Lessons from aviation’s first foray into market-based measures

International Civil Aviation Organization landed on the cheapest, most contentious, and finally outdated policy instrument out there – offsetting.

The Paris Agreement mandates deep decarbonisation of all sectors that rely on fossil fuels out to 2050, giving us a limited amount of greenhouse gases that we can emit by that year. Aviation and shipping, if their projected growth comes to pass, would take up almost 40 per cent of the allowable emissions if we are to limit global warming. These two sectors have severely delayed their action on climate change, in part because of their isolation within specialised UN agencies with heavy industrial representation; this insulates these sectors from wider climate discussions.

These agencies, the International Civil Aviation Organization (ICAO) and the International Maritime Organization (IMO), intend to use market-based measures (MBMs), known generally as carbon pricing, as a way to make polluting the air more expensive and decrease emissions. The most straightforward method is a tax on fuel. More complex measures require the trading of credits or permits that allow a plane or ship to pollute for a price. These trading options require perfect compatibility with the trading rules currently being negotiated under Article 6 of the Paris Agreement, which aim to prevent trades from being improperly accounted for more than once.

Of the two sectors, the aviation sector has moved first, with the ICAO deciding on the most controversial of trading options – offsetting – through the establishment of the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) in 2016.

CORSIA relies on the purchase of carbon offsets, with a stated preference for UNFCCC credits as long as they follow additional ICAO rules. As of the last ICAO session in June, the 36 negotiating parties, who are also parties to the UNFCCC, couldn’t agree to more stringent rules, with Brazil and China posting the heaviest opposition. There is a stalemate over the restriction of credits from the Clean Development Mechanism (CDM), which has the ability to supply well over the needed demand from the aviation sector, but has been riddled with environmental and social controversies. China and Brazil represent two of the most prolific countries for CDM projects, and are firmly opposed to going beyond existing offset rules.

Many CDM projects and the credits they generate have been analysed since the measure was introduced in 2000.  More recent studies only confirm the problems, and led the Economist to conclude in 2012 that the CDM was “a complete disaster in the making”¹. A study commissioned by the European Commission found that only two per cent of CDM projects were likely to have generated new emission reductions². This would mean that the use of these credits for aviation pollution would generate no new reductions in overall pollution levels – in essence, aviation emissions continue to rise and we do nothing more to reduce its climate footprint.

This is despite the fact that the cost of changing pollution trends in the sector would be negligible. The industry has stated publicly that it could absorb a cost of over 18 euros per tonne of pollution without significantly impacting the growth of the sector³. If CDM credits were allowed they could supply the entire demand of CORSIA for under one euro per tonne⁴. For reference, the EU Emissions Trading System, which covers aviation, required airlines to purchase allowances for almost 18 euros per tonne as of early August.

Airlines will start offsetting pollution above the levels they reach in 2020, so levels will grow even more before a small portion is offset in a few years’ time. 2020 represents the end of the second period of the Kyoto Protocol and should mean a resetting of failed policies for a higher ambition level and increasingly stringent rules. The years of attempted reform of market mechanisms under the Kyoto Protocol have not materialised and the summary of their impact on the environment is a convincing obituary for these mechanisms.

Should policy-makers decide that the potential unused supply of almost five billion pre-2020 CERs (credits from the CDM) are eligible to meet post-2020 targets under the Paris Agreement or the CORSIA aviation offsetting scheme, the Paris effort will be weakened by the equivalent of one-year’s pollution from the EU-155. What’s more, the utility of elaborating Article 6 rules is substantially reduced, since CORSIA, the largest source of demand for offsets, will satisfy its climate obligation through a loophole that permits the use of outdated credits – left unpurchased because of quality concerns.

The idea that the airline industry could give the CDM a new life conjures up images of unaccountable businessmen hiding behind PR to continue their dirty work. From the early discussions of an economic instrument to curb emissions in the aviation sector, ICAO landed on the cheapest, most contentious, and finally outdated policy instrument out there – offsetting. The least that can be done is a requirement to allow only new projects and credits that take place post-2020, at the same time as the pollution that should be compensated.

This important decision on the timeframe of eligible projects will be decided by ICAO in early November, just before COP24, and will fundamentally decide on whether to extend the lifeline of failed environmental market policies. ICAO has an opportunity to show us its roadmap to limit warming to 1.5°. Transforming the economy requires progress towards raising the price of pollution and lowering the levels of pollution. Purchasing offsets from the CDM opposes this objective. Will the ICAO opt for CDM credits, defending an option that will not move us one inch closer to averting climate change, and effectively ruin the future for market measures under the Paris Agreement? Or will the ICAO internalise the cost of its pollution in a credible way and assure the quality and contribution of the sector to the massive efforts needed to limit global warming?

The IMO should take note of the landmines the ICAO is facing from both a technical and political level to make offsetting work post-2020. Instead, a levy to recycle funds in a more environmental and future-proof way, with the aim of making the shipping sector more resilient, is not only common sense, it would also save the industry from having to wrap their heads around carbon markets.

Win-win for everyone.

Kelsey Perlman
Carbon Market Watch
 
1 https://www.economist.com/finance-and-economics/2012/09/15/complete-disa...
2 https://ec.europa.eu/clima/sites/clima/files/ets/docs/clean_dev_mechanis...
3 https://www.icao.int/Meetings/HLM-MBM/Documents/HLM_GMBM_IATA_WP12_en.pdf
4 https://newclimate.org/wp-content/uploads/2018/03/Marginal-cost-of-CER-s...
5 Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the United Kingdom