Voluntary Carbon Markets and Carbon Credits

Introduction

‘Türkiye intends to peak its emissions at the latest in the year 2038 […] a step forward toward to long-term objective of achieving a net zero target by 2053.’[1] The first paragraph of Turkey’s Nationally Determined Contribution (NDC), a non-binding action plan communicated by member states under the Paris Agreement, sets an ambitious target. To meet these targets, Turkey must implement a mechanism that makes it more costly to emit greenhouse gases and offer incentives for those that reduce their emissions, that is, carbon pricing. This article explores the legal aspects of voluntary carbon markets, the only (mild) type of carbon pricing that has been practised thus far in Turkey.

Carbon pricing can take two forms: a carbon tax or an emissions trading system (ETS). A carbon tax follows a bottom-up approach; it aims to raise the cost of carbon emissions but does not guarantee minimum emissions. An ETS, or cap-and-trade mechanism, by contrast, sets a gradually declining upper limit on emissions and allows emitters to sell and buy emissions units, measured in tonnes of carbon dioxide-equivalent (MtCO₂e). The price of carbon is set by the market of each particular scheme. Established in 2005, the European Union (EU) ETS is the world’s first carbon market, covering 40% of the emissions in the EU.[2] Other prominent schemes are California’s Cap-and-Trade Program, which was initiated in 2013 and applies to 80% of the state’s greenhouse gas emissions,[3] and China’s national ETS, which started its operations in 2021.

Where no cap-and-trade mechanism exists, emitters may purchase carbon credits in voluntary carbon markets to achieve self-defined goals for reducing emissions. These differ from compulsory carbon markets (dubbed compliance carbon markets), in which governments impose a cap on emissions. Therefore, voluntary carbon markets do not impose a fee on emissions, but instead direct funds to emission-reducing projects that would otherwise be more economically challenging. Independent organisations set project eligibility requirements, monitoring, reporting and verification (MRV) procedures, and an infrastructure to purchase, sell or retire carbon credits, i.e. remove them from the market.

This article first explains the international legal framework for carbon credit trading under the United Nations Framework Convention on Climate Change regime (UNFCCC). It then examines the Turkish legislative and regulatory environment on MRV requirements and ETS plans. The third section outlines the global practice of issuing and trading carbon credits. The final section focuses on the practices of Turkish operators in voluntary carbon markets.

International law background

The main international legal instrument to combat climate change is the UNFCCC. Signed in 1992 and effective since 1994, the UNFCCC aims to stabilise the greenhouse gas concentrations of the atmosphere at a level that would prevent ‘dangerous anthropogenic interference with the climate system.’[4] Turkey ratified the UNFCCC in 2004 and is listed among the developed states in Annex I of the convention that have undertaken to ‘adopt national policies and take corresponding measures on the mitigation of climate change, by limiting its anthropogenic emissions of greenhouse gases.’[5]

Two international treaties that have been adopted under the framework of the UNFCCC are the Kyoto Protocol of 1997 and the Paris Agreement of 2015. Turkey ratified the former in 2009 and the latter in 2021.

The Kyoto Protocol operationalises the UNFCCC’s objective of reducing greenhouse gas emissions by imposing binding emission reduction targets on developed countries listed in its Annex B (which does not include Turkey). In addition, the clean development mechanism (CDM), as set forth in Article 12 of the Kyoto Protocol, allows a country that is not listed in Annex I of the UNFCCC to benefit from projects resulting in saleable certified emission reductions (CER).[6] Turkish projects are not eligible to earn CERs, as Turkey is listed in Annex I of the UNFCCC.

The Paris Agreement set the goal of limiting global warming to well below 2°C above pre-industrial levels and to pursue efforts to limit it to 1.5°C.[7] Article 6 of the agreement foresees a framework for voluntary cooperation between member states to achieve emission reduction targets.[8] Article 6.2 allows countries to internationally transferred mitigation outcomes (ITMOs) that will count towards their NDCs. This will potentially create a new market (in addition to the voluntary market) for carbon credits. Article 6.4 of the Paris Agreement establishes a mechanism that will work in a similar way to the CDM of the Kyoto Protocol. Activities that remove or reduce emissions in host countries will generate tradeable carbon credits, dubbed A6.4ERs. Currently, the voluntary carbon market and the markets under Articles 6.2 and 6.4 of the Paris Agreement are separate but they may converge in the future.[9] Due to its recent introduction, both in Turkey and worldwide, the Paris Agreement has seen limited application with respect to its impact on voluntary carbon markets. Yet, it holds the promise of establishing a new market for carbon credits that will complement existing voluntary ones, featuring credits issued in accordance with standards aligned with the guidance from the Conference of Parties, the managing authority of the UNFCCC.[10]

