 1: its wings, which BNAF clients can find at BNF go
Speaker 1: on the Bloomberg terminal or on BNF dot com. All right,
Speaker 1: let's get to talking about CORSEA with Leila. So, Leila,
Speaker 1: welcome to the show.
Speaker 2: Thank you for having me.
Speaker 1: So I'm going to confess I've always found CORSEA to
Speaker 1: be a little bit of an intimidating topic. In all
Speaker 1: the different parts of my career where I have been
Speaker 1: adjacent to or involved in carbon markets, CORSIA has been
Speaker 1: this sort of shadow lurking in the background. And the
Speaker 1: reason I'm so intimidated by it was that everything had
Speaker 1: it seemed kind of complicated, involves lots of different nations,
Speaker 1: flights going to and from one place, so which jurisdiction
Speaker 1: does it fall into? You know, is it voluntary? Is
Speaker 1: it mandatory? But it all seemed a little bit scary
Speaker 1: to me. So I hope that today we can demystify
Speaker 1: some of this and to start with, tell us what
Speaker 1: is CORSA and how does it work well.
Speaker 2: CORSIA stands for the carbon offsetting and Reduction scheme for
Speaker 2: international aviation.
Speaker 1: Got it?
Speaker 2: And that's all you need to know. No, just kidding.
Speaker 2: So this is a un governed scheme, so it is
Speaker 2: international by nature, but it's not legally binding. You've got
Speaker 2: member states to the International Civil Aviation Organization which the
Speaker 2: scheme falls under, and this is the jurisdiction or the
Speaker 2: mandate of Corsia's the member states of KAO. The scheme
Speaker 2: aims at decarbonizing international aviation for both passenger and cargo flights.
Speaker 2: And it works in different phases and it has different
Speaker 2: ways that airlines especially can decarbonize their emissions. And it
Speaker 2: runs from twenty twenty one until twenty thirty five.
Speaker 1: And what happens after twenty thirty five, then there'll be reconvene,
Speaker 1: there'll be a new scheme of some of.
Speaker 2: Some it's still unclear. They could extend that, they could
Speaker 2: have a new scheme, they could redesign the scheme. It
Speaker 2: is still unclear. Coursia as it stands now is also
Speaker 2: not really set in stone. So at every three years,
Speaker 2: which is whenever a new compliance cycle starts, they'll sit
Speaker 2: together and maybe do some changes to the scheme. So
Speaker 2: who knows what will happen in twenty thirty five.
Speaker 1: And so just understand that the history of the scheme
Speaker 1: Cossia has been in existence as a concept before. Now
Speaker 1: has it just been all talk up until now or
Speaker 1: is this just a new phase of something that has
Speaker 1: been ongoing.
Speaker 2: No, it's not all talk. So as I mentioned earlier,
Speaker 2: it runs in three main phases, pilot phase, first phase,
Speaker 2: and second phase. The pilot and first phase are both voluntary,
Speaker 2: and the pilot phase started in twenty twenty one and
Speaker 2: it ran until twenty twenty three, so it was still running.
Speaker 2: There were still some talk around it, but it was
Speaker 2: more of a trial period, and then when we entered
Speaker 2: the first phase in twenty twenty four is when most
Speaker 2: market players, especially airline start paying attention. I think what
Speaker 2: makes Corsia a bit of a shadow that lurks like
Speaker 2: you described it is that airlines compliance deadlines actually are
Speaker 2: like thirteen months after each compliance cycle ends, So it
Speaker 2: gives us a lot of time to contemplate and pick
Speaker 2: and choose and decide what we want to do until
Speaker 2: we have to submit our upsetting obligations under Corsia.
Speaker 1: I mean, I'd love to have been in the meeting
Speaker 1: where they decided specifically it had to be thirteen months,
Speaker 1: so odd yeah, that really logical time period. So just
Speaker 1: to really clarify, we're now going from the pilot phase
Speaker 1: of COURSIA, which in twenty twenty three. We're in the
Speaker 1: first phase of CORSIA, and then the mandatory phase would
Speaker 1: be when.
