I. Introduction
The international legal landscape is undergoing a paradigm shift toward enhanced recognition of both State responsibility and the regulatory oversight of private actors in addressing climate change. The International Court of Justice, in its Obligations of States in respect of Climate Change Advisory Opinion, established that the fulfilment of international obligations requires States to exercise due diligence through domestic mitigation measures,[1] which extends beyond public authorities to private actors within a State’s jurisdiction.[2] The International Tribunal for the Law of the Sea, in its Climate Change Advisory Opinion, also observed that the “due diligence is particularly relevant in a situation in which the activities in question are mostly carried out by private persons or entities.”[3] Against this backdrop, States have increasingly turned to market-based instruments, primarily emissions trading systems (ETS).
As a market-based policy tool to reduce greenhouse gas emissions, ETS are increasingly serving as a key policy mechanism for governments committed to addressing climate change. By 2026, 41 ETS operate globally, covering 26% of worldwide greenhouse gas (GHG) emissions[4] across jurisdictions that account for 63% of global GDP, more than half of the global population, and 14 of the G20 countries.[5] 16 additional governments are assessing or designing ETS frameworks, including Türkiye, which is preparing to launch its pilot system this year.[6]
As ETS are expanding rapidly, significant variation has emerged in system design, particularly in terms of how caps are defined, how free allowances are distributed and what compliance options are available, including the use of carbon credits.[7]
This Article examines different ETS design models. Building on this comparative analysis, it situates and evaluates the emerging emissions trading system in Türkiye within the broader landscape of global ETS practices.
II. Emissions Trading Systems
A. Origins and Early Practice
In 1968, economist John Dales conceptualised the cap-and-trade system as a government-created market for pollution rights: the state caps on total allowable emissions to ensure scarcity in the market, and issues a tradable pollution credits that emitters must hold against their verifiable emissions.[8] The primary limitation of Dales’ system at the time was that an emissions trading market could not function without enforceable scarcity.[9] To maintain this scarcity, regulators would have to possess continuous, real-time data to cross-reference each entity’s actual emissions against their permitted allowances.[10]
The US adopted the world’s first emissions trading scheme in 1990.[11] The 1990 US Clean Air Act Amendments shifted away from the United States Environmental Protection Agency’s earlier pollutant-by-pollutant, technology-prescriptive approach toward cost-effective, market-based regulation.[12] This model was originally developed not for carbon dioxide but for sulphur dioxide (SO₂) to address acid rain, where it proved highly effective.[13] The significant reductions achieved in SO₂ emissions and related environmental harms in the United States[14] established Title IV of the 1990 Amendments as a blueprint for contemporary carbon markets. The EU’s adoption of a cap-and-trade system was, at least in part, influenced by this success.[15]
B. Kyoto Protocol and Modern ETS
ETS emerged first as a domestic/market-based policy before being recognised in international law. The 1997 Kyoto Protocol (the Protocol) to the United Nations Framework Convention on Climate Change (UNFCCC) was significant in its expansion to the inter-state plane, as well as its complexification.
The Protocol operationalised the UNFCCC by setting individual GHG reduction targets for industrialised States and economies in transition.[16] For example, in its 1st Commitment Period (2008-2012), participating States committed to reduction from 1990 levels by an average of 5%.[17] The main environmental principle behind the Protocol is the common but differentiated responsibilities and respective capabilities,[18] it only bound developed countries: Annex I parties carried legally binding reduction targets, while Non-Annex I parties, developing states, were encouraged to limit emissions but not bound by specific targets.
The Kyoto framework has catalysed the proliferation of domestic ETS from the EU ETS alone in 2005[19] to 41 active systems today.[20] This rapid expansion, however, has not been uniform, the main design split being between absolute-cap model and intensity-based cap model.
