Why the Draft Regulation Is a Significant Milestone
Turkey has been expressing its intention to establish a national emissions trading system on international platforms for years. Climate Law No. 7552 gave this intention a legal framework. However, the law left the ETS's design parameters — which sectors would be covered, how allowances would be allocated, how the MRV system would work — to secondary legislation. The publication of the draft regulation means these parameters are being presented in concrete form for the first time.
Technical work conducted under the World Bank's PMR/PMI (Partnership for Market Readiness/Implementation) program played a decisive role in shaping the draft (World Bank, 2024). This collaboration between international consultants and Turkish regulators has ensured the draft reflects lessons learned from the EU ETS experience.
For businesses, the draft regulation begins to answer three critical questions: what will the scope be, how will costs form, and when will the CBAM connection become effective?
Scope: Which Sectors, Which Facilities?
The draft regulation envisages covering Turkey's energy-intensive sectors through a phased approach. Sectors expected to be covered in the first phase:
| Sector | Coverage Threshold | Estimated Facilities | Share of Total Emissions |
|---|---|---|---|
| Energy generation | Thermal plants above 20 MWth | ~200-250 | ~35-40% |
| Cement | All clinker production facilities | ~50-60 | ~12-15% |
| Iron and steel | Integrated facilities + large EAF | ~40-50 | ~10-12% |
| Glass and ceramics | Large-capacity furnaces | ~20-30 | ~3-5% |
| Refineries | All petroleum refineries | ~5-8 | ~5-8% |
| Paper and pulp | Large-scale facilities | ~15-20 | ~2-3% |
Together, these sectors cover approximately 65-75 percent of Turkey's total greenhouse gas emissions. According to ICAP's (International Carbon Action Partnership) ETS Handbook, starting with energy and heavy industry and expanding gradually is the most common ETS design approach worldwide — the EU ETS, South Korea's K-ETS, and China's national ETS all followed this model (ICAP, 2024).
The point to watch is the capacity thresholds. Facilities below the threshold will initially fall outside the scope. However, thresholds are expected to be lowered over time (expanding scope), meaning mid-size facilities will enter the scope in the future.
Allocation Mechanism: Free or Auctioned?
The most debated aspect of the draft regulation is the allowance allocation mechanism. Two main approaches are at play:
Free Allocation (Grandfathering / Benchmarking)
Drawing from the EU ETS's early experience, the draft envisions free allocation for sectors with high carbon leakage risk. Two sub-methods are being discussed:
Historical emissions-based (Grandfathering): Allowances are given to facilities based on past emissions. This method is easy to implement but carries the risk of rewarding inefficient facilities — this problem was experienced in the EU ETS's first phase.
Benchmark-based: Allowances are given based on sectoral best-performance values. Fairer and promotes efficiency, but requires reliable benchmark data. The draft shows an orientation toward the benchmarking approach — this aligns with the EU ETS Phase 3 and 4 approach (European Commission, 2021).
Auctioning
A portion of allowances is planned to be sold through auctions. Auction revenue is envisaged to be channeled to a climate fund for financing decarbonization investments. However, the auction share is expected to be kept low during the pilot period — the EU ETS also distributed nearly all allowances for free in its early phases, gradually increasing the auction share.
International Comparison: Where Does TR-ETS Stand?
Placing TR-ETS's design choices in a global context helps understand the system better:
| Design Parameter | TR-ETS (Draft) | EU ETS (Phase 4) | K-ETS (South Korea) | China National ETS |
|---|---|---|---|---|
| Scope | Energy + industry | Energy + industry + aviation + maritime | Energy + industry + buildings + transport | Energy generation only |
| Total emissions share | ~65-75% | ~40% (EU total) | ~70% (national) | ~45% (national) |
| Allocation approach | Benchmarking + auction (predominantly free) | Benchmarking + auction (57% auction) | Benchmarking (97% free) | Benchmarking (100% free) |
| Pilot period | Yes | Phase 1 (2005-2007) existed | Yes (2012-2014) | Regional pilots (2013-2020) |
| MSR-like mechanism | To be evaluated | Yes (since 2019) | No | No |
The key observation from this table: TR-ETS references the EU ETS's mature design while also adopting the more gradual launch approach of South Korea and China. The formula of pilot period + predominantly free allocation + gradual tightening is the common pattern of developing-country ETSs.
