The Kyoto Protocol is the only international framework aimed at combating global warming and climate change. Signed under the United Nations Framework Convention on Climate Change, this protocol obliges the signatory countries to reduce emissions of carbon dioxide and five other greenhouse gases, or—if they are unable to do so—to fulfill their commitments through carbon trading.
The protocol requires countries to reduce the amount of carbon they emit into the atmosphere to the levels of 1990. Accordingly, companies that are projected to exceed these limits must obtain carbon credits from other sources to cover the shortfall. This obligation paved the way for the emergence of carbon trading and carbon exchanges.
Mechanisms for Reducing Carbon Emissions: Reduction and Trading
The Kyoto Protocol introduces three market-based mechanisms for reducing emissions. These mechanisms represent the methods that industrialized countries can use to meet the targets set by the protocol.
- Joint Implementation (JI):
Industrialized countries can participate in emission reduction projects in developing countries. For example, France providing funding for a project in Latvia or Italy supporting renewable energy projects would be counted toward their own emission reduction targets. From such projects, countries obtain Emission Reduction Units (ERUs), each equivalent to 1 ton of CO₂. These ERUs are then credited toward the country’s Kyoto commitments.
- Clean Development Mechanism (CDM):
Similarly, under this mechanism, developed countries earn Certified Emission Reductions (CERs) through emission-reducing projects they support in developing countries.
- Emissions Trading:
Countries may sell the unused portion of their allocated emission allowances. If a country exceeds its emission limit, it can purchase the surplus allowances from countries that have not used their full quota. Likewise, companies with emission reduction obligations can, when unable to reduce sufficiently, buy the missing portion from other companies that hold excess allowances under market conditions.
Has Carbon Emission Reduction Created a New Commodity?
The mechanisms aimed at reducing emissions have also created a new type of market and commodity.
In addition to the CERs and ERUs mentioned above, there are also Removal Units (RMUs), each equivalent to 1 ton of CO₂, generated from land use, land-use change, and forestry (LULUCF) activities.
Moreover, emission reductions carried out in ways not fully aligned with the established standards can be verified by institutions accredited under the United Nations Framework Convention on Climate Change (UNFCCC) and introduced to the market as Verified Emission Reductions (VERs). All of these products are standardized to represent 1 ton of CO₂ and are traded in over-the-counter (OTC) markets.
These “new commodities”—CERs, ERUs, RMUs, and VERs—serve as market instruments in emissions trading. The European Union has incorporated this system as a strategic part of its fight against climate change by launching the EU Emissions Trading System (EU ETS) on January 1, 2005.
The EU ETS operates on the principle of cap and trade. Under national allocation plans, member states distribute emission allowances that can be bought and sold. At the end of each year, companies may only emit up to the limit allocated to them. Those that emit less than their allowance can sell their unused credits, while those that exceed their limits must either invest in new technologies to reduce emissions or purchase additional allowances from the market—or adopt a combination of both approaches.
The marketplace where these new commodities are traded under the EU trading system is referred to as the Carbon Exchange.
The Scope of European Emissions Trading: The Carbon Exchange
The Carbon Exchange is a specialized type of financial market that allows businesses to buy and sell carbon credits, turning their sustainability efforts into economic gains. Companies can purchase credits to offset excess carbon emissions or sell credits obtained from their own sustainability projects to generate income.
Carbon markets are divided into two main categories:
- Voluntary Carbon Market:
Companies and individuals may purchase carbon credits to offset their emissions without being under any legal obligation. This market is especially suitable for firms that prioritize sustainability policies. It functions as an over-the-counter (OTC) market: on one side are clean energy producers, and on the other side are companies, individuals, or organizations with higher emissions. The payments made to offset carbon emissions are used to finance environmental projects in other countries.
Voluntary carbon markets are typically used by firms, individuals, and organizations that want to neutralize their greenhouse gas emissions but are not subject to binding regulations. Buyers include companies from industries such as aviation, automotive, IT, waste management, and finance, as well as major organizations like the G8 Summit and the 2006 FIFA World Cup. Today, leading actors in this market include the Xpansiv CBL exchange in the United States and ACX in Singapore.
