Factor

CORSIA exclusivity clause – potential EU ETS implications

08 November 2019 | Trading

The International Civil Aviation Organisation (ICAO) met at the beginning of October to discuss the way forward for its carbon offsetting and reduction scheme for international aviation (CORSIA). The progress includes an exclusivity clause, which creates some degree of uncertainty regarding the future of the aviation sector within the EU's emissions trading system (ETS).

Main points

    On 4 October 2019, the ICAO assembly voted on a resolution (Resolution 17/1) trying to move forward on its international offsetting scheme for aviation emissions

        Under this scheme airlines would need to offset all emissions above the average 2019-2020 level

        Under the EU ETS, intra-EU flights currently face a much stricter compliance obligation with a decreasing cap of EU aviation allowances (EUAAs) in the fourth trading period (TP4, 2021-2030)  and a decreasing share of free allocation 
    The paragraph 18 of  Resolution 17/1 includes an exclusivity clause

        “[…]CORSIA is the only global market-based measure applying to CO2 emissions from international aviation so as to avoid a possible patchwork of duplicative state or regional market-based measures, thus ensuring that international aviation CO2 emissions should be accounted for only once”

    China, India and Russia and other states filed a formal reservation against the whole scheme and 25 countries objected the resolution

    None of the EU member states filed a formal reservation against this clause despite a recommendation by both the European Parliament and commission to do so

        EU environmental ministers repeated on Friday (link) their general support for CORSIA and stressed the importance that ‘double-counting’ is avoided.

        The statement, however, also reiterates a call for more ambition in line with general Paris targets 

Analysis

Our take

    Overall, the EU faces a dilemma between wanting high domestic ambition for the aviation sector (intra-EU flights) and its desire to see international flights covered by a carbon scheme

    Hence, the EU must “play ball” within the ICAO process to ensure its success while at the same time not putting itself in a position where it will not be able to have higher domestic ambition amid the future international framework

    Down the road, should CORSIA display low ambition, we can definitely expect strong opposition from the EU parliament against a CORSIA participation “only” and an exclusion of intra-EU flights from the ETS 

Possible scenarios for aviation within the EU ETS for 2021-2030

    Status quo: Intra EU flights remain part of the ETS

        Due to the application of the LRF on the aviation cap and the steady increase in emissions, the aviation sector is heavily undersupplied for TP4 with a cumulated fundamental short demand of -548m allowances over TP4 

    Intra-EU flight fall out of the ETS and only CORSIA applies

        While the supply of EUAAs via allocation and auction would be dropped, the significant short position of the sector would disappear leading to loss in fundamental short demand of around -548.5m EUAs over TP4 or around -55m per year as well as +51.6m less auction supply on a cumulated basis.

        While aviation net demand does not compare, for instance, to utilities in terms of net demand magnitude, a potential loss of -55m fundamental short demand per year is not negligible 

    Intra EU flights remain part of the ETS + CORSIA

        All emissions above the 2020 level would be covered by CORSIA, while the EU ETS compliance obligations remains for all emissions below that level

        In our base-case scenario this would result in approximately -65m of compliance obligation covered by CORSIA while the sectors ETS fundamental short position would still be at -483.5m for TP4

        Such a scenario could support the EU's domestic climate ambition while supporting the coverage of internal flights while at the same time avoiding a double counting of emissions

            That being said, it is unclear how feasible such approach would be from a political and technical perspective 
 

Source: ICIS