EU’s Carbon Border Adjustment Mechanism: Impact on Trade and the Western Balkans

The European Union’s Carbon Border Adjustment Mechanism (CBAM), adopted to address carbon leakage, requires importers of specific carbon-intensive products – including electricity – from third countries to purchase CBAM certificates corresponding to the products’ embedded emissions. While designed to encourage cleaner industrial production globally, the implementation of CBAM, particularly its application to the electricity sector, raises structural and methodological concerns, especially for countries in the Western Balkans.

Understanding the Carbon Border Adjustment Mechanism

Established by Regulation (EU) 2023/956, CBAM aims to neutralize the carbon intensity of imported goods and prevent carbon leakage – the relocation of production to countries with less stringent regulations. The EU as well intends to encourage the establishment of carbon pricing mechanisms similar to its own Emissions Trading System (EU ETS). European Commission

If a third country operates a carbon-pricing system equivalent to the EU ETS and the corresponding carbon price is paid in the country of origin, CBAM does not apply. Currently, CBAM covers carbon-intensive sectors including iron, steel, cement, aluminum, certain chemicals, hydrogen, fertilizers and electricity. Wikipedia

The system became fully operational on January 1, 2026, with the first certificate sales scheduled for February 2027. Importers of CBAM goods exceeding a threshold of 50 tonnes annually must apply for authorization as CBAM declarants and purchase certificates based on the auction price of EU ETS allowances. European Commission

Simplifications and Flexibility Measures

Responding to concerns about competitiveness, the European Parliament and the European Council reached an agreement in December 2025 introducing simplifications to CBAM. Importers with annual imports below 50 tons are exempt from payment obligations. The European Commission has also proposed granting itself the authority to suspend CBAM for specific products if unforeseen circumstances cause severe internal market disruption, a proposal currently under negotiation.

EU-Western Balkans Relations and the Energy Nexus

The EU has prioritized the Western Balkan region – Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia, and Serbia – through the Stabilisation and Association Process. The region’s energy networks, largely constructed in the 1970s, rely heavily on fossil fuels, with Albania being a primary exception. The EU is a major trading partner and investor in the region, particularly in the energy sector, providing substantial funding through initiatives like the Western Balkans Investment Framework (WBIF) and the Energy Community.

The Reform and Growth Facility for the Western Balkans, approved in 2024, provides up to 2 billion euros in grants and 4 billion euros in concessional loans for the 2024-2027 period, contingent upon the implementation of reforms related to energy policy and the green transition.

Challenges of Applying CBAM to the Electricity Sector

Applying CBAM to the electricity sector presents unique challenges. Unlike manufactured goods, tracing the origin of electrons within interconnected transmission systems is physically impossible, requiring approximations for emissions calculations. This is further complicated by electricity exports often occurring during periods of surplus renewable generation. The European electricity market, through the Energy Community and ENTSO-E, operates as a pan-European integrated system, directly affecting regions like the Western Balkans.

The current CBAM methodology relies on predefined default emission values and a five-year average of CO₂ intensity. This averaging methodology can be problematic, failing to reflect rapid structural developments in electricity systems. For example, the closure of coal-fired power plants may not be immediately reflected in the carbon intensity calculations.

Potential Impacts and Responses

CBAM could impose significant costs on Western Balkan countries reliant on coal-fired power generation, potentially weakening the integration of electricity networks. Calculations suggest potential export penalties of 70-80 euros per MWh for countries like Bosnia and Herzegovina, Montenegro, North Macedonia, and Serbia. The mechanism also poses risks to EU Member States, such as Greece and Hungary, that rely on electricity imports from the region.

However, CBAM may also incentivize Western Balkan countries to align their carbon markets with EU standards. Serbia has already introduced a carbon tax and announced the launch of its own carbon market, while Montenegro established an emissions trading system in 2020. Bosnia and Herzegovina has indicated its intention to adopt a roadmap for introducing a similar system.

Conclusion

The introduction of CBAM presents both challenges and opportunities for the Western Balkans. While the mechanism may pose economic challenges and potentially disrupt electricity trade, it could also serve as an incentive for regional decarbonization and integration with the EU energy market. The ultimate impact will depend on the implementation of CBAM, the adoption of carbon pricing mechanisms in the region, and the Commission’s decision regarding the proposed suspension authority for specific products.