Sector-by-Sector Impact Assessment
Energy Generation: The Biggest Impact Is Here
Thermal power plants will be the sector with the highest emissions share under TR-ETS. The emission intensity of coal-fired plants is approximately double that of natural gas — under the ETS, coal plants will face disproportionately high costs.
This directly links to Turkey's energy transition policy. The ETS will function as a mechanism that economically incentivizes the transition to natural gas and renewable energy.
Cement: Process Emissions Create a Benchmarking Challenge
In the cement sector, approximately two-thirds of emissions originate from the chemical process (clinker calcification). Since these emissions cannot be reduced through energy efficiency, the cement sector is structurally disadvantaged under the ETS. How the free allocation mechanism will be applied to this sector — particularly whether EU ETS benchmark values will be referenced — is a critical design decision for the sector.
Iron and Steel: EAF vs BOF Differentiation
The EAF-dominated structure of Turkey's steel sector creates an advantage under the ETS. EAF-based production has emission intensity far below BOF. However, how EAF's indirect emissions (electricity consumption) will be treated in the ETS is important — the draft regulation's Scope 1 focus strengthens the advantage of EAF facilities.
Refineries: Complex Emission Profile
Petroleum refineries have a complex emission profile due to multiple products and processes. Whether the allocation calculation will be product-based or process-based will be determinative for refineries.
CBAM Connection: The Strategic Dimension for Exporters
Perhaps the most important dimension of TR-ETS is its direct connection to the EU's CBAM. Under Article 9 of the CBAM Regulation, the carbon price paid in the country of origin can be deducted from CBAM certificate costs (Regulation 2023/956, Article 9).
This mechanism transforms TR-ETS from merely an environmental regulation into a strategic tool that protects export competitiveness. With a concrete example: if the TR-ETS price is EUR 40/tCO2 and the EU ETS price is EUR 72/tCO2, the Turkish exporter's CBAM cost becomes 72 - 40 = EUR 32/tCO2. Without TR-ETS, the same exporter would pay EUR 72.
However, certain conditions must be met for the deduction mechanism to become functional:
- TR-ETS must be recognized by the European Commission as an "effective carbon pricing mechanism"
- Allowance prices must be transparent and verifiable
- How the free allocation share will be treated in the deduction calculation must be clarified
The details of these conditions will be finalized through Commission implementing regulations. However, the fundamental principle is clear: the carbon price paid in Turkey will be deducted to prevent double taxation on EU exports.
Open Questions and Uncertainties
While the draft regulation answers many fundamental questions, some critical details have not yet been clarified:
Cap and reduction rate: Total allowance volume and the annual reduction rate have not been finalized. In the EU ETS, the annual reduction rate is 4.3 percent (from 2024) — whether TR-ETS will adopt a similar rate is unclear.
Market mechanisms: Will a secondary market be established? Will banking and borrowing be permitted? These mechanisms directly affect price formation and volatility.
International linking: The possibility of TR-ETS linking with the EU ETS or other systems is being discussed. Linking strengthens price convergence and the CBAM deduction mechanism, but is unlikely in the short term due to sovereignty concerns.
Penalties: Sanctions for non-compliance have not yet been detailed. The EU ETS applies a EUR 100 per tonne penalty plus deduction of missing allowances from the following year.
Implications for Businesses
The draft regulation makes companies' preparation processes concrete. The question "will the ETS come or not" is now behind us — the question is "how prepared are we for the ETS?"
Preparation prioritization:
- MRV infrastructure: The foundation of the pilot period. Monitoring plans, data collection processes, and verification capacity.
- Benchmarking analysis: Comparing your facility against EU ETS benchmark values — determines your position under the allocation mechanism.
- Financial impact modeling: Operational cost impact under different carbon price scenarios.
- CBAM deduction strategy: Documentation and reporting capacity to ensure TR-ETS costs are deducted from CBAM costs.
- Stakeholder consultation participation: Active participation in regulatory processes to influence the regulation's final form.
Action Item: The draft regulation shows that TR-ETS is no longer a "future plan" but an "implementation timeline." The best time to build MRV infrastructure is before the pilot period begins — that is, now. This investment forms the foundation of both ETS compliance and the CBAM cost advantage.
See how enterprise teams prepare for Turkey's emissions trading system.