The absolute-cap model sets a fixed, predetermined limit on total emissions within a given period,[21] ensuring environmental integrity by capping overall pollution through a finite number of allowances,[22] but its inflexibility can lead to higher compliance costs for industry during periods of economic growth when demand for allowances rises. [23]
The intensity-based model regulates emissions relative to output by setting benchmarks per unit of production rather than a fixed overall cap,[24] allowing firms to generate or purchase allowances based on performance, which provides flexibility[25] but does not guarantee a reduction in total emissions as output grows.[26]
1. Jurisdictions Implementing the Absolute-Cap Model
While approximately half of the 41 emissions trading systems (ETS) currently in operation worldwide are based on an absolute cap, intensity-based systems account for nearly 75% of the total emissions covered under ETS globally, largely due to the extensive scope of China’s national ETS.[27]
Among jurisdictions adopting the absolute-cap approach, the EU ETS stands out as the oldest and the largest in terms of trading volume and market value.[28] Established under Directive 2003/87/EC, the system is currently in Phase IV (2021-2030), with annual linear reduction factors progressively tightening the cap in alignment with the EU’s 2030 climate targets.[29]
Other notable jurisdictions employing an absolute-cap system include South Korea, which launched its ETS in 2015, and the United Kingdom, which introduced its own scheme in 2021 following Brexit.[30]
2. Jurisdictions Implementing the Intensity-Based Model
As of July 2025, Türkiye has also moved toward an intensity-based approach, adopting its first Climate Law, which establishes the legal foundation for an emissions trading system and creates a Carbon Market Board chaired by the Minister of Environment, Urbanisation and Climate Change, together with other relevant regulators.[31] Türkiye’s COP31 partner Australia on the other hand, has implemented a system that is neither a pure absolute-cap nor pure intensity-based scheme. Under its Safeguard Mechanism, facilities emitting more than 100,000 tons of CO₂-equivalent annually are subject to facility-specific emissions baselines: entities performing below their baseline generate tradable Australian Carbon Credit Units, while those exceeding it must acquire and surrender credits to comply.[32]
Another key point of reference is the Chinese ETS. Although the EU ETS remains the largest in terms of trading volume and market value, China’s system is the largest globally in terms of emissions coverage.[33] It operates on an intensity-based benchmark model, under which allowances are allocated based on output and sector-specific benchmarks.[34] Notably, in August 2025, Chinese authorities announced a roadmap to transition the national ETS from an intensity-based system toward an absolute cap by 2027.[35]
III. Turkish Climate Law Framework
A. Monitoring, Reporting and Verification Regulation
Since 2015, Türkiye has operated a Monitoring, Reporting, Verification (MRV) system covering more than 800 facilities.[36]
This framework is currently governed by the 2014 Regulation on Monitoring of Greenhouse Gas Emissions (MRV Regulation). The Turkish Emissions Trading System Draft Regulation, once enacted, is expected to repeal the MRV Regulation and consolidate the monitoring, reporting and verification obligations within its own framework, leaving the substantive obligations largely intact while integrating them into the broader ETS architecture.[37]
This system has allowed for an effective recording and verification of the GHG emissions by industrial facilities in energy and industry sectors, including combustion installations and sectors such as oil refining, coke production, iron and steel, cement, glass, ceramics, among others.[38] Collectively, in-scope installations as listed under Annex-1 of the MRV Regulation account for approximately half of Türkiye’s total GHG emissions.[39] The MRV framework constitutes a critical prerequisite for any functional ETS. The environmental integrity of an emissions trading system rests on the enforceability of its cap: unless actual emissions are continuously and accurately measured, reported, and independently verified, it is impossible to determine whether covered entities are operating within their permitted allowances or to maintain the artificial scarcity upon which carbon price formation depends. Without robust MRV, allowance scarcity becomes unenforceable, the price signal collapses, and the emissions reduction objective of the system is undermined. Effectively, the absence of real-time, verifiable emissions data rendered Dales’ original cap-and-trade model largely theoretical at the time of its conception.
