CORSIA Market Outlook: Key Trends, Supply Shortages, and Eligibility Hurdles

Felix: Hello, and welcome to this carbon podcast from Argus Media. I'm Felix Todd, Deputy Editor for the Voluntary Carbon Report, and today I'm joined by Roby Crean from South Pole. Hi, Roby.

Roby: Hi there. Thank you for having me.

Felix: Great to have you on. Today we'll be speaking about the developing market for CORSIA, some of the challenge it's been facing, and how the landscape might evolve over the course of next year. I suppose, really, the best place to start regarding CORSIA is on the supply front. It's no secret that the market is undersupplied currently, which poses a problem for airlines seeking to comply with the first phase of the scheme. Could you outline some of the supply issues facing the CORSIA market this year, and talk a bit about why it has proven so difficult to get carbon credits approved for the scheme in 2025?

Roby: It's an interesting question. And yeah, thank you very much for having me on. Maybe diving straight into that supply side of things. So, I think that the supply shortage that we've seen has certainly been a significant challenge for the development, of CORSIA market. And I think, when we analyze it and take a bit of a step back, we sort of see two main reasons for that. So, the first one being the ICAO eligibility requirements exclude, actually, quite a large number of credits. So, credits from renewable energy and nature-based projects, with a few exceptions, are broadly excluded. And these have represented the majority of sort of historically issued volumes. So, what that's meant is that the market's really had to reinvent itself, and identify new solutions and project types and methodologies in a pretty tight time frame, considering that the CORSIA phase one retirement deadline is Jan 2028. So, that's sort of the main first one.

And then the second one that we're seeing, that I think is very consistent across the market, and many people will tell you, is that a number of the projects that we're seeing are finding quite a lot of difficulties in actually acquiring letters of authorization, insurance policies, or direct corresponding adjustments, which, I guess, while evolving, is sort of a big piece in contributing to that current shortfall. And maybe just to elaborate a little bit further, because I know there's a lot of jargon in this market, with corresponding adjustments, and letters and LOAs and things like that, so, just to expand on that. Firstly, corresponding adjustments are essentially a tool that are used to export units of emissions reductions from host countries, and so they're required to be used as part of CORSIA. However, host countries that are closely looking at and monitoring their own progress of their own NDCs are quite cautious at the moment providing these units, as it essentially involves recognizing that the achieved emissions reductions are no longer part of their own climate progress.

So, that's one sort of piece. And then, letters of authorization, or LOAs, how they're often referred to, are essentially precursors to these adjustments. And so, when they are tied with an insurance policy, can also enable sort of full course year eligibility. So, that's sort of the two areas that we see at the moment. And then, for now, I guess we're seeing, let's say, varying maturity levels from host governments in the actual ability to provide both the CAs, the corresponding adjustment, and the letters of authorization.

Felix: I'd just say at that point, because I think it's important to clarify that there's different stages of development, depending on the region. And from what we've seen, there seems to be a lot of progress, particularly in Africa. Is that something you've observed as well? Does it seem to be a little bit further ahead? Obviously, the main project that's supplied CORSIA credits right now is a J-REDD plus project in Guyana, but it seems that there's some progress being made in some African nations, particularly in the clean cook stove sector.

Roby: The good news is certainly that despite some of the challenges, we are starting to see solutions develop, and that supply unlocked. So firstly, with Guyana a while ago, but as you referenced, just earlier this month, Malawi confirming those corresponding adjustments directly for that one project, and so really hopping over that LOA and insurance challenge, and adding an additional, I think it was 1.5 million tons into the market. So, becoming that second project to provide fully eligible units. So, I think that's certainly a good unlocking point. And I think that probably also ties in what you just mentioned, some of the other areas that we're seeing unlock. So, the other challenge around the insurance piece particularly, which I think comes back to a host government challenge as well, is that until recently, the only route that project developers really had from an insurance perspective was the World Bank's Multilateral Investment Guarantee Agency. Again, what a mouthful, but MIGA. And that sort of piece around MIGA, you know, we've seen host countries, or host governments, let's say, be uncomfortable with the sort of bringing together the MIGA insurance policy and the LOAs. And so that's been a tricky bit. But then unlocking that, again, on the insurance challenge, again, we're moving at a bit of a pace now, but last month, Gold Standard then just approved three new insurance policies. So, I think CFC, Oka, and, Artio, which are expected to be a bit more amenable to those host governments, so, should start unlocking that supply a little further.

