Turkiye’s Own ETS Is in the Works

Introduction

Türkiye aims to achieve net zero emissions by 2053 pursuant to its First Nationally Determined Contribution under the Paris Agreement. The Ministry of Environment, Urbanization and Climate Change (“MoE”) is working on the Draft Law on Climate Change (“Draft Law”), which observers in Türkiye expect will enter into force in 2024.

In this article, we will first explain the general structure of the Draft Law and then delve into the main novelty of the law: the emission trading system (“ETS”) of Türkiye and compare it to its European counterpart. Finally, we will examine the relationship between the Turkish ETS and European Union’s (“EU”) Carbon Border Adjustment Mechanism (“CBAM”).

1. An Overview of the Draft Law

The Draft Law starts by listing the general principles for combatting climate change. Among these, it is worth noting the reference to a just transition, which is defined as, “A policy where no one is left behind and green job opportunities are provided, with priority given to vulnerable groups, in order to prevent unemployment and economic fluctuations while achieving the goals set in the battle against the climate change.” The term “just transition” appears to derive from the EU’s Green Deal policy and is clear evidence of the so-called “Brussels Effect.”

The Draft Law charges the MoE and other governmental bodies with completing certain actions, such as establishing regulations for energy-efficient buildings, implementing the principles of a circular economy, and reducing greenhouse gas emissions in agriculture. However, these obligations lack precise deadlines and are not quantified. Well-defined obligations would have enabled both public institutions and civil society to more efficiently assess where public bodies stand in relation to fulfilling these legislative targets.

2. The Turkish Emission Trading System

The MoE, as part of its Partnership of Market Readiness Project conducted with the help of the World Bank, decided that the most appropriate carbon pricing mechanism for Türkiye would be an ETS. Accordingly, the Draft Law envisions the establishment of an ETS. The Turkish ETS will operate like its European counterpart. Companies in scope will have to maintain enough allowances to cover their greenhouse gas emissions. Allowances will be available through government allocations (i.e., free allowances), through auction processes, or by trading with other market players. More emissions mean more allowances will be required, which means greater costs for companies. The ETS, therefore, incentivizes companies to reduce emissions. 

The Draft Law envisions a set of fines for noncompliance. Most notably:

- Entities operating without a greenhouse gas emission permit or with expired or cancelled permits will face fines based on their reporting status:

▪️ Those with a verified annual emission report will be fined 10 Turkish Liras per ton of carbon dioxide equivalent emissions in their latest annual emission report, and

▪️ Those without such a report will be fined from 100,000 to 5 million Turkish Liras.

- Entities failing to submit sufficient allowances to cover for their annual emission reports will be fined twice the price of the discrepancy on the last business day of the reporting year.

The Draft Law envisions a transition period during which administrative fines will be applied at a reduced rate. The Directorate of Climate Change at the MoE (“Directorate”) will decide on the duration of the transition period. The Directorate will also decide on the sectors covered by the ETS. In addition, for the first three years after the Draft Law enters into force, greenhouse gas emission permits, which are a prerequisite for operating in the Turkish ETS, will not be required on a one-off basis.

A new administrative body called the Carbon Market Board that will consist of representatives from various ministries including the Ministry of Trade and the MoE will decide on emission caps and the distribution of free allowances. The Directorate will develop and regulate the Turkish ETS. The Capital Markets Board of Türkiye will supervise the Turkish ETS and implement measures against fraud and market abuse.

3. The Relationship between the Turkish ETS and CBAM

Recognizing climate change as a global problem, the EU introduced the CBAM to prevent carbon leakage. As of 2026, EU importers of cement, iron & steel, aluminum, fertilizers, electricity, and hydrogen will be obliged to purchase CBAM certificates over the weekly average auction prices of EU ETS allowances.

CBAM will deeply affect Turkish exporters because the EU is Türkiye’s biggest export destination. According to a report prepared by the European Bank for Reconstruction and Development (EBRD) and the MoE, the cost of CBAM for Turkish exporters could be as high as €2.5 billion per annum by 2032. However, it is not all doom and gloom for Turkish industries. The report also examines potential solutions such as the establishment of a Turkish ETS linked or unlinked with the EU ETS, and the integration of the Turkish and EU electricity markets. The report concludes that complete exemption from CBAM is only possible if the Turkish ETS is linked with the EU ETS or if the Turkish and EU electricity markets are integrated.

However, linking attempts have historically been difficult because of the high degree of alignment required. A notable example is the linking of the Swiss ETS with EU ETS, which took approximately 10 years. At the very least, importers subject to a carbon tax or participating in a local ETS scheme are eligible for a reduced price when purchasing CBAM certificates. Therefore, even an unlinked Turkish ETS could help Turkish exporters obtain discounted CBAM certificates.

Conclusion

Türkiye’s Draft Law appears to aim at mitigating the effects of CBAM on Turkish industries as much as achieving Türkiye’s net zero target. The EU has successfully leveraged the power of its internal market to nudge Türkiye into establishing an ETS that is very similar to the EU version. The Brussels Effect is clearly at work, and hopefully, our planet will be better off because of it. Whether or not exporting to the EU, all Turkish companies should start preparing for the additional costs that will be generated by the Turkish ETS.