Reading the Turkish Emissions Trading System Regulation, and Its Sectoral Effects

Keywords

Emissions trading system, Climate Law, allowance, free allocation, benchmark, Carbon Border Adjustment Mechanism, excessive difficulty of performance, information exchange.

A. Statutory basis and layers of regulation

The statutory foundation of the emissions trading system is Climate Law No. 7552, which entered into force on 9 July 2025. Article 9 of the Law leaves the establishment of the system, national allocation planning and the distribution of allowances to the Climate Change Presidency, and gives the operation of the market to Enerji Piyasaları İşletme A.Ş. (EPİAŞ). The same article requires operators carrying on activities within the ETS to obtain a greenhouse-gas emissions permit from the Presidency, and it makes the surrender of allowances equal to verified annual emissions a statutory obligation. Article 10 regulates the institutional structure, article 14 the administrative sanctions, and transitional article 1 the pilot period and the time allowed for obtaining a permit.

The Regulation takes its basis, together with the Law, from article 792/D of Presidential Decree No. 4. The text consists of forty-two articles, six transitional articles and seven annexes. What is striking is the density of the references it makes to rules that are still to come. The book-entry issue of allowances and their introduction to the market is left to EMRA (art. 12/2); the number of operators to be included in the benchmark, the sectoral activity coefficient and the free-allocation rate to the Carbon Market Board (arts. 13/1 and 13/8); the implementing provisions of the market-stability and flexibility mechanisms to the Presidency (art. 19/4); the price corridor to the Board (art. 21/1); and the functioning of the ETS market, in coordination with the relevant institutions, to EMRA (art. 21/3). Monitoring, verification and the supervision of verifiers are likewise areas referred to the Presidency’s procedures and principles (arts. 28/2, 31/1 and 33/1). The Law itself foresaw this structure, leaving the procedures and principles relating to the ETS to the Presidency and the principles of market operation to EMRA.

The resulting structure is a six-layer hierarchy of regulation: the Law, the Regulation, Board decisions, Presidency procedures and principles, EMRA rules, and EPİAŞ procedures. It cannot be expected that every detail of a technical and rapidly changing market will be laid down by statute; leaving the administration a wide field of regulation is not, on that account, a defect in itself. The problem is that the operator who bears the obligation can learn what cost it will face only when the last layer also enters into force. The Constitutional Court has consistently accepted that the text of a statute must be drafted at a level of clarity that allows individuals to foresee, with a certain degree of certainty, which legal consequence is attached to which concrete fact. That principle weighs most heavily not for the system as a whole, but for provisions that give rise to a sanction; yet leaving the economic parameters of the market to constantly changeable subordinate rules is also a serious source of uncertainty for investment decisions.

A concrete example of that uncertainty is the way the pilot period is regulated. The draft Regulation opened for consultation in July 2025 defined 2026 and 2027 as the pilot period, provided for one hundred per cent free allocation by the benchmarking method during the pilot, and divided the first implementation period, 2028–2035, into two sub-periods. The final text contains none of those elements. Transitional article 1 says only that the system will begin with a pilot period and that the scope, duration and principles of the pilot will be determined by the Board. The Board decision was announced a week after the Regulation entered into force. Because transitional article 3 requires operators within the pilot scope to submit their first Monitoring Methodology Plan within two months of the Regulation’s entry into force, which operators are within the pilot became clear on 3 September, while the last day remained 27 October 2026. The Presidency has power to extend that period by up to six months; unless an extension is announced, operators’ actual preparation time is less than eight weeks.

B. How it differs from the 2014 regime

The Regulation repealed the Regulation on the Monitoring of Greenhouse Gas Emissions of 17 May 2014, and provided that references to the repealed regulation are deemed to be references to the new Regulation (art. 40). This is not a rupture; it is the addition of a superstructure. The monitoring, reporting and verification (MRV) institutions — the monitoring plan, the annual emissions report, verification and accreditation — have been largely preserved, and an emissions permit, allowances, a surrender obligation and a market have been built on top of them. Ten years of MRV data are also the raw material of the system’s benchmarks and of the allocation calculation. An installation that reported carelessly in past years may therefore meet the consequences of that carelessness, for the first time, as a real line of cost.

A. Scope: which installation, which obligation?

The scope of the Regulation has two rings. In the outer ring, every installation carrying on an activity listed in Annex 1 is subject to the MRV obligation. Annex 1 covers activities such as fuel combustion above specified capacity thresholds, petroleum refining, coke production, iron and steel and other metals, aluminium, cement clinker, glass, ceramics, gypsum, pulp, paper and cardboard, and the production of nitric acid, ammonia, hydrogen, soda ash and sodium bicarbonate. In the inner ring, only installations whose emissions exceed a specified threshold are included in the emissions trading system.

Classification is made on the basis of annual emissions calculated prudently according to the installation’s installed capacity. Carbon dioxide from biomass is left out of that calculation, while carbon dioxide transferred outside the installation is taken into account. Installations whose annual emissions are equal to or below 50,000 tonnes of CO₂ equivalent are Category A; those above 50,000 tonnes and up to 500,000 tonnes are Category B; those above 500,000 tonnes are Category C (art. 4/1-y, z, aa). The ETS covers only Category B and C installations (art. 5/1). Category A installations do not join the market, but their MRV obligations continue.

That the criterion is installed capacity, rather than emissions actually released, has important practical consequences. An installation whose capacity-utilisation rate remains low may fall in Category B by reason of its capacity even if its actual emissions stay below 50,000 tonnes. A capacity-based threshold is also the choice of the EU emissions trading system: Annex I to Directive 2003/87/EC defines activities by production-capacity and thermal-input thresholds. By contrast, what the allocation calculation takes as its basis is the verified activity level. Scope is thus tied to capacity, and cost to production actually achieved.

The Regulation provides for three kinds of exception. The first is a general exclusion from scope: research and development installations, installations using biomass exclusively, and military units are wholly outside the Regulation (art. 2/2). The second is an exception relating only to the ETS: installations belonging to schools, universities, hospitals and defence-industry establishments are left outside the ETS, limited to the activities they carry on, while their MRV obligations are preserved (art. 5/2-3). The third is transitional: the transmission and storage of natural gas and crude oil remain outside the ETS until the end of the first implementation period (transitional art. 6).

