No end in sight for CER oversupply

Supply of certified emissions reduction (CERs) will continue to exceed demand until 2035 unless restrictions are placed on the type of credits accepted for compliance by the Carbon Offsetting and Reduction Scheme for International Aviation (Corsia), according to research organisation the New Climate Institute (NCI).

CER supply from existing and planned offset-producing projects could reach 4.6bn units by 2020, NCI said. This would far exceed the demand for 2.7bn units that the International Civil Aviation Organisation's (ICAO) Corsia scheme is expected to generate in 2020-35.

Corsia, which aims to freeze global aviation sector CO2 emissions at 2020 levels, is viewed as the most significant source of new CER demand. But ICAO advisory bodies are still deciding which types of offsets will be eligible for the scheme when it begins in 2020.

If Corsia accepts all offset credits, regardless of age or type, then the scheme could cover "almost all" its demand from projects that are likely to continue issuing CERs regardless of the credit's price, NCI said.

Under this scenario, the CER price would likely remain below €1/unit to 2035, it added.

"Without eligibility restrictions, the demand from Corsia would not materially affect the [CER] prices," NCI research co-author and former chair of the Clean Development Mechanism (CDM) executive board Lambert Schneider said at an industry event in Frankfurt.

The year-ahead CER contract price has languished below €1/t of CO2 equivalent (CO2e) since November 2012, largely because of oversupply. Argus assessed the CER December 2018 contract at €0.22/t CO2e yesterday.

Many offset-producing projects do not depend on the revenue they receive from issuing CERs. This means they can continue to supply the market with CERs, even though they get little or no return from issuing the credits.

Corsia should restrict the CERs it accepts to those issued by new projects — based on the project's start date, or final investment decision date — or to those issued by projects that are vulnerable to stopping reducing emissions if CER prices remain low, NCI said.

The process for drawing up Corsia rules is "a very closed door discussion", Dutch airline KLM's environment manager, Fokko Kroesen, added. "We as an industry do not know anything that is coming out of it," he said.