UNSPLASH | License | Nikola Johnny Mirkovic
The impact of CBAM on Western Balkan electricity imports
Under the European Union’s Carbon Border Adjustment Mechanism (CBAM), adopted to address the risk of carbon leakage, importers of specific carbon-intensive products – including electricity – from third countries must purchase CBAM certificates corresponding to the products’ embedded emissions. The European Commission has proposed several simplification and flexibility measures to ease these obligations, most recently introducing the possibility of suspending the mechanism for specific products if its implementation were to disrupt the EU’s internal market.
Furthermore, CBAM will not apply to countries operating carbon-pricing systems equivalent to the EU Emissions Trading System (EU ETS). This approach aims to foster the global adoption of carbon pricing, which could influence the Western Balkans. Despite this potential incentive, however, serious concerns persist that carbon pricing may undermine the competitiveness of third-country economies – a trend already evident in Montenegro and Serbia.
The EU Carbon Border Adjustment Mechanism
The Carbon Border Adjustment Mechanism (CBAM), established by Regulation (EU) 2023/956, seeks to neutralise the carbon intensity of imported goods and prevent carbon leakage by discouraging companies from relocating their production to third countries with less stringent regulations. With the introduction of CBAM, the European Union also aims to encourage the establishment of mechanisms similar to its own Emissions Trading System (EU ETS).
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, the CBAM does not apply. The mechanism covers carbon-intensive sectors, including iron, steel, cement, aluminium, certain chemicals, hydrogen, fertilisers and electricity.
Following a two-year transitional period, the system became fully operational at the start of 2026, with the first certificate sales scheduled for February 2027. Amid Member State concerns over competitiveness, the European Parliament and the European Council reached a political agreement in December 2025 on the Omnibus I package, which introduced significant simplifications. Under this agreement, importers whose annual imports do not exceed 50 tons are exempt from payment obligations.
Simultaneously, the Commission proposed extending the Regulation to machinery and equipment manufactured from regulated materials. These shifts, combined with rising fertiliser prices – further exacerbated by the Mercosur agreement – have negatively affected the agricultural sector, sparking protests across several Member States in early 2026. Consequently, the Commission proposed a further amendment to grant it authority to suspend CBAM for specific products if unforeseeable circumstances cause severe internal market disruption. This proposal is currently under negotiation.
EU–Western Balkans relations and energy nexus
Since the 2000s, the EU has devoted increasing attention to the Western Balkan region through the Stabilisation and Association Process, encompassing Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia and Serbia. The framework aims to stabilise the region and foster regional cooperation, particularly in infrastructure. Among the participants, Albania, Bosnia and Herzegovina, Montenegro and Serbia hold candidate status, while Kosovo is recognised as a potential candidate.
These countries share several structural characteristics in their power systems. Their energy networks were largely constructed in the 1970s using Soviet era technology and suffered significant damage during the conflicts of the 1990s. Subsequent reconstruction and modernisation have progressed slowly and with difficulty. They all rely heavily on solid fossil fuels, particularly coal, with Albania being the main exception. Low levels of energy efficiency, coupled with high consumption rates, are a common regional trait.
Furthermore, the Western Balkans’ main trading partner and investor is the EU, including in the energy sector, where it plays a particularly significant role. Through the Western Balkans Investment Framework (WBIF), operational since 2009, the EU provided 1 billion euros in support for energy and transport projects between 2015 and 2020, a substantial portion of which was directed to state-owned energy generation facilities. In 2023, the Commission announced an additional 1 billion euros in support, aimed at mitigating the effects of the energy crisis and facilitating the green transition.
The six Western Balkan countries are also members of the Energy Community, established in 2006, which also includes EU Member States, Moldova and Ukraine. Armenia, Norway, and Türkiye participate as observers. The ultimate objective of the Energy Community is to create an integrated market, remove various barriers, and harmonise regulatory frameworks. Energy cooperation is also significant at the bilateral level. In 2022, Hungary concluded two agreements with Serbia, under which the parties committed, among other things, to coupling their electricity markets and increasing the transmission capacity of existing interconnections.
In 2024, the Council approved the establishment of the Reform and Growth Facility for the Western Balkans, providing up to 2 billion euros in grants and 4 billion euros in concessional loans to the six partner countries for the 2024–2027 period. Access to this funding is conditional upon the preparation and implementation of comprehensive reform agendas, which include commitments related to energy policy and green transition.
However, a 2025 report by CEE Bankwatch Network underscores that while the Facility has the potential to support regional decarbonisation efforts and facilitate alignment with CBAM requirements, governments in the region have, for a variety of structural and administrative reasons, struggled to deliver on their commitments. According to the report, Albania and Montenegro have made the most substantive progress in advancing the required energy-sector reforms. Nevertheless, in aggregate terms, less than 20 per cent of the pledged energy-related reform measures have been effectively implemented.