Turkish Legislative Framework

In the last decade, Turkey has enacted a series of laws aiming to reduce the country’s greenhouse gas emissions. A recent amendment to the Environment Law numbered 2872, the main legislation for the protection of the environment, provides the basis for emissions trading in the country:

The general principles for the protection and rehabilitation of the environment and prevention of its pollution are as follows: […] h) […] market-based mechanisms, such as carbon trading to monitor greenhouse gas emissions, and economic instruments and incentives shall be used […] to combat climate change.[11]

The law authorises the Ministry of Environment, Urbanisation and Climate Change (hereinafter ‘the Ministry of Environment’) to establish rules and procedures for the implementation of this principle. It provides for administrative fines of up to TRY 173,207 to entities that do not timely submit an emissions monitoring plan and a verified emissions report.[12] The Ministry of Environment has also enacted a number of regulations and communiqués that impose MRV obligations on industries responsible for 50% of the country’s total emissions.[13]

Turkey does not currently have a cap-and-trade mechanism. However, the Medium-Term Programme (2023–2025) prepared jointly by the Ministry of Treasury and Finance and the Presidency of Strategy and Budget stipulates that ‘[a]n effectively functioning National Emission Trading System will be developed within the scope of harmonisation with CBAM [Carbon Border Adjustment Mechanism].’[14] The forthcoming compliance ETS will be based on the existing MRV structure in Turkey.[15]

The Ministry of Environment has also attempted to establish its own voluntary carbon market through the Communiqué on Voluntary Carbon Market Project Registration of 2013.[16] However, it appears that the programme of the Ministry of Environment has attracted few submissions, and the programme is currently inactive.

Global Practice of Voluntary Carbon Markets

The voluntary carbon market operates on a patchwork of independent standard-setting organisations. These entities monitor and certify projects that avoid or remove carbon emissions according to their standards and award carbon credits to their operators. The credits can be sold over the counter or in special exchanges to companies or individuals. Purchasers who would like to offset their emissions can retire these carbon credits.

There are two types of credits. Avoidance credits are issued for projects such as renewable energy plants that avoid/reduce carbon that would otherwise have been emitted. Projects such as direct air capture that draw down CO₂ from the atmosphere issue removal credits. Avoidance credits are more abundant, constituting over 80% of the market, but removal credits are more expensive, since it is easier to ascertain their quality.[17] This is because the amount of carbon that is reduced can be directly calculated when CO2 is withdrawn from the atmosphere, and therefore private individuals or companies wishing to buy carbon credits in voluntary markets can be sure that the credits that they buy correspond to the exact amount of carbon removed from the atmosphere.

The current state of the global voluntary carbon market is far from perfect. Unlike a compliance ETS with emission caps, the demand depends on ethical imperatives of firms and individuals, making the price vulnerable to considerations that shift with time.[18] The price is also depressed by the varying quality of credits. Accounting and verification methods change from one standard-setting organisation to another, and therefore the pool of high-quality carbon credits is not large.[19] For example, to generate high-quality carbon credits, an emissions-reducing project should not have been undertaken without the proceeds from the sale of credit, an attribute known as additionality.[20] Since the Chicago Carbon Exchange (which used to manage half of the world’s credit trading) closed in 2010, the market is dominated by over-the-counter transactions.[21] This has also led to low liquidity and a lack of transparency.[22] To achieve a daily, reliable price signal, the Taskforce on Scaling Voluntary Carbon Markets, a private sector-led initiative, recommends creating core carbon reference contracts based on a set of agreed principles that can be traded on exchanges.[23]

Turkey’s Experience with the Voluntary Carbon Markets

Without access to the CER market under the Kyoto Protocol, Turkish renewable energy developers instead tapped into the lucrative voluntary carbon markets since as early as 2005 and managed to attract low-carbon investments as a major host country of the voluntary carbon market.[24]