Speaker 2: So the second phase is mandatory for all ico member
Speaker 2: states unless they are except and that starts in twenty
Speaker 2: twenty seven. So up until now, when we say voluntary,
Speaker 2: it means that certain states have said we'll participate and
Speaker 2: we'll see how that goes. But once they do, airlines
Speaker 2: have to comply.
Speaker 1: And so i COW, I'm sorry if you already spelled out,
Speaker 1: could you just define out ICAO and I'll be curious
Speaker 1: to know how many states are part of it?
Speaker 2: Okay, So ICOW stands for the International Civil Aviation Organization.
Speaker 2: It's the part of the yue that runs CORSEA, and
Speaker 2: member states to ICW I believe are north of one
Speaker 2: hundred and fifty. But the ones that for sure are
Speaker 2: participating in the second phase or the mandatory phase of CORSEA,
Speaker 2: are one hundred and thirty five. Because ICOW does give
Speaker 2: out exemptions to small states or island states, et cetera.
Speaker 1: Got it, So countries that have less alternative options to
Speaker 1: relying on aviation, I.
Speaker 2: Would say so. Also, to clarify, one hundred and twenty
Speaker 2: six markets volunteer to participate in CORSEA in twenty twenty four,
Speaker 2: that's the beginning of the first phase, and then three
Speaker 2: additional markets joined in twenty twenty five, So now we're
Speaker 2: up to one hundred and twenty nine for phase one,
Speaker 2: and then in phase two, which in twenty twenty seven,
Speaker 2: around one hundred and thirty five markets are expected to join.
Speaker 1: So when we get into the mandatory part of phase one,
Speaker 1: it's actually not going to be that big a difference
Speaker 1: in terms of the number of countries participating. The majority
Speaker 1: of countries that are part of AIKAO have already opted in.
Speaker 2: That is true. However, the ones that are joining in
Speaker 2: phase two are Russia and China and India and Brazil,
Speaker 2: and those are big markets that would impact the emissions
Speaker 2: covered under CRISTIAS, So those emissions would actually go up
Speaker 2: by around fifty percent in twenty twenty seven relative to
Speaker 2: twenty twenty six.
Speaker 1: Okay, wo wow, that's a pretty big difference. Okay, cool,
Speaker 1: So I think I've I've got a good understanding certainly
Speaker 1: compared to where I was five minutes ago on you
Speaker 1: know what COURSEA is and the sort of the scope
Speaker 1: and and the sort of trajectory of it. So then
Speaker 1: the next big question is is what options do the
Speaker 1: airlines actually have to reduce their emissions under this scheme.
Speaker 2: So airlines have two options. They can either use carbon credits,
Speaker 2: which is why I'm on the podcast to begin with,
Speaker 2: and those are CORSIA eligible carbon credits, or they can
Speaker 2: use CORSIA eligible fuels and those include saff or sustainable
Speaker 2: aviation fuels or lower carbon aviation fuels, and they to
Speaker 2: meet Corsia's criteria, a fuels life cycle emissions must be
Speaker 2: at least ten percent lower than those of conventional jet fuel.
Speaker 2: As for the CORSIA eligible credits, they need to also
Speaker 2: be approved by ICO, they need to meet certain eligibility criteria.
Speaker 2: But there's an additional layer of complication, which is that
Speaker 2: these credits need to be approved by their host countries
Speaker 2: such that these governments apply corresponding adjustments so they don't
Speaker 2: double count the emission reductions when they're accounting for their NDCs.
Speaker 1: For example, Got it, so the emissions reductions take place
Speaker 1: under ICO, you're saying is that can't count towards the
Speaker 1: country's DC emissions target. Correct, And so these when we're
Speaker 1: talking about eligible offsets and eligible fuels, is that all
Speaker 1: determined by ICO?
