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Carbon offsetting, lenders and COVID-19: an uncharted CORSIA?8 June 2020

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2020 was supposed to mark the baseline for the landmark Carbon Offsetting and Reduction Scheme for International Aviation (“CORSIA”), which gives rise to important implications for the risk profile of lenders in the aviation industry and requires steps to be considered to mitigate and manage such risks. With these waters muddied by the significant impact of COVID-19 on flight density, this article outlines the basic functions of CORSIA, identifies risk mitigation measures which lenders might take to protect their position and addresses how COVID-19 might reshape the mechanics for airlines meeting CORSIA emissions targets.

"The primary objective is to achieve neutral carbon growth from 2020 onwards together with a 2% annual fuel efficiency improvement through to 2050."

What is CORSIA?

In 2016, the International Civil Aviation Organisation (the “ICAO”) adopted CORSIA as part of its quest to address CO2 emissions resulting from international aviation.

CORSIA aims to address increasing levels of CO2 emissions caused by international aviation. The primary objective is to achieve neutral carbon growth from 2020 onwards together with a 2% annual fuel efficiency improvement through to 2050.

Since the introduction of the EU Emissions Trading System (“EU ETS”) in 2008, extended to include CO2 emissions from aviation in 2012, there has been a requirement for airline operators to monitor and report levels of CO2 emissions and surrender the equivalent number of allowances. It operates on a cap and trade system such that emission levels are capped and within that cap companies can receive or buy emission allowances which they can trade with one another as needed. Operators can also buy limited amounts of international credits from global emission-saving projects. It is basically a “polluter pays” principle. The level of the cap reduces over time, and so, in theory at least, encouraging the airline industry to reduce the volume of greenhouse gas emissions for which it is responsible.

The EU ETS scheme had been intended to apply to all airlines operating to, from or within the European Economic Area (“EEA”) regardless of where the airline was based. However, following adverse reactions from some countries (including the USA, China, India and Russia) to what they contested was an attempted overreach by the EU, the scope of the EU ETS scheme was scaled back. The EU concession (made in the face of threatened trade constraints) meant that the EU ETS scheme is now limited in application purely to intra-EEA flights (the broader scheme is deferred until at least 2024).

How does CORSIA work?

Airlines will be required to buy emission reduction offsets from other sectors to compensate for any increase in their own CO2 emissions. Such increases will be measured by reference to a baseline of CO2 emission levels as at 2020. Any growth in CO2 emissions above 2020 levels will give rise to a relevant offsetting requirement.

In basic terms, buying an offset involves airlines purchasing a credit that has been verified as having reduced emissions elsewhere. Once an airline has purchased an offset it can use it to “cancel” out its own emissions. The price of eligible emissions units under CORSIA, however, will not be known until the actual time when it is purchased by an operator (save where an operator might hedge its CORSIA exposure through a forward contract with a carbon broker).

From 2021 to 2029, the offsetting requirement will be imposed based on a full sectoral approach. The number of offsets which an individual airline needs to purchase will be dependent on the global airline industry emissions growth since the 2020 baseline as opposed to being measured by reference to the individual airline’s CO2 output. This initial requirement to offset will be divided amongst airlines in proportion to the total reported CO2 emissions of the individual company (as opposed to being based on growth in emissions since 2020). Consequently, larger airlines which already have bigger CO2 emissions may initially have to offset a greater share of global emissions growth than they are in reality directly responsible for.

From 2030 onwards, there will be a gradual move towards measuring performance by reference to individual operators based on an individual operator’s actual emissions. To begin with, from 2030 to 2032, at least 20% of the total will be calculated on an individual basis, rising to 70% from 2033 to 2035.

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"From 1 January 2019, all airline operators are required to monitor, verify and report emission levels on all relevant international flights."

Time frames for implementation and participation

From 1 January 2019, all airline operators are required to monitor, verify and report emission levels on all relevant international flights. The average level of CO2 emissions from 2019 up to and including 2020 will then be used as a baseline for comparison and measuring growth in the years following.

The “Pilot Phase” for CORSIA (2021 to 2023) and the “First Phase” (2024-2026), both of which are broadly similar, are open to voluntary participation by ICAO countries and will therefore only apply to routes between volunteer states.

Participation in the “Second Phase” is, however, mandatory (save for some developing countries including landlocked and small island states, who will be exempt). Additionally, emissions from emergency, police, military, customs and state aircraft together with aircraft with a maximum take-off weight of or under 5,700 kg and low emissions operators will be exempt. CORSIA will not apply to helicopters.

Over 80 states, representing together more than 75% of international aviation activity, have indicated that they intend to participate in CORSIA from the outset. This includes the UK, USA, Australia, Canada, Saudi Arabia, Japan and many EU countries. Notable absences include China, India and Brazil.

Considerations for lenders

Enforcement uncertainties

Although CORSIA is a global scheme, the implementation and enforcement of the scheme is the responsibility of individual states. There will not be a centralised enforcement regime. Consequently, the approach to enforcement and the consequences of non-compliance will be subject to variation and dependant on the approach adopted by an individual state; plainly, this will give rise to a considerable degree of uncertainty.

It is important that lenders understand the position in a particular jurisdiction when assessing the merits/risks of a particular transaction. For example, if in a particular jurisdiction non-compliance with CORSIA may result in seizure of an aircraft, the transaction documentation will need to account for this in a way not perhaps necessary if the consequence of local non-compliance is a limited monetary fine. The complexity of these considerations is heightened in circumstances where the transaction involves a portfolio of aircraft operating across multiple jurisdictions.