In voluntary carbon markets, each certification organisation sets its own carbon credit standard or standards. The main certification standards used by Turkish projects have been Verified Carbon Standard (VCS), popular among hydropower projects, and Gold Standard (GS), preferred by wind plants.[25] As of 2020, Turkey has 288 projects registered under VCS and GS, which makes it the third largest host country in number of registered projects and one of the largest sellers of voluntary carbon credits.[26] However, as of 2020, these two organisations do not accept new projects from Turkey.[27]

Currently, the Global Carbon Council (GCC), a MENA-based standard established in 2019, accepts project applications from the countries in the region.[28] GCC accepts new registrations for projects that started operations in Turkey after 2016.[29]

In line with the upcoming national compliance ETS mechanism, Turkey is expected to establish a specialised exchange for the trading of carbon credits at Borsa İstanbul, the country’s main stock exchange.[30]

The Path Forward

Turkey should deploy effective carbon pricing mechanisms to reduce its emissions in the path towards the net-zero goal of 2053. To date, renewable energy projects have spearheaded these efforts by issuing carbon credits that have been sold in the voluntary carbon markets. The decision by VCS and GS, the two most popular standards, to stop accepting Turkish projects will likely direct operators to seek certification under alternative standards. Turkish lawmakers are also planning to establish an ETS based on a cap-and-trade mechanism, which is expected to create a compliance carbon market. The already existing MRV legal framework may help with the transition to the ETS.

One of the most imminent climate policy challenges facing Turkish companies is the Carbon Border Adjustment Mechanism (CBAM) of the EU, Turkey’s largest export market. CBAM aims to price carbon emitted during the production of goods that are imported to the EU. It will start with a transitional phase in October 2023, when importers will first need to report the embedded emissions in the goods that they bring in. The mechanism will enter a permanent phase in January 2026, when importers will have to start purchasing CBAM certificates.[31] The EU plans to link the price of CBAM certificates with the price of EU ETS allowances.[32] A study commissioned by the European Bank for Reconstruction and Development (EBRD) found that Turkish exporters could be paying extra charges of EUR 777 million in 2026 under the CBAM.[33] In the present circumstances, carbon credits purchased at the voluntary markets will not help with meeting CBAM targets. However, a potential collaboration between the forthcoming Turkish ETS and the EU’s programme may relieve Turkish exporters of the need to purchase CBAM certificates.

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[1] Republic of Turkey, Updated First Nationally Determined Contribution submitted on 13 April 2023 in accordance with Article 4, paragraph 12 of the Paris Agreement,  2.

[2] European Commission, EU Emissions Trading System (EU ETS) <https://climate.ec.europa.eu/eu-action/eu-emissions-trading-system-eu-ets_en>.

[3] California Air Resources Board, Cap-and-Trade Program <https://climate.ec.europa.eu/eu-action/eu-emissions-trading-system-eu-ets_en>.

[4] UNFCCC, art 2.

[5] UNFCCC, art 4.2(a).

[6] Kyoto Protocol, art 12.

[7] Paris Agreement, art 2.

[8] Paris Agreement, art 6.

[9] International Emissions Trading Association, The Evolving Voluntary Carbon Market, (March 2023) 10.

[10] Decision 2/CMA.3, Guidance on cooperative approaches referred to in Article 6, paragraph 2, of the Paris Agreement, FCCC/PA/CMA/2021/10/Add.1 (8 March 2022); International Emissions Trading Association, The Evolving Voluntary Carbon Market (March 2023) 10.

[11] Environment Law numbered 2872 dated 9 August 1983, art 3(h).

[12] ibid. art 20.

[13] Regulation on Monitoring of Greenhouse Gas Emissions published on the Official Gazette numbered 29003 dated 17 May 2014; Communiqué on Monitoring and Reporting of Greenhouse Gas Emissions published on the Official Gazette numbered 29068 dated 22 July 2014; Communiqué on Verification of Greenhouse Gas Emissions and Accreditation of Verification Organisations, published in the Official Gazette numbered 30258 dated 2 December 2017; Republic of Turkey, Updated First Nationally Determined Contribution, submitted on 13 April 2023 in accordance with Article 4, paragraph 12 of the Paris Agreement 5.

