Emission Trading System and Its History
The Emission Trading System is a trading system that supports a low-emission development model. Within this system, businesses are allocated a certain amount of carbon emission rights, and these rights can be traded. This provides businesses the opportunity to trade carbon among themselves. Looking at the history of the Emission Trading System, although it began to spread widely with the Kyoto Protocol, which was accepted in 1997 and implemented in 2005, the concept of an emission trading system existed before 2005. For example, in the United States, comprehensive amendments made to the Clean Air Act in 1990 introduced market-based mechanisms like emission trading to reduce pollutants such as SO2 and NOx. These mechanisms involved setting limits on emissions, granting emission permits to participants, and allowing these permits to be bought and sold. These elements were later applied in similar ways in other emission trading systems. The significance of the Kyoto Protocol for the Emission Trading System lies in promoting its acceptance and proliferation worldwide, bringing this mechanism to an international platform. The Kyoto Protocol imposed limits on carbon emissions for early industrialized countries. Following this decision, some countries initiated Emission Trading Systems as a Kyoto Protocol Sanction, while others adopted the emission trading system voluntarily.
How Does the ETS Work? Understanding the Operation and Effects of the ETS
The Emission Trading System operates on the "polluter pays" principle, reflecting the cost of greenhouse gas emissions to the polluter through a market mechanism based on a cap-and-trade system. The operation of the ETS begins with setting emission reduction targets for a certain period. These targets limit greenhouse gas emissions for each business in the sector. Regulatory authorities grant businesses a certain amount of "carbon allocation" rights. Carbon Allocation in Emission Trading Systems refers to the annual amount of carbon dioxide equivalent greenhouse gas emissions granted to businesses. Each carbon allocation represents the emission of 1 ton of CO2 equivalent greenhouse gases. Carbon allocations are distributed to businesses by the relevant government bodies at the start of the target period, based on their capacities and activities. These allocations can be distributed for free or sold for a fee. However, a business's emissions may not exactly match the amount of permission given at the end of the period. The emissions of businesses can exceed or fall below their allocated pollution rights. There are several reasons for different scenarios in each business, but one of the most apparent reasons is the varying costs of decarbonization across sectors. For some businesses, the cost of reduction is higher, while for others, it is lower. Therefore, businesses are allowed to buy and sell their permits in a designated market. Businesses that exceed their targets can sell their excess permits, while those who fail to meet their targets can buy these permits. This way, a market mechanism is created through supply and demand for emission permits. However, if businesses cannot find enough emission permits on the market, they must pay a penalty for each unit they fail to reduce. This measure is seen as an incentive to achieve reduction targets.
For instance, both Company A and Company B had an initial emission of 100,000 tons of CO2. For the following year, both were given an emission permit of 60,000 tons of CO2, 25% below their initial emissions. However, the cost of emission reduction for Company A and Company B differs. By the end of the period, Company A has emitted 10,000 tons less than the given emission permit, while Company B has emitted 10,000 tons more. In this case, Company A has the opportunity to sell its 10,000-ton emission permit to Company B, which needs it to meet its target. Assuming the market price for one ton of CO2 at that time is $20, this transaction would amount to $200,000. Analyzing this situation for both companies can provide insights into the effects of the emission trading system. It appears that the emission trading system offers significant economic and environmental advantages. Both companies have financially benefited from the system. Company A is rewarded for exceeding its reduction by selling 10,000 emission permits in the market, making a profit of $100,000. As long as Company A sees this profit in the carbon market, it will be motivated to reduce more. Without emission trading, this advantage would not exist, nor would the incentive to reduce. On the other hand, Company B, by emitting 10,000 tons more than the target, has bought this excess from the market for $200,000, saving $100,000 compared to reducing emissions on its own, which would have cost $300,000. This approach adheres to the "polluter pays" principle, but since Company B achieved its target at a lower cost, it contributes to lower national emission reduction costs. If the emission trading system is well-planned, it can be an effective system. For the Emission Trading System to be effective and functional, critical points such as which sectors to include, accurate emission calculations, and setting the carbon price must be considered. For instance, the lower the carbon price compared to the costs of low-emission technologies, the more it will encourage businesses to invest in these technologies. The carbon pricing in the market depends on the emission limits imposed on businesses. If there is a significant reduction commitment for that period, the carbon price will rise; otherwise, the carbon price will be lower. Therefore, countries seeking to enhance the effectiveness of emission trading should increase their greenhouse gas reduction targets each year, thereby keeping the market carbon price high.
Global ETS
The ETS system is currently widely implemented worldwide, with 42 countries known to apply this system. Looking at the practices in these countries, different situations are encountered. For example, looking at New Zealand, which has been using the ETS since 2008, the system is designed to cover the economy entirely. The system includes various sectors such as the forestry industry, fossil fuel sector, and power plants. While the forestry industry is considered an emission source due to logging, it is also seen as an allocation source due to reforestation activities. The agricultural sector is not subject to any obligations other than annual reporting. However, carbon pricing for livestock and fertilizer production is planned to be implemented by 2025. For this purpose, an informal agreement has been made between the agricultural sector and the New Zealand Government, and discussions on various options are ongoing. Looking at the ETS system in the state of California, the ETS obligation period began in January 2013. The system covers 80% of the state's emissions, with the main goal of reducing the state's greenhouse gas emissions by 40% by 2030 and 80% by 2050.
ETS and Turkey
Turkey took its first step towards establishing a domestic Emission Trading System (ETS) in 2015 by creating a Monitoring, Reporting, and Verification (MRV) system. According to this regulation, the sectors included in the ETS are aluminum, cement, paper, electricity, glass, iron-steel, lime, ceramics, mineral wool, refinery products, and chemicals. Certain size facilities in these sectors are required to report their emissions to the Turkish Ministry of Environment, Urbanization, and Climate Change. The MRV system categorizes these facilities into three categories: A, B, and C. The categories are determined based on the facilities' emissions. Category A includes facilities emitting less than 50 ktCO2e, Category B includes facilities emitting between 50 and 500 ktCO2e, and Category C includes facilities emitting more than 500 ktCO2e. According to 2020 MRV data, there are a total of 476 facilities in the scope, with 214 in Category A, 136 in Category B, and 126 in Category C. Turkey's total emissions in 2020 were calculated at 520 MtCO2, with the facilities within the MRV scope responsible for 250 MtCO2, accounting for 48.2% of the total emissions. When examining the emissions within the MRV scope by category, 1.2% were generated by Category A facilities, 6.7% by Category B facilities, and 92.1% by Category C facilities. The ETS pilot application, which is planned to start on October 15, 2024, will only include Category C facilities. The implementation phase of the ETS is planned to begin 2 years after the pilot process, on October 15, 2026.
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