The Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) was initiated by the International Civil Aviation Organisation (ICAO) in 2016. Developed to deliver a consistent approach to carbon offsetting and ensure that the industry can prove its commitment to CO2 reduction, it became fully operational at the start of 2024, will become mandatory in 2027, and conclude in 2035.
Under CORSIA, airlines with annual emissions of more than 10,000 metric tons of CO2 will be expected to monitor and report emissions for international flights. They will be required to purchase emission reduction units, also known as carbon credits or carbon offsets, from a regulated carbon market.
CORSIA is being implemented in a phased manner that reflects the differing capabilities of ICAO’s 193 member states[1]. The voluntary pilot phase in 2022 included 107 states, representing an estimated 80% of global aviation activity[2]. The number of participating states rose to 115 in 2023[3], and a further 11 announced their intention to join the scheme in 2024.[4]
The initial phase is voluntary, but it will inevitably increase demand for carbon credits from international airlines, demand that will increase further when the scheme becomes mandatory in 2027. This article offers a high-level explanation about what carbon credits are, and seeks to explain how the insurance markets can support the process.
Keeping it relatively simple, a carbon credit represents a verified greenhouse gas (GHG) emission reduction from a certified climate project, whether that’s reduction, removal or avoidance of emissions. Certified projects can be either nature-based, such as a reforestation programme, or technology based, such as a windfarm. The reduction, removal or avoidance of carbon during a project’s lifetime is calculated and accredited, and carbon credits are issued accordingly. In this model, the entity buying the carbon credit is paying for the GHG emission reduction.
A carbon credit represents one metric ton of CO2 or equivalent GHG reduced, removed or avoided from the atmosphere. This is used to offset the emission of one ton of CO2 of GHG.
According to estimates cited by the World Economic Forum, credits worth 2 billion metric tons of CO2 will be needed to meet the target of halving current GHG emissions by 2030.[5]
2billion metric tons of CO2 will be needed to meet the target of halving current GHG emissions by 2030
The Kyoto Protocol, an international treaty created under the auspices of the United Nations in 1997, introduced the concept of trading of carbon credits, also known as emissions permits, between countries.
This led to the launch of the compliance carbon markets (CCMs) which are regulated through international, regional, or sub-national carbon reduction schemes such as the European Union Emissions Trading Scheme or the California Carbon Market. These markets are governed by cap-and-trade regulations, and governmental organisations issue carbon emission allowances to their domestic firms and sectors. Participants in the CCMs are selected by their governments based on carbon intensity, sector or size.
In some ways, the fact that carbon credits and their corresponding markets have existed for around a quarter of a century means that they have had time to build up their stability and gain some credibility. As with any market, fraudulent projects have been set up in the past and the voluntary carbon markets, which operate in parallel with CCMs, suffered several controversies in 2023,[6] but there is focus on ensuring that the international framework of standards, approved methodologies, and quality testing, is robust. These frameworks are intended to ensure that carbon projects are efficient, well managed and could not have been developed without revenue from the carbon credits.
There is always a risk that a carbon capture project simply fails to deliver though. This could be either in its entirety or, more commonly, that the expected CO2-related savings that the carbon credits are based on do not match the forecasts. There are several reasons why this could happen: Trees that have been planted might not grow as quickly as expected, there might be a forest fire or illegal logging, the company building a windfarm could become insolvent, or a government might change a subsidy regime that stops a project being viable.
There are two aspects to this. Firstly, from a practical perspective, there is the commitment itself: airlines need to show that they are offsetting their CO2 emissions under the terms of CORSIA. If a project fails to deliver, an airline would need to source their required carbon credits, which tends to be a costly exercise in a functioning market.
There is also an associated reputational risk. If an airline fails to meet a commitment to offset its CO2, it could be accused of greenwashing, even if it had been acting with the best of intentions. In the worst-case scenario, if an airline invests in a project that fails to deliver, it could lose its investment and be accused of not living up to its responsibilities.
With CORSIA becoming mandatory in 2027, this issue becomes even more pressing, which is why the insurance market is in the process of delivering products that will support aviation organisations as they look to offset their CO2 emissions. This includes products that will offer support in the event of non-delivery.
The bottom line is that at this stage of the technology cycle, the aviation industry cannot avoid CO2 emissions, simply because alternative propulsion systems for long haul flights are still in development and even for short haul, the various technologies needed are in their infancy. While airports and airline offices can make steps to reduce, and even remove, CO2 emissions from their processes, the fundamental process of long-haul air travel will continue to generate CO2 for several years and carbon offsetting will continue to be relevant for all distances for the foreseeable future.
As we move towards the mid-point of the 2020s, the aviation industry is estimated to deliver a little under 3% of global CO2 emissions.[7] While this figure is relatively low, other industries are striving to decarbonise rapidly, and in some cases these industries might have the scope to bring down emissions without having to go through a complete technological overhaul. The result is that the aviation industry could find itself under increasing scrutiny as its proportion of CO2 emissions starts to rise relative to other industries.
Aviation organisations need to show social responsibility, but they also have a responsibility to their owners, irrespective of the structure, to ensure that they invest wisely and protect those investments as far as possible. The insurance market is responding to the evolution of risk and WTW’s global team of aviation insurance brokers have a perspective across the markets to help airlines find products that simultaneously protect investments and do the right thing. For more information, please contact Charlotte Dubec.
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