ISTANBUL, Turkey—Turkey is finally getting serious about building a domestic carbon trading scheme, and many Western governments and carbon market analysts worldwide are watching to see if it will follow through on its pledges.
"The government has been dragging its feet for quite some time on this," said Simone Ruiz, European policy director at the International Emissions Trading Association, a trade group.
As an emerging economy, Turkey isn't required by any international agreements to reduce carbon dioxide, a major greenhouse gas, despite being one of the world's biggest polluters. But after a successful run in the thinly traded voluntary carbon market, the government has signaled serious interest in creating a mandatory carbon trade at home.
The chief motivation is economic—to eventually become a major international supplier of carbon offsets and make Turkish businesses more globally competitive—but officials say carbon trading will also encourage more renewable energy production in its fossil fuel-dominated electricity system.
In a first step, Turkey plans to release legislation by the end of 2011 to build its capacity for monitoring, reporting and verification of emissions data—a system known as MRV. "This new MRV focus has come as a very good surprise," said Ruiz.
The MRV law will take effect in 2014 and will allow the government to track about half of Turkey's emissions using rules similar to those in the European Union's Emissions Trading Scheme (EU-ETS), the world's largest carbon cap and emissions-trading program, or "cap and trade." The scheme sets a limit on global warming emissions and allows utilities and other emitters to trade pollution permits among themselves.
Turkey's carbon-regulation program could be linked to Europe's—when, and if, it opens.
For now the timeline and form of the scheme are still very much up in the air. Under Turkey's notoriously vague 2011 National Climate Change Action plan, the government must create cap-and-trade "infrastructure" by 2015—but it's not clear how binding this mandate is and what is expected to happen beyond MRV.
'A Great Benefit' to Turkey
Jill Duggan, a former expert on carbon markets at the European Commission's Directorate-General for Climate Action with a special focus on Turkey, took the coming release of the MRV bill as a positive sign.
"The MRV legislation shows that Turkey has recognized that there is a great benefit to them in getting control over their emissions," she said. "The fact that they've chosen to do this in a way that aligns with the European Union means they're keeping the door open to creating something that links to the EU ETS—or, in a much longer time frame, becoming part of the EU."
Duggan said Turkey's advantage lies in building something "robust," such as "a cap-and-trade program in their most energy-intensive sectors," which would allow certain businesses to carry out trades of emissions credits.
Evren Türkmenoğlu, a climate change specialist at the Turkish Ministry of Environment and Urbanization, said putting caps on high-polluting sectors was a very real possibilty. China, another emerging economy and the world's largest emitter, has floated a similar idea.
However, an economy-wide curb on emissions isn't in the cards for Turkey, Türkmenoğlu said.
"Turkey is a developing economy and country, so the amount of energy that we use increases rapidly every year," he said. "When we project our GHG emissions, we don't see a peaking point until at least 2030. So it's hard for us to impose an economy-wide cap."
Not everyone in Turkey wants the MRV law to pave the way for carbon credit training.
"We do not see carbon trading as a meaningful tool to reduce emissions," said Alidost Numan, a member of the Turkish Green Party's climate change and energy working group.
Numan said his party favors a "strong carbon tax policy" that could immediately incentivize carbon-intensive industries to shift to clean energy alternatives. Complex carbon trading schemes would open Turkey to investment opportunities in clean energy development but wouldn't directly discourage fossil fuel-powered economic growth, he said.
Big Developing Economies Eye CDM Alternatives
Turkey is one of the world's biggest carbon polluters, with three-quarters of its emissions coming from its electricity sector. Between 1990 and 2008, its greenhouse gas emissions rose by 101 percent, the steepest rise of all the 43 developed, or Annex I, countries that ratified the 1997 Kyoto Protocol.
While it's considered Annex 1 by the United Nations Framework Convention on Climate Change, the global forum for fighting climate change, Turkey was granted a special designation under the 1997 Kyoto Protocol as an "advanced developing country" when it finally ratified the treaty in 2009.
Turkey's in-between status as neither a rich nor a poor nation has provided it with both benefits and drawbacks.
Unlike other Kyoto signatories, it doesn't have to limit CO2, a major byproduct of economic growth. But neither can it reap the benefits of the pact. Most importantly, it can't partake in carbon trading through the Clean Development Mechanism (CDM), a scheme spawned by Kyoto that allows companies in rich countries to offset their emissions by investing in greenhouse gas-reducing projects in the developing world, helping to give rise to greener infrastructure in those countries.