Speaker 2: Then yes, more or less. So for fuels, ICOW does
Speaker 2: provide airlines with a set of fuels that are eligible
Speaker 2: and then there's a bunch of documentation airlines need to
Speaker 2: submit to ICO for it to count. And the same
Speaker 2: goes for credits. But the thing with course eligible credits
Speaker 2: is that you don't have new credits that come from
Speaker 2: a special ICO registry that's reserved for the use of airlines.
Speaker 2: They're actually borrowed from the existing voluntary carbon market, which
Speaker 2: we know and we've discussed before, even on this podcast
Speaker 2: last year. It's a very troubled market and it's bruised.
Speaker 2: So that adds a layer of complexity to what CORSEA
Speaker 2: or ICO in general has to do to make sure
Speaker 2: that those credits are legitimate and have high environmental impact.
Speaker 1: Right. So that's part of the issue then, is that
Speaker 1: the voluntary markets at the moment have too many low
Speaker 1: quality credits, and that is why EIKAW has kind of
Speaker 1: created its own specifications, but those same high quality credits
Speaker 1: are still available to other sectors, which airlines will have
Speaker 1: to compete with those other sectors as well.
Speaker 2: Exactly, Yeah, exactly.
Speaker 1: So whenever we're looking at an emissions reduction scheme, particularly
Speaker 1: one which is as maybe complex isn't the word, but
Speaker 1: it's sort of so multilateral, let's say, between nations, the
Speaker 1: question always comes is is doesn't really have teeth? Obviously,
Speaker 1: the first phase is voluntary, although let's assume that all
Speaker 1: of the countries involved have good enough intentions that they
Speaker 1: have volunteered seriously, and then it's mandatory after twenty twenty seven.
Speaker 1: But what happens when these targets aren't met? I mean
Speaker 1: who's on the hook? Firstly? Is it the airlines specifically,
Speaker 1: or is it the countries or is it sort of
Speaker 1: the airlines are on the hook to the countries and
Speaker 1: the countries are on the hook to the scheme? Yeah,
Speaker 1: what is the What are the mechanisms that really ensure
Speaker 1: that this doesn't turn into sort of you know, I
Speaker 1: mentioned earlier all talk. How do we ensure that this
Speaker 1: isn't all talk?
Speaker 2: It's honestly down to the participating member states and governments
Speaker 2: to determine this. So this scheme, or at least the
Speaker 2: responsibility to decarbonize falls on airlines. But airlines are on
Speaker 2: the hook to the countries, like you explained, So some
Speaker 2: countries or some governments like Canada and the UK, did
Speaker 2: incorporate CORSIA into their national laws, so they have monetary
Speaker 2: penalties for airlines that fail to comply. The UK has
Speaker 2: a pretty significant one. So if I'm an airline and
Speaker 2: I'm operating my flight between the UK and another member
Speaker 2: state and I don't comply with CORSIA, then I will
Speaker 2: have to pay around two thousand pounds a day, so
Speaker 2: that will force me to go and those credits rather
Speaker 2: than pay that fine. But for other governments that don't
Speaker 2: have any penalties in place, they don't really enforce CORSIA
Speaker 2: international law. There is nothing really binding those airlines to
Speaker 2: comply unless out of the good of their hearts they
Speaker 2: want to, or if they want to avoid also reputational
Speaker 2: risk that comes with not decarbonizing, which they're already sort
Speaker 2: of under.
Speaker 1: And just one more question, and this this is not
Speaker 1: so much about enforcement. You know, whenever I, as an
Speaker 1: individual go and book a flight, I do always have
Speaker 1: the option as a consumer to buy offset credits to
Speaker 1: offset my flight. So can airlines also claim those as
Speaker 1: reduced emissions or is that sort of is the emissions
Speaker 1: that they reductions they have to make in addition to
Speaker 1: whatever offsets consumers taking.
