Net zero: why must carbon markets be part of the solution?
CORSIA eligible emissions units
Investment structures
Lessor engagement with CORSIA and the carbon market


With sustainability at the centre of discourse within the aviation community in recent years and annual environmental, social and governance (ESG) reporting becoming more widespread for industry participants, market observers are applying increasing levels of scrutiny to detect and call out greenwashing, lack of true ambition and lack of impactful action and investment. This article, the first in a series of two, sets out an approach that participants should consider.

The sustainability challenges faced by the aviation industry are well-known, but the following major points are worth reciting in brief:

  • aviation is responsible for approximately 2.5% of global carbon dioxide emissions;(1)
  • the commercialisation and scaling of hydrogen fuel-cell or battery powered aircraft is approximately 15 years away;(2)
  • sustainable aviation fuel (SAF) is a scarce resource and is currently very expensive to produce (and will not, in any event, achieve 100% emissions reductions);(3) and
  • procurement of carbon offsets often leads to negative press and association with greenwashing.(4)

The intentions of the industry are good. In 2021 the International Air Transport Association (IATA) committed to achieve net zero carbon emissions by 2050 – a goal that was reaffirmed as the long-term aspirational goal of the International Civil Aviation Organisation (ICAO) at its assembly meeting, which ended on 7 October 2022.

Additionally, this year's inaugural Global Aviation Sustainability Day held by Aircraft Leasing Ireland in Dublin announced its "Sustainability Charter" – the first set of ESG and climate-aligned principles for the aviation industry promoting collaboration and ambition among the lessor community. However, critics have pointed out that although the Sustainability Charter's strong focus on the "S" and the "G" is welcome and important, this cannot hide the more difficult and expensive climate issue hidden within the "E". Furthermore, the EU Corporate Sustainability Reporting Directive will soon require certain companies to report on how their activities impact the environment, human rights and social standards, bringing the "E" home to the Irish lessors' front door.

The pathway for the aviation industry to achieve net zero emissions by 2050 is difficult and relies on significant technological improvements in the medium-to-long term. The industry must discuss the significant investment needed into research and development of key technologies that is required to truly transform the emissions trajectory of commercial aviation in an impactful way, how best to remove legacy emissions from the atmosphere and equitable sharing of the burden of decarbonising the sector with airlines.

Other global industry sectors, such as tech and pharma, have made major leaps in advancing their decarbonisation strategies, from investing into non-core business sectors(5) to signing long-term renewable energy power purchase agreements(6) to investing in high-quality and high-integrity carbon projects to remove legacy emissions. The level of investment emphasises the intent of those sectors to decarbonise.

The aircraft leasing community owns approximately half of the world's operating aircraft.(7) This means about 1.25% of the world's carbon dioxide emissions fall within the leasing communities' scope three emissions.(8) This proportion will increase if overall emissions of the sector continue to grow, particularly if the industry is unable to decarbonise in parallel with other sections.

The pressure on the industry to decarbonise will increase, but there are good reasons for it to take the required steps anyway. Doing so will not only help participants' ESG credentials, but will also help them provide a compliance solution to their airline customer base. The market mechanisms needed already exist – the industry must learn how to leverage the existing mechanisms in a strategic and impactful way to help unlock the methods that participants will need to deploy to achieve net zero by 2050.

This series of articles focuses specifically on carbon markets. Some in the aviation community may still consider the carbon-investment space as an inexpensive way to make customers feel better about flying and, in some cases, have intentionally moved away from buying carbon offsets to protect their reputation from accusations of greenwashing. Other industry participants are moving away from offsetting programmes to focus on other decarbonisation strategies.(9)

This series of articles suggests that this narrative must be reversed, as the carbon market must play an integral role in any genuine effort by the aviation sector to achieve net zero; net zero cannot be achieved without it. The carbon market continues to evolve at a rapid pace with many efforts being made to develop and/or establish standards that provide for integrity and quality, as well as opportunity to scale nature-based and technological solutions that can help remove legacy emissions and provide a pathway to make technologies such as hydrogen and sustainable aviation fuels economically viable in the medium-to-long term.

The purpose of this series of articles is to explore some of the developments in the carbon markets with the hope that the leasing community will take a fresh look at the carbon markets and leverage the advantages they provide in an effort to cut the aviation industry's emissions in the transition to net zero and beyond.

Net zero: why must carbon markets be part of the solution?