The second exception is a provision that must be construed narrowly. “Defence-industry establishment” is not defined in the Regulation. It is not clear whether, where a company in the defence-industry group has an installation producing steel or aluminium that is also used other than for defence products, that installation stays outside the ETS. Because the wording contains the phrase “limited to the activities they carry out”, we take the view that the exception should be attached not to the identity of the establishment, but to the defence purpose of the activity. The contrary reading would exempt one of two producers competing in the same market from the carbon cost.

Another provision on scope creates a kind of spillover effect for MRV. Where an operator carries on one of the activities in Annex 1, its other activities in Annex 1 also fall within the Regulation regardless of capacity (art. 27/2). A ceramic kiln that, on its own, remains below the threshold will thus be subject to monitoring and reporting if it is operated by an operator that runs a combustion installation above the threshold. It should be noted that the provision widens the MRV scope, not the ETS scope; the ETS scope depends in every case on the installation being Category B or C.

Finally, an installation that leaves the ETS during the year because of a change of category remains within the ETS throughout the system year in which the change occurs (art. 5/4). The route of reducing capacity in the middle of the year in order to escape that year’s surrender obligation is thereby closed.

B. The greenhouse-gas emissions permit

Operators within the ETS must obtain an emissions permit from the Presidency in order to continue activities that give rise to greenhouse-gas emissions (art. 6). The permit is installation-based: an operator with more than one installation obtains a separate permit for each, but a single permit is sufficient for installations operating at the same address (art. 7/2). The application is made electronically with the documents in Annex 3 and is assessed within sixty days at most. If there is a deficiency, it is notified within ten business days of the application and must be remedied within three months; otherwise the application is rejected and the application fee is not refunded (art. 7/4-8). Draft Annex 3 required, for Category B, the employment of an engineer experienced in emissions monitoring, and for Category C two such engineers, or engagement of a consultancy of that qualification. That a personnel condition of this kind also appears in the final annex shows that the permit application is not merely a paperwork exercise.

The permit is valid for five years, and a renewal application must be made at least six months before the end of the term (art. 8). Changes in the nature, operation or category of the installation, or in the permit holder, that occur during the permit term are notified to the Presidency within thirty days (art. 9/1).

Cancellation of the permit is tied to three cases (art. 10/1): the submission, in transactions within the Regulation, of information or documents that are intentionally false, misleading or unreal; the cessation of the installation’s activity, or its return to activity becoming technically impossible; and the serious surrender breach provided for in article 14/4-ç of the Law. In the first case, the requirement of intent matters. Errors made through negligence are not a ground for cancellation; they are corrected in the make-up year and, where necessary, met with a fine. Attaching a result as severe as cancellation, equivalent to a prohibition of activity, only to a deliberate deception is what the principle of proportionality requires. The burden of proving intent lies with the administration.

For existing installations the Law has allowed a transitional period. Operators within the ETS must obtain a permit within three years of the Law’s entry into force on 9 July 2025, that is by 9 July 2028; during that period their permits are deemed, on a one-off basis, to exist. The Board may extend that period by up to two years (Law, transitional art. 1/2; Regulation, transitional art. 2). As a legal fiction, “deeming the permit to exist” ensures that the installation does not face the sanction for operating without a permit during the transition; it does not, however, postpone the surrender and reporting obligations.

A further provision on the legal character of the permit calls for attention. Where the operator changes for any reason, the new operator is deemed, without any further transaction, to have assumed the previous operator’s commitments and liabilities under the Regulation, and is obliged to notify the change within thirty days (art. 34/5). The provision does not distinguish according to the form of the transfer. In a share transfer the legal person remains the same, so there is in any event no change of operator; the provision’s real effect appears in transactions in which the installation changes hands by a transfer of assets. The buyer, even if the transfer agreement provides otherwise, takes over, as against the administration, the previous operator’s surrender shortfalls and make-up-year obligations. It cannot, by contrast, be concluded that administrative fines imposed on the previous operator pass to the new operator. The principle of the personal nature of criminal liability in the seventh paragraph of article 38 of the Constitution applies to administrative penalties as well. What is transferred is not the penalty itself, but the surrender obligation.

C. The legal nature of the allowance

The Law and the Regulation define the allowance in the same way: a right, of a fungible nature, transferable, issued in book-entry form, and granted for a specified period, to emit one tonne of carbon-dioxide-equivalent greenhouse gas (Law, art. 2/1-cc; Regulation, art. 4/1-ll). Each element of the definition carries a separate legal consequence. That it is “fungible” means that allowances are interchangeable, so the surrender obligation can be performed with any allowance. That it is “book-entry” means that the allowance is not tied to a physical instrument, and that its existence and its change of hands are determined by the entry in the Transaction Registry System operated by EPİAŞ. The element “for a specified period” means that the allowance is not a right of indefinite duration: at the end of the relevant implementation period it loses its validity and is deleted from the system (art. 15/1-2).

The Law has placed two important limits on the allowance. Allowances cannot be the subject of security agreements; free allowances that are the subject of the surrender obligation cannot be attached unless they have been transferred from the account to which they were first credited (Law, art. 9/9). Transactions on the ETS market are also not subject to the State Procurement Law (Law, art. 9/8). The prohibition on security has a direct consequence for financing structures. In EU practice, transactions such as pledge and transfer by way of security over emission rights are known; in the Turkish system, allowances cannot be used as security for a loan. However large an installation’s stock of allowances, it will carry no collateral value in a banking relationship.

Whether the allowance has the character of a property right becomes important especially if the deletion and banking rules are later changed. In our view, the allowance is a right of its own kind, arising from public law, transferable, and of economic value. The European Court of Human Rights interprets the concept of “possessions” in article 1 of Protocol No. 1 autonomously and independently of the domestic classification, and it also protects interests that have economic value and give rise to a legitimate expectation. It is a strong possibility that an allowance which is bought and sold on a market and has a price counts as a “possession” in that sense. The practical consequence is this: applying deletion at the end of the implementation period as a rule known in advance is not an interference; but if the Presidency uses the power it has under article 15/1 to determine the banking period in a way that changes it to the holder’s detriment after the allowances have been acquired, that can be discussed as an interference with the right of property subject to a proportionality review.

The tax character of a transfer of allowances has not yet been expressly regulated either. Questions such as whether, for value-added tax and corporate tax, the allowance is a right, a stock or a financial asset, and whether an allowance received free of charge is capitalised, await regulation by the Ministry of Treasury and Finance.