Speaker 2: Those flights a buying, So it's a bit more complicated.
Speaker 2: So when you go as a consumer and you go
Speaker 2: buy a ticket and some offsets on top of it
Speaker 2: to offset your emissions, airlines used out more or less
Speaker 2: like a marketing strategy, and you often end up buying
Speaker 2: very cheap credits that do have questionable environmental impacts, and
Speaker 2: if they are questionable, then they are likely not eligible
Speaker 2: to be used towards CORSIA regardless. The way this works,
Speaker 2: or at least the way airlines submit their emissions or
Speaker 2: account for their emissions for CORSIA, is that they count
Speaker 2: how many emissions they have at the end of every year,
Speaker 2: and then they compare that with a preset baseline for
Speaker 2: that year, and for CORSIA, it's the twenty nineteen emission levels,
Speaker 2: and then my total emissions is an airline for that
Speaker 2: year needs to be below that twenty nineteen baseline, and
Speaker 2: the difference is what you need to reduce using credits
Speaker 2: or eligible.
Speaker 1: Fuels, so those consumer offset credits are irrelevant both to
Speaker 1: CORSA and ultimately to how many emissions are made overall.
Speaker 1: In effect, if there's such poor quality, let's move on
Speaker 1: to talking about the sort of the geopolitics of this.
Speaker 1: You know, you've talked a little bit about the challenges
Speaker 1: of you know, maybe different degrees of commitment to enforcing this.
Speaker 1: The UK and Canada have turned it into law, maybe
Speaker 1: some other countries will, I mean, is that something that
Speaker 1: we see happening? Yeah, how does this all play into
Speaker 1: the relationships between all the different countries involved?
Speaker 2: More or less, the relationships between countries don't seem to
Speaker 2: be affected as much if they're all operating under an
Speaker 2: international scheme that they've signed to do, signed up to do.
Speaker 2: When we talk about geopolitics and Christia, I think the
Speaker 2: main question that arises is will the US actually participate
Speaker 2: in Courstia given the Trump administration and their view on
Speaker 2: climate policies in general. But the relationships between countries themselves,
Speaker 2: having them governed by as scheme like Cristia actually protects
Speaker 2: them from any tension, which is a solution that we
Speaker 2: see to other compliance carbon schemes trying to expand to
Speaker 2: international aviation but could not because of these issues and
Speaker 2: these complexities.
Speaker 1: So Leila, we've kind of established a little bit about
Speaker 1: the qualitatively how CORSEA works. But you are a BNF
Speaker 1: analyst and a very fine one, indeed, which means that
Speaker 1: you presumably have somewhere a spreadsheet where you've crunched the
Speaker 1: numbers and figured out what all of this means, and
Speaker 1: you've put it into a report which BNF clients can
Speaker 1: access at BNF dot com or on the terminal via
Speaker 1: BNF Go. But you will have created a forecast, I presume,
Speaker 1: of what all of this means. So talk us through
Speaker 1: the numbers. How much demand is there going to be
Speaker 1: for either emissions reductions or offsets because of the phase
Speaker 1: of CORSEA that we're currently in.
Speaker 2: Yeah, that's what she did. Give me a lot of headaches,
Speaker 2: but it's done and it's out now and it looks beautiful.
Speaker 2: So for the report that we're talking about, there are
Speaker 2: several scenarios that we run. The base case scenario just
Speaker 2: assumes business as usual in we have a total of
Speaker 2: one hundred and twenty nine participating markets in Phase two
Speaker 2: we have one hundred and thirty five. I will just
Speaker 2: preface this and point out that Corsia credits are available
Speaker 2: to everyone and not just airlines. But our forecast and
Speaker 2: our scenarios are based completely on what airlines will have
Speaker 2: to offset or reduce emissions, and that is what drives demand,
Speaker 2: or at least the main driver of demand for Corsia credits.
