Emission Trading System is On the Way!

In our article titled the issue of net zero, I stated that the Directorate of Climate Change was established and that the establishment of an emissions trading system in Turkey is among the competences of the Directorate. In his speech at COP26, Minister of Environment, Urbanization and Climate Change Murat Kurum stated that a general climate law is being prepared and the basis of the emission trading system has been established. Thus, Turkey will be one of the many states that have established a pricing mechanism for greenhouse gas emissions. So, let’s take a look at what the emissions trading system is.

Emission trading system stands out as a market-based approach among greenhouse gas emission reduction activities aimed at fighting against climate change. If we look at how the emission trading system works; Businesses included in the system can be allocated free emission ‘rights’ to be used in certain periods, as well as selling the emission right by auction. Businesses that need less than the maximum emission right allocated to them can sell their remaining remaining emission rights to businesses that have insufficient emission rights allocated to them. Similarly, businesses that need more than the allocated emission right can buy the missing part from businesses that emit less greenhouse gas emissions. In this way, greenhouse gas emissions are traded and green transformation is encouraged by providing a flow of funds from businesses with high greenhouse gas emissions to businesses with low greenhouse gas emissions. Similarly, businesses in developed countries that need emission rights can also purchase greenhouse gas credits obtained by developing countries from emission-reducing activities such as renewable energy, within the scope of the Clean Development Mechanism introduced by the Kyoto Protocol. Thus, climate finance is provided from developed countries to developing countries.

One of the crucial points of the system is the regular reduction of the emission right initially allocated to the enterprises. By regularly reducing the emission right, businesses are encouraged to achieve their green transformation. Indeed, assuming a business is constantly emitting the same amounts of greenhouse gas emissions, with allowances being reduced regularly, the business’s current greenhouse gas allowance begins to fall short and the business is forced to purchase emissions rights. As a result of this, businesses that face increasing costs will lose their competitiveness against their competitors that follow environmentalist policies, so the best economic solution for businesses is to adapt to decreasing allocations by reducing greenhouse gas emissions.

What makes the emission trading system different from other emission reduction mechanisms such as carbon tax is the monitoring and limitation of total greenhouse gas emissions within the country. Finally, I would like to point out that one of the most important aspects for the healthy functioning of the emission trading system is the monitoring, reporting and verification of greenhouse gas emissions by businesses. In the current emission trading system in the European Union, businesses have to report their greenhouse gas emissions to the European Union at the end of each calendar year. After reporting, the accuracy of the data on the amount of emissions is audited by independent organizations, and businesses whose data are not verified cannot sell their increased emission right until their data is verified.

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