Obtaining an exemption from the European Union’s Carbon Border Adjustment Mechanism (CBAM) for electricity would mean a rapid and unfeasible decarbonization of Serbia’s energy sector, which would be unacceptable for households and businesses alike, according to Ljubo Maćić, special advisor at Serbia’s Economics Institute. This is why Serbia never sought an exemption. He added that the implementation of the carbon border tax will prevent the coupling of electricity markets between Serbia, other Energy Community contracting parties, and the European Union, and discourage investment in renewable energy in the region.

CBAM will apply from January 1, 2026. Although the tax was announced at least five years ago and is set to take effect in less than two months, there are still many unknowns about its implementation and impact, particularly in the electricity sector.

In preparation for its implementation, Serbia has drafted bills to tax greenhouse gas emissions and imports of carbon-intensive products, Ljubo Maćić noted at the Power Plants 2025 conference, organized by the Serbian Society of Thermal Engineers.

The law would allow electricity producers – primarily state-owned power utility Elektroprivreda Srbije (EPS), which will account for about 90% total GHG tax revenues and has the largest decarbonization needs – to receive a tax credit equal to 20% of investment in renewables.

The tax is set at EUR 4 per ton of CO2, which translates to about EUR 100 million annually in EPS’ case, not including the tax credit. The proposed rate is low compared to those in the EU, but many countries outside the bloc began with similar rates to protect the competitiveness of their industries, he said. Serbia’s tax would certainly increase in the coming years, Maćić warned.

The implementation of CBAM should not significantly affect EPS

The bill on the GHG emissions tax has two key shortcomings. First, the tax rate is set only for 2026, rather than for several years ahead. The second is that the tax revenues would not be allocated to a decarbonization fund but to the state budget. Maćić noted that tax revenues would go into the budget, but that the bill envisages the funds to be used for decarbonization. The solution is consistent with the revenue allocation model under the EU Emissions Trading System (EU ETS).

The bill is prudently designed, tailored to the circumstances and context, he said, adding that it would encourage changes in the right direction without jeopardizing energy security and energy prices.

“The implementation of CBAM should not significantly affect EPS, as the company doesn’t have the capacity for larger electricity exports and will likely seek to trade within this region, where the CBAM cost doesn’t apply. However, Serbia’s steel production will be particularly affected by CBAM, and this will be the hardest to address in terms of technology,” said Maćić.

Exemption for electricity

CBAM would reach its full effect over a transitional period from 2026 to 2034, aligned with the gradual rise in the CO2 price under the EU ETS. However, this will apply to all CBAM-covered goods except electricity, which will be subject to a full CBAM rate immediately.

This is why the Energy Community contracting parties were given the option to obtain an exemption for electricity until 2030, but only if they meet six conditions. A critical condition is that a country agrees to charge an emissions price equivalent to that under the EU ETS from 2030, according to Maćić. There is no indication that this doesn’t mean ‘the same price,’ he added.

Maćić explained how that would affect Serbia: The current CO2 price in the EU is EUR 80, but is expected to rise to above EUR 100, or even reach EUR 150, by 2030.

“Assuming that carbon emissions from power plants in Serbia decrease to about 22 million tons in 2030, the annual additional cost for EPS would be EUR 2.2 billion at a carbon price of EUR 100 per ton of CO2 and EUR 3.3 billion at EUR 150 per ton. If these costs were passed on to EPS’ consumers, the price would increase by about EUR 75 per MWh and EUR 110, respectively,” the expert stressed.

Of note, the market power price is currently around EUR 105.

However, not all of these costs can be passed on to end consumers, Maćić added. Households will likely be affected first if, by 2030, their electricity prices do not reach market levels. EPS cannot raise its electricity prices due to emissions costs above the market prices, because customers would switch to other, more competitive suppliers with lower emissions.

The European Commission is not willing to provide financial support for the region’s decarbonization

That is good for consumers, but it has its limits, because the production capacities of these suppliers are still far from sufficient, Maćić explained.

If other power companies in the region with a high coal share were to begin reducing their power generation, energy prices on the power exchanges would rise compared to the rest of the EU. This would result in faster price growth and volatility, in Maćić’s view.

These higher prices would affect power prices for businesses, further eroding their competitiveness, similar to what is already happening in the EU, he added.

