Although, environmental tax revenue as a percentage of GDP was below the OECD average as of 2021, Türkiye has made some progress in implementing environmental taxes. However, their effectiveness in achieving net-zero commitments remains limited. The environmental tax base is primarily on energy and transportation and Türkiye does not have any significant taxes on pollution or resource use and it continues to provide substantial environmentally harmful subsidies. 

Considering that carbon taxes require a larger and more significant transfer from both individuals and companies to the state but the cost of cap and trade to consumers is indirect, governments are inclined to foster emissions trading. In this regard, parallel to the EU where the Emission Trading System (ETS) is the major instrument for emission reduction in energy and industrial sectors, Türkiye plans to introduce the pilot phase of the ETS in October 2024. 

There are signs of the application of market-based solutions increased across middle-income countries, but carbon pricing adoption has still been improving in a slow pace globally and the level of global emissions covered by carbon pricing is unlikely to reach 30 percent in the short term, according to the World Bank. Besides, even in the EU where market-based solutions are well established, fossil fuels continue to benefit from tax incentives and exemptions, particularly in the aviation and maritime sectors which contradicts with the decarbonization process.

Therefore, alongside the ETS, tax regulations have been implemented in many countries in the last five years. In this context, countries are reviewing their tax policies, including tax expenditures, and implementing reforms related to environmental taxes to align carbon taxes with the net zero commitment.

In parallel, Türkiye needs to design carbon reducing policy to harmonize environmental taxes with expenditure policy and other policies to improve market efficiency, and cost-effectiveness through enhancing the connection between taxation and carbon emissions and other environmental impacts.  This approach supported with the establishment of the ETS would also enable Türkiye to align with the European Union, the largest trade partner.

You may read working paper from here.