Speaker 2: So in Phase one we estimate that the airlines offsetting
Speaker 2: requirements will total one hundred and fifty million tons by
Speaker 2: twenty twenty six, and then they will climb to a
Speaker 2: total of one point two three billion tons by end
Speaker 2: of phase two. Now, Phase two is three times as
Speaker 2: long as Phase one, but also, as we mentioned, it
Speaker 2: does include the major or big markets that operate a
Speaker 2: lot of the flight routes, like Brazil and Russia and
Speaker 2: China and India.
Speaker 1: So just to clarify these numbers, you're saying these accumulative,
Speaker 1: you know it is not per year, it's for the
Speaker 1: entire phase, Yes, got it.
Speaker 2: The annual demand for CHRISTI eligible credits would peak in
Speaker 2: twenty thirty five at around one hundred and sixty one
Speaker 2: million tons of CO two.
Speaker 1: And when you say it peaks, that's that's the last
Speaker 1: year of Phase two, so presumably something is coming after.
Speaker 1: So it's not like it's going to peak and go
Speaker 1: down necessarily, it's just that's the end of the runway.
Speaker 2: So it will reach one hundred and sixty one million
Speaker 2: tons of CO two in twenty thirty five. One last
Speaker 2: thing I'd like to note is that apart from passenger flights,
Speaker 2: we also account for cargo flights. Now in phase one,
Speaker 2: which is now they are very little, they account for
Speaker 2: an additional two percent of emissions that say, but once
Speaker 2: we have China and Russia in Phase two, cargo flights
Speaker 2: will account for around nine percent of total emissions, so
Speaker 2: they will also contribute with that additional demand or jump
Speaker 2: in demand that we see in phase two.
Speaker 1: I mean, I'm going to ask a really really stupid question.
Speaker 2: No stupid questions.
Speaker 1: Well, you haven't had my question yet. Is this a lot?
Speaker 2: This is actually a great question. If you compare Christia
Speaker 2: with the wider ol global carbon credits market, where it's
Speaker 2: very massy, it's oversupplied, everyone and anyone can buy a
Speaker 2: credit that's actually very little. And even if you compare
Speaker 2: that with the demand for credits from corporates that we
Speaker 2: go over. In our long term carbon credits demand outlook
Speaker 2: that my colleague Kyle published a couple months back, it's
Speaker 2: twenty two point five times higher than airlines demand for
Speaker 2: Christia in twenty thirty five. But if you look at
Speaker 2: airlines on their own, it is a lot for airlines.
Speaker 2: So since twenty fifteen, we tracked the buying activity of
Speaker 2: credits for airlines and that amounted to around thirty six
Speaker 2: million tons, and that's only twenty four percent of airlines
Speaker 2: offset requirements in Phase one alone.
Speaker 1: So this is I mean, you know, to my question,
Speaker 1: is this a lot? It's a big deal for airlines,
Speaker 1: it's not as much a big deal for carbon markets.
Speaker 1: Is that a fair framing?
Speaker 2: Not really, because it's a little more nuanced than that.
Speaker 2: It's a big deal for airlines, definitely, because it's going
Speaker 2: to be because they need to buy them, they're obliged to,
Speaker 2: and they're expensive.
Speaker 1: So I was half right, half right.
Speaker 2: But if you want to talk about whider carbon credits
Speaker 2: and markets, COURSA is the closest thing carbon credits or
Speaker 2: vulntary carbon markets have gotten to standardization or legitimacy. And
Speaker 2: because you have that, you and stamp of approval on
Speaker 2: that carbon credit. Everyone is attracted to it and wants
Speaker 2: to buy it because that helps them hedge against reputational risk.
Speaker 2: But the quantity of it, it's another issue, and that's
Speaker 2: something we go over in our supply outlook in the report.
