European Commission looks at additional eligibility criteria for CORSIA Phase 2 only

The European Commission is looking to scale back its push for stricter carbon credit rules under the Carbon Offsetting and Reduction Scheme (CORSIA), dropping planned restrictions for the first phase while maintaining tougher standards for later compliance periods.

The Commission is proposing to introduce additional eligibility criteria only for the second phase of the Carbon Offsetting and Reduction Scheme for International Aviation, or CORSIA, according to minutes from a recent Climate Change Committee meeting organized by the EC's Directorate-General for Climate Action seen by Platts on July 15, part of S&P Global Energy.

The shift marks a retreat from the Commission's April proposal, which sought to impose more stringent quality standards on carbon credits used by airlines based in the European Economic Area for compliance under both Phase 1 and Phase 2 of the scheme.

"The only, yet substantial, proposed change is the removal of the proposed additional quality criteria for credits used under Phase 1 of CORSIA," the minutes said.

Under the revised approach, no additional credit quality criteria would apply for Phase 1. The Commission has removed requirements that would have excluded credits from High Forest-Low Deforestation projects, as well as from cookstoves and other projects that displace the use of non-renewable biomass.

The Commission is proposing to maintain the other rules already outlined in the document.

A spokesperson from the European Commission was not immediately available for a comment.

A "constructive gesture of goodwill"

Such decision represents a "compromise" confirming the EU's support of CORSIA, the minutes read.

"Member states are invited to see it as a constructive gesture of goodwill vis a vis the feedback they have voiced and that of the industry, with a view to securing a positive vote on the draft act in the autumn," the minutes said.

Over the past few days, market sources talking to Platts had shared expectations that the EC would have adopted a similar solution as part of its broader ETS review, expected on July 17.

Timing and a lack of supply for Phase 1 were the main reasons behind such expectations.

"We're almost at the end of Phase 1, so we will see whether [the EC] retrofits new requirements on Phase 1, or just do for Phase 2," a Europe-based trader said on June 30.

A second Europe-based developer echoed this sentiment on July 1:

"The EU will still push the additional quality criteria for Phase 2... there's no time to do it for Phase 1," a Europe-based developer said on July 1.

"There is definitely more of a case for more stringent quality criteria under Phase 2... there's still a lot of unresolved issues in terms of Phase 1 supply," added the trader.

Market fragmentation

Under the scenario of CORSIA being maintained and additional eligibility criteria being introduced for European carriers, market participants had expected market fragmentation and a premium on EU-eligible credits.

On July 14, Platts heard EU eligible CORSIA Phase 1 eligible credits indicatively valued at a $5-6/mtCO2e premium over non-EU eligible phase 1 credits.

The Uzbekistan leak detection and repair project has emerged as a frontrunner for generating credits deemed EU eligible in light of the proposal, which the trader said has been trading at just below $14/mtCO2e.

"If EU legislation happens, then Bangladesh [leak detection and repair credits] will become more attractive," for inquiries, said a Singapore-based developer on the same day.

Regulatory clarity to kickstart activity

Over the past few days, market participants had expected demand for CORSIA credits to pick up with more regulatory clarity from the European Commission.

"The current expectation is for more demand to materialize as the EU position becomes clearer and we get closer to the compliance deadline," said the first developer.

Some sources have taken the view that European airlines won't enter the market until eligibility is legislated.

"It's not a matter of prices, it's about policy," said the first Europe-based trader, adding that European airlines would not commit to credits without knowing what they are allowed to buy.

A third Europe-based developer said that airlines are hoping to have eligibility criteria adjusted and in place by autumn this year so they can prepare for procurement as Phase 2 approaches.

Other market participants believed an official proposal as part of the EU ETS review due on July 17 to be enough to bring European airlines into the market.

"Though it may take several months to put in place the legislation, the proposal should give enough policy certainty/direction to give airlines confidence to buy. Of course, it depends on what is proposed," said a fourth Europe-based developer.

The first Europe-based developer said that Asian airlines would continue to buy as "compliance has a moral dimension," alongside an element of "matching competitive behaviour" which may give airlines more urgency to buy as prices rise.

In the week starting July 6, market sources attributed an uptick in pricing to Asian RFPs circulating in the market, totaling around 700,000 mt.

Multiple sources told Platts that these RFPs were seeking to "lock in" a good price ahead of July 17.