[14] The Ministry of Treasury and Finance and the Presidency of Strategy and Budget, The Medium-Term Programme (2023–2025), Presidential Decree numbered 6003 and dated 4 September 2022, Section 2.9.

[15] Republic of Turkey, Updated First Nationally Determined Contribution, submitted on 13 April 2023 in accordance with Article 4, paragraph 12 of the Paris Agreement 6.

[16] The Communiqué on Voluntary Carbon Market Project Registration (Official Gazette numbered 28790, 9 October 2013).

[17] Shell plc and BCG, ‘The voluntary carbon market: 2022 insights and trends’ (19 January 2023) <https://www.shell.com/shellenergy/othersolutions/carbonmarketreports.html> 16.

[18] ‘Offset markets struggle in the face of surging commodity prices’ The Economist (19 May 2022) <https://www.economist.com/finance-and-economics/2022/05/19/offset-markets-struggle-in-the-face-of-surging-commodity-prices>.

[19] Christopher Blaufelder, Cindy Levy, Peter Mannion, and Dickon Pinner, ‘A blueprint for scaling voluntary carbon markets to meet the climate challenge, McKinsey & Company’, (McKinsey, January 2021) 4 <https://www.mckinsey.com/capabilities/sustainability/our-insights/a-blueprint-for-scaling-voluntary-carbon-markets-to-meet-the-climate-challenge>.

[20] The Taskforce on Scaling Voluntary Carbon Markets, ‘Final Report’ (January 2021) 119 <https://www.iif.com/tsvcm> .

[21] ibid 41.

[22] ibid 41.

[23] ibid 41.

[24] Ethemcan Turhan and Arif Cem Gündoğan, ‘Price and prejudice: the politics of carbon market establishment in Turkey’ (2018) Turkish Studies 20(4) 518; Ferhan Can, ‘Türkiye’de Uygulanan ve Gönüllü Karbon Piyasalarında Faaliyette Bulunan Projelerin Paydaş Katılımı Açısından Değerlendirilmesi’ (2018) Ekonomi Politika ve Finans Araştırmaları Dergisi 3(1) 4.

[25] Burcu Ergün Yüksel, Mustafa Özcan and Elif Ocaklı, ‘Türkiye Gönüllü Karbon Piyasaları’nın Değerlendirilmesi’ (2022) Düzce Üniversitesi Bilim ve Teknoloji Dergisi 10(5) 13.

[26] Climate Focus and Gaia Carbon Finance, Mid-size Sustainable Energy Financing Facility (MidSEFF), European Bank for Reconstruction and Development, Carbon markets in Turkey <http://turkishcarbonmarket.com/background/carbon-markets-in-turkey>.

[27] Burcu Ergün Yüksel, Mustafa Özcan and Elif Ocaklı, ‘Türkiye Gönüllü Karbon Piyasaları’nın Değerlendirilmesi’ (2022) Düzce Üniversitesi Bilim ve Teknoloji Dergisi, 10(5) 13.

[28] Solar 3GW, ‘Karbon Azaltım Sertifikaları Hakkında Sıkça Sorulan Sorular’ 4 <https://www.solar3gw.org/wp-content/uploads/2021/09/Karbon-Azaltim-Sertifikalari-Hakkinda-V2.pdf> accessed 15 November 2023.

[29] Global Carbon Council, Clarification No. 01 v1.3, (2022) 11 <https://www.globalcarboncouncil.com/wp-content/uploads/2022/01/Clarification-No.-01.pdf>.

[30] ‘Borsa İstanbul Karbon Piyasası kuracak’ Dünya Gazetesi (29 November 2022) <https://www.dunya.com/ekonomi/borsa-istanbul-karbon-piyasasi-kuracak-haberi-675457>.

[31] European Commission, Taxation and Customs Union, Carbon Border Adjustment Mechanism <https://taxation-customs.ec.europa.eu/carbon-border-adjustment-mechanism_en> accessed 15 November 2023.

[32] ibid

[33] Vanora Bennett, ‘Turkish exporters could face steep extra costs under new EU carbon rules’, (EBRD, 29 July 2021) <https://www.ebrd.com/news/2021/turkish-exporters-could-face-steep-extra-costs-under-new-eu-carbon-rules.html> accessed 15 November 2023.