The EU's draft proposal to impose additional eligibility criteria on credits approved for the first phase of the Carbon Offsetting and Reduction Scheme for International Aviation (Corsia) used by European Economic Area (EEA)-based operators, while intended at supporting integrity and quality of credits, could dampen confidence in the scheme by fragmenting the market and making it increasingly difficult for airlines to comply, and posing a higher burden on EU airlines, market sources told Argus. The European Commission aims to adopt the implementing act that lays out the requirements for Corsia credits in the second half of 2026.
A draft proposal discussed at the European Commission's expert group on climate change policy (CCEG) seen by Argus earlier this week suggested additional criteria for credits used by EEA-based operators to comply with Corsia obligations could render nearly all of the existing Corsia Phase 1 (CP1) tagged supply ineligible for the bloc.
This "represents preliminary ideas and not an official position of the commission," a commission official told Argus on 24 April.
According to the proposal, projects crediting existing stocks of carbon through high forest, low deforestation (HFLD) methodologies — such as the Guyana-based forestry project registered on the ART-TREES registry which currently has 25mn CP1-tagged credits of the 34mn tagged in total so far — and from projects whose fraction of non-renewable biomass (fNRB) is above the host country value, as adopted in Table 3 of version 3.0 of TOOL33 of the Clean Development Mechanism.
The proposed rules suggest clean cookstove projects could cancel some of their credits to reach the volume they would have issued with an appropriate fNRB value and become eligible ex-post. This would leave with just about 10pc of existing credits eligible.
It is also unlikely any developer takes this path.
"I cannot see any project developer voluntarily sacrificing credits ex-post," a developer told Argus, adding that even if the EAA airlines would pay for the revenue differential, by doing this, developers would implicitly be agreeing that their initial math was flawed to prospective non-EAA airlines.
The commission is proposing to set Article 6 of the Paris Agreement (PA) as a benchmark for credits to be purchased and cancelled by EAA airlines as part o their Corsia obligations, a "clear signal in support of environmental integrity and Article 6, including the Article 6.4 of the PA crediting mechanism … the best-in-class on credits' quality," the official said. Adding that the proposal for CP1 aimed at providing airlines with more flexibility for their compliance compared with Phase 2, "while excluding credits with the lowest environmental integrity."
Some developers speaking to Argus raised concerns that industry players may unfairly infer that this rule speaks to the quality and integrity of HFLD and other related methodologies in the future, which may have ripple effects into the wider voluntary carbon market.
That said, one intermediary said they would "rather have a strong scheme than have another [mainstream media] attack on the market."
The market could form an argument that metered methodologies with accurate emissions reduction calculations are useful and even necessary, another source said.
Price to soften on tepid demand
The proposed criteria for EEA airlines could lead to market fragmentation if approved, and cost operators based in the bloc much more to comply with Corsia compared with their non-EEA peers.
Many market stakeholders were digesting the proposed rules throughout the week, but said these might temporarily pressure prices for CP1-tagged credits, provided that none of the existing compliant credits — except the 500,000 generated by a methane reduction project in Uzbekistan which just received the tag on 24 April — meet the criteria. EAA airlines may switch to project types different to the existing supply to fulfil their obligation under Corsia Phase 1, and allow non-EAA airlines to snap up the remaining credits at relatively lower prices.
CP1 demand from EEA countries is estimated to count for around 10-15pc of the total projected demand for this phase, for emissions generated in 2024-26. The EU applies its own emissions trading scheme (EU ETS) for any intra-EEA flights, and only applies Corsia for extra-EEA flights.
Further out, prices for CP1-tagged credits could face further pressure as the market nears the deadline for submitting biennial transparency reports — greenhouse gas inventory submissions to the UN. This is when host countries will have to apply corresponding adjustments — stamp emissions reductions for export and acknowledge they will not be counted towards its nationally determined contribution to avoid double counting. Prices could face a sustained fall with an even greater pool of supply against stagnant demand, a market source said.
Shifting supply pipelines
In response to tightening restrictions on supply from the EU, developers could adjust their project pipelines to tap into an emerging two-tiered pricing structure and sell at a premium in the EAA. For instance, most developers of methane reduction projects in countries that have capacity to approve exports under Article 6 of the Paris Agreement by providing a letter of authorisation are targeting Corsia, some said.
One such project in Asia that received a letter of authorization (LoA) from its host country this month could supply about 700,000 credits into the scheme. But the developer is facing delays in obtaining insurance, and therefore the CP1 tag. Regardless, it is targeting to sell to Asian end users, Argus understands.
"We expect more [CP1-compliant] supply to come online. It is key to uphold higher quality for credits, and we hope to orientate future supply in the right direction. We will strike a balance between this and allowing EEA airlines to meet their offsetting obligations," the commission official told Argus.
But this will come at a cost for European carriers.
"It's not the same being unable to comply due to [an overall] lack of supply and being unable to comply due to restrictions imposed by your government that fall outside the scheme's rulebook," the intermediary source said.
Further supply could come from large-scale renewable energy or non-jurisdictional reducing emissions from deforestation and forest degradation credits. But this would be a step back from the commitment to quality highlighted in the EU draft proposal. Renewable energy methodologies were rejected by the Integrity Council for the Voluntary Carbon Market (ICVCM) for its high-integrity Core Carbon Principles tag in 2024 because they had broadly not considered additionality, a principle that proves a project would not be able to exist without carbon finance. Although, the ICVCM expects one new renewable energy methodology currently under development may receive the CCP label in the near future, Argus understands.
Fragmented pricing, for a while
A temporary two-tiered pricing structure could emerge driven by regional supply restrictions, until prices merge when extra-EAA participants soak up the credits that would not be eligible in the EAA, and developers adjust projects based on the prevailing sub-market, some said.
One developer currently holding CP1-tagged credits said they were not taking any forward-looking decisions based on this proposal alone.
Developing or transferring projects can take months, depending on registry administrative capacity, with little time for the new project pipeline to recalibrate in line with new EU criteria.
Therefore, adopting the implementing act in the current proposal's shape would make it more difficult for European airlines to comply and raise their costs. Reducing supply and narrowing a globally standardised approach is a "sub-optimal outcome for all concerned ," a market source said.
What next?
In its current form, the proposal does not send a signal of confidence to stakeholders, and may affect ongoing tenders and future CP1 demand.
In recent weeks a large EU-based carrier was seeking significant volumes for compliance — for about 6mn spot tagged credits — with a view to purchasing by June or July. The said carrier was likely aware about the EU concerns already, as they asked suppliers to offer guarantees should the EU put extra layers of requirements for eligibility of credits in the terms of the request for proposals (RFP), a source involved in the auction said.
The European Commission told Argus on 24 April that it will adopt the final implementing act on the criteria for credits for EEA airlines to meet their Corsia offsetting obligations in the second half of this year. This will likely follow a wider review of the EU ETS expected to be announced in July, whereby the commission will also express an opinion whether it thinks the Corsia scheme is sufficient for the aviation sector to meet Paris Agreement objectives or whether it believes the EU ETS should be extended to international flights.
"We urge all partners to continue the momentum under the internationally agreed cleaner energy, innovation, operational improvement, and market-based mechanisms that function together to drive progress towards net zero carbon emissions by 2050," a spokesperson from the International Civil Aviation Organization (Icao) — which is the body managing the Corsia scheme — told Argus. Adding that they would not comment on the position of external parties.