Net zero can only be achieved at a planetary (and at a stakeholder/corporate) level when there is a balance between greenhouse gas (GHG) emissions and removals. Even if industries decarbonise across their operations as much as technologically possible, there will always be a degree of residual or unavoidable emissions in their value chains. As such, carbon-removal projects will be needed to achieve the balance required for net zero. In the context of aviation, if and when SAF is fully scaled, SAF will work to cut emissions by up to 80%, meaning that there will always be a margin of emissions that will need to be removed through other means to achieve equilibrium.

In recognition of the role that the carbon market must play in achieving "Paris-aligned" net zero targets, the 194 parties to the Paris Agreement finally agreed on a set of rules for article 6 of the Paris Agreement at the 2021 United Nations (UN) Climate Change Conference in Glasgow. Article 6 allows countries to transfer carbon credits (or "mitigation outcomes") and effectively establishes a new carbon market, with safeguards in place to ensure higher integrity than the market mechanisms that preceded it under the Kyoto Protocol. This article of the Paris Agreement is discussed in more detail in the second article of this series, but it is worth noting at this juncture that one of its constituent parts, article 6.4, will serve (if implemented as intended) as an enabler of private sector engagement in a carbon project marketplace that will replace the Kyoto protocol era's Clean Development Mechanism.

The types of project activities and mitigation outcomes that will be included in the article 6.4 mechanism will be decided by project developers, host country governments and the investment community, within parameters adopted by parties to the Paris Agreement and the mechanisms' supervisory body.(10) The stated purpose of article 6.4 is "to contribute to the mitigation of GHG emissions and support sustainable development". To achieve this purpose, the article 6 rules prescribe that baseline setting and methodological design for each project activity will need to be approved by the supervisory body. One of the supervisory body's functions is to ensure that the mechanism facilitates the long-term goals of the Paris Agreement and, as such, the baselines and methodologies which it approves will need to be aligned with this objective.


The Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) is the market-based mechanism that represents the aviation industry's effort, acting through the auspices of ICAO, to mitigate the effects of climate change arising from increasing emissions from international travel. This mitigation is to be principally achieved by offsetting emissions that exceed a baseline level.

As industry participants will be aware, the "pilot phase" (2021-2023) of CORSIA is currently underway. This will lead into the "first phase" of CORSIA (2024-2026). Both phases are voluntary and 118 states currently participate, or have signed up to participate from 2023, including many of the world's largest aviation markets.(11)

As much of the world exited the covid-19 pandemic, there was significant discussion among the parties about the level of annual emissions that ought to be set as the baseline given the interruption to the industry caused by the pandemic. Last year this was determined to be 2019 levels and this year's ICAO assembly agreed that the baseline for the first phase would be 85% of 2019's emissions.(12) Airlines will have to offset any eligible emissions over this limit, representing a real outlay for them to comply.

This liability – to purchase sufficient offsets to comply with CORSIA obligations – will continue to grow, unless there is a significant reduction in emissions through technology or a reduction in the number of flights being undertaken. During the "second phase" (2027-2035), participation will no longer be voluntary for states, and large aviation markets such as Brazil, China and India will also participate, expanding the requirement for offsets further.

CORSIA eligible emissions units

The most recent version of ICAO's document on CORSIA eligible emissions units sets out the emissions unit programmes that have been approved by the ICAO Council to supply CORSIA eligible emissions units and identifies the registries designated by CORSIA eligible emissions unit programmes for the purpose of fulfilling the provisions set out in the CORSIA-related ICAO Standards and Recommended Practices.(13)

The two best-known voluntary carbon market registries are those of Verra and the Gold Standard. Importantly, not all programmes are accepted by ICAO. was rejected twice on the grounds that ICAO decided that it could not determine whether had the necessary basic features of a crediting programme.(14)

What does this mean from a lessor-investment perspective? Essentially, provided that lessors invest in or buy credits from projects that fall within the eligibility criteria set by ICAO, these credits may (upon pass-through of title) be used by airlines for retirement (ie, application as offsets) under and in compliance with the CORSIA requirements.