The impact of CBAM on the EU electricity sector
Applying CBAM to the electricity sector raises a number of structural and methodological concerns. The European Union engages in cross-border electricity trade with several neighbouring countries through highly interconnected transmission systems. Unlike manufactured goods, it is physically impossible to trace the origin of electrons within an integrated, cross-border grid. Consequently, emissions from electricity trade must be calculated via approximations rather than verifiable physical flows. This complexity is compounded by the fact that electricity exports often occur during periods of surplus renewable generation – which runs counter to the mechanism’s intent of capturing embedded fossil-fuel emissions.
The structure of the European power system compounds this problem further. The European electricity market extends beyond EU Member States and, through the Energy Community and ENTSO-E, effectively operates as a pan-European integrated system. Consequently, regions of strategic importance to the EU’s energy market – including the Western Balkans – are directly affected. Although the six Western Balkan countries account for only around 1 per cent of the European Union’s total electricity demand, their electricity markets are of particular importance to certain Member States, including Hungary, Romania, Greece and Bulgaria.
Source: Bruegel based on Ember, ENTSO-E via Energy Charts and REE
As illustrated in Figure 1, the electricity exporters to the EU most significantly affected by CBAM include Morocco, the Western Balkan countries, Türkiye, Ukraine, Moldova and the United Kingdom. The United Kingdom plans to introduce its own CBAM mechanism in 2027 and link it to the EU framework, but it has not been granted an exemption under the current regulation.
The application of CBAM to electricity markets is also problematic for two other major reasons. First, the European Union itself does not regard this sector as being particularly exposed to carbon leakage. Free emission allowances granted to electricity producers under the EU ETS were already withdrawn in 2013. This implies that the European Commission does not regard the electricity sector as particularly vulnerable to carbon leakage. Second, the current legal framework is not sufficiently tailored to ensure its effective application in electricity markets.
The CBAM system is built on predefined default emission values. Departures from these benchmarks are allowed only in exceptional cases, provided that the importer complies with the conditions set out in Annex IV of the Regulation (for example, a direct contractual relationship between the importer and the power plant, physical connection to the EU grid, emissions below a specified threshold, and appropriate verification and accreditation). Only in such circumstances may the actual emissions of the specific generating installation be taken into account.
As a general rule, in accordance with the methodology laid down in Commission Implementing Regulation (EU) 2023/1773, the carbon intensity of electricity is calculated from the average CO₂ intensity of fossil-fuel-based generation over the preceding five years. The use of a five-year average poses a significant challenge for the electricity trade… Furthermore, a five-year reference period cannot reflect rapid structural developments in electricity systems. For example, the United Kingdom closed its last coal-fired power plant in 2024; however, with the averaging methodology, its electricity exports continue to be treated as if they were generated from coal.
Because of these structural shortcomings, it can be argued that the continued application of CBAM in its current form may undermine electricity trade and pose risks to the security of supply. According to Bruegel’s calculations, the Western Balkan countries and Ukraine could face export penalties of at least 70–80 euros per MWh. In addition, as noted above, the Regulation may also create serious challenges for several EU Member States. Greece could lose a substantial share of its electricity exports if these flows – transiting through Western Balkan electricity networks – become subject to CBAM-related export charges.
In 2024, Greece exported an average of approximately 2 GW of green electricity per day, largely via the electricity network of North Macedonia. Italy currently imports 600 MW of electricity from Montenegro through a submarine cable. By 2031, under a 500-million-euro project, it is planning to double this capacity. At the same time, Italy also intends to import electricity from Tunisia and Algeria through the 4 GW Medlink project. However, the additional costs resulting from CBAM could put both Italian projects at risk, potentially creating serious security-of-supply concerns for the country.
Other member states face similar problems. Hungary purchased 772.8 GWh of electricity via Serbia in 2024 and 576 GWh in 2025. These imports took place primarily during the winter months, under constrained supply conditions. A substantial increase in prices would therefore likely cause significant difficulties. Similar vulnerabilities can be observed in EU Member States neighbouring the Western Balkans, including Croatia, Romania and Bulgaria.
Western Balkan responses
According to the Energy Community’s 2024 report, coal-based electricity generation in the region declined by 7.6 per cent in 2024 compared to 2019 levels, and by 14.2 per cent compared to 2020. At the same time, nearly 60 per cent of newly installed generation capacity uses renewable energy sources. Hydropower continues to play a leading role; however, non-hydro renewables have more than doubled since 2020, reaching 5.1 GW. This growth has been driven almost entirely by the expansion of solar and wind power.
Since 2020, only Serbia has announced the construction of a new coal-fired power plant. In 2025, one of the region’s largest coal-fired plants – the 225 MW Pljevlja plant in Montenegro – was taken offline for nearly eight months for upgrades. In Bosnia and Herzegovina, capacity shortfalls occurred on several occasions as a result of insufficient coal reserves. Electricity exports from the region to the European Union have fluctuated significantly in recent years. Exports fell from 6 TWh in 2023 to 0.5 TWh in 2024 due to a severe drought affecting the region.