The MRV system consists of three main obligations, according to which, operators must adopt a monitoring plan and send it to the Ministry of Environment, Urbanisation and Climate Change for approval six months before the start of monitoring,[40] monitor emissions in accordance with that plan, have the annual emissions reports verified by an accredited third-party verifier,[41] and finally, submit annual emission reports before 30 April of the year following the reporting period.[42]
The Turkish Climate Law No. 7552 (Climate Law) provides for administrative fines for the violation of certain reporting-related obligations. Its Article 14 provides that operators who fail to submit a verified greenhouse gas emissions report within the prescribed period are subject to an administrative fine ranging from TRY 500,000 to TRY 5,000,000, with this amount doubled for installations operating within the scope of the ETS.[43] Additionally, operators that fail to comply with information, document, or data submission obligations, or that make misleading declarations, are subject to an administrative fine of TRY 170,000.[44]
B. Turkish Emissions Trading System
Climate Law, enacted in July 2025, establishes a legal basis for a national emissions trading system. Although the Turkish Emissions Trading System Regulation (Draft Regulation) has not yet been adopted, its draft gives important indications as to how the system is designed. While noting that the Draft Regulation is not binding, this section of the study will present certain assessments based on the Draft Regulation in order to provide a better understanding of intensity-based models. The Draft Regulation introduces a facility-level categorisation based on annual emission thresholds. Installations emitting below 50,000 tonnes of CO₂ equivalent per year fall within Category A and are excluded from the ETS scope.[45] Categories B and C cover installations emitting between 50,000 and 500,000 tonnes, and above 500,000 tonnes respectively.[46] Certain facilities are additionally exempt regardless of emission levels, including public service installations such as universities and hospitals, as well as facilities engaged in research and development activities.[47]
1. Greenhouse Gas Emission Permit
Covered installations are required to obtain a GHG emission permit prior to commencing operations.[48] Permits are valid for five years, with renewal applications due at least six months before expiry.[49] Where an operator conducts activities across multiple facilities, a separate permit is required for each.[50] Covered installations may also face permit revocation in cases of serious non-compliance, including the intentional submission of false information or the failure to meet surrender obligations.[51]
The implementation of the ETS is structured based on application periods. The Pilot Period runs for the years 2026 and 2027.[52] Following that period, it becomes fully operational, where the first binding compliance periods run in two sub-periods between 2028-2030 and 2031-2035.[53]
2. System Design in Its Binding Compliance Period
The Turkish ETS is designed as a cap-and-trade system with an intensity-based cap, meaning that the cap is determined by reference to emissions per unit of production.[54] In this system, the Turkish Carbon Markets Board (the Board), with the proposal of the Directorate of Climate Change, determines a certain number of free allowances to be allocated for each in-scope installation.[55] An allowance refers to transferable entitlement issued in the form of units, granting the right to emit one metric ton of carbon dioxide equivalent of GHG for a specified period.[56]
a. Allocation of Free Allowances
As noted above, free allocations are provided to all in-scope installations at the beginning of the implementation period. In determining how many free allowances would be allocated, the system applies a uniform formula across all covered installations: free allowances are calculated by multiplying (i) the benchmark value, (ii) the sectoral activity factor, and (iii) the activity level of each sub-installation.[57]
The activity level of the installation reflects the actual production output of each sub-installation during the relevant compliance year,[58] as reported and verified through an Activity Level Report.[59] The sectoral activity factor is determined by the Board.[60] It adjusts the allocation to account for sector-specific considerations, most notably, carbon leakage risk.[61] Sectors deemed vulnerable to carbon leakage, where high carbon costs could incentivise the relocation of production to jurisdictions with less stringent climate regulation, receive a higher factor, effectively increasing their free allowance entitlement to preserve competitiveness. The benchmark value represents the emissions intensity of the facilities in that particular given sector,[62] determined based on the reports of industry installations.
Crucially, the allowance calculation is performed not at the facility level as a whole but disaggregated into sub-installations defined by reference to a specific product, measurable heat flow, fuel use, or production process.[63] This ensures that the benchmark applied to each unit of output corresponds to the emissions profile of that specific activity, rather than averaging across operationally distinct processes within the same facility.
