Energy Affordability Under Pressure: What the EU’s new climate policy mechanism means for the Western Balkans

As candidates for European Union membership, the Western Balkans nations are committed to accelerating the decarbonization of their economies in compliance with the EU’s climate agenda. Still, the region continues to rely on carbon-intensive coal plants for its electricity generation. The newly introduced Carbon Border Adjustment Mechanism (CBAM) of the EU will increase the pressure to speed up the green transition, offering a path towards closer EU market integration in the future. However, if not mitigated carefully, this transition process risks exacerbating existing socio-economic fault lines related to the affordability of energy in the region.

Recent geopolitical crises such as the Russo-Ukrainian war and the COVID-19 pandemic underscore the importance of robust energy systems alongside the social and political consequences of sharp energy price increases. In the face of energy-related poverty, implementing measures to keep electricity prices low is an important tool to protect vulnerable households from economic shocks. In post-conflict societies, where poverty is interconnected with social fragmentation, energy affordability becomes crucial for the maintenance of social cohesion and trust in institutions.

Despite growing long-term challenges related to the diminishing economic competitiveness and environmental acceptability of fossil fuels, the Western Balkans nations (WB6) – Albania, Bosnia and Herzegovina (BiH), Kosovo, Montenegro, North Macedonia, and Serbia – have historically prioritized short-term energy availability and affordability over decarbonization. This has translated into a persistent reliance on fossil fuels and the prolonged lifetime of ageing and energy-intensive coal-based power plants. Against this background, the EU’s recently introduced Carbon Border Adjustment Mechanism (CBAM) exposes long-standing structural weaknesses in the region’s carbon-intensive electricity sector, while potentially increasing socio-economic vulnerabilities during an accelerated green transition.

Having entered into force on 1 January 2026, CBAM imposes a carbon price on imports into the EU territory covering electricity, aluminum, cement, fertilizer, iron, and steel products. In doing so, CBAM protects EU industries from competitive disadvantages against foreign producers, rendering the cornerstone of its own climate policy, the EU’s Emissions Trading System (ETS), more acceptable to domestic actors. By mirroring the EU’s domestic carbon price at its borders and effectively taking into account the carbon-intensity of imported products, it further allows the EU to address insufficient climate regulations in trade partners.

The Western Balkans’ Exposure to CBAM

CBAM impacts a wide range of EU trade relations, such as steel imports from its main suppliers like Turkey, South Korea, India or China. While the WB6 are not among the EU’s top trading partners in terms of absolute trade volume, their close economic ties with the EU – 77.8% of their exports were destined for the EU market in 2024 – presents them with particularly intense pressure to adjust. This interconnectedness is especially pronounced in the electricity sector, where Serbia, North Macedonia and Montenegro are heading towards the “point of no return” in terms of electricity market coupling, reflecting an aspiration for deepened market integration in the context of their accession process. By applying border-based carbon costs to electricity exports, CBAM creates a structural tension with the logic of electricity market integration as well as Inter-EU transit flows via the Western Balkans.

Apart from Kosovo, which has no direct transmission lines to the EU, all WB6 countries export and import electricity with annual variations depending on market prices and grid constraints. Between 2014 and 2023, the region’s electricity exports to the EU amounted to 109 TWh, equivalent to around 15.5% of their total power generation. However, the specific CBAM exposure varies relative to individual countries’ trade patterns and energy mixes, with hydropower-dominated Albania constituting an exception within an otherwise coal-dependent region.

For the region’s coal sector, electricity exports to the EU generate revenues that influence the economic viability of domestic utilities. To ensure energy affordability, governments across the WB6 often subsidize household electricity prices to keep them at an artificially low level, well below the EU average. Consequently, this creates a market inefficiency, where domestic sales alone seldom cover the full cost of coal-based power generation. Exporting electricity to the EU at market-based prices hence promises higher revenues, thereby offering some compensation for domestic utilities and burdened public budgets.

Under these circumstances, the CBAM-imposed market restrictions are particularly critical for the Western Balkans electricity sector. Yet, despite the growing urgency, the ability of governments to formulate a strategic response remains constrained by prevailing institutional weaknesses and political challenges associated with the distributional effects of decarbonization. Local authorities have had several years to plan for the introduction of CBAM, but instead of working towards fulfilling their climate commitments, governments were hoping for the EU to grant them a postponement. At the same time, private renewable energy projects are often discouraged, as governments believe that state-owned power companies will be the main drivers behind the future energy transition.

CBAM as a Stress Test for Coal-based Energy Systems

With CBAM, the Western Balkans will face export penalties of €70 to €80 per megawatt-hour, rendering their carbon-intensive electricity exports less competitive. EU importers will have to find other electricity sources to avoid paying high CBAM charges, ultimately reducing the regions electricity export volume. The associated loss of income-generating revenues risks decreasing the economic rentability of carbon-intensive energy utilities in the WB6, putting coal plants and public budgets under further strain. CBAM therefore provides governments with financial incentives to speed up the closure of coal-fired power plants.

In this context, transitioning towards renewable energy sources becomes more urgent than ever. In the long-term, an accelerated green transition would not only align the WB6 closer with the EU and its climate ambitions, but simultaneously increase the regions energy security by reducing fossil fuel dependencies and offering alternative energy sources that are less affected by price volatilities. Nevertheless, to ensure the short-term security of supply during the transition, a gradual coal phase-out needs to be organized alongside a rapid scaling of renewables. Against the background of long overdue efforts on decarbonization, the challenge lies in how to get there.