Since the country must ensure enough electricity for all consumers, EPS would quickly incur huge financial losses, threatening the company’s operations and, more importantly, the security of the supply in Serbia.

“Such a rapid and costly decarbonization, even if it had begun earlier, would not be possible in Serbia without the ability to replace coal with other stable sources of supply. This is far from realistic, and the very idea of anyone undertaking such a fast and uncertain process is highly questionable,” Maćić stressed.

He underlined that the communication between the Ministry of Mining and Energy and European Commission institutions, the conclusions of the Energy Community Ministerial Council, and the documents within the Berlin Process for the Western Balkans six do not inidcate that the commission is ready to provide financial support for the region’s decarbonization above the level it has promised under the IPA and the Growth Plan, which is insufficient.

Three problems created by CBAM: market coupling will be blocked

According to Maćić, the European Commission has acknowledged that problems with applying CBAM to electricity exist, but has not yet offered solutions. There are three main problems, he added.

First, the existing solutions do not allow for the parallel functioning of CBAM and the coupled electricity markets of the Energy Community’s contracting parties and the EU, the expert claims.

“We have been talking about, preparing, and working on this integration for almost two decades. This, among other things, is one of the most important reasons why the Energy Community was established. CBAM will practically suspend the coupling,” Maćić insisted.

A second issue is that the costs of CBAM on electricity imports into the EU are based on the emissions factor of fossil fuel power plants, regardless of their share in the country’s power generation mix.

Maćić recalled that Serbia and other contracting parties have proposed that the emissions factor be equal to the national emissions factor, which corresponds to the electricity production mix. For Serbia, this factor is currently 1.04, but if the national power mix were taken into account, it would go down to 0.7, making the cost of CBAM about 40% lower, he explained.

All this will certainly affect trade and renewable energy investments in the region

Also, electricity producers in countries that export electricity to the EU cannot use either guarantees of origin or power purchase agreements (PPAs) to reduce the CBAM cost.

The third problem is that it is still unclear how electricity transit costs would be calculated, for example, from Bulgaria to Hungary via Serbia, and who would be required to cover them.

All this will certainly affect trade and renewable energy investments in the region, according to Maćić. This is already happening, and regardless of any potential solutions, the damage will remain, he warned.

Maćić also recalled that in June, similar issues were highlighted by the European Network of Transmission System Operators for Electricity (ENTSO-E), the European Federation of European Traders (EFET), and EUROPEX – Association of European Energy Exchanges.

They also proposed that the application of CBAM to electricity be postponed for at least a year, until solutions are found, he added.

Are there solutions?

A solution exists, according to Maćić, and it could be described as trivial: abolish CBAM for electricity.

He believes it is a legitimate question whether it was justified to introduce CBAM for electricity. The main reason for introducing CBAM is carbon leakage, which is not at all relevant in the case of electricity.

Second, total electricity imports from all Energy Community contracting parties are less than 1% of the EU’s production, and are declining. Ukraine was the only significant exporter, while imports from other countries are negligible.

“Applying CBAM to electricity would bring the EU modest climate and financial effects, while generating unsolvable problems, thwarting good intentions in market integration, and producing financial damage to the contracting parties and even larger damage to EU member states,” the expert asserted.

A less radical solution would be to postpone the implementation of CBAM, not by one but by ten years, to provide the power sector with additional long-term regulatory certainty and a stable business environment, in Maćić’s view.

Not everyone from the region can claim they have done everything they could

However, these issues do not concern the implementation acts, whose final versions are still pending, but for the CBAM regulation itself, whose amendments, as he understands, have already been implemented.

Maćić acknowledges that not everyone in the region can claim to have done everything in their power, but emphasizes that decarbonization ambitions and timelines must be realistic and supported by all necessary resources.

Maćić said he hopes the EU will show more understanding, a sense of reality, and a willingness to support the changes through solidarity. Such support could change the conditions and capacity for implementation, as well as the pace of decarbonization and changes to the energy mix, the expert underlined.

“The Energy Community Secretariat should also, when it comes to climate change, be more enthusiastic than it has been. It should be an advocate for the interests of the contracting parties in Brussels and more independent in its approach to the European Commission’s initiatives toward the contracting parties,” Maćić concluded.