D. The cap: not absolute, but intensity-based

The classic model of emissions trading sets an absolute cap on total emissions for a given period and lowers that cap by a specified rate each year. The EU system is the typical example: the total quantity of allowances shrinks each year by a linear reduction factor. The Turkish system has not adopted that model. The Regulation takes an emissions-intensity approach as the basis for determining the cap (art. 11/1). Emissions intensity is the emission released per unit of product, energy or fuel (art. 4/1-m). The ETS cap is defined as the sum, for a system year, of the free allowances distributed and the quantity of allowances placed on the primary market (art. 4/1-l).

In an intensity-based model, the total quantity of allowances grows with production. A sector that increases its production receives more allowances; the system encourages a reduction in emissions per unit of production, but it does not guarantee a reduction in total emissions. A similar choice was made in China’s national emissions trading system, which began with the power sector. For economies that are developing and that aim to grow industrial production, the choice is understandable. That the targets in Turkey’s Nationally Determined Contribution are also defined as a reduction against a reference scenario shows that the approach is consistent with that framework.

The legally most striking feature of the model is that the cap is determined afterwards. The cap is announced by the National Allocation Plan published in the Official Gazette within sixty days of the deadline for submission of the verified emissions reports for the relevant system year (art. 11/2). In other words, throughout the year in which it produces, the operator does not know how many allowances in total will exist in the system for that year. This structure weakens the formation of the price signal in advance. On the other hand, because the National Allocation Plan is a regulatory act published in the Official Gazette and applied nationwide, it may be thought that actions for its annulment should be heard at first instance in the Council of State.

E. Free allocation and the benchmarking method

The mechanism that actually determines the economic burden of the system is free allocation. Free allowances are distributed to sub-installations by the benchmarking method (art. 13/1). A sub-installation is a technical unit obtained by reducing an installation’s emissions to a given product, production process, measurable heat use or fuel use, and whose boundaries are set by a mass and energy balance (art. 4/1-b). The operator identifies the product-benchmark, measurable-heat, fuel-benchmark and process sub-installations at the installation and attributes the installation’s verified emissions to them (art. 13/2). This design is almost a one-to-one counterpart of the sub-installation architecture in Commission Delegated Regulation (EU) 2019/331, which sets the EU rules on free allocation.

The quantity of free allowances is found, for each sub-installation, by multiplying the benchmark announced by the Presidency, the free-allocation rate and the sectoral activity coefficient by that sub-installation’s activity level (art. 13/7). Sectoral correction factors may, where necessary, be added to that product (art. 13/11). Benchmarks are announced to four decimal places; if the calculation produces a fraction, the quantity is rounded up to the next whole number (art. 13/9-10). The sectoral activity coefficient is set by the Board so as to reflect sectoral differences such as the risk of carbon leakage (art. 4/1-hh).

The operator must submit to the Presidency a Monitoring Methodology Plan showing the data on its sub-installations and how it will monitor them; the plan must contain at least the parameters in Annex 4 (art. 13/4). Activity levels are submitted each year together with the verified activity-level report and the verified emissions report (art. 13/5). The free-allocation application is made within thirty days of publication of the National Allocation Plan; the Presidency examines it within fifteen business days, and if a correction is requested the operator corrects it within ten business days (art. 14/2-4). Late applicants pay the application fee increased by fifty per cent, and ETS operators who submit their report after the deadline pay it increased by one hundred per cent (art. 14/7).

A worked example helps to understand the system. The figures below are entirely hypothetical. Consider a cement installation producing 1,000,000 tonnes of clinker a year. Assume that, for the clinker sub-installation, the benchmark is set at 0.8000 tonnes of CO₂ equivalent per tonne, the free-allocation rate at one hundred per cent, and the sectoral activity coefficient at 1. The installation receives 800,000 tonnes of free allowances. If its verified emissions are 850,000 tonnes, a shortfall of 50,000 tonnes arises, and that shortfall will be closed on the market. A more efficient installation whose emissions remain at 760,000 tonnes can sell a surplus of 40,000 tonnes. One hundred per cent free allocation does not, as can be seen, mean that all emissions will be covered free of charge. The rate of one hundred per cent is applied not to actual emissions, but to the quantity calculated with the benchmark. The incentive effect of the system lies precisely in that difference: the installation whose emissions intensity is above the sector average pays, and the installation below it gains.

F. The surrender obligation, the make-up year and the additional reserve

Operators surrender, through the Transaction Registry System, allowances corresponding to the quantity in the verified emissions report for the system year, by the last business day of November of the obligation year (art. 16/1). The quantity not surrendered is added to the quantity that must be surrendered the following year; that year is called the “make-up year” (art. 16/2). Where an error is later found in the verified report, the correction is also made in the make-up year (art. 16/4).

Two provisions are particularly important for the continuity of the obligation. First, cessation of the installation’s activity, liquidation of the operator, or a concordat decision does not prevent performance of the surrender obligation (Law, art. 9/10; Regulation, art. 16/3). Second, the imposition of a fine on an operator that fails to perform the surrender obligation does not extinguish the obligation to surrender the missing allowances; the Law expressly provides that the missing quantity will also be surrendered the following year (Law, art. 9/5). This structure follows the “excess-emissions penalty” model of the EU system, where payment of the penalty likewise does not end the obligation to surrender the missing rights.

For operators that cannot find allowances on the market, or that are under price pressure, the Regulation provides a safety valve called the “additional reserve” (art. 16/5-8). The additional reserve may be used only for the purpose of performing the surrender obligation, and only by a decision of the Board; total use may not exceed ten per cent of the relevant year’s cap. Provided there is no increase in emissions intensity, the reserve may be applied for in two cases. An installation that has received free allowances of more than seventy per cent of its verified emissions must have surrendered as many as the free allowances it received. An installation that has received free allowances of less than seventy per cent must have performed at least seventy per cent of its obligation and must have no allowances left in its account. The additional-reserve price is deliberately kept punitive: the minimum price is fifty per cent above the higher of the weighted-average prices, over the last three months, of the primary market and of the spot secondary market (art. 16/6). Installations using the additional reserve perform their obligations by the last business day of December.

