By Gabriel Thoumi, CFA, FRM. Originally published at ValueWalk.
Peru’s aviation sector is rapidly growing. Climate Advisers recently analyzed new opportunities facing the sector. Major airlines flying international and domestic routes in Peru include: Delta, Copa Airways, Aeromexico, British Airways, United, American, Latam, Avianca, Peruvian Airlines, GOL, and many others.
The International Civil Aviation Organization and its 191 member States agreed in October 2016 to implement a Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) to limit future increases in greenhouse gas emissions from the sector. This market-based scheme creates a potential global demand of over 2 billion tons of investment-ready emissions reductions from 2021 to 2035.
Peru could meet some of this demand with its current and projected supply from reducing emissions from deforestation and forest degradation and through forest restoration. By choosing to participate in the early Phases of this scheme, starting in 2021, the Peruvian Government could generate more than $500 million in additional investment at an estimated cost of $24 million to its aviation industry, which represents a small fraction – less than 0.4 percent – of global emissions from international aviation.
- The International Civil Aviation Organization (ICAO) in October 2016 created a potential global demand of more than 2 billion tons of investment-grade emissions reductions from 2021 to 2035 that could be partially met through continuing development of programs and projects in Peru.
- The value to Peru of supplying the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) is, conservatively, over US$500 million in additional private institutional investment. Higher prices and more ambitious supply projections indicate potential gains of over US$2.5 billion.
- Peru has the potential to benefit by linking this market demand to domestic supply through eligible supply-side activities, including Reducing Emissions from Deforestation and Forest Degradation (REDD+), structured via existing World Bank and many other long-term international investment supply contracts for emissions reductions.
- To facilitate this investment, the Peruvian national government policy must deliver the necessary institutional and legal conditions for jurisdictional REDD, building on those currently applied to existing programs and projects.
- Peru can increase the impact of CORSIA and augment the associated demand for offset credits by opting-in to the scheme starting in 2021, and by encouraging others in the region to do the same. Peru’s airlines would incur an estimated additional cost of $24 to $57 million over the period 2021-2026, which is less the than marginal fuel price variability. The associated increase in demand and credit price could quadruple investment value.
Background and Purpose
The International Civil Aviation Organization (ICAO) and its 191 member states agreed in October 2016 to implement a global market-based scheme (GMBM) in the form of the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) to limit future increases in greenhouse gas emissions from international civil aviation to 2020 levels. The CORSIA is implemented in three phases, reflecting a principle of common but differentiated responsibilities and respective capabilities, as follows:
- Pilot Phase 2021 to 2023: States participate on a voluntary basis
- First Phase 2024 to 2026: Applies to States that have volunteered to participate
- Second Phase 2027 to 2035: Applies to all States that have an individual share of international aviation activities above the specified threshold, except Least Developed Countries (LDCs), Small Island Developing States (SIDS) and Landlocked Developing Countries (LLDCs) unless they volunteer to participate in this phase. The specified threshold refers to where the individual share in Route-Tonne-Kilometres (RTKs) in year 2018 is above 0.5 percent of total RTKs or whose cumulative share in the list of States from the highest to the lowest amount of RTKs reaches 90 percent of total RTKs.
As of October 12, 2016, 66 States, representing more than 86.5 percent of international aviation activity, intend to voluntarily participate in the CORSIA Pilot Phase. The Government of Peru has not yet opted-in to the voluntary Pilot Phase or First Phase and Peru is expected to be exempt from mandatory inclusion in the Second Phase based on the 2018 threshold described above. Although airlines registered in Peru represent only a small fraction – estimated 0.37 percent – of international activity, their exclusion from the scheme has a substantial impact on the overall GHG effectiveness of the CORSIA due to the ICAO rule that restricts policies that discriminate among airlines traveling the same route.
Recognizing the current technological limits to reducing emissions within the sector itself, the CORSIA will allow airlines to meet their regulatory obligations through the acquisition of international verified emissions reductions achieved in other sectors. The ICAO members further agreed (in Assembly Resolution A39-3) to promote the use of emissions units that benefit developing nations, such as Peru. Therefore, the CORSIA represents a significant opportunity to help solve one of the main challenges to achieving global and national REDD+ objectives – the mobilization of adequate and predictable financial support to catalyze REDD+, including through results-based payments, while generating economic growth opportunities for States, such as Peru. With the implementation of Peru’s National Forest & Climate Change Strategy, these economic growth opportunities translate to economic growth and diversification for rural economies, improving the livelihoods of local communities and indigenous peoples.
REDD+ is recognized in the 2015 UNFCCC Paris Agreement as an important mitigation tool for developing countries. Recent analysis by Environmental Defense Fund and Climate Advisers concludes that:
- REDD+ could provide a significant source of emissions reductions to offset airlines’ emissions above capped levels
- A challenge to realizing this supply is the need for a strong signal of market demand
- The ICAO CORSIA has the potential to provide this necessary demand signal
Based on the ICAO Assembly decision in October 2016, this brief takes a closer look at the potential demand from global airlines, the potential supply from REDD+ in Peru, and the current barriers to connecting the two. Analysis is presented demonstrating the benefits to Peru’s early entry into the CORSIA Pilot Phase and First Phase (2021 to 2026) and compares them to the cost of participation for the country’s airlines.
Global Demand for Emissions Reduction (Offset) Credits
Estimates show that cumulative international aviation emissions may exceed 2020 levels by more than 500 million tons carbon dioxide equivalent (tCO2) during the Pilot Phase and First Phase of the CORSIA (2021 to 2026). Countries responsible for 65 percent of these emissions have voluntarily opted into the scheme, implying a global demand from their airline companies of at least 325 million tCO2 over the first five years during the Pilot Phase and First Phase. Projected excess emissions during the Second Phase (2027 to 2035) are higher still: about 2,600 million tCO2. Covered routes are expected to represent at least 79 percent of these emissions, resulting in a global demand of 2,050 million tCO2 or larger. These figures are summarized below in Table 1
Table 1. Projected global demand for offset credits (million tCO2)
|Phase||Timeline||Emissions Above 2020 Levels||Projected Demand|
|Pilot Phase and First Phase||2021 to 2026||500||? 325 (65%)|
|Second Phase||2027 to 2035||2,600||? 2,050 (79%)|
Source: ICAO’s Market-Based Measure, Environmental Defense Fund
It is important to note the uncertainty in estimating the demand for GHG emissions reduction units under the CORSIA, as it requires
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