Speaker 1: So this is a big deal for airlines. We agreed
Speaker 1: on that, and then it might not be quite as
Speaker 1: big a deal for sort of maybe the poor quality
Speaker 1: carbon offset markets, but it is a big deal for
Speaker 1: this idea of like higher quality offsets. It's something like
Speaker 1: to what you're describing is almost like it might crystallize
Speaker 1: the creation of a a sort of a higher tier
Speaker 1: of offset and solve some of these problems that the
Speaker 1: broader market has suffered from. Is that what you're saying? Yes, well,
Speaker 1: that's quite exciting because this is this quality issue has
Speaker 1: been some people I've been talking about for a long time,
Speaker 1: so I'm really happy to hear about this. So anyway,
Speaker 1: you were just about to talk about the supply of
Speaker 1: these high quality credits and of course direct emissions reductions,
Speaker 1: so I'm sure in your spreadsheet you calculated that as well.
Speaker 1: So what did the spreadsheet tell us?
Speaker 2: So the question of supply in Christia is even trickier
Speaker 2: than demand. So i COOW decides whether a credit is
Speaker 2: eligible or not, and they publish this document at the
Speaker 2: beginning of every phase telling us what we can buy
Speaker 2: and what we cannot buy for it to count towards CORSIA.
Speaker 2: But then they also add another layer and they say
Speaker 2: that credit needs to be approved by your host country
Speaker 2: and corresponding adjustments must be applied so that we don't
Speaker 2: double count, and that does enforce or reinforce the environmental
Speaker 2: impact of coursia. But then we know governments, and we
Speaker 2: know the Yuan, and we know that they're slow and bureaucratic,
Speaker 2: and because of that, right now we only have fifteen
Speaker 2: million credits that are available for airlines to use towards
Speaker 2: their offsetting obligations, and frankly, that's nothing. These fifteen million
Speaker 2: tons come from a forestry project in Guyana that the
Speaker 2: government has approved, but all the other projects and credits
Speaker 2: that are eligible for cristia are still waiting approval from
Speaker 2: their host countries, and their host countries still need to
Speaker 2: go through a bit of a process to submit their
Speaker 2: corresponding adjustments and the requirements and so on, so it
Speaker 2: might take some time, and that makes apply very very uncertain.
Speaker 2: In our outlook, we estimate that supply could reach three
Speaker 2: hundred and six million in phase one and one point
Speaker 2: five to three billion in phase two. That's also cumulative,
Speaker 2: and it surpasses offsetting requirements in each phase. But that
Speaker 2: happening is contingent on governments getting those approvals in place.
Speaker 1: I mean, this is I mean it kind of comes
Speaker 1: back to the previous point, doesn't it that this whole
Speaker 1: thing is a forcing mechanism for governments that are interested
Speaker 1: in offset markets to kind of get their act together
Speaker 1: in actually defining what good is, enforcing what good is
Speaker 1: in order to enable that to happen. Yeah.
Speaker 2: Correct, And that is a double edged toward, I would say,
Speaker 2: because on one hand, yes, you have some enforcement and
Speaker 2: some policy mechanism, but then if you leave it completely
Speaker 2: up to governments without any overarching standards between them, it
Speaker 2: could create some inconsistencies.
Speaker 1: And so final question about your spreadsheet, You've looked at demand,
Speaker 1: you've looked supply. So the inevitable question that follows is
Speaker 1: what did your spreadsheet tell us about the price.
