International: New baseline for CORSIA and proposals for integration within the EU ETS and the UK ET
On 30 June 2020, the Council of the International Civil Aviation Organization (ICAO) voted overwhelmingly to adjust the carbon offsetting baseline period used for measuring growth of CO2 emissions under the Carbon Offsetting and Reduction Scheme in International Aviation (CORSIA). The adjusted baseline will only take into account the 2019 CO2 emissions for the aviation sector, and not the 2020 ones1.
The airline industry, which has been hit hard by the COVID-19 pandemic2, has welcomed this change. According to airlines and industry trade associations, using 2020 emissions as a baseline would impose an unexpected economic burden on the airline industry due to the significant decline in air travel caused by the COVID-19 pandemic. However, some environmental organizations have criticized ICAO’s decision as setting a bad precedent and weakening environmental regulations.3
- Adjusted CORSIA baseline
- Incorporating CORSIA within the EU ETS framework
- Integrating CORSIA within the UK ETS framework
This client alert assesses:
- what the CORSIA baseline change means for the future of carbon offsetting in international aviation; and
- how CORSIA will be integrated within the European Union’s system for trading carbon emissions (EU ETS) and the recently proposed UK Emissions Trading System (UK ETS)4.
In October 2016, ICAO adopted CORSIA, a global market-based mechanism to combat the CO2 emissions produced from international aviation. Under CORSIA, airplane operators are required to offset their share of any increases in CO2 emissions by purchasing approved carbon credits. Such increases were to be measured by reference to the average of 2019 and 2020 CO2 emissions by aircraft operators conducting international flights between participating countries5.
As a result of the dramatic grounding of aircraft during the COVID-19 pandemic, and the associated reduction in emissions levels, using the 2020 CO2 emissions figures would have resulted in a reduction in the CORSIA baseline. This, in turn, would have led to an increase in the number of carbon credits to be purchased by airlines once air traffic (and hence emissions) rebound and therefore increased CORSIA compliance costs.
According to the International Air Transport Association (IATA), such increased CORISA compliance costs would have risked the sustainable recovery of international aviation post COVID-19 pandemic6. The EU Council also backed CORSIA’s baseline adjustment on 9 June 2020 as “crucial to maintaining a similar level of ambition for the scheme”7. However, as noted above, the adjusted baseline has been highly criticized by environmental organizations on the basis that it “delays climate action by several years and could reduce the overall mitigation achieved by CORSIA by about 25-75%”8.
Adjusted CORSIA baseline
Paragraph 16 of ICAO’s Assembly Resolution A40-19 includes provisions to adjust CORSIA both in case of an unforeseen circumstance that affects the sustainability of the scheme or of an inappropriate economic burden.
The ICAO Council determined that:
In 2022, the 193 members of ICAO’s Assembly will decide whether to continue with the baseline change beyond 2023 or revert back to the previously agreed 2019-20 average.
- using the 2020 emissions figures would cause an inappropriate economic burden on aeroplane operators and contravene the spirit of the CORSIA framework agreed in 2016; and
- only the 2019 emissions should be used for CORSIA’s implementation during the pilot phase (2021 to 2023).
France, Germany, Italy, the UK, Finland, the Netherlands, Spain and Greece had all lobbied the ICAO Council to adopt the adjusted baseline.The US indicated that it would withdraw from CORSIA’s voluntary scheme if the baseline remained unchanged.
A coalition of environmental organizations, including the Environmental Defense Fund, Carbon Market Watch and the World Wildlife Fund, have expressed concerns that the change to the baseline will undermine CORSIA’s framework. According to these organizations, if air traffic fails to recover to 2019 levels until 2024,9 as anticipated by IATA:10
Their position is therefore that the ICAO Council should not have adjusted the baseline.
- the adjusted baseline means that airlines will not be required to purchase any carbon credits until then, vitiating ICAO’s goal of achieving carbon neutral growth from 2020 onwards; and
- the effect of a lower baseline (i.e. the non-adjusted baseline) and lower aviation emissions would have partially netted out. In other words, the aviation industry’s compliance costs with CORSIA would not have increased as lower emissions mean that aircraft operators would be required to purchase fewer carbon credits.
Whether or not ICAO’s decision to change CORSIA’s baseline was justified will ultimately depend on how quickly and how well airline operators recover from the perilous financial situation they are facing due to the COVID-19 pandemic. As things stand now, the airline industry’s perspective is that any CORSIA compliance costs would jeopardize their recovery.
Whilst the full repercussions of an adjusted CORSIA baseline on the international effort to curb greenhouse gas emissions will not be known for some time, the EU Commission has made it clear that climate change is at the core of its European Recovery Plan11. Therefore, we anticipate that, in the long term, CORSIA is here to stay.
Incorporating CORSIA within the EU ETS framework
Since 2012, aviation emissions from all flights in the European Economic Area (EEA)12 have been subject to the EU ETS’ rules. Under the EU ETS, airlines operating in the EU / EFTA are required to monitor, report and verify their emissions, and to surrender allowances against those emissions13. Airlines receive annual tradeable allowances but may be required to purchase additional allowances based on their actual emissions.
