The Picture after Doha
Another international climate change summit, this time in the Qatari city of Doha, has concluded as of 08 December 2012. Although the much anticipated Doha Summit did not conclude with a binding agreement reached to reduce global greenhouse gas emissions, the participating countries did agree to prolong the term of the Kyoto Protocol until 2020. Participants also committed to finalizing a post- Kyoto treaty through a conference to be held in Paris in 2015, with the new treaty to take effect in 2020.
Trading of carbon emissions and the creation of carbon exchange markets were probably the most innovative of the package of solutions introduced by the Kyoto Protocol to reduce greenhouse gas emissions. There are generally two carbon markets: compliance markets and voluntary markets. Turkey, being one of the countries that did not commit to a quantitative emission limitation under the Kyoto Protocol, can only provide access to voluntary markets to those investors interested in carbon trading. This is partly due to the fact that the Kyoto Protocol is now a very limited agreement, with the US remaining apart from it, and other countries, including Japan, Russia, and Canada, withdrawing. Only the European Union, several non-EU European states, Australia and three former Soviet republics signed on, covering countries responsible for an estimated 15 per cent of global emissions. This, of course, has its financial consequences. With lesser emission-producing countries participating in compliance markets, it is not as easy for the global emissions trading market to reach a high transaction volume and the carbon credits to be regarded as any other valuable financial commodity.
No slow down on internal legislation
Despite this picture of international law, Turkey's law-making efforts to provide the legal basis for carbon-trading does not appear to have slowed down. In a nutshell, the main legal text governing carbon emissions under Turkish law is Environment Law numbered 28721. Article 3(h) of the Environment Law states "utilization of market-based mechanisms such as carbon trading" as one of its main objectives. Until this year, this was the only reference available under Turkish legislation. But the picture is set to change rapidly.
Opportunities enabled by the new Capital Markets Law
One important piece of legislation that furthered the commodification of carbon allowances has been the newly enacted Capital Markets Law. Under the capital markets law, the main focus of the law and the CMB had been the 'capital markets instruments' with a very limited scope in definition. Under the new Capital Market Law, however, not only the capital market instruments, but also precious metals, precious stones, and "other contracts, papers and values that are approved by the CMB" will be traded under exchanges established under Borsa Istanbul A.Ş. (Istanbul Exchange Corporation). This provision is broad enough to conclude that it gives the CMB, without recourse to any other law enacted by Parliament, the power to create and issue rules for a Turkish emission allowance exchange.2
Carbon emissions as 'energy products'?
Paragraph (2)(b) of Article 67 of the Capital Markets Law states the following: "Save for the derivative markets [..] rules applicable to (i) licensing for transactions in exchange established for trading of energy products, as well as (ii) obligations of the licensees, will be regulated [by the CMB] in consultation with the EMRA and Ministry of Energy."
No clear definition is provided in the Capital Markets Law, or any other piece of legislation that clarifies the question as to whether or not emission allowances are considered 'energy products.' Nevertheless, it would not be too far-fetched to think that it is the intention of the legislators to categorize carbon emissions as such, given that the new Electricity Market Law explicitly refers to emissions trading and the EMRA is authorized to set the rules for emission trading.
Opportunities enabled by the new Electricity Market Law
With the enactment of the new Electricity Market Law as of 14 March 2013, legislators have signaled that they aim to enable emission trading under the supervision of the same institutions that are in charge of supervising electricity market activities.
Article 11 of the Electricity Market Law defines the authorities and obligations of Energy Markets Management Corporation ("EPIAS"). EPIAS, inter alia, will mainly be in charge of the management of energy trading markets. EPIAS does not currently exist, but will be established within six months following the enactment of the Draft Law.
Paragraph (8) of Article 11 reads as follows: "Matters relating to (i) energy market activities that EPIAS is to conduct outside the scope of its market management license, and (ii) emission trading activities [of EPIAS], shall be regulated by the EMRA with the consultation of the Ministry of Energy."
This practically means that EPIAS will be in charge of managing the day-to-day management of the emission allowance exchange. In this respect, the EMRA will be authorized to issue regulations and communiqués, and may eventually establish legal matters such as (i) what will be the rules of transfer, (ii) at which point of time the allowance unit will be deemed to be transferred, (iii) at what registry the ownership, transfer and pledge of emission allowances will be registered, (iv) what will be the binding effect of the registry, etc.
So, who will be in charge?
Although it is announced that EPIAS will be primarily in charge of the emission exchange, it is not fully clear whether or not it will operate within or outside the authority of the CMB. Given the above, one may reasonably conclude -based on the assumption that the CMB recognizes emission allowances as 'energy products'-, that the CMB, the EMRA and the Ministry of Energy will jointly prepare secondary legislation applicable to emission trading. EPIAS, directly or through a subsidiary, will act as a sub-exchange operating under Borsa Istanbul A.Ş., and will be in charge of management of the emission trading exchange.
Having reviewed the announcements and press releases of various state institutions and their representatives concerning the Electricity Market Law, we find the level of uncertainty noticeable, as different state institutions have announced their willingness to assume the management role for the energy exchange in the last one year, often contradicting the statements of the other.
Aside from the above considerations, one would hope that investors will have more to see on the legislation front so that they can start trading their carbon credits on legally recognized exchanges - a move that definitely will help boost the basis of enforcement of the Kyoto Protocol and provide financial markets with a high-ranked commodity protected by well-defined regulations.
1 Published in the Official Gazette dated 11.08.1983 and numbered 18132.
2 It is noteworthy, however, that as of the date of this article, no rules or announcements have been made by the CMB to classify emission allowances as such.
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