Read together, the periods in the Regulation yield this sequence for the 2027 system year, in which the price mechanism will begin: reports will be submitted by 30 April 2028, the National Allocation Plan will be published within the following sixty days, and the first real surrender will be made by the last business day of November 2028.

G. Market architecture

Allowances are issued in the Transaction Registry System and are sold by auction on the primary market or distributed free of charge (art. 12/1). The auction calendar is announced on EPİAŞ’s website within fifteen business days of publication of the National Allocation Plan. The quantity in cancelled auctions is distributed equally across the remaining auctions; if the last auction is cancelled it is repeated at most twice within fifteen business days, and if there is still no result the quantity is carried to the following year (art. 17). Primary-market revenues are recorded as special revenue in the (B) schedule of the general budget and, under article 12 of the Law, may be used only for green transformation and for combating climate change. Market participants buy and sell on the secondary market by continuous trading (art. 18). An important detail is that the Regulation defines the market participant only as “operators within the ETS” (art. 4/1-ff). In that form, the participation of financial intermediaries and investors is not provided for; the market is designed as an exchange market among the obligated parties themselves.

Three instruments are provided against price volatility. The first is the market-stability mechanism and its reserve, which are triggered according to the quantity of allowances in circulation and to prices (art. 19/1-2). The second is the flexibility mechanisms, which allow allowances to be used in later years (banking) and allowances relating to later years to be used in today’s surrender (borrowing) (art. 19/3). The third is the Board’s power, where necessary, to set a range of minimum and maximum allowance prices (art. 21/1). That price corridor does not apply to the additional reserve or to the supplementary allowance-price mechanism (art. 21/2).

The “supplementary allowance-price mechanism” is the least understood institution in the Regulation (art. 20). Under the provision, an additional price may, at the request of operators, be applied on the primary market for the allowances they will surrender, and EPİAŞ will operate the mechanism in auctions determined by the Presidency for that purpose. The Board decision also states that a method for applying this mechanism will be developed during 2026. Press references to a “supplementary price” for 2026, applied on a voluntary basis, give a clue to the purpose of the mechanism. In our view, its basic function is, at the operator’s request, voluntarily to raise the carbon cost that will in practice remain low domestically because of free allocation, and thereby to create a payment that can be put forward under CBAM as a carbon price actually paid in the country of origin. If that reading is right, the mechanism will, for an operator exporting to the EU, be the legal instrument for paying in Turkey the amount that would otherwise be paid at the EU border. Whether such a payment will be eligible for deduction within the meaning of article 9 of the CBAM Regulation depends, however, on the Commission’s implementing rules, and is not yet certain.

Supervision and oversight of the market have been given to EMRA. By a paragraph it added to article 16 of the Electricity Market Law, the Climate Law has also brought market-disrupting conduct on the ETS market within the sanction regime. Legal persons may accordingly be fined up to twenty million Turkish lira; if a benefit has been obtained or damage caused through the act, the fine may not be less than twice that benefit or damage. EMRA’s draft regulation on the operation of the ETS market was opened for consultation in October 2025, but as of September 2026 the final text has not yet been published.

H. Offsetting and the linking of systems

Carbon credits obtained from projects carried out within the borders of Turkey may be used for offsetting, provided they do not exceed a rate of the surrender obligation to be set by the Board (art. 25). The door is closed to the use of credits from abroad. If information and documents relating to the project that is the subject of the offset prove to be erroneous or fraudulent, the offset is treated as invalid and the surrender obligation as not performed (Law, art. 11/3). The Board’s decision on the offsetting rate has not yet been announced.

The Regulation also allows TR ETS to be linked with other emissions trading systems through mutual-recognition agreements (art. 26). In the long run, a link with the EU system is the path that would solve the CBAM problem at its root. Given, however, that the EU requires systems to be compatible for a link, and in particular that there be an absolute cap, the intensity-based Turkish model cannot, in its present form, be said to be suitable for a link.

I. Monitoring, reporting and verification

Operators must submit the monitoring plan for approval at least six months before emissions are first monitored; plans that are not found suitable are given an additional thirty days (art. 28). The previous year’s emissions and activity levels are reported by 30 April each year; the Presidency may extend that period by at most one month (art. 29). Reports must be verified before they are sent to the Presidency. Verifiers are appointed by the Central Electronic Verifier Assignment System (MEDAS) established by the Presidency; operators subject to the Public Procurement Law are outside that system (art. 30). That the operator does not itself choose its verifier is a sound choice, aimed at breaking the verifier’s economic dependence on the operator.

Verifiers must be accredited by TÜRKAK to the ISO/IEC 17029 standard (art. 33/2-3). A verifier and its managers may not be in any financial or commercial relationship, with the operator being verified or with the undertakings it controls, that would impair independence (art. 31/2). As a rule, accredited laboratories are used for analyses relating to calculation factors; if it is proved that this is technically impossible, laboratories providing conditions equivalent to the TS EN ISO/IEC 17025 standard may be used (art. 32). Operators keep all their data for at least ten years (art. 37).

The legal character of the verification report will matter in a dispute. In an action concerning an administrative fine imposed under the Environment Law, the Sixth Chamber of the Council of State upheld the first-instance decision dismissing, without examination, the claim for separate annulment of the emissions-determination report on which the fine was based. By the same reasoning, a verification report will not be treated as a final and executable act that can be challenged on its own; its unlawfulness can be raised only in an action brought against the allocation, surrender or sanction act adopted in reliance on that report. Operators should therefore put their objections during the verification process in writing; that matters for the evidential basis of an action brought later.

On confidentiality, the Regulation provides that information given to the Presidency and to the verifier may not be shared with third persons without the operator’s written consent or a statutory compulsion (art. 34/7). The Law, by contrast, provides that, for market transparency, free-allocation data, verified emissions and surrender information may be shared with the public by a decision of the Board (Law, art. 10/2). The balance between the two provisions will become clear in Board decisions, together with the question of how production and cost data that are trade secrets at installation level will be protected.

J. Institutional structure

The decision-making body of the system is the Carbon Market Board. The Board consists, under the chairmanship of the Minister of Environment, Urbanisation and Climate Change, of one deputy minister representing each of the Ministries of Energy and Natural Resources, Treasury and Finance, Industry and Technology, Trade, Agriculture and Forestry, and Transport and Infrastructure, the Deputy Head of Strategy and Budget, the chairs of the Capital Markets Board and of EMRA, and the Climate Change President (Law, art. 10/1-a). The Board approves the National Allocation Plan, decides the distribution of free allowances and the quantity to be placed on the primary market, sets the offsetting rate, and determines the principles of the pilot period (Regulation, art. 23).