As free allowances are calculated using this formula, a sub-installation may not receive allowances equal to its actual emissions. The main reason is the benchmark value. Although the benchmark is based on sectoral emissions data, it does not simply reflect each installation’s own emissions. Instead, it sets a reference emissions level for a particular production. As a result, installations that emit less than the benchmark may receive more allowances than they need, while installations that emit more than the benchmark may need to buy additional allowances to comply.
b. Additional Allowances
As to the question of how a sub-installation can buy additional allowances, there are several avenues to do so. The first is the primary market, where allowances are sold by auction under a schedule announced by the Directorate of Climate Change within fifteen working days of the publication of the National Allocation Plan.[64] The market operator under this system is defined to be the EPİAŞ.[65] The second is the secondary market, where installations holding surplus allowances may trade them with other market participants through continuous trading.[66] These two channels constitute the ordinary compliance pathways under the system.
The Draft Regulation additionally provides for an additional reserve mechanism as a last-resort option for installations that remain in deficit after exhausting ordinary market channels.[67] Allowances drawn from the additional reserve are priced at a fifty percent premium over the higher of the three-month weighted average price on the primary and secondary markets as of the last working day of November,[68] making this avenue deliberately costly so as to preserve its exceptional character.
Reserve usage is capped at ten percent of the ETS cap announced in the National Allocation Plan and requires approval from the Carbon Markets Board.[69]
Finally, the Draft Regulation permits the use of carbon credits generated from mitigation projects carried out within Türkiye as a form of offsetting, subject to a ceiling of ten percent of each installation’s total surrender obligation.[70] This flexibility mechanism is unavailable during the pilot period and becomes operative only in the binding compliance period.[71]
c. National Allocation and Intensity-Based Cap
The overall volume of allowances available under the Turkish ETS is determined through the National Allocation Plan (The Plan), which is published in the Official Gazette within sixty days of the final submission deadline for verified greenhouse gas emissions reports for the relevant compliance year.[72] The Plan sets out the ETS cap, the volume of free allowances to be distributed, the quantity to be auctioned on the primary market, and, where applicable, the additional reserve amount.
The aggregate cap emerges as the sum of individual sub-installation allocations, each calculated by reference to a benchmark per unit of output multiplied by actual production levels. As a result, the total number of allowances in circulation is not fixed in advance but varies with the overall output of covered installations: if aggregate production increases, the cap rises accordingly, and if it contracts, the cap falls. This design choice is precisely what places the Turkish ETS within the intensity-based model rather than the absolute-cap model.
IV. Conclusion
Emissions trading systems have emerged as a central instrument in the regulatory response to climate change, yet their design varies significantly across jurisdictions. The core distinction between absolute-cap and intensity-based models carries material consequences: while the former guarantees a reduction in aggregate emissions, the latter incentivises efficiency gains without placing a ceiling on total output.
The Turkish ETS ties the aggregate cap to emissions per unit of production rather than a fixed allowance ceiling, preserving flexibility for industrial growth. This reflects a deliberate policy choice at an early stage of carbon market development, prioritising institutional capacity-building and a gradual compliance trajectory over immediate absolute reductions.
Since Turkey is not an Annex I country under the Kyoto Protocol, it is not bound by specific country-level emission reduction obligations. However, it remains uncertain whether the intensity-based cap-and-trade model will be sufficient in the long term. With the increase in external financial obligations such as the Carbon Border Adjustment Mechanisms introduced by the European Union and the United Kingdom,[73] the adequacy of an intensity-based cap as a carbon reduction tool will likely come under increasing scrutiny. How Turkey’s ETS evolves in response to these pressures, including whether it will transition to an absolute cap model, as China has done, will serve as a key indicator of Turkey’s broader climate goals.
—–
[1] Obligations of States in respect of Climate Change, the International Court of Justice, Advisory Opinion dated 23 July 2025, para. 252.
[2] Id.
[3] Responsibilities and Obligations of States with respect to Climate Change in the Context of the United Nations Convention on the Law of the Sea, International Tribunal for the Law of the Sea, Advisory Opinion dated 21 May 2024, p. 90, para. 236.
[4] International Carbon Action Partnership, “Emissions Trading Worldwide: ICAP Status Report 2026”, https://icapcarbonaction.com/en/publications/emissions-trading-worldwide-icap-status-report-2026, (“ICAP Status Report”) accessed 16 June 2026, p. 9.
