The implementation of the European Union’s Carbon Border Adjustment Mechanism (CBAM), effective from January 1, 2026, is set to significantly alter energy trade dynamics for the Western Balkans. Initially perceived as a distant regulatory change, CBAM is now poised to have immediate and profound effects on export competitiveness and power trading flows in this region.
CBAM mandates that imports of carbon-intensive goods into the EU mirror the carbon costs faced by local producers, effectively extending the EU’s carbon pricing regime beyond its borders. This shift transforms emissions from a domestic environmental issue into a critical variable impacting international trade.
In anticipation of the mechanism’s rollout, the European Commission has indicated potential flexibility regarding electricity imports, aiming to mitigate disruptions in interconnected regional energy markets. Despite these reassurances, the structural implications for Balkan economies remain significant.
Targeting sectors such as steel, cement, fertilisers, aluminium, hydrogen, and electricity, CBAM imposes a requirement for importers to acquire certificates aligned with the EU Emissions Trading System (ETS). This introduces a direct cost tied to carbon intensity for Western Balkan countries where EU exports dominate industrial output.
The power sector stands out as particularly vulnerable under this new framework. Between 2014 and 2023, the Western Balkans exported approximately 109 TWh of electricity to the EU, constituting about 15.5% of their total generation. Notably, around 57% of these exports are coal-based, placing them at high risk for CBAM-related costs.
Estimates suggest that countries like Serbia and Montenegro could face CBAM-related expenses reaching €60–70/MWh. Such costs threaten to erode historical profit margins on exports to EU markets and will likely prompt EU importers to pivot toward lower-carbon generation sources within the bloc or compliant external suppliers.
This evolving landscape is reshaping trade logic. Electricity exports previously driven by marginal cost advantages—largely reliant on lignite—now confront structural disadvantages. Essentially, CBAM acts as a filter that favors low-carbon electricity in cross-border transactions with the EU.
Balkan utilities will experience implications beyond mere pricing pressures. Revenue streams reliant on export arbitrage are expected to diminish significantly, especially in coal-dependent systems like those in Bosnia and Herzegovina and North Macedonia. Analysts predict a sharp decline in export volumes as EU buyers internalise CBAM costs.
Moreover, CBAM is beginning to influence investment signals within the region. Projects relying on lignite or other high-emission fuels face an increasingly bleak outlook as CBAM accelerates asset obsolescence. In contrast, renewable energy sources such as wind and solar are gaining strategic importance as “CBAM-compatible” export capacities.
The introduction of this policy also adds a fiscal dimension for Western Balkan nations. By adopting domestic carbon pricing aligned with EU standards, these countries could retain carbon revenues locally rather than transferring them to the EU through CBAM payments. Such systems could potentially generate billions annually and support energy transition investments.
This shift indicates that CBAM is not merely a trade barrier but rather a significant policy lever for governments in the region. They now face critical decisions: either absorb external costs that diminish competitiveness or internalise carbon pricing and invest revenues into grid modernisation and decarbonisation efforts.
Electricity remains central to this transition process. Power flows are highly sensitive to immediate price signals; historically, Balkan economies have relied on trading with EU markets such as Italy and Greece. Under CBAM guidelines, these flows will hinge on carbon intensity metrics, fundamentally altering dispatch economics across borders.
The European Commission’s openness to transitional measures highlights the complexities involved. Given that power systems in the Western Balkans are physically integrated with those of the EU, any abrupt changes could pose security-of-supply risks for both regions.
Ultimately, it is clear that CBAM represents not just a temporary measure but a long-term extension of EU climate policy into its neighbouring territories. For Balkan economies, aligning with EU carbon frameworks has evolved from being part of accession negotiations to an essential requirement for sustaining access to European markets.
As such, carbon intensity has become integral to pricing structures and investment strategies within these nations. The ability to deliver low-carbon electricity will increasingly dictate market access and competitiveness in this new regulatory landscape.
