Turkey Takes the First Step with a Monitoring-Verifying-Reporting System

An Emission Trading System is of considerable significance because of the environmental and economic advantages it offers, such as; Carbon Emission Reduction: It facilitates emissions reduction by implementing measures to control carbon emissions. Reducing emission limits incentivizes businesses to invest in greener technologies.

Economic Benefits: Companies can buy and sell within the carbon market while striving to achieve emission reduction targets. Companies meeting their emission limits can profit by selling their allowances to those with a shortfall.

International Cooperation: In a globalized world, international emission trading among different countries is allowed, promoting collaboration in the global fight against climate change.

Green Technology Investment: Businesses are investing in clean energy and green technologies to comply with emission caps, accelerate the transition to renewable energy, and support the fight against climate change.

What is an Emission Trading System?

Implemented globally, the Emission Trading System aims to reduce carbon emissions by imposing upper limits on industrial carbon emissions to mitigate environmental impacts. A significant mechanism of the Kyoto Protocol, ETS enables emission trading between countries. Known as the carbon market, this system aims to achieve cost-effective emission reductions, facilitating significant steps in the fight against the climate crisis.

How is the Emission Trading System implemented?

A company that emits carbon due to its activities can purchase emission allowances from another company if it exceeds its emission limit. Companies that successfully reduce emissions can either sell their remaining allowances or save them for future use. This upper limit, free pollution rights or free allocation, is determined based on a company’s past emission levels. Trading allowances through auctions or between actors within the Emission Trading System (ETS) helps determine prices in the carbon market. The costs associated with emissions are determined by the emission quantity, serving as a mechanism that incentivizes companies to reduce carbon emissions. Consider two companies, A and B, each emitting 100 tons of emissions annually. Let’s assume that the Emission Trading System (ETS) imposes a cap-and-trade mechanism, setting an upper limit of 60 tons of emissions for both companies. In this case, A and B companies must reduce their emissions by 40 tons each. A company achieves this reduction by reducing emissions by 60 tons to 40 tons. However, due to various costs, B company can only achieve a reduction of 20 tons and an emission level of 80 tons. At the end of the day, “A” company ends up with an excess of 20 tons of carbon allowances, while “B” company needs an additional 20 tons. In this situation, B company can continue its operations by purchasing 20 tons of allowances from A company, based on the prevailing market prices in the carbon market.

Turkey established a domestic ETS by instituting an MRV system (Monitoring-Reporting-Verification (MRV) in 2015. According to the regulation, iron-steel, aluminum, cement, glass, ceramics, lime, mineral wool, paper, refinery products, and chemicals must report their emissions to the Turkish Ministry of Environment, Urbanization, and Climate Change. Regarding sectoral and product coverages, Turkish MRV matches almost one-to-one with the EU ETS, except in aviation. According to officials, the pilot phase of the Turkish ETS will start on October 15, 2024, with the announcement of national allowance allocations. The first implementation phase will start on October 15, 2026, following a two-year transition period. Note that Turkish MRV categorizes installations under three groups: Category A includes installations with emissions lower than 50 ktCO2 e; Category B installations with emissions between 50 and 500 ktCO2 e; and Category C installations with emissions higher than 500 ktCO2 e.

The World Bank supports the Turkish government’s implementation of a national emissions trading system (ETS). This project is part of a broader objective of a net zero target for the Turkish economy by 2053 following the country’s National Determined Contributions (NDC).

Through the Partnership for Market Implementation, a World Bank initiative supporting 25 developing countries working on carbon pricing and carbon markets, the World Bank has supported the government of Turkey in designing and implementing the ETS and a national crediting system that will provide offsets to ETS entities.

The program has five components: (i) informing design decisions for the national ETS from its pilot phase to formal implementation; (ii) developing a domestic crediting system that could supply offsets and a certain level of flexibility to participants of the ETS; (iii) drafting a strategy for participation in international carbon markets; (iv) developing carbon pricing communication strategies; and (v) creating the underlying infrastructure for carbon pricing.

It is essential to consider that the transition phase of the Turkish ETS ends in 2027 after some installations (mainly thermal power plants) are required to buy allowances from the market. Calculations indicate that there will be an oversupply of 17 million allowances. This would drive down carbon prices and lead to windfall profits for some sectors (i.e., EUR 170 million if the carbon price is 10 EUR/tCO2 e), disincentivizing decarbonization efforts.

For any ETS to function effectively, the cap should first be binding. Secondly, the free allocation of allowances should be kept to a minimum. Increasing the cap in the Turkish ETS can hardly satisfy the first condition, and the generous allocation of allowances could, ironically, reward carbon-intensive installations rather than incentivize them to decarbonize

It should be acknowledged that ETS is not the only tool for decarbonizing economies. Existing and new companion policies can help improve the effectiveness of carbon markets (complementary policies), duplicate incentives provided by carbon markets (overlapping policies), or, in some cases, counteract incentives in carbon markets (countervailing policies). The fossil fuel subsidies, tax breaks, and special treatment offered to some industries in Turkey can be viewed as counterproductive policies risking the effectiveness of ETS.

This Post was submitted by Climate Scorecard Turkey Country Manager Dr Semih Ergur.


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