The scope of project types that can be supported by these investments is incredibly broad. Using the Gold Standard's GSF Impact Registry as an example, ICAO designates all Gold Standard verified emissions reductions (VERs) issued to activities that started their first crediting period from 1 January 2016 as eligible, subject to the narrow range of limited exceptions expressed in the eligibility document linked above. This means that a lessor can support a carbon project or mitigation activity based on a tailored strategy that may include input from its customer base. What a lessor and its customers choose to support and finance will be for them to decide, but (the Gold Standard) examples include energy efficiency, soil carbon, agriculture, livestock and biogas-based projects.(15)

Other registries, such as the ART Registry, focus on carbon reduction and removal through forestry and nature-based projects. Gold Standard, Verra and others are currently developing methodologies for green hydrogen projects.(16) Verra and other registries are continuing to develop removal-based methodologies (ie, those that focus exclusively on removing GHGs from the atmosphere). Some registries differ on attribution of co-benefit-based certification for projects.(17)

Irrespective of the type of investment that a lessor elects to make, the principle of additionality should be at the forefront of its decision-making. This is a defining concept for carbon projects – to qualify as a genuine carbon offset, the reductions or removals achieved by a project need to be "additional" to what would have happened if the project had not been carried out (eg, continued as business-as-usual).(18) Several initiatives are combining to enhance the integrity of the voluntary carbon market to ensure a means by which high-quality, impactful projects can be identified with relative ease.

Investment structures

In other global industries, the narrative of buying carbon offsets exclusively for the purpose of "cleaning" scope three emissions profiles is quickly dissipating. This is in part due to guidance from the Science Based Targets initiative to reposition offsetting from being a contributor to corporate decarbonisation strategies to being seen as a complement, and in part due to a desire on the part of major corporates to immerse themselves in carbon projects by providing direct finance, acquiring an equity stake or committing money to a carbon-investment fund. This is a strategic measure deployed for high-integrity and high-impact projects that corporates assess as having the potential to unlock a long-term stream of quality carbon assets that is in some way linked to their industry sector, ESG goals and/or decarbonisation strategy. For many, this is also felt to be a much more powerful story to tell than simply buying carbon credits and is seen as providing security of supply over the medium-to-long term.

A clear example is SMBC Aviation Capital's (AC's) recently announced investments in projects that will yield high-quality, globally certified carbon credits that align with the UN's sustainable development goals. It is part of SMBC AC's strategy to have the yield from these investments help its customers with compliance with CORSIA. This affords SMBC AC the opportunity to say that it has made an impactful investment that has a positive impact on GHG emissions and benefits local communities while simultaneously helping its customers with a compliance issue.

Some of the climate/carbon investment structures that have been recently deployed by major actors in various industries are set out below.

Pre-funding and forward purchasing
Investors identify credible project developers with experience in developing nature-based or technologically-focused carbon reduction or removal projects. The criteria that investors consider include:

  • track record;
  • creditworthiness;
  • project types;
  • geographical focus;
  • whether co-benefits are a feature; and
  • whether the credits to be issued for the project will be eligible for certain uses (such as for CORSIA).

The investor agrees to provide up-front funding for the project to enable the developer to bring the project through various developmental milestones to accreditation with an eligible standard and issuance of the first volume credits. How the payments are structured will depend on the risk profile and the project type. In exchange for this pre-funding, credits are usually offered by the developer at some level of discount to market up to a certain volumetric threshold beyond which the investor may negotiate a right of first refusal. Whether there is some form of security over shares or assets or liquid security in the form of letters of credit or parent company guarantees is usually up for negotiation and will depend on the counterparties involved.

Pre-funding with carbon stream
This emerging structure is similar to a forward purchase, but instead of locking in a discounted fixed price for future credits, the parties agree that title to the whole or partial volume of credits will pass (promptly after issuance by the relevant registry) to an investor. This investor is required to sell the credits in the open market with the possibility that the ultimate purchasers/end-users may be narrowed to a particular sector (eg, aviation). The investor is incentivised to procure as high a price as possible, part of which will be passed through to the project developer.

Contracting through intermediary
Some investors will rely on the expertise of an intermediary such as a carbon broker to pre-fund and contract with a variety of projects on its behalf through back-to-back emissions reductions purchase agreements. The advantage with this structure is a portfolio spread and a delegation of key responsibilities to industry experts. The disadvantage is that the intermediary retains a margin for its services that would otherwise be paid directly to the project developers/local communities.

Investing into climate/carbon fund
Specialist funds have been and continue to be established with the purpose of pooling and harnessing corporate capital for high-impact carbon-based investments. The structures behind these funds are varied and are ultimately driven by the return expectations of their investors. Are the investors seeking a financial return or is their investment focused on procuring and taking title to high-quality carbon credits? The fund managers would typically have experience in international climate finance and carbon project development, and their investments may be focused to cater to the needs of their investor base (eg, investments limited to CORSIA-eligible project activities and methodologies).

Investing directly into project/taking equity stake
An investor may decide to invest directly into a specific project or project developer based on a range of criteria and its own strategic goals. This is analogous to infrastructure project investment and may be documented via share purchase agreements, shareholder agreements, project development agreements or offtake agreements providing some combination of equity/debt funding. The deployment of this type of structure in the market is a sign of its maturity as it is demonstrative of experienced project developers of other asset-classes applying their skillsets and experience to carbon project development.