Felix: There's clearly some challenges, but it does really feel like there's been some progress, particularly in the last month or so, like you mentioned with the 1.5 million issuance from Malawi in particular. But there are also, I suppose, some questions still lingering around concerning demand. We're now just over a year out from the completion of CORSIA's first phase, but demand buying interest, particularly out of the U.S. and the EU, still seems to be a little bit uncertain. Could you explain a little bit about the demand-side challenges facing CORSIA right now?

Roby: It's certainly an important piece of the market. So, yeah, you're right. Demand has been inconsistent. And I think we can probably point to several factors that actually contribute to that, and also how they're likely to shift moving forward. So, I think firstly, it comes back to supply. There's not really much getting around the supply issue at the moment. But right now, in the last two weeks, as we just said, there's only been one, now two, projects that have actually met those requirements. And that has been a barrier to instilling confidence in this market. So, just looking at the numbers, that supply, as we just said, is sort of around 10% of the expected demand. So, in a more established market, that would probably cause a pretty huge crunch. But CORSIA, being a very new mechanism, combined with, as you say, some of the current political environment, which is challenging, let's say, it's instead caused a lot of uncertainty around the whole future of CORSIA. And so I think airlines have then been hesitant, on the back of that, to actually take positions. Though, as we said, and as we're seeing overall, we're starting to see that supply challenge unlock, and so, with it, confidence in the strength of the market will come.

Maybe, touching upon your points of where we're actually seeing the market as a whole, and demand crystallizing, from a geographical point of view, I think it's obvious that airlines in Japan have arguably been the front runners there. So, we've seen two Japanese airlines make their first CORSIA retirements already. I think, a bit more broadly, stepping back a little bit, South Asia in general is probably approaching carbon markets from a compliance angle, you know, when we look at the JCM in Japan, South Korean, you know, the ETS and the offsets there, Singapore carbon tax, using some of those eligible units, you know, all similar to CORSIA, in the sense that they require corresponding adjustments. And so, the airlines and companies in that region, market participants, are probably more familiar with the systems, and so a little bit more comfortable to act.

Stepping out a little bit further, and building on that, I think outside of Asia, we're also starting to see policies leaning into CORSIA, and shoring up the market confidence, which is much-needed. So, looking at the EU, the EU's recently published its decision laying out its position on CORSIA, and added a couple sort of conditions of its own. But essentially making it clearer for European operators to actually see that direction of travel, and where they're going, in regards to the compliance obligations.

So, I think that's going to be really valuable. And then, maybe away from the [inaudible 00:08:26] policy side, but on an operational side, let's say, I think we should see some more movement in the near term. So, ICAO, they recently published the growth factors, which are used in the offsetting requirement calculation. And so now, I think, following on from that, the airline, or airplane operators, should start receiving their state notifications by the end of this month, the end of November. And that then determines the obligations for 2024, which, you know, used for phase one. So, I think, you know, we're really seeing a pick-up in the pace of what's going on here. We're talking about news that has happened over the last month, you know, month and a half. And as we're coming towards the end of this month, seeing a lot more action.

Felix: Looking ahead, something that's obviously going to be informed by these dynamics you've just laid out is the price that these credits actually trade at, prices for CORSIA phase one. Credits appear to vary quite significantly, depending on the contract type, from what we see, whether it be spot or conditional forward structure deals, or futures. There's quite a lot of activity across all three, but the price seems to change, depending on which contract type it is. What are you seeing on this front, and what do you think the current price signals tell us about the market heading into next year?

Roby: Big question. And it all has to sort of come back to pricing at some point. I think, I mean, as you said, you know, the pricing is kind of fractionalized across different offer types, the ones you mentioned. And ultimately, prices, at the moment, reflect, to some extent, the degree of risk associated with each of those contracts. So, at the moment, there are, I guess, two approaches to do this. One is looking at fully eligible units, and the other is to assess free eligible units. So, taking them one by one, let's say, for the first approach, there are immediate volumes available for two projects, which carry none of that eligibility risk. And pricing, we're talking in the sort of low $20s USD. That sort of piece of the market, you know, when we're able to look at it, is in sort of shallow backwardation, as we're seeing the futures for 2026 and 2027 dip towards the mid-high teens. So, that in itself, you know, if we're just looking at it on the numbers, sort of suggests that participants and actors are expecting a flow of eligible credits through in 2026. And while that's probably true, and I think we'd all back that, but there are some interesting dynamics which are quite difficult to account for. And it's, again, somewhat uncertain to really identify to what level they're priced in, I guess.

