I. Introduction
In the first article of our green transition series, the legal framework underlying Climate Law No. 7552 (“the Law”) was examined, with a focus on national policies and international obligations. In this article, the Draft Regulation on the Emissions Trading System (“ETS”), prepared in line with the legal framework established by the Law, is evaluated.
With the entry into force of the Law, Türkiye’s green transition process has begun to take concrete shape not only at the level of policy objectives but also through secondary legislation guiding implementation. The Draft ETS Regulation, presented to the public on 22 July 2025, envisions a transition to a market-based mechanism for managing national greenhouse gas emissions. It has been prepared as a regulatory tool that considers Türkiye’s foreign trade and competitive conditions, particularly in relation to the European Union's Carbon Border Adjustment Mechanism (CBAM). In this respect, the ETS demonstrates that climate policies are being addressed not solely within the framework of environmental obligations, but also as a regulatory field closely interconnected with industrial, energy, and foreign trade policies.
II. What is the Emissions Trading System?
The ETS, which marks a new phase in Türkiye’s climate policy, constitutes a regulatory framework that reframes greenhouse gas emissions not merely as an environmental obligation, but as a measurable, traceable, and economically valued element. In line with the legal framework established by the Law, Türkiye’s ETS model envisages a structure that enables undertakings to report their emissions in a transparent manner, to manage allowances within prescribed caps, and to treat carbon as a financial asset.
Within this framework, the ETS is founded upon an emission cap defined for a specified compliance period. Under the system, an overall emissions limit is established for the activities of undertakings falling within the scope, and emission allowances are to be allocated within that limit. By enabling these allocated allowances to be traded under market conditions, the system aims to incentivize emissions reductions and to provide economic support for low-carbon production choices. In this manner, emissions reduction is transformed from an obligation based solely on administrative sanctions into a mechanism that directly influences production, investment, and cost-related decisions.
III. ETS Operating Mechanism
The ETS is based on an integrated framework aimed at managing national greenhouse gas emissions in a systematic, measurable, and verifiable manner. Within the scope of the system, the establishment of the technical and administrative infrastructure for carbon management is envisaged through the monitoring, reporting, and verification of emissions arising from the activities of undertakings.
1. Alignment with the EU Carbon Border Adjustment Mechanism (CBAM)
The ETS not only supports Türkiye’s achievement of its climate objectives but also serves as a strategic alignment tool that can alleviate the cost pressure on exporting sectors resulting from the EU Emissions Trading System and the CBAM. In this context, the ETS is closely linked to emerging regulatory domains concerning the calculation and management of carbon emissions in international trade and, in particular, provides a framework for the monitoring and management of carbon-related costs for exporting industries. In this respect, the ETS functions as a regulatory tool facilitating the coordination between climate policies and the fields of industry, energy, and foreign trade.
2. The Allowance System, Emission Permits, and the Emission Cap Approach
Within the framework of the ETS, it is envisaged that periodic emission allowances will be allocated to facilities in accordance with a nationally determined emission cap. An emission allowance represents the maximum amount of greenhouse gases that a facility may release into the atmosphere within a specified period. By progressively reducing this cap over time, a gradual transition aligned with national emissions reduction targets is established. It is of particular importance that allowances be determined by taking into account criteria such as the activity level and emission intensity of facilities, thereby ensuring a fair and predictable allocation structure that reflects the sectoral and technical characteristics of each facility.
3. The Cap-and-Trade System
The core functioning of the emission trading system is based on the free transferability of emission allowances allocated to facilities. Facilities that are able to reduce their emissions may place surplus allowances on the market, while those requiring additional allowances may acquire them in order to comply with their obligations. This structure is intended to allow undertakings to determine their emission reduction strategies in line with their own cost structures and technical capacities.
4. Monitoring, Reporting, and Verification (MRV) Structure and Obligations
The technical infrastructure of the ETS is intended to be secured through a monitoring, reporting, and verification (MRV) system. Within this framework, facilities are required to prepare monitoring plans appropriate to their activities, to report their greenhouse gas emissions annually in accordance with the prescribed calculation methodologies, and to have these reports verified by independent bodies. Through instruments such as the monitoring plan, methodology plan, annual emissions report, and activity level report, the system aims to ensure that emissions data are collected in a consistent, comparable, and verifiable manner, thereby placing national emissions management on a technically robust and reliable foundation.
IV. Implementation Timeline and Sectoral Scope of the ETS
The ETS is designed around a phased transition model—consisting of a Pilot Phase and a Full Implementation Phase—aimed at enabling undertakings to adapt to emissions management processes in a predictable and gradual manner. This approach seeks to enhance the accuracy of national emissions data, strengthen the technical capacity of facilities, and accelerate compliance with obligations arising from the CBAM. The Draft ETS Regulation supports this transition process through the categorization of facilities based on their emissions levels.
