Understanding the Carbon Border Adjustment Mechanism (CBAM)

The Western Balkans is at a critical juncture in its energy transition, with carbon-heavy industries at the heart of their power generation, except for Albania, which relies primarily on hydropower. The European Union’s Carbon Border Adjustment Mechanism (CBAM) aims to shift the region’s economic reliance on coal towards cleaner, renewable energy by leveraging market-based tools.

CBAM’s introduction presents both risks and opportunities for the Western Balkans as
they seek to align with EU regulations, modernize their infrastructure, and transition to sustainable energy. This guide explores the CBAM’s procedures, potential impact, and the steps Western Balkan countries must take to ensure compliance and make the most of
the opportunities ahead.

Key Features

What is CBAM?

CBAM is an innovative tool designed by the EU to level the playing field between domestic industries subjected to strict carbon emissions regulations and international imports from regions with less stringent carbon policies. It essentially imposes a carbon price on imports into the EU to prevent “carbon leakage,” where industries shift operations to countries with less strict climate policies to avoid paying carbon costs. This measure creates incentives for countries like those in the Western Balkans to adopt cleaner energy practices to avoid additional costs when exporting to the EU.

How does CBAM work?

  1. Starting in 2026, CBAM will require EU importers of certain carbon-intensive goods to purchase CBAM certificates.
  2. These certificates are based on the emissions embedded in the imported goods and are priced according to the average EU Emissions Trading System (ETS) carbon allowances.
  3. Importers must annually report the emissions embedded in their products and purchase the corresponding certificates. The CBAM fee will start small but increase steadily, reaching the full EU ETS price by 2034.
  4. To avoid this financial burden, countries exporting to the EU, such as those in the Western Balkans, are encouraged to adopt or align with the EU ETS or introduce a regional carbon pricing system.
  5. The integration with the EU market is essential for continuing electricity exports while reducing costs associated with CBAM compliance.

Opportunities and Incentives for the Western Balkans

Renewable Energy Investments

CBAM provides a unique opportunity for Western Balkan countries to accelerate their transition to renewable energy. With the potential for financial support from the EU’s Growth Plan for the Western Balkans, which offers €6 billion in funding, countries can modernize their energy sectors by investing in renewables like solar, wind, and hydropower. These investments will not only help meet the region’s energy needs sustainably but also create jobs and stabilize economies.

Carbon Pricing as a Tool for Transition

Carbon pricing mechanisms, whether through an ETS or carbon taxes, offer significant incentives for clean energy investments. The revenues generated can be used to support vulnerable communities and retrain workers in carbon-intensive industries. These measures will also help limit the region’s exposure to EU carbon tariffs, making it a viable strategy for reducing dependence on coal.

Aligning with EU regulations

Complying with the EU’s climate regulations and adopting ETS can serve as a stepping stone for greater integration with the EU market, even without full EU membership. Participation in carbon markets will demonstrate the region’s commitment to climate action, increasing foreign investment and facilitating smoother access to European funding streams.

Risks and Challenges

Increased Costs and Financial Burden

The introduction of CBAM will impose additional financial burdens on countries that continue to rely on carbon-intensive industries, especially coal. Without a clear transition plan, these economies risk becoming non-competitive in the EU market due to the rising cost of carbon. Administrative costs associated with monitoring, reporting, and verifying emissions will also be significant.

Infrastructure Modernization Needs

The shift to renewable energy will require significant upgrades to the region’s energy infrastructure. Many of the existing power plants will need to be phased out, and new infrastructure must be built to support cleaner energy sources. This includes grid modernization, energy storage solutions, and integrating cross-border energy markets.

Knowledge Gaps and Capacity Building

Many stakeholders in the Western Balkans still lack a deep understanding of CBAM, its mechanisms, and its impacts. Limited awareness and technical capacity could hinder the region’s ability to make strategic decisions and comply with the upcoming regulations. Capacity-building initiatives and training programs will be essential to ensure that the region is prepared to navigate the complexities of CBAM and energy transition.

Strategies for a Successful Transition

  1. Developing a Regional Carbon Pricing System: Introducing a carbon pricing mechanism will help limit exposure to the EU carbon tariffs while incentivizing renewable energy investments. A regional ETS could be a feasible alternative to joining the full EU ETS.
  2. Focusing on Energy Efficiency: Implementing energy efficiency measures across industries and power generation could reduce emissions while minimizing costs, thereby easing the transition to CBAM compliance.
  3. Investing in Renewable Infrastructure: Prioritizing investments in renewable energy infrastructure is critical. Western Balkan countries must secure financial support from EU funding mechanisms, such as the Instrument for Pre-Accession Assistance and the 2023 Energy Support Package, to finance these infrastructure upgrades.
  4. Capacity Building and Awareness: Capacity building will be vital to ensure that key decision-makers, industries, and public stakeholders understand the implications of CBAM and are equipped to act accordingly. Educational initiatives led by the EU Commission and other international organizations can fill these knowledge gaps.

Conclusion

The CBAM presents both challenges and opportunities for the Western Balkans. By embracing carbon pricing, investing in renewable energy, and aligning with EU climate policies, the region can ensure a smooth transition to a sustainable, low-carbon future. As CBAM rolls out, it will act as a catalyst for this transformation, pushing Western Balkan economies towards greater competitiveness and closer integration with the EU.
The path forward will require strategic investments, regulatory compliance, and capacity building, but with the right steps, the Western Balkans can thrive in the global clean energy transition.