In 2025, exports recovered to 2.2 TWh, largely supported by increased generation in Bosnia and Herzegovina. Meanwhile, electricity imports from the European Union remained substantial. In 2025, total imports reached 4.1 TWh, of which Montenegro accounted for 2.5 TWh, Kosovo for 1.5 TWh, North Macedonia for 1.3 TWh and Serbia for 1.1 TWh.
Under the current methodology, CBAM poses a serious challenge for Western Balkan countries that rely heavily on coal-fired power generation – namely Bosnia and Herzegovina, Montenegro, North Macedonia, and, to a lesser degree, Serbia. Although coal plays a significant role in Serbia’s electricity mix, most of the electricity generated domestically is used for internal consumption rather than export. This means that the economic impact of CBAM on Serbia is likely to be more limited.
Kosovo, despite not sharing a border with the European Union, is also affected due to its substantial fleet of coal-fired power plants. Albania, with an electricity system based almost exclusively on hydropower, is the least exposed economically to the effects of CBAM.
In addition to the previously mentioned security-of-supply risks, another structural challenge for the region lies in the strong government influence over household electricity prices. As a result, there is only a weak link between the cost of electricity generation and the price ultimately paid by end users. According to an OECD analysis, between 2018 and 2023, the six Western Balkan countries allocated 5.8 billion euros to electricity providers in order to keep household tariffs low.
The organisation estimates that maintaining the current pricing structure will require a further 4.2 billion euros in support between 2025 and 2030. Consequently, electricity exports have been instrumental in offsetting the financial burden of subsidising household tariffs. Bosnia and Herzegovina, for example, exports approximately 21 per cent of its electricity generation, making it a regional leader. The situation of Montenegro and North Macedonia is even more complex, as they not only export but also function as transit corridors for electricity flows to the European Union.
Based on International Energy Agency data and assuming a carbon price of 75 euros per tonne of CO₂, the additional cost burden for the Western Balkan countries would amount to approximately 965 million euros. Broken down by country, this would translate into an estimated 319 million euros for Serbia, 291 million euros for Bosnia and Herzegovina, 191 million euros for Montenegro and 164 million euros for North Macedonia. Figure 2 illustrates the evolution of electricity prices in the Western Balkans and across neighbouring EU Member States since the introduction of CBAM.
Source: Institute for Energy Strategy
However, CBAM may also prompt Western Balkan candidate countries to align their carbon markets with EU standards and prepare the ground for eventual integration with the EU ETS. Achieving this, however, requires substantial adjustments to the regulatory frameworks of the countries concerned.
Serbia has already initiated this process. In early 2026, two relevant laws entered into force in the country. One of them introduced a carbon tax of 4 euros per tonne on greenhouse gas emissions, primarily targeting carbon-intensive product categories covered by CBAM. In addition, Serbia announced the launch of its own carbon market, modelled on the EU ETS. Montenegro, by contrast, established its emissions trading system as early as 2020, based on the climate law adopted in 2019. The system currently applies to three installations: the Pljevlja coal-fired power plant, the KAP aluminium plant in Podgorica, and the Tosčelik steel mill. In early 2026, the Minister of Foreign Trade and Economic Relations of Bosnia and Herzegovina indicated that adopting a roadmap for introducing an emissions trading system was among the country’s priorities for 2026.
Conclusion
Given the scale of electricity imports into the European Union from the Western Balkans, the introduction of CBAM may pose a significant economic challenge for the countries of the region and could weaken the integration of electricity networks. The carbon charge payable by third countries is calculated on the basis of the average CO₂ intensity of fossil-fuel-based electricity generation over a five-year reference period. While a carbon levy increases costs for importers, the averaging methodology applied as a general rule cannot adequately reflect developments within electricity systems.
Rising costs may further complicate the green transition in the countries concerned, despite the substantial financial support provided by the European Union for this purpose. The price increases expected from the introduction of the carbon charge may adversely affect EU Member States – including Hungary – that rely significantly on electricity imports from the Western Balkan region, potentially exacerbating disparities among Member States.
Conversely, CBAM provisions that exempt countries from payment obligations if they establish a mechanism equivalent to the EU ETS could serve as an incentive to develop domestic emissions trading systems. This may strengthen integration within the Energy Community and support the accession efforts of candidate countries. To date, however, only Montenegro and Serbia have established similar regulatory frameworks, although Bosnia and Herzegovina has identified the issue as a policy priority. The overall impact will also depend on whether the Commission’s proposal – which would allow for the suspension of CBAM for specific products in the event of serious disruption – is ultimately adopted.
This post is a reprint of an article written by our colleague, which was originally published on March 14, 2026, in the online journal CEEnergy News.