[5] Id.
[6] Turkish Directorate of Climate Change, “Draft Regulation on the Turkish Emissions Trading System has been published”, 22 July 2025, https://iklim.gov.tr/turkiye-emisyon-ticaret-sistemi-yonetmeligi-taslagi-yayimlandi-haber-4519, accessed 14 June 2026.
[7] OECD, “Effective Carbon Rates 2025, Recent Trends in Taxes on Energy Use and Carbon Pricing”, 13 November 2025, https://www.oecd.org/en/publications/effective-carbon-rates-2025_a5a5d71f-en/full-report/emissions-trading-systems-a-variety-of-designs_b98e7b5c.html, accessed 14 June 2026.
[8] Daniel H. Cole, “Origins of Emissions Trading in Theory and Early Practice,” in Research Handbook on Emissions Trading, Stefan E. Weishaar (ed.), Edward Elgar, 2016, pp. 10-11.
[9] Id., pp. 11-12.
[10] Id.
[11] Siikamäki et al., “The U.S. Environmental Protection Agency’s Acid Rain Program”, Resources for the Future, November 2012, https://media.rff.org/documents/Issue_Brief_EPAs_Acid_Rain_Program.pdf, accessed 26 June 2026.
[12] Natural Resources Defense Council, “The Clean Air Act 101,” 23 February 2026, https://www.nrdc.org/stories/clean-air-act-101, accessed 12 June 2026.
[13] U.S. Environmental Protection Agency, “THE CLEAN AIR ACT – Highlights of the 1990 Amendments,” https://www.epa.gov/sites/default/files/2015-11/documents/the_clean_air_act_-_highlights_of_the_1990_amendments.pdf, accessed 16 June 2026.
[14] Gabe Chan et al., “The SO2 Allowance Trading System and the Clean Air Act Amendments of 1990: Reflections on Twenty Years of Policy Innovation”, Harvard Kennedy School Belfer Center for Science and International Affairs, January 2012, https://www.belfercenter.org/publication/so2-allowance-trading-system-and-clean-air-act-amendments-1990-reflections-twenty-years, accessed 26 June 2026, p. 1.
[15] Id.
[16] United Nations Climate Change, “Process and Meetings, Kyoto Protocol”, https://unfccc.int/process-and-meetings/the-kyoto-protocol, accessed 16 June 2026.
[17] European Commission, “International action on climate change, The Kyoto Protocol”, https://climate.ec.europa.eu/eu-action/international-action-climate-change/kyoto-protocol_en, accessed 16 June 2026.
[18] As codified by the Rio Declaration Principle 7, common but differentiated responsibilities and respective capabilities principle provides that while all States share responsibility for environmental protection, their international obligations may differ in scope based on how much they have contributed to environmental damage. Developed countries, in particular, recognise their greater responsibility because of the higher impact of their economies and their greater access to financial and technological resources.
[19] European Commission, “Climate Action, Carbon Markets, About the EU ETS”, https://climate.ec.europa.eu/eu-action/carbon-markets/about-eu-ets_en, accessed 16 June 2026.
[20] ICAP Status Report, p. 23.
[21] International Carbon Action Partnership, “Cap Setting” (“Cap Setting”), https://icapcarbonaction.com/en/cap-setting, accessed 16 June 2026, p. 9.
[22] Institute for Energy Economics and Financial Analysis, “China’s Emissions Trading System (ETS) Reforms: On Track, But Needs Robust Enforcement,” 3 November 2025, https://ieefa.org/resources/chinas-emissions-trading-system-ets-reforms-track-needs-robust-enforcement, accessed 16 June 2026; European Commission, “About the EU ETS,” Climate Action, https://climate.ec.europa.eu/eu-action/carbon-markets/about-eu-ets_en.
[23] Carbon Knowledge Hub, “Emission caps and permit allocation”, 18 October 2024, https://www.carbonknowledgehub.com/factsheets/caps-and-allocation, accessed 29 June 2026.
[24] Cap Setting, p. 9.