So, one of those uncertainties is looking at the sink of demand that will come from non-CORSIA buyers, not airlines, that might be under-accounted-for at the moment. I think it's gonna be a really big piece. So, again, you know, stepping back a little bit, but it's really quite important to recognize that these units are not just ringfenced, you know, just for airlines. And there is a huge additional demand that could come in, and really start to squeeze supply, and then spur prices on. And we've gotta look a little bit broader. Voluntary markets, at the moment, have had a tough time, but are really starting to strengthen. And project developers themselves, where they can, are looking for optionality on their routes to market. So, you know, whether it's CORSIA, whether it's voluntary, whether it's other compliance markets that we see around the world. So, that sink away from CORSIA might be stronger than expected. I mean, that being said, I think at the moment, and most people will see that project developers are relatively well-incentivized to move their units towards the CORSIA market. You know, they're seeing revenues in some instances of two to three times what they might expect in the voluntary market, at least maybe slightly different in other markets, but certainly when they're assessing where to put them. So, I guess that's the piece for the fully eligible units.

And then for the second approach, you know, when we're looking at soon-to-be-eligible units, or pre-eligible, let's call them, I think we're seeing airlines looking to take positions on those pre-eligible units for forward contracts, which, again, may still need corresponding adjustments, and [inaudible 00:12:32] authorization. But ultimately, the incentive there is that they're priced more competitively. And then they also have varying levels of risk. So, based on, you know, the airline and the developer appetite, so then come with clauses, you know, condition precedents and other safeguards, which, again, sort of pricing that. And then, I guess, again, other than the pricing discount, that approach also gives airlines, at the moment, quite a lot more selection of projects. You know, as opposed just to Malawi and Guyana, they've got a wider pool to look at. And there are some maturing structures there which can then actually help them manage the sort of associated risks as well.

So from a pricing perspective, if we take back and take stock in the market, it appears to be, from that pricing perspective, that there's a large pool of credits which will soon enter the market. So, giving airlines a lot more choice, and with that, you know, all the things that we want to see in a market. So, price discovery, you know, timeline flexibility, you know, all the other benefits that come from a true liquid market. And I think that's true. But nonetheless, the market is likely to still remain quite undersupplied throughout 2026, and probably all the way up through to Jan 2028. So, I mean, we're very much encouraging companies to look at approaches that are out there in the market at the moment, and start making plans.

Felix: Understood. That's a lot of ground covered already, but I suppose with all that information out there, just looking ahead to next year, is there anything else, any other areas that, you know, anyone observing this market, you think, should be watching for, I suppose, on the supply side? I mean, it's impossible to predict timelines of when buying might pick up, when supply might come in, but if you were talking to someone looking at this market from the outside in, what are the areas you think that they should be paying attention to in particular?

Roby: Looking at the market from the inside out and outside in, I think it's sometimes quite different, especially people who've sort of assessed voluntary markets, and then assessing CORSIA markets, and again, new compliance markets and things like that. What I guess I'd say is, however it might seem from the outside, the whole carbon market has really actually thrown its shoulder into this CORSIA markets. I think the developments around those insurance policies, and again, growing maturity from host countries, I think 2026 will certainly be a significant year. And I think we're going to start seeing a lot of the issuances, the eligibility coming, and transfer of units, and, again, getting towards that truly liquid market. And I think maybe something to consider is that the more projects that come through, the more, the increase in the sort of eligible projects, that, in itself, will spur demand, just by confidence sort of reason.

So, the reason we really think that that supply will actually push that demand is that, you know, a lot of people in the market have been arguing, and a bit of division around this, that these units are essentially fully commoditized products, and it's only the eligibility and the price that's all-important. I think they're missing a slight trick there. Airlines do, and they will continue to dig into the fundamentals of the projects, beyond price and eligibility, and will really hunt out that quality. And I think why we're seeing some of the dynamics at the moment is that, you know, with minimal projects, until recently, only one, now only two in the frame, it hasn't given airlines, at the moment, enough scope to really assess the comparative quality. So, it's not really surprising that they've held back from taking action to secure the units. But, as I said, you know, as we're starting to see new projects come through and reach that eligibility requirement, you know, as seen in Malawi, and certainly elsewhere, coming very soon, I think that'll really improve the optionality for airlines, and really bolster this market. So, yeah, we're certainly encouraging airlines, like I said, to dive in and take a look now.

Felix: Fantastic. Well, unfortunately, that's all we've got time for today. Any data and analysis provided by myself today is created using the Argus Carbon service. You can request a free trial and more information by visiting www.argusmedia.com/argus-carbon. Finally, a big thank-you to Roby for providing his insight. Thank you so much, Roby, for joining us.

Roby: Thank you very much, Felix. Lovely to be here.

Felix: And a big thank-you to you, our listeners. We'll catch you next time on the next Argus carbon podcast.