The voice of the private sector is the Advisory Board chaired by the Union of Chambers and Commodity Exchanges of Turkey (TOBB). The Board includes representatives of MÜSİAD, TÜSİAD, YASED, TİM, DEİK, the Banks Association of Turkey, the associations of insurance, financial institutions and capital markets, and the Chamber of Environmental Engineers of the Union of Chambers of Turkish Engineers and Architects (Law, art. 10/1-b). Decisions of the Advisory Board are consultative and are submitted to the Carbon Market Board through the Presidency (Regulation, art. 24).

A. Failure to submit the report

The Law provides an administrative fine of between TRY 500,000 and TRY 5,000,000 for those who do not submit the verified emissions report on time, leaves to the regulation how the fine is graduated according to the installation’s installed capacity, and provides that the fine is applied at double for operators within the ETS (Law, art. 14/1). Article 35 of the Regulation makes that graduation. It is noticeable at first glance that the amounts in the Regulation exceed the limits in the Law: against a statutory ceiling of TRY 5,000,000, the Regulation provides TRY 6,274,500. The reason is that, under article 17/7 of the Misdemeanours Law, administrative fines are increased each year by the revaluation rate. The revaluation rate for 2025 was announced as 25.49 per cent; all the fixed amounts in the Regulation are the figures in the Law increased by that rate (500,000 × 1.2549 = 627,450).

Installations that cannot be placed in any category because they have no approved monitoring plan are assigned an installation and a category equivalent to their installed capacity, and the relevant fine is applied (art. 35/1-a-6). That Category A installations are also subject to this fine shows that remaining outside the ETS is not an exemption from reporting discipline. For a small industrial operator, TRY 627,450 is not an amount that can be ignored.

Failure to submit the report on time also gives rise, alongside the fine, to a market sanction: transactions other than surrender are blocked in the accounts in the Transaction Registry System. The block is lifted when the report is submitted, but the fine is still applied (Law, art. 14/4-a). An ETS operator that submits its report late performs the surrender obligation in the make-up year (art. 35/3).

B. Activity without a permit

The sanction applied to ETS operators that continue activity without obtaining a permit, or with a permit that has expired or been cancelled, divides in two according to whether the operator has a verified report. An operator that has a verified report is fined at the rate of TRY 5 per tonne of the highest emissions figure submitted in the last five years. For an operator that has no report, a fine of between TRY 1,000,000 and TRY 10,000,000 is provided, and the graduation is left to the regulation (Law, art. 14/4-b). For that second case the Regulation sets six steps: from TRY 1,254,900 to TRY 3,764,700 for Category B installations, and from TRY 6,274,500 to TRY 12,549,000 for Category C installations (art. 35/1-c). The Regulation gives no reason for the difference between the steps for activity without a permit (50–100 thousand, 100–300 thousand and 300–500 thousand tonnes) and the steps for failure to submit the report (50–250 thousand and 250–500 thousand tonnes). In practice, the same installation will be assessed on different scales for two separate breaches.

C. Failure to surrender

The system’s principal sanction concerns breach of the surrender obligation. For each allowance not surrendered on time, a fine is applied of twice the higher of the weighted-average prices, over the last three months of the year to which the verified report relates, of the primary and secondary markets (Law, art. 14/4-c). Because the fine is proportional, it is not subject to revaluation; its amount depends directly on the market price. As noted above, the fine does not extinguish the surrender obligation. The real cost of a failure to surrender is therefore the sum of a fine of twice the price and the price of the allowance that will still have to be bought the following year: about three times. In the EU system, by contrast, the penalty is set as a fixed amount per tonne, indexed to inflation. Indexing the Turkish model to the price ties the deterrent effect of the fine to the course of the market price: as the price stays low, the fine stays low as well.

The most severe consequence of a surrender breach is cancellation of the permit. If at least eighty per cent of the allowance-surrender obligation is not performed on time for three consecutive years, the permit is cancelled and no new permit is granted for between three and six months (Law, art. 14/4-ç; Regulation, art. 10/1-c). Because the permit is a precondition of the activity, this sanction means, in effect, that the activity is stopped.

D. General provisions, the pilot-period reduction, and the judicial remedy

Administrative fines under the Law are increased, for breaches repeated within three years of notification, by one multiple on the first repetition and by two multiples on the second and subsequent repetitions (Law, art. 14/9). The Ministry may, on a one-off basis and for no more than one year, allow time for the contravention to be remedied; if the contravention is not remedied at the end of that time, the activity is stopped in part or in whole (Law, art. 14/10). The fine to be applied for each act may not exceed TRY 50,000,000 (Law, art. 14/11). Whether that ceiling is also subject to revaluation is open to debate. Article 17/7 of the Misdemeanours Law increases “administrative fines”, and there is no express provision on whether a ceiling on a penalty counts as within that scope.

During the pilot period, administrative fines imposed for breach of the obligations in the Law are applied with an eighty per cent reduction (Law, transitional art. 1/1). The reduction is the legislature’s choice to design the pilot as a learning period; it does not, however, remove the breach. Errors made during the pilot may be taken into account in the calculation of repetition.

An action may be brought in the administrative courts against decisions imposing administrative sanctions; bringing the action does not stop collection of the fine, and collection is carried out under the Misdemeanours Law (Law, art. 16/2-3). Because the general rule of the Misdemeanours Law is an application to the criminal court of peace against administrative fines, a special judicial path has been laid down here and the administrative courts have been preferred. That collection is not stopped by the action makes an application for a stay of execution more important in practice.

E. An assessment from the standpoint of the legality principle

The constitutionally most sensitive point of the sanction regime is that part of the amounts of the fines is graduated by regulation. The Constitutional Court accepts that applying the legality principle in administrative offences as strictly as in criminal law would not suit the nature of the matter, and that the principle must be applied more flexibly in the face of the slow-moving structure of the legislature and the rapidly changing conditions of technical life. By contrast, in its more recent individual-application decisions, the Court has held that the legality principle is violated where administrative sanctions are applied directly on the basis of a regulation provision whose framework has not been drawn by statute.

