Challenges facing the Eastern European electricity market

From 1 January 2026, the EU’s Carbon Border Adjustment Mechanism (CBAM) took full effect. Despite debates, there is no postponement. Most electricity generation companies in the Western Balkans will be heavily affected, as their exports to the EU become dramatically less attractive overnight.

The CBAM is the EU’s tool to put a fair price on carbon emitted during the production of carbon-intensive goods that are entering the EU, and to encourage cleaner industrial production in non-EU countries. CBAM applies to imports of certain goods and selected precursors whose production is carbon-intensive and at most significant risk of carbon leakage: cement, iron and steel, aluminium, fertilisers, electricity and hydrogen. In other words, CBAM is a system to confirm that a price has been paid for the embedded carbon emissions generated in the production of certain goods imported into the EU.

According to the report published by the CEE Bankwatch Network in October 2025, the Western Balkans exported 109 TWh of electricity to the EU from 2014 to 2023, amounting to 15.5% of their total power generation. According to Bruegel’s analysis published on 19 November 2025, the impact of CBAM on net carbon emissions is geographically heterogeneous and complicated; the reduction in overall trade flows is more obvious. For example, Ukraine and the Western Balkans will face implied export penalties of €70 to €80 per megawatt-hour of electricity. Bruegel’s analysis also stated that this will significantly reduce trade with the EU. CBAM introduction could reduce Ukraine’s electricity exports to the EU by more than 60% compared to a scenario without CBAM.

The CBAM regulation allows for exemptions. If a third country has an electricity market which is integrated with the Union internal market for electricity through market coupling, and there is no technical solution for the application of the CBAM to the importation of electricity into the Union from that third country, such importation of electricity shall be exempt from the application of the CBAM, provided that the Commission has assessed that certain conditions have been fulfilled. Such a condition is, for example, that the domestic legislation in that third country implements the main provisions of Union electricity market legislation, including on the development of renewable energy sources and the market coupling of electricity markets.

According to the CEE Bankwatch Network’s Report, none of the countries are near to fulfilling these conditions, so none of the countries can now avoid being hit by CBAM, raising the risk of a calamitous and unjust transition. The report states that the CBAM has the potential to accelerate the Western Balkans’ transition to a cleaner, healthier, more efficient and inclusive energy sector, based on decentralised renewable resources. However, it also risks being used as a scapegoat for governments’ inability to properly plan for the social consequences of closing coal mines. The report finally draws attention to the fact that the EU must therefore do much more than has been the case so far to support a just transition of coal-dependent regions, including outside its own borders.