ETS – Emissions
Trading System

An allowance is the basic unit of ETS. In simple terms, it is an electronic right that a business can use for a specified quantity of greenhouse gas emissions within the system.

Allowances are issued in the Transaction Registry System, held in business accounts, transferred and surrendered to meet compliance obligations.

A business's verified annual greenhouse gas emissions must be matched by the quantity of allowances it surrenders.

For example, assume a facility has verified emissions of 100,000 tonnes CO₂e and receives 75,000 free allowances. It may need to obtain the remaining 25,000 allowances from the ETS market.

Higher emissions can therefore become a direct cost factor.

Businesses do not necessarily have to buy all ETS allowances from the market. Türkiye's ETS Regulation also provides for free allocation.

Free allowances are primarily distributed using a sub-installation benchmarking method.

The calculation may take into account:

• Sub-installation activity level
• The relevant benchmark
• Free allocation rate
• Sectoral activity coefficient
• Sectoral correction factors where necessary

The calculation does not depend solely on a facility's total emissions. Correctly identifying production processes and sub-installations is important.

Businesses must submit electronic applications for free allocation within the specified period after publication of the National Allocation Plan.

A benchmark is a reference value used to compare the carbon intensity of a product or production activity.

In simplified terms, production quantity × benchmark may be one of the main inputs into a business's free allocation calculation.

The system does not simply award more allowances to facilities that emitted more in the past. It aims to benefit facilities with greater carbon efficiency.

The question is therefore not only ‘How many tonnes of CO₂ do we emit in total?’ but also ‘How many tonnes of CO₂ do we emit per tonne of product?’

For ETS purposes, an industrial facility may be assessed as separate production and energy activities rather than as a single unit.

Free allocation calculations include approaches such as:

• Product benchmark sub-installation
• Measurable heat benchmark sub-installation
• Fuel benchmark sub-installation
• Production process sub-installation

Defining the correct sub-installation structure is an important part of ETS work.

An incorrect structure can directly affect the free allocation calculation.

ETS includes an upper limit, or cap, on the total quantity of allowances in the system for a given period.

Türkiye's ETS Regulation uses an emissions-intensity-based approach to determine the cap.

The cap relates to the allowances distributed free of charge plus those made available on the primary market.

The National Allocation Plan is a key document in this respect.

Allowances can be traded on the ETS market.

A business whose emissions are lower than its allowances may hold a surplus, which it can manage under the relevant market rules.

A business whose emissions exceed its allowances may need to acquire the shortfall from the market.

Lower-carbon production can lead to lower carbon costs, while higher-carbon production can lead to higher costs.

This mechanism creates an economic incentive to reduce emissions.

Türkiye's ETS Regulation provides for primary and secondary markets.

Primary market: allowances are first offered to market participants through auctions or other specified methods.

Secondary market: allowances already issued can be bought and sold between market participants.

This structure makes allowances carbon market instruments with economic value.

Once a facility's verified annual emissions are determined, the business must surrender the corresponding quantity of allowances to the system.

Under Türkiye's ETS Regulation, surrender obligations are fulfilled through the Transaction Registry System.

A simplified example: verified emissions of 100,000 tonnes CO₂e require 100,000 allowances. If 70,000 allowances are received free of charge, the remaining shortfall is 30,000.

The business must manage this shortfall within the ETS market.

Managing the allowance position is therefore as important as calculating emissions.

The electronic Transaction Registry System handles the issuance, allocation to business accounts, holding, transfer, surrender and cancellation of allowances.

An account in the operator's name is envisaged for each facility.

The system provides the accounting and record infrastructure for ETS.

ETS needs reliable emissions data to function effectively. Monitoring, reporting and verification (MRV) therefore form its foundation.

• Monitoring: regularly tracking emission sources and activity data at the facility.
• Reporting: calculating and reporting annual greenhouse gas emissions.
• Verification: an independent authorised verifier checks the emissions report.
• ETS: allowance obligations are determined using verified emissions.

A faulty MRV system is more than an environmental reporting problem: it may directly affect the business's ETS costs.

An environmental tax: ETS differs from a system that only charges a fixed tax per tonne of CO₂.

A greenhouse gas report alone: MRV provides the data infrastructure, while ETS also involves carbon markets and allowance management.

A corporate carbon footprint alone: corporate inventories and facility emissions under ETS may use different boundaries and regulatory rules.

CBAM: the EU's Carbon Border Adjustment Mechanism relates to embedded emissions in certain imported products.

Türkiye's ETS is the national carbon market system for covered domestic facilities and their allowance obligations. The two systems nevertheless have important links, particularly through carbon costs and trade with the EU.

When ETS becomes operational, industrial businesses must manage a new economic variable: carbon cost.

This cost can be affected by:

• Total annual emissions
• Emissions intensity per product
• Free allocation quantity
• Allowances that must be purchased
• Allowance prices

ETS is therefore a topic for more than the environmental team alone.

Environment, production, energy, finance, procurement and senior management need to work together.

ETS preparation should not be left until the final day.

Businesses should first:

• Determine whether they fall within ETS scope
• Review their MRV system
• Analyse verified emissions data
• Calculate production and emissions intensity
• Define the sub-installation structure
• Assess free allocation potential
• Develop carbon cost scenarios
• Identify emissions reduction opportunities