Imposing eligibility constraints on CORSIA offset credits could have significant impact on UN CDM, finds study
Thu 22 Mar 2018 – The UN’s Clean Development Mechanism (CDM) is likely to be a primary source of carbon credits for airlines seeking to offset the industry’s growth in CO2 emissions post-2020 under ICAO’s Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). However, slow demand for the credits – known as Certified Emission Reductions (CERs) – from registered CDM projects has led to a prolonged period of low prices, but CORSIA is likely to have a major impact on the market. A 2017 study estimated the potential demand for emission units at around 2.7 billion across the life of the scheme, which is due to run until 2035. A new analysis prepared for the German Emissions Trading Authority (DEHSt) finds that up to 3.8 billion new CERs could supply the market at prices below €1 per unit but recommends eligibility restrictions are required to drive up the price of CERs and incentivise new and vulnerable projects that could lead to real emission reductions.
Without eligibility restrictions, the demand from CORSIA is unlikely to either materially impact the current price level for CERs or alter the overall level of greenhouse gas abatement undertaken, says the study led by the NewClimate Institute. Applying constraints and restrictions on eligible CERs would be an effective way for CORSIA to incentivise reductions beyond those that are likely to occur anyway, it suggests, and recommends two courses of action.
One is to exclude CERs from registered project types with what it describes as ‘low vulnerability’, which are largely to blame for the low price of CERs. These projects already receive alternative revenue streams, such as from electricity sales, and do not depend on CER revenues to continue emission reduction activities. For these project types, the marginal costs of supplying further CERs are limited to CDM transaction costs and are likely to continue GHG abatement activities regardless of the price incentives offered by the CDM market.
Without such a restriction, the continued low price of CERs is unlikely to offer many project developers and investors the level of returns they anticipated at the project outset that would fully compensate for their upfront capital expenditures, nor offer further incentives for investment in new projects.
The second course of action is to impose vintage restrictions that limit supply based on the date of project milestones such as the registration date or start date of the project. Restrictions on the date of the project investment decision could incentivise the development of new projects to meet the anticipated additional demand, which might not have gone ahead without CORSIA, says the report. These new projects could be developed either within the CDM or under alternative schemes that are approved for use within CORSIA, it adds.
Restrictions on the registration date may, however, be less effective at incentivising the implementation of new projects. This is because there are a large number of projects within the CDM pipeline that are not yet registered, but which are likely to have been implemented and may still request registration in the future if it were to become financially attractive to do so.
There are nearly 7,800 projects registered under the CDM and the current price of CERs is around €0.25 ($0.30).
The CORSIA eligibility criteria for offsets remains under discussion and analysis at ICAO, which is also considering carbon offset programmes from the voluntary market and the use of allowances from emissions trading schemes.
In its comments submitted to ICAO on the proposed CORSIA SARPs rules (see article), the European Union expressed its preference for only emission units from projects with a start date after 31 December 2016 be eligible under the scheme. Norway, a non-EU State, has gone a step further and called for eligible units be restricted to those originating from programmes and projects that start after 31 December 2019.
Restricting the vintage to after CORSIA formally starts is supported by Brussels-based Carbon Market Watch, which warns of the danger posed to the environmental integrity of the scheme by the use of substandard carbon credits.
Commenting on the DEHSt study, Kelsey Perlman, the NGO’s Policy Officer for Aviation, said: “It repeats what we know about the history of carbon markets, namely there are a lot of bad credits out there. If no restrictions are applied on what kind of offsets can be used – by year and by activity – the aviation offsetting scheme will not reduce emissions anywhere and airlines will pay practically nothing for their climate impact.”