Speaker 2: So in my spreadsheet, when I put those demand in
Speaker 2: supply balances against each other, we estimated the average price
Speaker 2: for Corsia credits in phase one to be sixteen point
Speaker 2: seven dollars briton and an average of forty nine point
Speaker 2: four dollars priton in phase two. Right now, the auctioned
Speaker 2: price of Corsia credits is around twenty one point seven
Speaker 2: dollars priton, and that actually decreases in twenty twenty six
Speaker 2: to twelve point four dollars priton because in Phase one
Speaker 2: demand is so little, it's comfortably below available supply if
Speaker 2: like we said, governments approve those credits. But then as
Speaker 2: soon as we enter phase two, which is in twenty
Speaker 2: twenty seven, I mentioned that offsetting requirements jump by around
Speaker 2: fifty percent, and suddenly you have that spike in demand
Speaker 2: and you're sort of scrambling to get enough credits to
Speaker 2: cover that, and more expensive credits come in and they
Speaker 2: set the price at ninety six point five dollars per
Speaker 2: toon in twenty twenty seven, and that's the peak price.
Speaker 2: The year after the market is still slightly oversupplied and
Speaker 2: prices fault around forty dollars peron.
Speaker 1: Okay, so these are you know, maybe these prices in
Speaker 1: the early phases of the scheme are you know, in
Speaker 1: terms of the big picture of carbon markets, that's quite cheap,
Speaker 1: but it gets to being pretty meaningful by the end
Speaker 1: of the scheme.
Speaker 2: Yeah, they do so, even frankly, even at the beginning
Speaker 2: of the scheme. I know that twelve and sixteen dollars
Speaker 2: perton might sound cheap, but if you compare that to
Speaker 2: the wider voluntary carbon market prices, these are pretty decent
Speaker 2: because low integrity credits or low quality credits that are
Speaker 2: flooding the market right now trade at below three dollars perton.
Speaker 1: So the current voluntary phase you mentioned, there's four major
Speaker 1: markets that run involved India, China, Brazil, Russia, and they're
Speaker 1: going to be joining in the next phase. But given
Speaker 1: the current state of global politics, and in particularly US politics,
Speaker 1: it's not to me outside the realms of possibilities that
Speaker 1: the US might not be willing to participate, just given
Speaker 1: the political narratives we've seen recently. Is this something that
Speaker 1: people are talking about as a realistic possibility.
Speaker 2: Yes, definitely. The US leaving seems more and more of
Speaker 2: like a reality to Christia. Now, like we mentioned before,
Speaker 2: Cristia is actually not legally binding and there are no
Speaker 2: consequences for any government to leave, and the US has
Speaker 2: the option to do so, and we did model that.
Speaker 2: So if the US drops out of the aviation decarbonization scheme,
Speaker 2: it could reduce demand for Christia credits by three million
Speaker 2: tons in phase one that's two percent of the base
Speaker 2: case demand, and one hundred and eighty four million tons
Speaker 2: in phase two or fifteen percent of the base case.
Speaker 2: And in that scenario, because you have less demand and
Speaker 2: the market is still oversupplied, credit prices don't there are
Speaker 2: no dramatic peaks and price it reaches an all time
Speaker 2: law of twelve dollars per ton in twenty twenty six,
Speaker 2: and then they will gradually rise and peak at forty
Speaker 2: four point four dollars perton in twenty thirty.
Speaker 1: And so if the US pulls out, would international flights
Speaker 1: coming in and out of the US two countries that
Speaker 1: are participating in CORSEA, they would still be subject to
Speaker 1: CORSEA right No, So.
Speaker 2: For a route to be covered under CORSA, both of
Speaker 2: its departing and arrival markets need to be member states
Speaker 2: or at least ones that are participating in CORSEA. So
Speaker 2: if the US drops out, all international flights coming out
Speaker 2: or into the US won't count, and that actually alleviates
Speaker 2: a lot of the responsibility from US based airlines, seeing
Speaker 2: that ninety nine percent of their emissions come from flights
Speaker 2: that operate either in or out of the US.
Speaker 1: Wow. Okay, so that would be a major impact, although
Speaker 1: in the prices of the scheme you still see some
Speaker 1: pretty robust pricing, but just in terms of the total
Speaker 1: emissions coverage, that would be a pretty major And I suppose,
Speaker 1: as with all carbon schemes, if the US pulls out,
Speaker 1: they'll it'll leave a lot of other countries asking themselves, well,
Speaker 1: why should we stay in if the US is pulling out?