- Compliance (Regulated) Carbon Market:
This market is for companies required to meet carbon emission limits set by governments and international organizations. Carbon trading between countries under the Kyoto Protocol falls into this category. Mechanisms such as the EU Emissions Trading System (EU ETS) are examples of compliance markets. The European Climate Exchange (ECX) is one of the largest in this field. Similar climate exchanges have also been established in Australia, Canada, Austria, and China.
In summary, the carbon trading system serves as a mechanism that matches carbon reducers with those in need of carbon credits. Today, many countries operate both compliance and voluntary carbon markets, and these markets continue to expand rapidly.
The United Nations has also launched a voluntary carbon offsetting platform where organizations and individuals can purchase carbon credits either to compensate for their greenhouse gas emissions or simply to support climate action.
Why Trade in the Carbon Exchange?
This mechanism can be explained through a hypothetical example (Yamanoğlu, 2002):
Companies A and B are each allocated 95,000 tons of emission allowances by the regulatory authority. However, both companies emit 100,000 tons annually. Therefore, each firm must reduce its emissions by 5,000 tons.
To achieve this reduction, companies have two options:
- Reduce emissions by adopting new technologies,
- Purchase additional emission allowances from the market.
Naturally, the least costly option will be chosen. Suppose the market cost of reducing 1 ton of carbon dioxide emissions is 10 TL. For Company A, the reduction cost is 5 TL, while for Company B it is 15 TL.
- Company A will choose to reduce emissions through new technologies since its cost is lower than the market price.
- Company B, on the other hand, will purchase emission allowances from the market since its cost is higher than the market price.
If emissions trading did not exist:
- The cost of reducing 5,000 tons for Company A would be 25,000 TL,
- For Company B, the same reduction would cost 75,000 TL.
With emissions trading, however:
- Company A reduces 10,000 tons, spending 50,000 TL. It then sells its surplus 5,000-ton reduction on the market, earning 50,000 TL.
- Company B buys the required 5,000-ton allowance from the market for 50,000 TL, which is 25,000 TL less than the cost it would incur without trading.
In conclusion, emissions trading reduces costs for both parties and ensures a more efficient functioning of the market.
Where Does Turkey Stand in the Carbon Exchange?
Within the Ministry of Climate Change, the Carbon Pricing Department was established on October 29, 2021. The department began its work with the aim of developing market-based mechanisms and economic tools—particularly the carbon emissions trading system—conducting studies on carbon offsetting and voluntary markets, drafting national regulations for international carbon markets, and contributing to the management of revenues generated from carbon pricing instruments.
More recently, a significant step was taken: under the Climate Law No. 7552, which came into effect on July 2, 2025, the draft Carbon Credit and Offset Regulation was published for public consultation as of August 1, 2025. The draft establishes Turkey’s National Carbon Offset System (TR KDS), setting out the framework for converting the gains from emission reduction and removal projects into carbon credits.
The primary objective of the new system is to ensure that emission reductions generated under voluntary and mandatory carbon reduction projects are traceable, verifiable, and usable in international markets as carbon credits.
Key highlights of the draft regulation include:
- Introduction of the “Turquoise Credit” concept,
- Establishment of separate registries for national and international transactions (Turkey Carbon Offset Registry and Turkey International Carbon Registry),
- Validation, monitoring, and verification of projects by accredited bodies such as TSE and TÜRKAK through an Independent Verification Mechanism,
- Systems to ensure credit validity and prevent double counting,
- Pilot Applications allowing the temporary use of international credits within the Emissions Trading System (ETS).
At present, all projects in Turkey operate within the Voluntary Carbon Market. Turkish companies have long been active in this market, engaging in trade between firms seeking to offset their emissions and “green investors” implementing projects to reduce carbon output. Companies such as Zorlu, Bilgin, Demirer, Dost, Akenerji, Rönesans, Ayen, and İSTAÇ have been involved in carbon trading through their projects.
As Turkey is still at the early stages of this rapidly growing market, success will depend not only on comprehensive legal frameworks but also on ensuring transparency, traceability, and reliability in practice. Additionally, the creation of green jobs, the internalization of corporate transformation, minimizing costs, and securing financing through favorable credit mechanisms will be crucial.
Therefore, providing the private sector with the necessary financial support, offering guidance through knowledge and expertise, and facilitating technological development are indispensable for Turkey to become a strong player in the carbon markets.