Lessor engagement with CORSIA and the carbon market

CORSIA-compliance, and compliance with CORSIA-like schemes(19) creates a requirement for offsets that is a known, measurable liability for airlines and lessors. Sophisticated tools exist that allow lessors to monitor the emissions of their customers and calculate liability to CORSIA and CORSIA-like schemes.(20) As a result, lessors are able to monitor liability and manage risk, perceived or actual, with their airline customers, relying on their airline customers to update them on compliance with their offsetting obligations.

Alternatively, some lessors are participating in the carbon markets themselves(21) and provide carbon credits available for offset to airlines. This approach differentiates them from other lessors, perhaps provides a lower-cost solution to airlines that do not have great purchasing power and begins to tackle the difficult "E" of ESG reporting. Lessor engagement could also offer airlines respite from the need to rapidly climb the curve in the carbon investment space, which is complex and specialised, and which may require a significant human resources commitment.

For further information on this topic please contact John Pearson at Vedder Price LLP by telephone (+44 20 3667 2900) or email ([email protected]). The Vedder Price LLP website can be accessed at

Lev Gantly, partner at Philip Lee LLP, assisted in the preparation of this article.


(1) Global Carbon Project (2019). It should also be noted that a recent study published in the journal Nature reports that the non-carbon dioxide climatic effects of aviation (due the chemical composition of contrails) are responsible for approximately two-thirds of aviation's impacts on the climate. The paper demonstrates that these non-carbon dioxide climatic effects would by themselves cause up to 0.4 degrees Celsius of additional warming if no action is taken to mitigate or reduce their impact. These non-carbon dioxide climatic effects are currently excluded from the aviation industry's climate mitigation efforts.

(2) See, for example, the IATA's milestones towards net zero, which indicate that the industry's expectation is for these technologies to be available for regional markets in 2035.

(3) See, for example, the IATA's milestones towards net zero, which indicate that SAF will not reach 5% of fuel until 2030.

(4) See, for example, Greenpeace.

(5) For example:

(6) For example, RE100 now has over 300 corporate members who have committed to procuring 100% renewable electricity to power their business operations, predominantly by entering into corporate power purchase agreements.

(7) See, for example, KPMG.

(8) Scope three emissions of an organisation are, broadly speaking, all indirect (value-chain) emissions associated with that organisation's business operations. In the case of aircraft leasing companies, the emissions of the aircraft that it owns and that are operated by its airline customer are likely to be categorised as the aircraft leasing companies' scope three emissions (while simultaneously being a scope one emission-type for the airlines).

(9) For example, Easyjet.

(10) It is possible, for example, that avoidance-based mitigation activities will be ruled out although a decision on this point is unlikely to be issued before the 2023 UN Climate Change Conference in Dubai.

(11) As of October 2022.

(12) See paragraph 11(b) of Resolution A41-22.

(13) This is a living document that is regularly updated, but the registries that are listed as eligible as of November 2022 are:

  • the American Carbon Registry;
  • the ART Registry;
  • China's Registry of the GHG Voluntary Emissions Reduction Program;
  • the CDM Registry;
  • the Climate Action Reserve Voluntary Offset Project Registry;
  • the Global Carbon Council Registry;
  • Gold Standard's GSF Impact Registry; and
  • the Verra Registry.

(14) It is also likely that this document will in time be updated to account for developments around internationally transferred mitigation outcomes and "A6.4ERs" (ie, a new mechanism which establishes the framework for the creation, transfer and use of unitised mitigation outcomes).

(15) The live listing of CORSIA-eligible Gold Standard VERs can be viewed here.

(16) See, for example, the Hydrogen for Net Zero Initiative.

(17) For example, all Gold Standard accredited projects feature some combination of attributes from the UN-approved range of sustainable development goals. Investing in these not only positively impacts GHG emissions but also supports local communities and habitats in an effort to secure a just transition to net zero.

(18) This is why Verra and Gold Standard, for example, no longer accredit grid-connected renewable energy projects in developed economies (ie, non-least developed countries).

(19) For example, the EU, Swiss or UK Emissions Trading Scheme.

(20) See, for example, the Platform for Analysing Carbon Emissions.

(21) See SMBC AC above. According to its annual report, AerCap has also proceeded to "support two projects to offset these unavoidable emissions from our global office operations (Scope 2) and employee business travel (Scope 3)". It is not clear if this is an investment or a purchase of offsets.