INTERVIEW: South Korean airlines target price-driven intermediary CORSIA procurement: KIS

South Korean airlines are procuring their Carbon Offsetting and Reduction Scheme for International Aviation credits via Korea Investment & Securities to mitigate potential counterparty risk, while credit preference is driven primarily by price, KIS Manager Hwan Young Chang told Platts, part of S&P Global Energy, July 15.

Chang said KIS is acting as an intermediary between overseas developers, brokers and South Korean airlines seeking to buy CORSIA eligible emissions units, or CEEUs.

Intermediary-led procurement

"Based on our meetings with Korean airlines, the most common hurdle preventing them from purchasing CEEUs directly from overseas entities is potential counterparty risk," said Chang.

"They are concerned about the difficulty of taking legal action, particularly if the governing law is not Korean and favors the counterparty ... however, by signing an offtake agreement with KIS, the governing law remains within South Korea," the executive added. "Additionally, we possess a strong financial standing should we need to procure credits from the market or third party."

In the past week, market participants have attributed an uptick in CORSIA prices to Asian requests for proposals by Asian airlines, which have been led by intermediaries, namely a tender from Abatable for over 440,000 metric tons.

Price-driven focus

Chang said that South Korean airlines' credit purchases are primarily compliance-driven, with price being the key criterion, while non-South Korean airlines place greater emphasis on project type.

"This difference stems from Korean airlines viewing this activity purely from a cost and compliance perspective, whereas non-Korean airlines often view it as part of their [environmental, social and governance] strategy and marketing/PR efforts directed at customers," Chang said.

"Korean airlines believe that once a project issues CORSIA-eligible credits, it has met the regulatory body's basic thresholds and is sufficient for compliance purposes," he added.

Chang said that South Korean airlines understand that credit prices "have bottomed out, considering prices were above $20/metric tons of CO2 equivalent at the beginning of the year."

The Platts CEC assessment, which reflects the price of fully eligible CORSIA credits, hit a Phase 1 record low at $9.45/mtCO2e July 1, and was most recently assessed at $10.50/mtCO2e July 15, driven by an uptick in Asian RFP activity, according to market sources.

CORSIA Phase 1 runs from 2024 to 2026 and is voluntary, involving 130 member states of the International Civil Aviation Organization who must comply with offsetting requirements.

Chang anticipated that CORSIA prices will reach $13-$15/mtCO2e by the end of Phase 1.

Stalled South Korean demand

South Korean airlines, namely Korean Air and Asiana Airlines, are taking a cautious approach to the procurement of CORSIA credits due to the conflict in the Middle East, with more detailed discussions expected between the late third quarter and early fourth quarter of this year.

"These two carriers are currently merging and will eventually consolidate into Korean Air. For this reason, coupled with geopolitical tensions in the Middle East, Korean airlines are taking a very cautious approach to their CEEU procurement," Chang said.

"While they are interested in signing offtake contracts now, the actual transactions will likely occur in 2027. By then, they anticipate that most uncertainties will be resolved before the end of the first phase," he added.

Chang said there are 11 airlines in South Korea with CORSIA obligations, and KIS estimates annual credit demand from these airlines exceeds 3 million credits, with 80% of that demand from Korean Air and Asiana Airlines.

Smaller low-cost carriers in South Korea, which mostly operate domestic or regional Asian routes, typically have a demand obligation lower than 20,000 mt/year, Chang said.