While there is still uncertainty regarding how CORSIA will be in practice monitored and enforced, lenders may wish to consider retaining the EU ETS provisions in their documentation, extended to cover CORSIA. This should be a relatively straightforward change to the lessee covenants which currently refer to EU ETS.

Further assurance provisions in a loan or lease agreement should be extended as appropriate to cover any CORSIA-related documentation which may be required or become necessary. This could for example include a letter of authority (similar to the EU ETS authority letter) authorising the lessor/owner and mortgagee to obtain information from the relevant authority as to the operator’s CORSIA compliance.

Consideration could be given to including a repeating representation to the effect that the operator warrants compliance with all relevant CORSIA-related legislation and that all relevant payments are up to date.

The position should continue to be monitored as documentation in this area develops. Currently, market participants are relying on the general compliance with applicable law covenants, however this may change as the enforcement regimes are established.

Consideration should be given to what steps will be needed to enable the monitoring of compliance with CORSIA.


Consideration should be given to what steps will be needed to enable the monitoring of compliance with CORSIA. One option may be to require a letter of authority enabling lenders/lessors/mortgagees to contact the relevant authority to check what amounts have accumulated and whether any payments are outstanding.

Other potential risks

Enforcement exposure: national implementing legislation may include enforcement measures which extend liability for CORSIA non-compliance to the owner and/or against the aircraft. Lenders should follow a similar approach to mitigating against the lessee’s non-compliance as is done in respect of EU-ETS, including information undertakings and event of default triggers.

Identity of operator: the entity responsible for compliance with CORSIA is the operator. This could, however, give rise to difficulties where, for example, the lessee subleases but does not update the relevant CORSIA records with the identity of the new owner. The operator of a flight may not be identified. In such circumstances, the initial line of enquiry is the ICAO designator, followed by the aircraft registration mark and holder of an Aircraft Operator Certificate (“AOC”); if the ICAO designator and AOC holder cannot be readily established, CORSIA compliance will then fall to the aircraft owner identified in the aircraft registration documentation. Lenders may wish to consider extending loan covenants to oblige the borrow/owner to also comply fully with any CORSIA-related obligations.

Insolvency of operator: legal and financial consequences may arise in circumstances where an operator fails to cancel enough eligible emissions offset units to cover its existing obligations.

Enhanced credit risk: whilst CORSIA will have an annual emissions reporting cycle, cancellation of emissions unit offsets, effective from 2020, will be subject to a three-year compliance cycle (in contrast to the EU ETS which is subject to an annual emissions allowance surrender cycle). CORSIA therefore gives rise to a greater credit risk exposure. Until the expiry of the three-year compliance cycle, the CORSIA regulator will not be able to confirm the level of an operator’s compliance and financial liability by which point the damage (and potential exposure for the lessor or mortgagee) may have become irreversible.

Further, from a credit perspective, lenders should bear in mind that airlines will need to factor the cost of their offsetting obligations under CORSIA into their financial operating models. The International Air Transport Association (“IATA”) has acknowledged that “as tradeable commodities, the price of offsetting emissions can vary significantly”. This volatility risk is not helped by the uncertainties surrounding the question of what may or may not qualify as an eligible emissions unit for the purposes of CORSIA.

Some practical observations

The question remains as to how in practice the enhanced level of risk arising out of CORSIA will be mitigated. Operators are likely to push back on any new obligations which might increase the cost and time spent monitoring and reporting and argue that the covenant to apply with applicable law is sufficient protection. Having regard to the potential cost exposure and consequences of non-compliance, lenders should, however, consider including appropriate undertakings and event of default triggers in their documentation, particularly once its implementation and enforcement regime is clearer.

The main theme is that lenders, lessors and aircraft owners should aim to gain an understanding of the basic functions of CORSIA, monitor the evolving landscape of the scheme and its requirements, particularly in relation to non-compliance, and seek to implement relevant risk mitigation measures into loan and lease documentation accordingly.

"As a result of the widespread grounding of aircraft during the coronavirus crisis, the 2020 baseline will likely be much lower than had originally been envisaged and the carbon targets therefore much more challenging. "

Global pandemic: COVID-19

There is a final but significant point to be made regarding the impact of the COVID-19 crisis on the implementation and operation of CORSIA.

The massive decline in international travel due to national lockdowns to try and control the spread of COVID-19 has decimated the airline industry, resulting in mass redundancies and withdrawals from airline hubs.

Airlines are now lobbying to move the goalposts such that their CORSIA obligations are adjusted. Before the pandemic, estimates were that airlines were likely to spend as much as £18bn per annum by 2035 on purchasing carbon credits to comply with the CORSIA rules. The baseline for measuring growth in CO2 emissions (requiring airlines to pay to offset such growth) is to be set by reference to the average emissions in 2019 and 2020. As a result of the widespread grounding of aircraft during the crisis, the 2020 baseline will likely be much lower than had originally been envisaged and the carbon targets therefore much more challenging. Using 2020 figures as a baseline without adjustment seems neither workable nor desirable.

A clash between the airlines and proponents of CORSIA is now in the making. Airlines (through IATA) are demanding that the baseline be adjusted to ensure the sustainable development of international aviation and avoid an inappropriate economic burden on the sector. CORSIA’s exponents together with environmental lobbyists have accused the airline sector of seeking to “worm its way” out of the new environmental obligations inherent to CORSIA. Greenpeace have accused the industry of seeking to “dodge its obligations towards cutting carbon emissions” while asking for massive government bailouts. The International Business Aviation Council has appealed to the ICAO to use only 2019 emissions as the baseline as “a simple solution”.

Lenders should keep a watchful eye over how this plays out in the coming months.

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