Between those two lines, the position of the Climate Law is, in our view, one of conformity with the Constitution. The Law has clearly defined the act to which the sanction is attached for failure to submit the report and for activity without a permit, has set the lower and upper limits of the fine, and has itself indicated the criterion of the graduation left to the regulation, namely annual emissions calculated prudently according to the installation’s installed capacity. The Regulation does not create a new act; it graduates, according to an objective criterion, within the range drawn by the statute. If, by contrast, the Regulation provides a sanction that has no counterpart in the Law — if, for example, it is argued that a rule such as payment of the free-allocation application fee at an increased rate (art. 14/7) has in practice acquired the character of a sanction — the relationship of that provision to article 14 of the Law can be questioned separately. To the extent that the application fee operates not as consideration for a service, but as a financial burden attached to being late, its basis must be sought in the Law.

A. Electricity generation

Electricity is the only sector whose benchmarking method is differentiated from the others during the pilot. A benchmark determined plant by plant, on the plant’s own weighted average over the past five years, is very close to what is technically called a “historical emissions” (grandfathering) model. The Law itself provides that free allocation may be made in proportion to historical emissions data or to benchmark values (Law, art. 9/6). In this model each plant is compared with its own past; a coal plant races not against a coal plant, but against itself. As a result, the plant obtains surplus allowances if it improves its efficiency against its past average, and runs a shortfall if it deteriorates. No cross-sector price signal arises, however, that would encourage a shift from coal to gas or to a renewable source.

The structure of the electricity market also calls for attention. In the day-ahead market the price is formed by the marginal cost of the last plant that meets demand, and that plant is usually fossil-fired. As is well known in the economics literature, an allowance distributed free of charge also has an opportunity cost: because the plant can sell the allowance instead of using it, it tends to pass the carbon price into its bid. In the early periods of the EU system this led producers that received free allowances to pass the carbon cost into the price and to obtain windfall profits. In Turkey, the maximum settlement price set by EMRA may limit that pass-through; but while the price is below the cap, the carbon price can be expected to raise the market-clearing price, and that to create additional revenue for hydroelectric and renewable plants as well. This effect will also indirectly affect the whole of industry that consumes electricity, that is, operators that are not within the ETS. EMRA’s sanctioning power in contraventions of electricity-market legislation is separately reserved (Law, art. 14/7).

B. Cement

The emissions profile of the cement sector makes it one of the system’s most difficult addressees. In clinker production, the greater part of emissions comes not from fuel, but from process emissions released during the calcination of limestone. Process emissions cannot be reduced by changing the fuel; they can be reduced only by lowering the clinker ratio, by expensive technologies such as carbon capture, or by changing the product mix.

A benchmarking method based on a weighted general average will create a transfer of wealth in the cement sector between efficient new kilns and old, less efficient kilns. Installations below the average will earn income by selling surplus allowances, while installations above the average will run a shortfall. That the benchmark is “weighted” means that large producers are more influential in determining the average. For the use of alternative fuels, it matters that the Regulation’s classification calculation leaves out CO₂ from biomass: the biogenic fraction of waste-derived fuels will lower the installation’s reported emissions. Determining that biogenic fraction correctly depends, however, on accredited laboratory analysis, and it will be one of the subjects most debated at the verification stage.

That cement markets are largely regional, and that transport costs are high, makes it easier to pass the carbon cost into prices on the domestic market. That also increases the risk of price announcements and information exchange, which is addressed below in the competition-law part. On export markets the position diverges: exports to the EU are subject to CBAM, whereas in markets outside the EU Turkish cement will compete with rivals that carry no carbon cost. Setting the sectoral activity coefficient so as to reflect the risk of carbon leakage is therefore decisive for the sector.

C. Iron and steel

Iron and steel is the sector in which Turkey’s largest export exposure to CBAM lies, and it is likely to be the sector most affected by the benchmark design of the pilot period. The greater part of Turkish steel production is carried out in scrap-based electric arc furnaces, and a smaller part in integrated installations using the blast-furnace and basic-oxygen-furnace route. There is a large difference in direct emissions intensity between the two routes. The emissions of arc furnaces arise largely from the indirect emissions of electricity consumption, and TR ETS covers only direct emissions.

How the Board decision’s phrase “the weighted general average of all installations within the scope” will be applied is of vital importance here. If the benchmark is calculated separately, on a product basis, for separate sub-installations such as hot metal, sinter or electric-arc-furnace steel, each route is benchmarked within itself. If, by contrast, a single general average is calculated for the steel sector, the average falls somewhere between the two routes: integrated installations systematically run a shortfall, while arc-furnace installations systematically obtain surplus allowances. The second model would provide income to arc-furnace producers without any abatement, and would place a heavy burden on integrated producers. The Regulation’s sub-installation architecture points to the first model, but the wording of the Board decision is also open to the second reading. The uncertainty cannot be removed until the procedures and principles are published.

There is also a critical point in the interaction with CBAM. Article 9 of the CBAM Regulation allows deduction of a carbon price “actually paid” in the country of origin, while taking into account the part given back in the form of free allocation or another compensation. A Turkish steel producer that receives one hundred per cent free allocation and runs no shortfall will be treated as not having actually paid a carbon price domestically, and will therefore have no amount it can deduct from CBAM. In other words, free allocation protects the producer on the domestic market and provides no protection at all on the EU market. That contradiction also explains why the supplementary allowance-price mechanism described above may be of particular importance for steel exporters.

D. Aluminium

In the aluminium sector there is a sharp distinction between primary production and secondary production and semi-finished processing. Primary aluminium production also releases perfluorocarbon (PFC) gases through the anode effect in the electrolysis process; those gases are expressly listed in the Law’s definition of greenhouse gas (Law, art. 2/1-z). Primary production capacity in Turkey is limited; the greater part of the sector consists of scrap melting, casting, extrusion and rolling. A significant share of these installations will remain below the 50,000-tonne threshold and will, as Category A, be subject only to the MRV obligation.

Remaining outside the ETS does not relieve an aluminium processor of the carbon cost. Aluminium products exported to the EU are within CBAM, and the importer will demand verified data on embedded emissions. For a producer that cannot provide verified data, the EU’s default values are applied, and those values are in most cases above the actual emissions. For an aluminium processor in Category A, the MRV obligation is therefore not only an administrative requirement, but also an instrument of price competition on the EU market.

