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Cross border: COVID-19 and aviation emissions: what next for CORSIA?

Cross border: COVID-19 and aviation emissions: what next for CORSIA?

Published

May 13 2020

Written By

Of Counsel
UK

I am Of Counsel in our Aviation & Aerospace practice in London. I bring more than 30 years' commercial and litigious experience to a diverse array of aerospace issues.

Whilst recent commentary on the current state of the aviation industry has predominantly focused on the impact of COVID-19 on corporate earnings in the sector, less attention has been given to its impact on aviation emissions. The International Air Transport Association's (IATA) forecast that 2020 passenger demand will amount to 48% less than that of 2019[1] will have notable implications for both aviation's carbon footprint and the regulatory regime that is attempting to reshape it.

We review the challenges presented to the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) by the COVID-19 crisis.

What is CORSIA?

On 6 October 2016, 191 member states of the International Civil Aviation Organisation (ICAO) adopted CORSIA (reviewed in detail in our previous briefing), a scheme intending to offset annual increases in CO2 emissions from a baseline level, to be calculated as the average of total CO2 emissions for the years 2019 and 2020 on relevant routes.

Under CORSIA, aircraft operators will be required to offset any growth in CO2 emissions above the baseline level. The scheme will operate as follows on a three-year compliance period (the first running from 2021-2023):

As of 1 January 2019, operators with emissions greater than 10,000 tonnes of CO2 are obligated to report emissions in respect of qualifying flights between contracting states to their national aviation authority;
The data is disseminated by the national aviation authorities to ICAO and used to calculate the emissions growth factor across the aviation sector against the baseline level; and
At the end of each three-year cycle, each operator must offset an amount of emissions (calculated by its own annual emissions multiplied by the sectoral growth factor) by buying credits that are verified by ICAO as reducing emissions elsewhere (such as investing in a renewable energy project or using less carbon intensive fuels).

How will the COVID-19 crisis affect the CORSIA baseline level?

The COVID-19 crisis has had a dramatic impact on aviation traffic globally. According to Reuters, on January 23 more than 20,000 flights departed from or landed in Europe. Two months later, the number of flights dropped to fewer than 5,000 per day[2]. Moreover, IATA has predicted the widespread contraction in demand will lead to losses amounting to $314bn across the sector[3], an unprecedented calamity which has precipitated ensuing damage throughout the aviation world and its supply chain: insolvencies, unprecedented state bailouts, fuel price collapse and consumer rights crises.

CORSIA's reliance on a baseline defined by the average emissions for 2019 and 2020 is therefore problematic: the 2019-2020 figures will be unrepresentative of regular emissions activity in the sector. IATA put the average emissions for 2019-2020 at 584m tonnes of CO2 in advance of the crisis[4]. Factoring in the crisis, the revised 2019-2020 baseline prediction is expected to be 450m tonnes of CO2[5]. Such a reduction in emissions figures for 2019-2020 would lead to offsetting requirements increasing by between 50-85% (depending on IATA's alternate assumptions regarding the recovery rate of aviation traffic in 2020)[6].

How will a distorted baseline affect CORSIA and/or participants and stakeholders?

Airlines and industry bodies, amongst others, have raised the following concerns regarding the prospect of an aberrative baseline figure:

Increased offsets: When aviation traffic recovers, the lower than anticipated baseline will result in airlines needing to significantly increase their offset obligations, which will represent a significant added cost. This will be particularly concerning for airlines, as the current liquidity crisis will require prudent management of outgoings whilst the industry emerges from its financial malaise. In particular, airlines in receipt of state-sponsored bailouts will face a conflict between debt service, shareholder value and environmental credentials.
Reduced uptake: As of 27 February 2020, 82 states had agreed to voluntarily participate in CORSIA, with ICAO expecting increased participation as potential contracting states observe the implementation of the initial pilot phase (2021-2023). The first phase (2024-2026) and the second phase (2027-2035) will be open to other states that volunteer to participate. States may be discouraged if the costs of CORSIA to operators appear prohibitive. Generally, economic crises usher in sustained periods of more limited governmental interdependence.
Lack of offsetting credits: If the 2019-2020 baseline is used, the offsetting requirement will be significantly higher than anticipated. The supply of eligible emissions units is finite and IATA has expressed its concern that there may not be enough to meet the demands of the pilot phase[7].

How have industry participants reacted?

Operator-side arguments have largely focused on the urgent need for ICAO to respond to widespread industry concern regarding the use of the 2019-20 baseline. IATA has told ICAO that the baseline "must be adjusted to ensure the sustainable development of international aviation and avoid an inappropriate economic burden on the sector"[8]. IATA has called on ICAO to use the 2019 average figures as a substitute baseline.

However, so far ICAO appears resolute in its prosecution of CORSIA incorporating the 2019-2020 baseline figures. Indeed, the organisation has forged ahead with approval of six eligible emissions unit programmes that airlines can use to offset emissions during the pilot phase. The list has been provided by ICAO along with strict exclusions and reconciliations which will apply to their use.

Conversely, environmental bodies have posited that the COVID-19 crisis should not precipitate a relaxation in the burgeoning Environmental, Social and Governance (ESG) movement's focus on the aviation industry. Airlines in receipt of government bailouts, such as Air France-KLM, which received €10bn, will face renewed public pressure to improve environmental performance. This is perhaps reflected in the French government attaching 'green conditionality' to the aforementioned loan, requiring, amongst other commitments, that Air France renew its fleet with more efficient aircraft and commit to obtaining 2% of its fuel requirements from sustainable sources by 2025.

Moreover, offsetting regimes have faced long-standing criticism. The EU Emissions Trading System, and other regimes already in operation by airlines on a voluntary basis have faced accusations of 'green washing'. Critics highlight that offsetting regimes do not necessarily reduce carbon emissions (although the cost of offsetting may lead to fewer flights), and that offsetting is limited by difficulties in establishing accuracy in terms of the amount of emissions to be offset, and the amount of emissions that have been saved by purchasing a credit.

Future outlook for airlines

The implementation of CORSIA forms part of the aviation industry's wider effort to improve its environmental credentials, which encompasses a range of other measures – improved engine and airframe technologies, more efficient flight planning and sustainable fuels. Notwithstanding the possible revision of CORSIA's envisaged baseline, airlines will need to focus considerable effort on the wider ESG movement as a key part of their business strategy when the crisis subsides.