Turkey: The Carbon Trade And Turkish Implementation

Last Updated: 12 March 2018
Article by Yigit Alemdaroglu

The carbon dioxide, greenhouse gases and other gases (nitrous oxide and perfluorocarbons etc.) emitted through industrial scale production, the energy sector, the burning of fossil fuel and other activities are contributing in global warming and have negative effects on the life itself on Earth. Public awareness on climate change has considerably increased throughout the past couple of decades, and in parallel the demand to change our way of living and maintain a sustainable existence in harmony to nature. So, countries and international organizations are seeking implementations on a world-wide scale to fulfil this goal.

When countries or corporations (emitters) produce carbon dioxide and other greenhouse gases, they do not pay for the full cost implications. They pay direct costs, such as fuel and maybe other costs, but there are other costs that are not necessarily in the price of the good or service these emitters provide. These are called external costs or externalities. They consist of health costs, such as heart, lung and other diseases, and environmental costs, such as pollution, degradation and global warming, costs that are not carried by the emitter. Externalities on this issue are negative, they affect the welfare of others. So, the natural reaction to this issue is to hold the emitters accountable for these costs, making them take account of these costs in their actions. These externalities can be estimated and presented in a common unit, money.

In comes the 1997 Kyoto Protocol, an international agreement that aims to reduce Carbon Dioxide emissions and greenhouse gases to mitigate future climate change, in which the Carbon Trade originated from. Basically, each country has a cap on the amount of carbon they are allowed to release. This trading is essentially where a country with higher emissions purchases the right to release more from countries that have excess release amounts in their cap. This "Cap and Trade" regulatory system is also used by individual companies. The ones who pollute less, sell their unused amounts to ones who wish/need to pollute more. This provides and ensures that the aggregate amount does not exceed the baseline level of emission. Governments set a total limit on annual emissions that shrinks each year, which is the "cap". After this cap is determined, allowances, permits, allocations are handed out or auctioned to individual companies, who in return are taxed if they produce a higher level of total emissions than their permits allow, but they can also sell off any unused allowance to other producers. Thus, the "trade". Under the Protocol, Emissions Reduction Purchase Agreements "ERPAs" are used to facilitate these transactions, which the outlines are drawn by the International Emissions Trading Association.

Since the adoption of the Kyoto Protocol and the later Paris Agreement of 2015, the need for world-wide governmental implementation and creating a market in something with no intrinsic value such as carbon dioxide has proven difficult. The right amount of cap may be unclear and imposing a wrong cap may have certain disadvantages in over or under production of pollution. That is also why, the alternative of the "Cap and Trade", the "Carbon Dioxide Tax" has also proven somewhat ineffective and strictly opposed by private equity. But it is still a way for governments to exert some control over emissions without resorting to the levers of a command economy, by which the state could control the means of production and manually halt carbon emissions.

Even though this idea was pushed by Americans, the failure to ratify the Kyoto Protocol and Barack Obama's intention to create an American Emissions Trading System was crushed by the GOP, the support for creating a global system for carbon trading was diminished, under a deflated price of carbon from a glut of allowances, and the lack of international coalitions, many deemed setting up the scheme had been a mistake. But with China launching a national emissions trading system and several countries in the Americas eyeing to link their trading systems, the long-forgotten emission trading system of the European Union is set for revival, with forty-two national and twenty-five sub-national jurisdictions setting a price on carbon emissions already in effect world-wide. Although President Trump intends to pull out the US from the Paris Agreement by 2020 and is very uncooperative regarding such matters, these other schemes developing across the globe with an irony in which the development and ripening of an American idea of global trading is continued whilst bypassing the "core of capitalism", provides a prospective future for a global pricing scheme.

Turkey plays a role in the global voluntary carbon market. The voluntary carbon market relates to transactions in carbon credits that fall outside the compliance schemes created under the Kyoto Protocol. Demand in such markets is driven largely by private equity that pursue voluntary emissions targets and intend to demonstrate climate leadership. As Turkey was granted a special designation under the Kyoto Protocol as an "advanced developing country", it was excluded from greenhouse gases emissions obligations. With the signing of the Paris Agreement in April 2016, Turkey starts to commit to certain compliance schemes regulated in the "Intended Nationally Determined Contribution". As the EU Emissions Trade System is in Phase III (in which until 2021; the allocation of emission allowances takes place through auctions, whereas secondary market transactions are performed through organized exchanges) Turkey tries to take steps closer to EU Legislation, in preparing for Phase IV (in which they will further tighten the overall emissions cap by 2.2% each year, compared to a reduction of 1.74% per year in the current phase.)

Primarily since 2011, in Turkish legislation, some moves where made to implement government regulations in such matters parallel to the global trend then, but they have not born fruit to this day, and Turkey still does not possess a national carbon exchange. Nothing has changed during the last years, but with the adoption of the Paris Agreement private equity and investors could see a Carbon Trade Model in some form in Turkey in the next few years, where they can take part in this commodity exchange as it is aimed globally also. Facing such an implementation of a capitalist idea to environmental concerns, one could, probably, compromise the detour in hopes of gaining a brighter and better future.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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