E. Fertilisers

The fertiliser sector has two basic sources of emissions: CO₂ arising from the use of natural gas both as a fuel and as a feedstock in ammonia production, and nitrous oxide (N₂O) released in nitric-acid production. Because the global-warming potential of N₂O is about three hundred times that of CO₂, catalytic abatement technologies at nitric-acid installations can deliver large emissions reductions at a relatively low cost. That makes the fertiliser sector one of the sectors best placed to obtain surplus allowances under the benchmarking method.

In urea production, part of the CO₂ coming from ammonia production is bound into the product. That the Regulation’s classification calculation includes transferred CO₂ shows that this carbon will not be deducted from the installation’s emissions in determining scope. Whether the same approach will also be adopted in the allocation and surrender calculation will become clear with the procedures and principles on the monitoring methodology. Given the effect of fertiliser prices on agricultural production costs and on food prices, the sectoral activity coefficient to be applied to the sector should be expected to be a political decision as much as a technical one.

F. Annex 1 sectors left outside the pilot

Category B and C installations operating in petroleum refining, coke, glass, ceramics, gypsum, paper and cardboard, and chemicals are not subject to the price mechanism during the pilot. Two obligations are, however, already running for these installations. The first is the MRV obligation. The second is the emissions-permit obligation: article 5 of the Regulation defines the ETS scope as all Annex 1 Category B and C installations, and transitional article 1 of the Law requires operators within the ETS to obtain a permit by 9 July 2028. Not being within the pilot scope does not, in our view, remove the permit obligation. These operators will have to submit their first Monitoring Methodology Plan by the end of the calendar year preceding the year in which the first implementation period begins (transitional art. 3/2). Because the starting year of the first implementation period is not stated in the Regulation, that period too will become certain only by a Board decision.

Among the sectors outside the pilot, ceramics and glass call for separate attention. Turkey is an important supplier of ceramics to the EU, and ceramic products are not within CBAM. In the first implementation period these sectors may therefore face a domestic carbon cost that has no counterpart in CBAM. Defining the sectoral activity coefficient so as to take account of the risk of carbon leakage (art. 4/1-hh) is an instrument provided precisely for sectors of this kind. In glass, the use of cullet reduces both energy consumption in the furnaces and process emissions from carbonates. The economic value of cullet should be expected to rise with the ETS, and that is directly connected with the competition-law risks mentioned below.

In the paper sector, the prevalence of biomass use will, thanks to CO₂ from biomass being left out of the calculation, lower the sector’s reported emissions substantially. In refineries, hydrogen production and process emissions will force the sector both to define a large number of sub-installations and to adopt a complex monitoring methodology.

G. Sectors affected indirectly

The effect of the ETS will not remain confined to the installations within the scope. The carbon cost will travel along the supply chain and reach every sector that uses steel, aluminium, cement and electricity.

The automotive sector is the clearest example of that chain. Steel and aluminium make up a significant part of the weight of a car. The main industry will face the passing of the carbon cost into prices by steel and aluminium suppliers. Producers that export vehicles and parts to the EU must also prepare for customers’ requests for scope 3 emissions data, for reporting obligations under the Turkish Sustainability Reporting Standards, and for the possibility that CBAM will later be extended to downstream products. Supply contracts in the automotive sector therefore need to be reviewed for carbon cost and emissions data.

The construction and contracting sector will be affected through the costs of cement and reinforcing steel. How price-difference formulae in public-procurement contracts will reflect the carbon cost depends on the extent to which the relevant indices include that cost.

For the financial sector, the fact that allowances cannot be the subject of security means that, when lending to companies within the ETS, banks will treat an allowance shortfall as a risk item, but will be unable to use an allowance surplus as collateral. Undertakings and lists of events relating to the carbon cost in project-finance agreements should be updated so as to reflect this new risk.

Finally, energy-intensive SMEs that remain in Category A will carry no market obligation, but will face both the risk of a reporting fine and rising electricity and raw-material costs. For these operators, the most concrete result of the ETS may be not a direct carbon invoice, but the price increases coming from their suppliers.

A. Passing on the carbon cost, and adaptation

In a long-term supply contract, the seller will want to pass on to the buyer the new cost brought by the ETS. If the contract contains no provision that allows this, the first route that comes to mind is adaptation for excessive difficulty of performance, regulated in article 138 of the Turkish Code of Obligations.

The Grand General Assembly of the Court of Cassation requires four conditions to be met together for adaptation: that an extraordinary circumstance, which the parties did not foresee when the contract was made and could not be expected to foresee, has arisen for a reason not attributable to the debtor; that this circumstance has changed the facts as they stood at the time of the contract, to the debtor’s detriment, to an extent that makes it contrary to the rule of good faith to demand performance; and that the debtor has not yet performed the obligation, or has performed it while reserving its rights. The Assembly has emphasised that the basis of adaptation is the rule of good faith in article 2 of the Turkish Civil Code, and that the institution relates to the collapse of the foundation of the transaction. The Court of Cassation also states that intervention in the contract is exceptional, secondary and auxiliary, and that otherwise there is a danger of departing from freedom of will and from the principle that contracts are binding. In the literature, too, it is accepted that adaptation takes place mostly by changing the content of the parties’ rights and obligations.

For the carbon cost, the hardest condition is unforeseeability. Turkey ratified the Paris Agreement in 2021 and announced a net-zero target for 2053; the Climate Law providing for an ETS entered into force in July 2025, and the draft Regulation was shared with the public the same summer. The Court of Cassation accepts that a debtor who is a merchant must contract in anticipation of price increases, that price increases therefore cannot as a rule be treated as force majeure, and that adaptation can come into question only if the increase occurs within unforeseeable bounds and the balance of the performances is excessively disturbed. Likewise, the dismissal of a claim for adaptation has been upheld on the ground that a change in economic conditions cannot be treated as unforeseeable for a merchant. The merchant’s duty to act, in all commercial activity, as a prudent business person also strengthens that assessment. In the light of this case law, the carbon cost cannot, in our view, be defended as unforeseeable in commercial contracts made after 9 July 2025, when the Climate Law entered into force. In long-term contracts made earlier, unforeseeability can be discussed; but then proof of the condition that the balance of the performances has been excessively disturbed becomes harder. Because one hundred per cent free allocation will apply during the pilot, the carbon cost will remain limited except for installations above the average.

