CORSIA Carbon Market Faces Growing Credibility Test amid Insurance-Backed Credits

A quiet but consequential contradiction is emerging at the heart of global aviation’s flagship climate mechanism, the Carbon Offsetting and Reduction Scheme for International Aviation (International Civil Aviation Organization’s CORSIA).

What was designed as a rules-based system to ensure airlines offset emissions with fully authorised carbon credits is increasingly relying on a workaround: credits sold before they are formally approved, backed by insurance rather than certainty.

At stake is not just market efficiency, but the credibility of a system meant to underpin aviation’s climate commitments.

A market built on future approval

CORSIA, adopted in 2016 under the International Civil Aviation Organization, requires airlines to offset emissions growth by purchasing eligible carbon credits.

In principle, those credits must be backed by host-country approval through Letters of Authorisation (LoA) and corresponding adjustments (CA), ensuring emissions reductions are not double-counted under the Paris Agreement.

In practice, that supply has proven scarce.

Governments — particularly in developing markets where many carbon projects are located — have been slow or reluctant to issue approvals.

The reasons go beyond administrative delay. Many countries were only loosely involved when projects were first developed under voluntary standards, and now face a dilemma: authorising exports of carbon credits could reduce their ability to meet national climate targets, or limit their control over carbon revenues.

This has turned what might appear to be a bureaucratic bottleneck into a structural constraint.

Yet instead of slowing down, the market has adapted.

Developers are increasingly selling CORSIA-labelled credits before approvals are secured, using insurance to cover the risk that those approvals never materialise. If authorisation fails, insurers compensate the seller.

The result is a system where credits are traded, and in some cases used for compliance, based not on confirmed eligibility but on the expectation that eligibility will eventually follow.

From carbon trading to confidence trading

On the surface, insurance-backed credits look like financial innovation — a way to keep markets liquid despite regulatory lag. But the mechanism does not resolve the underlying shortage of authorised supply. It merely allows the system to operate as if the problem has been solved.

What is being traded, increasingly, is not just carbon.

It is confidence — that governments will eventually sign off, that rules will accommodate current practices, and that replacement credits will be available if they do not.

This dynamic has drawn comparisons, albeit cautiously, to a “confidence trade”: a market sustained by expectations of future validation rather than present certainty.

When compliance creates friction

The tensions become more visible when examining countries that have attempted to align more closely with the Paris Agreement’s Article 6 framework.

Zimbabwe, for instance, has developed a national carbon registry system designed to give the government oversight of credit transfers and the ability to issue LoA and corresponding adjustments at the point of export. In theory, this reflects the kind of sovereign control envisioned under the Paris Agreement.

In practice, it collides with CORSIA’s procedural requirements.

Under rules shaped by the International Civil Aviation Organization and its Technical Advisory Body (TAB), eligible credits must move through approved international registries such as Gold Standard or Verra. Direct transfers from national registries are not recognised.

This creates a paradox: systems that strengthen national oversight and align with Article 6 can become less compatible with CORSIA’s operational mechanics.

A real-world case illustrates the contradiction. Credits initially issued under Gold Standard were transferred into Zimbabwe’s national registry, where they received full authorisation and corresponding adjustments, before being moved back for trading. Despite completing what appears to be the full compliance cycle, those credits were deemed to have lost their CORSIA eligibility following guidance linked to the Technical Advisory Body.

In effect, credits that satisfied the substance of the rules failed on procedure — while others without approvals continued to circulate under insurance-backed structures.

Risk shifted, not removed

The growing use of insurance highlights another imbalance.

In many arrangements, developers are protected if approvals fail, securing upfront revenue. Airlines, which ultimately bear compliance obligations, may remain exposed if credits are later deemed invalid.

The industry assumption has been that such credits can be replaced if necessary. But that assumption depends on a steady supply of authorised credits — precisely what remains constrained.

If approvals continue to lag, replacement credits could become scarce, pushing prices higher and straining liquidity. Insurance payouts, typically structured around initial transaction values, may not fully cover rising market costs.

In that scenario, risk is not eliminated. It is redistributed — often downstream.

Why the system persists

Despite these inconsistencies, the system continues to function — and to attract support from key institutions, including standard setters like Verra and Gold Standard, ratings agencies such as Sylvera, and governance bodies linked to CORSIA.

Part of the explanation lies in the need to maintain momentum.

A prolonged shortage of eligible credits would create immediate compliance challenges for airlines and risk undermining confidence in the scheme itself. Mechanisms that sustain transaction flow, even imperfectly, help avoid that outcome.

But this comes at a cost.

By prioritising continuity, the system may be tolerating — or even embedding — structural contradictions that could prove destabilising over time.

A system under strain

CORSIA remains a landmark effort in global climate governance, representing the first sector-wide mechanism to address international aviation emissions. But its evolution suggests a market moving faster than its institutional foundations.

Three dynamics now define the system:

• Countries are cautious about granting approvals, reflecting sovereignty and accounting concerns
• Fully authorised, sovereign-aligned pathways can be procedurally excluded
• Credits lacking approval are entering the market via insurance-backed structures

The result is a growing misalignment between form and substance.

Credits that meet the spirit of the rules risk being sidelined, while those that do not yet meet them are traded with financial safeguards. Insurance fills the gap, but does not resolve the underlying constraint.

A credibility question

The issue is no longer simply whether the market can function under these conditions. It is whether it can sustain credibility.

CORSIA was built on the premise of environmental integrity — that each credit represents a verified, authorised emissions reduction. As the system leans more heavily on future approvals and financial engineering, that premise is being tested.

For now, the market continues to operate.

But beneath the surface, a more fundamental question is emerging: is CORSIA solving its structural constraints — or adapting around them in ways that could eventually undermine its own foundations?

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