Whilst not identical in substance, CORSIA being an offsetting scheme14 and the EU ETS being a cap and trade scheme15, their geographical scopes cross-over as the EU Emission Trading System Directive 2003/87/EC (EU ETS Directive) covered emissions from flights from, to and within the EEA and CORSIA emissions from flights between signatories countries (which include EEA countries). This led to concerns that airlines operators would be subject to two different regimes to offset their emissions, leading to potential double counting issues and increased compliance cost.
In light of the above, and to support the development and implementation of CORSIA, the EU limited the scope of the EU ETS to intra-EU/EFTA flights in 2017. Barring any new amendment to the EU ETS Directive, the EU ETS is scheduled to revert back to including all flights in, out and within the EU/EFTA from 1 January 2024.
In light of this 2024 deadline, the European Commission published, on 3 July 2020, its roadmap for the legislative initiative to amend the EU ETS to implement CORSIA in a way that is consistent with the EU’s 2030 climate objectives16. It contains the following options for such implementation:
The roadmap also contemplates option to reduce the EU ETS allocated for free to airlines.
- EU ETS full legal scope: If no amendment to the EU ETS Directive is adopted by 31 December 2023, the EU ETS would cover flights departing from airports in the EU/EFTA and arriving to other airports in EU/EFTA or to third countries and, if not exempted through delegated legislation, incoming flights to airports in the EU/EFTA from third countries.
- Intra- EU/EFTA EU ETS only: Maintaining the status quo. The EU ETS would be applied exclusively and confined to intra-EU/EFTA flights. Under this option, CORSIA is not applied to ETS-exempted routes.
- CORSIA only: Only CORSIA would be applied to international flights, non-domestic intra-EU/EFTA flights, flights to and from the EU/EFTA states (including their outermost regions) and third countries.
- ETS-CORSIA “clean cut”: The EU ETS would continue to apply as at present and CORSIA would be applied to all other flights (to the extent that CORSIA is applicable to them).
- ETS-CORSIA “mix”: Regarding non-domestic intra-EU/EFTA flights, the EU ETS would apply up to each operator’s 2020 emissions. Above the 2020 emissions, CORSIA would apply. Regarding flights between EU/EFTA states (including their outermost regions) and third countries, CORSIA would apply on emissions above 2020 levels. This option would cover domestic flights.
- ETS-CORSIA “mix” according to licence of aircraft operators: The EU ETS would apply to nondomestic, intra-EU/EFTA flights, operated by operators with licences issued by Member States. For operators with licences issued by third countries, only CORSIA would apply on those non-domestic intra EU/EFTA flights and flights between EU/EFTA states (including their outermost regions) and third countries. This option would not cover domestic flights.
The roadmap is open for feedback by the public until 28 August 2020, with the amendments to the EU ETS Directive scheduled for June 2021.
Integrating CORSIA within the UK ETS framework
On 1 June 2020, the UK government announced its proposed framework for a UK ETS, which is scheduled to replace the EU ETS in the UK at the end of the Brexit transition period. The UK ETS will not be too dissimilar from the existing EU ETS, though there is a clear stated desire to align the UK ETS with the UK’s 2050 net-zero ambition17. The first phase of the UK ETS will run from 2021 to 2030, with an initial review period scheduled for 2023.
The aviation industry will be covered under the UK ETS and, as such, operators will be subject to a total annual cap on the amount of greenhouse gasses they are able to emit each year. The policy document also confirmed that the government will make flight reporting mandatory on all domestic and international flight routes for UK operators, enabling CORSIA compliance. However, the interplay between the UK ETS and CORSIA is not yet clear. The UK government is aware of this issue and has committed to provide clarity by the start of 2024 at the latest18 so that operators are not required to “submit both UK ETS allowances and offset credits for the same tonne of CO2 emissions”.
1 ICAO Council Announcement available here.
2 For example, in Europe, according to IATA’s research, airlines are set to lose $21.5 billion in 2020, with 6 million jobs at risk. See here for more details.
4 For more details on the proposed UK ETS, please see our client alert here.
5 For more background details on CORSIA (including a list of participating countries), please see our client alert here.
6 Prior to the pandemic, estimates were that airlines were likely to spend as much as £18 billion per annum by 2035 on purchasing carbon credits to comply with CORSIA.
7 For more details, please see here.
9 This is when the first phase of CORSIA starts and carbon offsetting becomes mandatory, as opposed to voluntary, for airlines flying between participating countries.
11 For more details on the European Recovery Plan, please see our client alert here.
12 The Swiss ETS linked with the EU ETS on 1 January 2020. As of this date, the EU ETS applies to the Swiss domestic aviation (including flights to the EEA). In other words, the EU ETS now applies to flights within the EU and the European Free Trade Association (EFTA), which includes Iceland, Liechtenstein, Norway, and Switzerland.
13 For more information on the monitoring, reporting and verification requirements of the EU ETS, see European Commission guidance here.
14 Under CORSIA, airlines can compensate for their CO2 emission output by funding an equivalent reduction in emissions elsewhere.
15 Under the EU ETS, a cap is set on the total amount of greenhouse gases that can be emitted by airlines covered by the system. The cap is reduced over time so that total emissions fall. Within the cap, airlines receive or buy emission allowances, which they can trade with one another as needed. For more details, please see here. Within the cap, companies receive or buy emission allowances, which they can trade with one another as needed.
16 The roadmap is available here.
17 UK ETS, The future of UK carbon pricing.
18 This will coincide with the start of mandatory carbon offsetting under CORSIA.