Demand for CORSIA carbon credits unlikely to match supply until 2030: Abatable

The first phase of the Carbon Offsetting and Reduction Scheme for International Aviation scheme has got off to a "turbulent" start but demand for carbon credits could outstrip supply by 2030, carbon markets-focused consultancy Abatable said May 14.

In a report, Abatable modeled two scenarios for CORSIA credits, with a conservative estimate showing that demand will not surpass 100 million credits until after 2034. However, the supply of CORSIA-eligible credits will peak in 2025, with the cumulative supply only able to meet demand until 2029.

"Supply for Phase 1 will be sufficient to meet the demand but where we see most of the gap is actually in Phase II, where there's going to be an acceleration of demand, as this phase will be more mandatory," Maria Eugenia Filmanovic, cofounder of Abatable told S&P Global Commodity Insights in an interview.

The first phase of CORSIA, which began on Jan. 1, 2024, will run through until 2026. It includes voluntary participation of 126 countries, covering roughly 80% of annual emissions from the aviation sector. Meanwhile, CORSIA phase two is set to run from 2027-2035, with mandatory participation for most flights between almost all states. The CORSIA program is run by the UN agency, the International Civil Aviation Organization.

Analysts at Commodity Insights expect almost 1.5 billion mtCO2e to be covered by CORSIA offsetting obligations by 2035 after accounting for sustainable aviation fuel (SAF) reductions.

"Under Abatable's optimistic scenarios, aviation emissions return to 85% of 2019 levels this year and CORSIA demand surpasses 100 million credits in 2027. Supply is also bolstered by projects expected to be eligible under CORSIA-approved pilot methodologies that have a high and medium likelihood of receiving a corresponding adjustment – a further requirement of CORSIA credits. This means demand exceeds supply in 2030," the report added.

However, the supply of credits under phase one of CORSIA is limited, with only credits issued by Architecture for REDD+ Transactions and the American Carbon Registry being eligible for now.

In fact, at present, only 7.14 million issued by Guyana under ART, which runs the TREES standard, are eligible.

Higher prices

With no increase in supply expected until at least next year, prices for CORRSIA-eligible credits are likely to remain at high levels.

The CORSIA eligible emissions units futures contract settled at $15/mtCO2e on May 13, ICE data showed. Prices rose to an all-time high of $23/mtCO23 on April 12 after news that three major carbon registries, Gold Standard, Verra and Climate Action Reserve, had still not received ICAO's full approval in the first phase of CORSIA.

Platts CEC, which reflects credits eligible under the first phase of CORSIA, was assessed at $11.25/mtCO2e on May 13, Commodity Insights data showed.

"In 2024, there is limited supply, so it is a relatively high price ... We expect prices to soften as more supply comes through on the market," said Filmanovic, adding that the next supply of credits is likely to come from African cookstove projects, which could further bring down prices.

She also said that the current price floor for CORSIA credits from the Guyana project was $20/mtCO2e.

Another reason for the sluggishness in CORSIA activity was weak demand from the aviation sector.

"Airlines don't tend to make long-sighted procurements to protect against price risks, typically only hedging two to three years ahead if prices are attractive," the report added.

Analysts at Commodity Insights said guidance from integrity initiatives in the voluntary carbon market could also spur renewed interest in CORSIA credits.

The increased interest will likely mean that companies from sectors other than aviation will look to purchase CORSIA credits, and considering the lower issuance level observed this year compared with 2022, this could lead to an increase in prices if projected volumes aren't issued to the market fast enough.