A recent decision of the Grand General Assembly on the effect of a cost increase originating in legislation also calls for attention. In an adaptation action based on an increase in the minimum wage above what was expected, the Sixth Civil Chamber of the Court of Cassation quashed the decision on the ground that the contract had to be adapted, holding that the minimum wage relates to public policy and that provisions in the contract preventing payment of a price difference are incompatible with that character. On the regional court’s insistence, the Grand General Assembly found the insistence decision appropriate on different reasoning. It found that the specialist chamber had relied only on public policy and had not examined whether the conditions of adaptation were met, and it sent the file back to the chamber for that examination. The decision confirms that a regulatory cost increase is not of itself a ground for adaptation, and that adaptation must in every case be examined separately against the conditions of article 138 of the Code of Obligations. Because the public-policy character of the minimum wage, directed at the protection of the worker, is absent from the carbon cost, the Sixth Civil Chamber’s ground of reversal does not appear capable of being carried over to the carbon cost.

The type of contract also affects the result. The Grand General Assembly has stated that article 138 of the Code of Obligations is a general provision, that where there is a special rule on adaptation that rule is applied, and that, for example, in lump-sum works contracts article 480 of the Code is taken as the basis. Where the conditions of adaptation are met, the court may adapt by any means it finds appropriate — reducing the burden of performance, increasing the counter-performance, changing the due dates or the manner of performance — even in a form the claimant did not foresee in the claim.

This picture shows the importance of solving the problem by the design of the contract, before it becomes a dispute. How the carbon cost will be shared along the supply chain should not be left to the uncertainty of an adaptation action. Contracts should regulate at least the following: the formula and the price index by which the carbon cost will be passed on; how the free allocation received by the seller, and any allowance surplus, will be reflected in that calculation; the time and the level of verification at which the verified emissions data required for CBAM and for the Turkish Sustainability Reporting Standards will be provided; renegotiation of the price if the legislation changes; and the relationship between the Presidency’s decisions, under article 38 of the Regulation, to postpone for force majeure and the force-majeure clause in the contract.

B. Acquisitions of companies

The ETS has added new headings to legal due diligence in mergers and acquisitions. As explained above, where an installation changes hands by a transfer of assets, the new operator automatically assumes all of the previous operator’s liabilities under the Regulation (art. 34/5). Liquidation and concordat do not end the surrender obligation either (Law, art. 9/10). The buyer should therefore examine the installation’s emissions-permit position, the approval status of the monitoring plan and of the Monitoring Methodology Plan, verified reports and verifier findings for past years, any surrender shortfall carried to the make-up year, disputes pending with the Presidency, and past breaches that may be taken as the basis of a repetition calculation. In the transfer agreement it will be appropriate to provide an indemnity that surrender obligations for system years before the transfer date remain with the seller, and a holdback or escrow mechanism for those obligations. Even if the obligation as against the administration passes to the buyer, which party bears the burden in the internal relationship can be determined by contract.

A. Setting the benchmarks, and information exchange

That, during the pilot and outside electricity, the benchmark is calculated as the weighted general average of all installations within the scope ties each installation’s allocation to the performance of its competitors. This creates a strong incentive for sector associations to collect, from their members, installation-level data on production, capacity, fuel consumption and emissions intensity in order to form a common view on the benchmarks. Yet production volume, capacity utilisation and unit cost are data treated in competition law as competitively sensitive.

The Competition Board accepts that the restrictive effect of information exchange among competitors depends on the degree of concentration, transparency and stability of the market and on the nature of the information shared, and that information exchange can also take place indirectly through third persons such as associations of undertakings. The Board emphasises that exchanges of information directed to the future have the object of restricting competition, and that the dynamic sharing of current data together with historical data can also lead to coordination. In an investigation into an allegation of competitively sensitive information exchange in the poultry sector, more than one undertaking was concluded by settlement.

The Board has also shown, by contrast, that information sharing at sector level can be accepted under certain conditions. On an application for negative clearance and exemption concerning the widening of the scope of the information that the Automotive Industry Association presents to the public, the Board assessed in detail the sharing to be carried out through the association, by reference to the nature of the data shared, the level of aggregation and its currency. That decision offers a roadmap for the sectors within the ETS. In joint work on the benchmarks, data should be collected by an independent third person; only aggregated results, from which the identity of the installation cannot be understood, should be passed to the association and the members; and forward-looking production and investment plans should not be shared. Submitting installation-level data only to the Presidency is the safest path in competition law. It is also recommended that sector associations record the agendas and minutes of their ETS meetings.

B. Price announcements and the simultaneous passing-on of the carbon cost

The carbon cost is a common cost element that affects all competitors at the same time. It is lawful for competitors to pass that cost into their prices independently. Announcements to the public or within the sector, however, such as “an increase of X per cent because of the carbon cost”, can serve to signal to competitors future price behaviour. The Board gives, as an example of situations that produce the result of an infringement, an undertaking explaining to a competitor the policy it applies or intends to apply. With their regional and concentrated market structure, the cement and ready-mixed concrete sectors are particularly sensitive in this respect; the Board has previously treated joint selling and the sharing of competitively sensitive information on the ready-mixed concrete market as an infringement.

Markets for inputs directed at carbon abatement may also see new competition problems. Cullet is the typical example: because the use of cullet in glass furnaces lowers emissions, demand for cullet, and the strategic importance of that input, will rise with the ETS. The Competition Board has recently examined allegations of the fixing of cullet prices, the sharing of regions and customers, and the exchange of competitively sensitive information. Similar subjects of examination may also arise in the supply markets for scrap, alternative fuels and biomass.

C. Dominance on the allowance market, and market-disrupting conduct

That market participants consist only of operators within the ETS, and that during the pilot the scope is limited to five sectors, indicates that the allowance market will be shallow. On a shallow market, an undertaking with a large allowance surplus may, by refraining from selling, make its competitors’ allowance shortfall more expensive, and that may be an instrument for placing them at a disadvantage on the product market on which it competes. Such conduct can be assessed both as market-disrupting conduct within the meaning of article 16 of Law No. 6446 and as an abuse of a dominant position within the meaning of article 6 of Law No. 4054. The overlap of competence and of sanctions that would arise if the two regimes were applied to the same act should be resolved in advance by a cooperation protocol between EMRA and the Competition Authority.