Speaker 1: Which kind of leads me on to something else which
Speaker 1: is touched on in your note, is the EU potentially
Speaker 1: dropping out? Is that tell us a little bit more
Speaker 1: about that.
Speaker 2: It's pretty ironic, isn't it That the US and the
Speaker 2: U might pull out, but for completely different reasons. So
Speaker 2: the US could drop out because they don't like decarbonization,
Speaker 2: but the EU might drop out because it loves decarbonization
Speaker 2: and CRISIA might not be as effective. So the EU
Speaker 2: will decide on whether CORSA is effective or not. In
Speaker 2: twenty twenty six, If it is not, then the EU
Speaker 2: ETS or the Compliance Carbon Scheme for the U would
Speaker 2: expand its Monday took cover international aviation emissions. But as
Speaker 2: it stands now, CORSA actually could be ineffective, seeing that
Speaker 2: even if airlines comply, their emissions for intra EU flights
Speaker 2: would still surpass the cap that is set by the
Speaker 2: EUTS or aviation. The EU is known to be more
Speaker 2: stringent when it comes to de carbonization policies, and Corsia
Speaker 2: can be deemed ineffective by the EU. They will decide
Speaker 2: on that in twenty twenty six. If Corsia's design remains unchanged,
Speaker 2: the EU is likely to deem the scheme ineffective because
Speaker 2: emissions from EU departing flights would still surpass the annual
Speaker 2: emissions cap set by the EU ETS, which is the
Speaker 2: compliance carbon scheme in the EU for aviation.
Speaker 1: Got it, so for their own rules they need something
Speaker 1: more stringent than CORSEA, and that's the sort of the
Speaker 1: problem that they face at the moment. There's so much
Speaker 1: interesting stuff we've discussed today, but one of the really
Speaker 1: interesting things about this was this idea that CORSA beyond
Speaker 1: aviation can have this impact of being a force for
Speaker 1: bringing integrity to voluntary carbon markets, which has always been
Speaker 1: the challenge there. The last sort of two questions we
Speaker 1: discussed is, you know, what could be the impact of
Speaker 1: the US dropping out? What could be the impact of
Speaker 1: the EU dropping out, albeit for very different reasons. If
Speaker 1: that happens, Would that diminish the power of CORSEA to
Speaker 1: have that broad impact?
Speaker 2: Yes, because the effectiveness of Coursia relies entirely on the
Speaker 2: fact that airlines and governments will comply by the scheme,
Speaker 2: and it would have like that would have a ripple
Speaker 2: effect on other crabin markets. So when we look at
Speaker 2: CORSA and whether it is necessary or not, there are
Speaker 2: two lenses. One is decribinizing the aviation sector, which is
Speaker 2: hard to abate, and this is something compliance schemes have
Speaker 2: failed to do because it's a big and international problem
Speaker 2: and you can step on other jurisdiction's feet when you're
Speaker 2: trying to decribinize aviation. And the other one that you've
Speaker 2: talked about is legitimizing the voluntary carbon market. Now that
Speaker 2: markets has been on a journey of hardship and media scrutiny,
Speaker 2: and COURSIA does provide a way out where it finally
Speaker 2: legitimizes the use of carbon credits. It tells everyone that actually,
Speaker 2: carbon credits are a real way for you to decarbonize
Speaker 2: your emissions and meet your targets. So if the scheme fails,
Speaker 2: that's just another pain point, another obstacle that the VCM
Speaker 2: has to overcome.
Speaker 1: Wow, I can hear the pain in your voice when
Speaker 1: you say that, Leila, Thank you so much for joining
Speaker 1: us today.
Speaker 2: Thank you for having me.
Speaker 1: Today's episode of Switched On was produced by Cam Gray
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