Under the ETS, facilities are classified into Categories A, B, and C. Within this framework, only monitoring, reporting, and verification obligations will apply to low-emission Category A facilities, while the core elements of the ETS, such as emission permits, allowance delivery, and balancing, will be phased in for medium- and high-emission Category B and C facilities.
1. Pilot Phase (2026-2027)
The Pilot Phase constitutes a transitional stage during which the ETS is implemented on a limited basis, and its technical infrastructure is tested using actual operational data. During this phase, facilities operating in the designated sectors and classified under Categories B and C are brought within the scope of the ETS, while Category A facilities are subject solely to monitoring, reporting, and verification obligations.
The sectoral scope of the Pilot Phase is limited to carbon-intensive sectors that are directly affected by the CBAM, namely the iron and steel, aluminium, cement, fertilizer, electricity, and hydrogen sectors.
During this period, facilities are expected to obtain emission permits, subject their annual emissions to monitoring, reporting, and verification processes, utilize free allowances, and carry out balancing where required. By allocating allowances free of charge during the pilot period, it is intended to prepare facilities for the full implementation period commencing in 2028 and to contribute to the establishment of a national culture of emissions management.
2. Full Implementation Phase (2028-2035)
As of 2028, the scope of the ETS is expected to be expanded and all activities listed in Annex I of the ETS Regulation will be brought within the system. At this stage, the ETS will evolve from a mechanism limited to the CBAM into a national carbon pricing system covering a wide range of industrial and energy activities.
During the Full Implementation Phase, facility categorization continues to serve as the fundamental framework for determining obligations. While monitoring, reporting, and verification obligations remain in place for Category A facilities, it is anticipated that emission permits, allowance delivery, activity level reporting, and balancing obligations will be fully implemented for Category B and C facilities.
With the establishment of a national emissions cap, it is planned to limit allowances and require facilities to surrender allowances equivalent to their annual emissions; thus, the ETS is intended to function as a mechanism aligned with Türkiye’s 2030 and 2053 climate targets, based on a steady reduction.
V. Conclusion and Assessment
The ETS demonstrates that the green transition is no longer merely an environmental policy area but has evolved into a strategic mechanism that directly impacts economic, legal, and commercial structures. The phased structure, extending from the Pilot Phase to the Full Implementation Phase, aims to develop the technical compliance capacity of businesses and establish a national framework compatible with international carbon regulations, particularly the CBAM. In this respect, the ETS is a fundamental regulatory framework that makes carbon a measurable and manageable economic variable.
Limiting the Pilot Phase to Category B and C facilities operating solely in CBAM-covered sectors demonstrates that Türkiye has adopted a controlled and targeted alignment strategy in areas that are critical for foreign trade. The subsequent expansion of the system, as of 2028, to encompass all activities listed in Annex I of the ETS indicates that the ETS is set to become a permanent and central instrument within Türkiye’s climate and industrial policies.
In this context, carbon management is no longer merely an environmental responsibility for businesses; it has become an area of compliance that directly affects foreign trade, competitiveness, and investment decisions. The combined application of category-based obligations and the free allocation mechanism envision a balanced structure that encourages the transition to low-emission production models while taking energy-intensive sectors into account.
For companies, the ETS preparation process should not be limited to establishing a reporting infrastructure. It is crucial that businesses undertake a comprehensive corporate preparation process prior to the Pilot Phase to anticipate potential obligations that may arise in later stages. Companies are advised to focus particularly on the following areas:
- Ensuring that emission data are generated in an accurate, consistent, and traceable manner, and strengthening the corporate data and reporting infrastructure,
- Analysing the relationship between production processes and carbon intensity, and identifying areas of regulatory and financial risk,
- Assessing medium- and long-term allowance requirements under the ETS,
- Developing an integrated strategy that jointly addresses technological transition, energy efficiency, and cost management.
For companies operating in sectors covered by the CBAM, the ETS constitutes not merely a compliance obligation but also a strategic planning imperative. Companies that achieve early alignment will be better positioned to manage carbon costs more effectively, while also gaining enhanced access to green finance, sustainable investment opportunities, and advantages across their supply chains.
In conclusion, beyond serving as an instrument to support Türkiye’s climate objectives, the ETS will necessitate a comprehensive compliance process that reshapes companies’ foreign trade, investment, and production strategies. Accordingly, the early-stage analysis of the ETS implementation timeline, the scope of obligations, and sector-specific impacts is of critical importance, enabling companies—particularly as they move toward 2028—to develop a proactive and sustainable transition strategy rather than adopting a reactive approach.