[25] International Energy Agency, “Implementing Effective Emissions Trading Systems, Defining the Role”, https://www.iea.org/reports/implementing-effective-emissions-trading-systems/defining-the-role, accessed 16 June 2026.
[26] Id.
[27] ICAP Status Report, p. 11.
[28] ICAP Status Report, p. 40.
[29] ICAP Status Report, p. 40.
[30] South Korean Act on the Allocation and Trading of Greenhouse Gas Emission Permits dated November 2012, entered into force 1 January 2015; The UK Greenhouse Gas Emissions Trading Scheme Order 2020 dated 1 January 2021.
[31] International Carbon Action Partnership, “Türkiye Adopts Landmark Climate Law, Paving Way for National ETS”, https://icapcarbonaction.com/en/news/turkiye-adopts-landmark-climate-law-paving-way-national-ets, accessed 16 June 2026.
[32] International Carbon Action Partnership, “Australian Safeguard Mechanism”, https://icapcarbonaction.com/en/ets/australian-safeguard-mechanism, accessed 16 June 2026.
[33] International Carbon Action Partnership, “China National ETS”, https://icapcarbonaction.com/en/ets/china-national-ets, accessed 16 June 2026.
[34] Id.
[35] International Carbon Action Partnership, “China issues landmark guidelines to transition to absolute cap and expand scope in National ETS”, 29 September 2025, https://icapcarbonaction.com/en/news/china-issues-landmark-guidelines-transition-absolute-cap-and-expand-scope-national-ets, accessed 16 June 2026.
[36] International Carbon Action Partnership, “Turkish Emission Trading System” (“ICAP MRV”), https://icapcarbonaction.com/system/files/ets_pdfs/icap-etsmap-factsheet-66.pdf, accessed 28 June 2026.
[37] Turkish Emissions Trading System Draft Regulation (“Draft ETS Regulation”), art. 40.
[38] ICAP MRV.
[39] Id.
[40] Turkish Regulation on Monitoring of Greenhouse Gases Emissions dated 22 July 2014 (“MRV Regulation”), art. 5.
[41] Id., art. 8.
[42] Id., art. 7.
[43] Turkish Climate Law no. 7552 dated 2 July 2025, (“Climate Law”) art. 14(1)(a).
[44] Id., art. 14(6).
[45] Draft ETS Regulation arts. 4(1)(y), 5(1).
[46] Id., arts. 4(1)(z), 4(1)(aa), 5(1).
[47] Id., art. 5(2).
[48] Climate Law, art. 9(3).
[49] Draft ETS Regulation, arts. 8(1), 8(2).
[50] Id., art. 7(2).
[51] Id., art. 10.
[52] Id., provisional art. 1(1).
[53] Id., provisional art. 1(11), 1(12).
[54] Id., arts. 4(1)(j), 4(1)(m).
[55] Id., art. 13.
[56] Id., art. 4(1)(ll).
[57] Id., provisional art. 1(4).
[58] Id., art. 4(r).
[59] Id., art. 13(5), 13(6).
[60] Id., art. 4(1)(hh).
[61] Id.
[62] Id., art. 4(1)(bb).
[63] Id., art. 4(1)(ç).
[64] Id., art. 17.
[65] Id., art. 4(1)(ee).
[66] Id., art. 18.
[67] Id., art. 16.
[68] Id., art. 16(6).
[69] Id., art. 16(5).
[70] Id., art. 25.
[71] Id., provisional art. 1(8).
[72] Id., art. 11.
[73] Regulation (EU) 2023/956 of the European Parliament and of the Council of 10 May 2023 establishing a carbon border adjustment mechanism, 16 May 2023, as amended by Regulation (EU) 2025/2083 of the European Parliament and of the Council of 8 October 2025, 17 October 2025; HM Treasury, “Factsheet: Carbon Border Adjustment Mechanism”, 24 April 2025, updated 28 November 2025, https://www.gov.uk/government/publications/factsheet-carbon-border-adjustment-mechanism-cbam/factsheet-carbon-border-adjustment-mechanism, accessed 28 June 2026.
