Decarbonizing Aviation: Beyond Offsets (Part 1)

Transportation produces a quarter of total US emissions, mostly from cars and light trucks, with the rest heavy transport like trucks, ships and jets.  Electrification of light vehicles is well underway and accelerating, but it isn’t and may never be viable for heavy ones. Biomass-derived alternatives like Sustainable Aviation Fuel significantly reduce carbon emissions but aren’t available in close to meaningful quantities. Without currently viable renewable pathways, heavy transport is “carbon locked” or “hard to abate.”

While a small piece of todays’ overall emissions, air travel’s rapid growth spurred the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). Starting in 2024, international airlines must begin partially offsetting their emissions: first by a factor derived from the entire sector’s growth; eventually (2030 on) by an operator’s individual growth.  CORSIA doesn’t reduce emissions but caps them at 2020 levels for carbon-neutral growth, because current technological and operational improvements can’t overcome carbon-lock.

Private jets aren’t subject to CORSIA, but many larger operators signed on anyway. It’s a low bar: in the current pilot phase, CORSIA’s 2021’s emissions reduction factor was 0% because it was based on 2020 when Covid all but shut down international travel.  Were growth in the pre-Covid 4% to 8% range, airlines would be obliged to somehow neutralize them—likely with offsets.

OFFSETS

Offset credits are tradable financial instruments earned by avoiding, capturing or sequestering a metric ton of carbon. For example, with blessing from an acceptable offset registry, a forest owner who’s agreed to cease, reduce or delay deforestation can sell offsets to an emissions-capped oil refinery. Reforestation and forest conservation are popular offset mechanisms to earn credits for carbon captured by new trees or sequestered through protecting old trees. While forest conservation offsets don’t reduce carbon (versus status quo), the trees sequester carbon along with ESG benefits like protecting eco-systems, wildlife, and social heritage. Other potential offset credit types—typically in less developed areas—include community efforts like low-carbon cooking stoves and some renewable projects.

For regulatory compliance, offsets must be independently certified to meet certain criteria including the concept of “additionality.” In offset parlance, this means that the carbon’s monetary value makes or breaks the project.  If the carbon reductions would have happened anyway, the project isn’t considered additional. Put differently: no (economic) pain, no (carbon credit) gain. For example, a new solar farm that delivers better ROI than a coal-fired generator won’t qualify for traditional offset credits.  

Pain works with regulated entities because offsets help avoid even greater pain from non-compliance. For everyone else, pain is a tough sell — tougher still when alternative approaches allow companies to earn 15% ROI while reducing carbon as much or more than “additional” projects. But now, with Wall Street’s recent emphasis on ESG and sustainable growth, demand outstrips supply because voluntary offset purchases have become critical to non-regulated entities with net-zero pledges.

Voluntary carbon markets have existed since 2005’s Kyoto Protocol. Annual trading hovered in the 30 to 40 million tonne range until 2016’s Paris Agreement skyrocketed sales to 140 million tonnes in 2019 and an estimated 250 million tonnes in 2021. Yet that only scratches the surface  — TSVCM estimates that credit demand will increase 15x in just the next 10 years.

As with any commodity, short supply leads to rising prices. Ernst and Young projects the cost of offset credits will rise to US$80-150 per tonne by 2035, compared with $25 today.

Outside of insufficient supply, offsets have other issues. As mentioned, they don’t necessarily reduce emissions—a traditional offset credit is essentially a permit to emit one ton of carbon.  United Airlines CEO Scott Kirby said:

“what I hate about traditional carbon offset programs is so many companies are using them, and they are a fig leaf for a CEO to write a check, check a box, pretend that they’ve done the right thing for sustainability when they haven’t made one wit of difference in the real world.”

Speaking on CAPA Live, Mar-2021

That type of criticism regarding offset quality exacerbates the difficulties of sufficiently scaling them. Notice that Kirby said “traditional offsets,” referring to the compliance credits traded around the globe to allow regulated emitters like power plants, factories, and fuel distributors to comply with carbon caps and taxes.

For voluntary buyers, offset credit quality isn’t black and white. While issuing a credit is a yes/no decision, the underlying evaluation criteria (eg additionality, permeance, potential harms of an offset project, etc.) are subjective and exist on a spectrum.  So offset credits aren’t all equal: one may just pass with a D while another got an A+. Both are fine for compliance, but voluntary buyers need to carefully assess the underlying project in order to avoid brand equity risks from subpar projects.

Offsets are considered a business expense, as makes sense for compliance purposes – especially with the traditional utility model of PUC-approved ROI on Capex. Non-regulated buyers need more flexibility to choose between expenses and investments, especially when paying a premium for investments with high financial and ESG returns.

SUMMARY: PROS and CONS of VOLUNTARY OFFSETS

Pros:

• Ease of purchase

Cons:

• Expense, not investment
• Sharply escalating prices
• Short supply
• Price uncertainty
• May not reduce emissions
• Variable quality
• Public relations risk

Coming Soon: Part 2–Active Carbon Removal.