China, for instance, has reaped hundreds of millions of dollars in foreign investment through its CDM projects.
But the CDM may not have a long future in the carbon trade, with the Kyoto treaty, the first phase of which expires in 2012, in doubt. Even China, which houses two-thirds of CDM-registered projects, has faced increasing disinterest from rich countries in these offset projects, said Denny Ellerman, a research associate at the MIT Joint Program on the Science and Policy of Global Change.
"There are discussions between the EU and China now, where the EU is saying, 'We're interested in China moving from project development to a cap, which can be regional or industry-specific, but it will require monitoring and must look like a cap-and-trade system,'" said Ellerman.
Indeed, several analysts see the demand for carbon assets turning away from CDMs toward agreements between countries or sectors within countries that wouldn't be confined to specific projects.
"I think most of the developing economies that can now benefit from the CDM will—over the long run—move away from the CDM towards their own measures," said Ruiz of the International Emissions Trading Association.
Voluntary Market: A Big Fish in a Small Pond
For now, the voluntary market is the only way for Turkey to engage in the carbon credit trade. And for four years it's been making carbon-reduction deals with foreign companies.
"Turkey is one of the most important countries in the voluntary market, which is important because they have developed a lot of expertise that'll come in handy if they move toward mandatory emissions trading, domestic cap and trade or a sectoral trading scheme," said Ruiz.
There are key differences between the regulated markets and the voluntary one. Unlike in markets established under Kyoto and the EU-ETS, there's no central registry for projects or a standardized verification process in the voluntary market. Instead, investors in renewable energy projects sell future carbon credits to companies who want to offset their CO2 pollution using third-party verifiers, or asset developers. The sellers earn money to finance their green projects; the buyers improve their environmental records.
"It's a boutique market, and quite volatile, because prices are very low," said Gediz Kaya, an infrastructure finance expert at Gaia Carbon Finance.
At nearly four years old, Gaia is the oldest carbon asset developer and broker in Turkey. "When we first started, nobody knew what carbon trading was. But we created our own market, went to project owners in different industries and convinced them to participate in this," she said.
Gaia currently has more than 50 projects in the pipeline. By the end of 2012, the company will have helped offset an estimated 1 million tons of "carbon-dioxide equivalent" emissions, most of which has been in new small-scale wind power or hydroelectric projects across Turkey.
While Turkey is a big seller, the market remains small, said Ruiz. In 2010, it was worth around $420 million, roughly one-third the total value of the global carbon trade.
"It's growing but probably won't become a very large market, especially because countries are more and more moving away toward more compliance-based markets," she said. "So Turkey must develop a national mitigation scheme or other domestic measures."
Kaya agreed that without any formal carbon trading agreements in place between Turkey and other countries, the capacity to use carbon trading to achieve economic growth is limited. "To increase demand and raise the prices, we either need a bilateral agreement with another country or a very strong post-Kyoto mechanism," she said.
First Comes MRV, then Bilateral Agreements
Enter the MRV legislation. "The data we obtain from it will pave the way for a market mechanism, such as a cap-and-trade scheme," said Türkmenoğlu.
Ruiz agreed. "If you know where the biggest emissions are, and where your abatement potential lies, you can do anything from that," he said.
Eventually, Turkey's government is planning to establish a carbon credit exchange based in Istanbul, joining the world's handful of exchanges that are trading in greenhouse gases, according to Türkmenoğlu. "The exchange would initially trade in credits generated domestically, then we'd see if there was an opportunity for our neighboring countries," he said.
It's already discussing the possibility of forming bilateral agreements around carbon trading with several countries, said Türkmenoğlu, though he declined to name them. Under such deals, one country would commit to supply a certain number of carbon offset credits to another at a certain price.
One nation likely to be on Turkey's radar is Japan, which has been one of the world's most active buyers of carbon offsets over the past few years. It forged a new carbon trading market through a series of bilateral agreements with Ukraine and nine countries in South Asia.
"But, of course, we have to see what international negotiations on carbon markets will shape into," Türkmenoğlu said. A post-Kyoto carbon trading framework could be devised at the Nov. 28-Dec. 9 UN climate talks in Durban, South Africa.
One potential setback is Turkey's inexperience. Since it hasn't participated in any regulated carbon credit schemes—or seemed particularly eager to commit to one—it still must earn the trust of other countries and carefully establish the integrity of the carbon credits it sells to them, said MIT's Ellerman.
"When foreign companies buy an allowance through a trading scheme, they want to be confident that a ton of emissions is going to be offset, that they're not just letting bogus money into their system," he said.