Airlines will be CDM’s lifeline, but expect CER price slump first, say analysts

Published 17:08 on April 27, 2016  /  Last updated at 17:08 on April 27, 2016  /  Aviation, Climate Talks, EMEA, EU ETS, International, Kyoto Mechanisms, New Market Mechanisms  /  No Comments

Demand for carbon offsets from airlines can provide a lifeline to the ailing CDM, which in return will be able to comfortably provide supply to an upcoming international market-based mechanism for civil aviation over the next decade, analysts say.

Demand for carbon offsets from airlines can provide a lifeline to the ailing CDM, which in return will be able to comfortably provide supply to an upcoming international market-based mechanism for civil aviation over the next decade, analysts say.

Just 40% of available CERs over 2020-2030 would be enough meet expected demand from airlines over that period, which is estimated at around 970 million tonnes, according to a study by Thomson Reuters Point Carbon analysts and seen by Carbon Pulse.

“It will be an exaggeration to say that the ICAO agreement can save the CDM. However, assuming the CDM will deliver most of the supply under the market-based mechanism, this will at least provide a lifeline to the mechanism,” the analysts said, adding that without ICAO, demand for CERs would dry up completely after 2020.

The analysts used assumptions based on the most recent negotiating text under consideration at UN aviation body ICAO, which is aiming to agree on global market-based measure later this year to help it achieve carbon neutral growth from 2020.

The current plan includes only using CERs generated from 2016 onwards and banning units generated from controversial HFC, N2O adipic acid, and large scale hydro projects – credits that have been barred from other carbon markets over concerns about their environmental integrity.

The draft ICAO proposal would also see airlines from richer countries join the scheme when it launches in 2021, with middle-income nations being phased in from 2026.

The analysts expect demand from the ICAO scheme will prevent CER prices, currently trading at around €0.40 in the European market, from falling to zero.  But they warned of a “demand gap” ahead of 2020 as the little remaining appetite for CERs from emitters in the EU ETS, the biggest buyers of the credits, dwindles.

“Airline operators only will have their first compliance deadline under an ICAO scheme in 2022.  In this period it is not unlikely CER prices could fall below issuance costs typically at €0.40 for the least expensive projects,” the analysts said.

FACTFILE

  • Countries have agreed to let ICAO craft a global offsetting mechanism by 2016 to take effect from 2020 and help the sector achieve carbon neutral growth.
  • Analysts predict the expanding aviation sector will need around 30 million offsets in 2021, increasing each year to around 300 million by 2030.
  • Offset supply is currently plentiful.  CDM developers are desperately seeking new buyers for hundreds of millions of already-issued carbon credits amid a dearth of demand from governments, which has pushed CER prices from above €20 to unprofitable levels below €1 over the past six years.
  • It is unclear how the CDM and its credits will be available to airlines after 2020, as rules over how the Kyoto Protocol mechanism could be eligible under the Paris Agreement have not yet been ironed out at UN climate negotiations.
  • One point of contention during these talks will be how to avoid double-counting of emission reductions, for example any credits bought by airlines while also being claimed by CDM host nations to meet pledges under the Paris Agreement.
  • In an effort to guarantee ready supply, airline body IATA is pushing for multiple offset standards to be eligible, while green groups are keen to limit eligibility to high quality projects.

Read our analysis for more details on how airline offset buying has been on hold as slow ICAO progress risks a supply squeeze.

By Ben Garside – ben@carbon-pulse.com

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