Energy 31 December 2025, 9:15am

Under the EU's new Carbon Border Adjustment Mechanism (CBAM), which is due to come into effect at the beginning of next year, importers of goods into the European Union from outside the EU

will have to pay for the carbon emissions associated with producing the goods in their country of origin.

One of the main objectives of the CBAM, often referred to as a carbon tariff, is to prevent the outsourcing of carbon-intensive activities and to protect European industry from cheaper, more polluting imported products.

The products concerned include electricity, for example. While producers of electricity covered by the EU Emissions Trading Scheme (EU ETS) must offset their emissions by purchasing carbon dioxide emission allowances, power stations outside the EU that export electricity to the EU have not previously incurred such additional costs. However, the introduction of a carbon tax could change this fundamentally.

Countries in the Western Balkans and Ukraine, which still rely heavily on coal for electricity production, releasing more carbon dioxide into the atmosphere than any other fossil fuel when burned, can expect particularly severe impacts. According to environmental groups, the Balkans' coal-based electricity exports could collapse entirely as a result of the introduction of a carbon tax or carbon dioxide border tax in early 2026.

This change could have a significant impact on energy producers in Bosnia and Herzegovina, Montenegro, North Macedonia and Serbia who rely on coal, as

it will make their electricity exports much more expensive for buyers in the EU, including in Hungary.

Although exporters are not required to pay the CBAM fee, they will be impacted by the anticipated decrease in export revenues. The governments of the Western Balkan countries could have mitigated the impact of the CBAM by introducing their own carbon pricing systems. This would have generated additional annual revenues of billions of euros, which could have been used to finance renewable energy projects, support affected workers and phase out coal.

Furthermore, under EU rules, countries that demonstrate significant progress in implementing EU energy and climate legislation — for instance, by introducing a carbon pricing mechanism — may be granted a partial exemption from CBAM.

However, this has not been done so far, which increases the risk of a catastrophic and unfair energy transition, according to a report published by CEE Bankwatch Network at the end of October. According to the report, around 57% of electricity imported by the EU from its carbon -intensive direct neighbours in the region – Bosnia and Herzegovina, Montenegro, North Macedonia and Serbia – is coal-based.

Due to the introduction of CBAM,

Ukraine and the Western Balkans will face implied export penalties of €70 to €80 per megawatt-hour of electricity, which will significantly reduce trade with the EU,

according to an analysis by the Bruegel think tank. This 'penalty' is comparable to current domestic and EU electricity market prices.

The exact amount of the carbon tax will be determined based on the price of CO₂ allowances at auctions held under the EU Emissions Trading Scheme. Source: tradingeconomics.

Once CBAM comes into force, it is likely to cause a significant increase in costs,

which will lead to a sharp reduction in EU demand for electricity from the Balkans overnight.

This will cut off a key source of export revenue for the countries concerned.

According to Bruegel, CBAM introduction could reduce Ukraine’s electricity exports to the EU by more than 60 percent compared to a scenario without CBAM (from six TWh to 2.5 TWh)

Ultimately, CBAM may force governments to close their highly polluting and increasingly uneconomical coal-fired power stations.

Bruegel warns that

the application of CBAM to the electricity sector [...]from January 2026 risks undermining European electricity market integration and security of energy supply,

while the climate benefits are unclear. A delay could form part of a constructive compromise in an ongoing CBAM revision."

Revenues from carbon taxes will go to the EU budget. If electricity exports remain at current levels, the EU could generate nearly €965 million in annual revenue from applying the carbon border adjustment to electricity imports alone.

Since 2022, the share of imports in Hungary's electricity supply has been declining and is expected to reach around 20% in 2025. This aligns with the government's energy strategy target for 2030. Of the countries bordering Hungary, it was a net electricity exporter to Serbia and Ukraine in 2024. However, it also imports electricity from these countries during certain periods, typically when exchange prices are high.

Additionally, any increase in the price of electricity exports from the Western Balkans, or any decrease in supply,

may indirectly impact Hungarian electricity import opportunities and prices via neighbouring countries and regional electricity market quotations.

Cover image (for illustration purposes only): Getty Images