One way forward would be to work towards fulfilling the conditions to acquire a CBAM-exemption through regulatory alignment for countries in the process of electricity market coupling, as laid out by the European Commission. Notably, this includes introducing a domestic carbon pricing mechanism on electricity generation set at price levels converging to the EU ETS. This would allow governments to free up the financial resources needed for the green transition, rather than letting these revenues flow into the EU budget via CBAM. Across the region, a carbon price at €75 per ton could raise up to €4.2 billion annually, enabling investments in the energy infrastructure on modernized grids, interconnections and energy storage facilities. In practice, however, without a functioning social safety net, carbon pricing poses severe challenges for the region’s energy affordability, undermining the social acceptability of the green transition.

Societal Risks of the Green Transition

A domestic carbon pricing mechanism would shift the costs of carbon externalities to producers and consumers, making higher electricity prices during the transition period likely. This would add a distributional pressure to a region that is already characterized by a high degree of socio-economic vulnerabilities related to energy poverty. According to the OECD, in 2023 one quarter of the population in the Western Balkans reported an inability to keep their homes adequately warm and nearly a third struggled with overdue payments on utility bills. Against this background, rising energy prices risk exacerbating existing societal conflict lines and potentially intensifying social unrest among vulnerable households.

Current practices to lower energy prices through state subsidies reduce some pressure on low-income households but remain largely inefficient. Broadly applied energy subsidies disproportionately benefit households with higher incomes that tend to have higher energy demand, therefore enforcing existing inequalities. Phasing out energy subsidies and using the freed-up money for targeted support instead would be more effective to mitigate the social impact of decarbonization.

Additionally, speeding up the green transition bears the danger of coal-dependent regions being left behind. The coal phase-out will affect approximately 138,000 jobs in coal-mining and electricity production across the WB6, putting employment rates on the line. While emerging renewable technologies have the potential to create new job opportunities, they demand a different skill set from workers. Coupled with the region’s ageing labor force, this poses a special challenge. Consequently, the feasibility of an accelerated decarbonization in the context of CBAM-induced carbon pricing will also depend on governments’ capacities to recycle revenues into vocational retraining programs that facilitate career transitions.

In the absence of such measures, insufficient policy planning might lead to CBAM being instrumentalized as a convenient scapegoat for socio-economic problems, allowing regional governments to deflect responsibility for years of delayed energy reforms. Faced with the risk of an immediate social backlash if socio-economic safety nets fail, governments are reluctant to introduce sufficiently high carbon prices and energy market reforms. So far, only Montenegro and most recently Serbia have introduced a carbon pricing mechanism. However, given the respective carbon prices of €24 and €4 per ton carbon dioxide, substantial gaps remain. Therefore, the region is currently exploring opportunities for a less disruptive transition.

The Risk of a New Fossil Trap

Given the rapidly declining costs for renewable technologies, linked with the region’s current relatively small gas demand at only 9% of the total energy supply, the WB6 are exceptionally well positioned to skip fossil gas altogether and prioritize investments in clean energy instead. However, governments are now planning to implement new fossil gas infrastructure projects as a less contentious transition option. This threatens to delay the green transition while also locking them in to future ‘stranded assets’ as well as long-term geopolitical vulnerabilities on major suppliers.

At present, Russian gas firms still hold a near-monopoly in Republika Srpska (BiH) and in Serbia, which is at present negotiating the renewal of a long-term supply contract. This would not only further delay the strategic energy decoupling from Russia in alignment with EU sanctions, but also maintain the exposure to the potential weaponization of gas as a diplomatic lever. New and costly infrastructure projects that are currently under way to promote liquified natural gas (LNG) across the region, merely shift import vulnerabilities to suppliers like the USA, without presenting a credible transition strategy. In this light, gas projects provide only partial relief, while they risk imitating the same dependency trap the EU itself is now struggling to overcome.

Conclusion

The Western Balkans are currently standing at an important crossroads between an accelerated decarbonization path on one side and the risk of a new fossil fuel lock-in on the other. CBAM exposes long-standing weaknesses in the region’s energy systems, putting the economic viability of coal-based energy production under strain. In this context, speeding up the green transition by incrementally introducing a carbon pricing mechanism could offer a strategic response that simultaneously generates financial resources and further aligns the WB6 with the EU’s climate policy regulations. However, this option is accompanied by severe political trade-offs that demand carefully orchestrated mitigation policies by local policymakers to limit vulnerabilities in terms of energy poverty and job losses in coal-dependent regions.

The feasibility of such measures will not only depend on the capacity of local governments to put long-overdue energy reforms into place, but also on the EU’s ability to embed CBAM in a broader strategy that actively targets political costs in the Western Balkans. Alongside providing technical assistance for implementing social safeguards, one option would be to temporarily reinvest CBAM revenues into the region’s renewable energy infrastructure, until domestic carbon pricing schemes reached sufficient alignment with the EU ETS. In doing so, the EU could highlight that CBAM is not intended as a protectionist trade barrier to punish carbon-intensive economies, but as a tool to achieve common climate goals.