I. INTRODUCTION

One of the crucial issues that the Climate Law, which has long been on the parliamentary agenda and is expected to reach its final maturity and be enacted in the upcoming period, will address is the emission trading system (“ETS“). While the anticipation for the Climate Law continues, the Energy Market Regulatory Authority (“EMRA”), based on the authority entrusted by Article 11/8 of the Electricity Market Law No. 6446, has published for public opinion the Draft Regulation on the Operation of Carbon Markets (“Draft Regulation”). The Draft Regulation aims to establish and operate carbon markets by defining the procedures and principles for a cost-effective reduction of greenhouse gas emissions. To achieve this purpose, the Draft Regulation specifies the ETS proposal wherein (i) transferable, (ii) nominally issued, and (iii) one ton of carbon dioxide (over a specific period) equivalent allowances (“Allowance”) are distributed, purchased and sold. The ETS mechanism encourages the limiting of greenhouse gas emissions by establishing an upper limit for these emissions.

Thus, the foundations of the European Union Emission Trading System, which has been implemented by Directive 2003/87/EC and has since evolved to its current form through the Carbon Border Adjustment Mechanism (“CBAM”) are being laid in Turkey.

II. FUNDAMENTAL PRINCIPLES

1. What Are the Types of Carbon Markets?

In the Draft Regulation, carbon markets consist of three types: bilateral agreement markets, primary and secondary carbon markets.  In the aforementioned markets, transactions for purchasing and selling Allowances and/or standardized contracts and documents related to emission trading will be conducted.

In the primary carbon market, Allowances are distributed among participants through auctions, whereas in the secondary carbon market, transactions for the purchase and sale of Allowances which have already been distributed through auctions and/or free Allowance methods are conducted. The secondary carbon market consists of the spot carbon market and physically delivered carbon futures market.

On the other hand, in the bilateral agreement market, transactions for the purchase and sale of Allowances are conducted among individuals who will become system participants (“System Participants”) by joining the Transaction Registry System (“TRS”) regulated in the Draft Regulation through commercial agreements.

2. Who Is a Market Operator?

The primary and secondary carbon markets are organized and operated by Enerji Piyasaları İşletme Anonim Şirketi (“Market Operator” or “EPİAŞ”). In these markets, EPİAŞ assumes the role of the central counterparty, acting as the seller against the buyer and vice versa.

Additionally, the Market Operator carries out reconciliation management, accrual, collection, and payment of invoices resulting from reconciliation as well as data publishing and reporting activities regulated in the Draft Regulation. In addition to the matters given, the Market Operator fulfils its duties within the framework of other provisions of the relevant legislation.

3. Who Can Conduct Activities Regulated Under the Draft Regulation?

Individuals who have completed the participation procedures as regulated in the Draft Regulation would become market participants (“Market Participant”), and these individuals will be the operators (“Operator”) who are identified under the ETS.

Accordingly, an Operator who;

• conducts activities, and

• operates facilities who is also the responsible person for  the ownership, leasing, or other legal rights

specified in Annex-1 of the Regulation on the Monitoring of Greenhouse Gas Emissions published in the Official Gazette dated 17.05.2014 and numbered 29003 (“Greenhouse Gas Emission Regulation”), can have the status of a Market Participant and System Participant, provided that it meets the conditions listed in the Draft Regulation.

The status of an Operator can be obtained based on the threshold values reached by summing up the capacities of activities corresponding to the same category within the same facility, even if the threshold values specified in Annex-1 of the Greenhouse Gas Emission Regulation have not been reached.

4. What Are the Principles Regarding Supply in the Primary Carbon Market?

The quantity of Allowances offered for sale through auctions will be determined annually by the Market Operator and distributed equally among the auctions held throughout the year.

In the Draft Regulation, the minimum bid size of purchase bids that can be submitted in the mentioned auctions is 1 (one) lot. In the primary carbon markets, each purchase bid for 1 (one) lot corresponds to 500 (five hundred) Allowances, and this quantity of Allowances is equal to 500 (five hundred) tons of carbon dioxide and equivalent to greenhouse gas emissions.

In such auctions, the Market Operator will act as the sole authorized seller and Market Participants will only be able to submit purchase bids.

5. Where Will the Revenues Obtained from Auctions Be Utilized?

The framework for the utilization and purpose of the revenues obtained from auctions has been outlined in the Draft Regulation. These revenues will be transferred to relevant accounts opened to create appropriate mechanisms to facilitate the use of green transformation and fair transition supports for:

• legal entities operating in strategically prioritized sectors, in particular sectors within the scope of the ETS,

• public institutions.

In our opinion, this step towards achieving the goals outlined in the Green Deal Action Plan published by the Ministry of Trade (“Green Deal Action Plan”) is highly accurate. However, given the nature of the revenues obtained from the auctions, it is crucial to provide a more detailed regulation in the Draft Regulation regarding (i) which sectors will be considered as “strategically prioritized sectors” and (ii) by whom and in what manner the “relevant accounts” to which the revenues will be transferred and then be opened.

6. How is the Auction Schedule Determined?

The auction schedule will include the auction date, start and end times of the sessions where bids are submitted, the quantity of Allowances subject to the auction, and other details related to the auction.

The Market Operator will first take the opinion of the Presidency of Climate Change while preparing the auction schedule and will submit it to the EMRA for approval by the end of October at the latest for the following calendar year. After obtaining the approval of EMRA, the auction schedule will be announced to the public and Market Participants by the end of the last business day of November at the latest.

7. What are the Principles for Transactions in the Spot Carbon Market?

Spot carbon markets which are operated continuously, where Market Participants can execute buy and/or sell transactions in their accounts on the TRS. Therefore, unlike the primary carbon markets, a Market Participant can submit bids for sale in addition to purchase bids in the spot carbon markets.

In the Draft Regulation, the minimum bid size of purchase or sale bids that can be submitted in the spot carbon markets is 1 lot. In these markets, each purchase bid for 1 lot corresponds to 1000 Allowances, and this quantity of Allowances is equal to 500 tons of carbon dioxide and equivalent to greenhouse gas emissions.

8. Why Does a Market Participant Provide Security?

The Draft Regulation introduces the requirement of providing “security” to minimize collection risk. Accordingly, the Market Participants will provide assurance to achieve the following purposes:

• to ensure the continuity of cash flow between participants if they are unable to fulfill their obligations regarding the market or to fulfill their activities,

• to secure the other Market Participant, who is the creditor, in case the Market Participant fails to make its payments on time.

Last but not the least, participants with insufficient security cannot submit bids for the respective session.

III. CONCLUSION

As the financial implications of the CBAM, which currently envisions a transitional period until December 31, 2025, and will fully and comprehensively come into effect on the January 1, 2026, come closer; it is vital for Turkey that has taken this step to establish the ETS mechanism within the scope of the Green Deal Action Plan, to mitigate adverse impacts on the export-oriented Turkish economy.

The full text of the Draft Regulation can be accessed here.