Türkiye’s Emissions Trading System: Mirroring the EU ETS with key differences and opportunities

Türkiye is poised to implement a significant climate policy with the introduction of its Emissions Trading System (ETS) in 2025. This system represents a critical step toward aligning with global climate goals and reducing greenhouse gas emissions. However, as Türkiye prepares to launch this ambitious initiative, a policy note authored by Ahmet Atıl Aşıcı in December 2023 provides crucial insights into the complexities and potential hurdles the country may face.

The Turkish ETS is designed to mirror the European Union’s Emissions Trading System, which has been a cornerstone of the EU’s climate policy since 2005. The EU ETS has evolved into one of the world’s largest and most successful carbon markets, covering a significant portion of the EU’s greenhouse gas emissions. By modeling its system after the EU ETS, Türkiye aims to integrate into a broader framework of global carbon markets, demonstrating its commitment to climate action. However, while the Turkish ETS shares many similarities with the EU model, there are key differences that could significantly impact its effectiveness.

Key Challenges in the Turkish ETS

One of the primary challenges identified in the policy note is the scope of the Turkish ETS. The system is set to cover facilities emitting over 100 ktCO2e per year, which could potentially exclude several important industries such as gypsum, glass, mineral wool, and iron production. These industries, though not as large as those in the energy or cement sectors, still contribute significantly to Türkiye’s overall emissions. Excluding them from the ETS could undermine the system’s effectiveness by leaving substantial sources of emissions unregulated.

Another challenge highlighted is the method for setting emission caps. The Turkish government plans to base its cap on projections outlined in its Nationally Determined Contribution (NDC), announced in April 2023. The NDC commits Türkiye to limit its emissions to 695 MtCO2e by 2030. However, historical emissions data suggests that if current trends continue, Türkiye’s emissions could reach 653 MtCO2e by 2030, which is significantly lower than the NDC target. This discrepancy poses a risk: setting the cap based on optimistic projections rather than realistic historical trends could result in an oversupply of carbon allowances. This oversupply could drive carbon prices down to ineffective levels, reducing the financial incentive for companies to invest in emissions reductions. Worse still, it could allow high-emission industries to generate windfall profits by selling excess allowances without making actual reductions in emissions.

The policy note also warns about the impact of existing economic policies in Türkiye, such as fossil fuel subsidies, tax breaks, and special treatment for certain industries. These policies could further diminish the effectiveness of the ETS by reducing the cost burden on carbon-intensive sectors, making it cheaper for them to continue emitting rather than investing in cleaner technologies.

Opportunities and Positive Aspects

Despite these challenges, the Turkish ETS also presents significant opportunities. By closely aligning with the EU ETS, Türkiye can benefit from the EU’s extensive experience in managing and refining its carbon market. The EU ETS has undergone several reforms since its inception, addressing issues like overallocation of allowances and market volatility. Türkiye can learn from these experiences to avoid similar pitfalls in its own system.

One of the most promising aspects of the Turkish ETS is its potential to expand coverage beyond what is typical in the EU ETS. The Turkish system’s facility categorization could allow it to include a broader range of installations, particularly if the categorization criteria are adjusted to mirror those used in the EU. For example, the EU ETS includes facilities with lower emissions thresholds in certain sectors, which ensures that more sources of emissions are regulated. By adopting similar criteria, Türkiye could extend its ETS coverage to include smaller but still significant emitters, thereby enhancing the system’s overall impact.

Additionally, the introduction of the ETS in Türkiye could drive innovation and investment in green technologies. As carbon pricing becomes a reality, companies will have a strong financial incentive to reduce their emissions. This could lead to the development and deployment of new technologies in sectors like energy, manufacturing, and transportation, helping Türkiye transition to a low-carbon economy. Moreover, aligning with the EU ETS could open new opportunities for Turkish companies to participate in international carbon markets, potentially generating revenue through the sale of excess allowances or carbon credits.

From a client perspective, businesses operating in sectors covered by the ETS will need to adapt to the new regulatory environment. This may involve investing in emissions-reducing technologies, improving energy efficiency, or purchasing allowances to cover their emissions. While this may increase operational costs in the short term, it also presents opportunities for forward-thinking companies to gain a competitive edge. Companies that can reduce their emissions below the cap could profit by selling excess allowances or avoiding the need to purchase additional ones. Furthermore, early adopters of green technologies may find themselves better positioned to meet future regulatory requirements and consumer demands for more sustainable products and services.

Looking Forward: Navigating the Complexities

As Türkiye prepares to implement its ETS, businesses and policymakers will need to navigate the complexities of this essential climate policy tool. The challenges are significant, but so are the opportunities. By learning from the EU’s experience and making strategic adjustments, Türkiye can ensure that its ETS not only meets its environmental goals but also supports broader economic development and integration into global carbon markets.

Given the unique differences in scope, cap setting, and economic context compared to the EU ETS, understanding these nuances will be critical to leveraging the full potential of Türkiye’s Emissions Trading System. To gain deeper insights and practical guidance on these issues, clients and stakeholders are encouraged to consult the full policy note by Ahmet Atıl Aşıcı. This comprehensive analysis will be invaluable in helping businesses and policymakers make informed decisions and capitalize on the opportunities presented by the Turkish ETS.