CBAM implications for Kosovo and its electricity sector
The Carbon Border Adjustment Mechanism (CBAM) is a climate policy by the European Union (EU). It aims to prevent carbon leakage – when production moves to countries with weaker climate rules – and to ensure fair competition between EU and non-EU producers. In October 2023, CBAM entered into force in a transitional phase, requiring EU importers to report the embedded emissions in certain goods (iron and steel, aluminium, cement, fertilisers, hydrogen, and electricity), without paying charges yet. On 1 January 2026, CBAM will move into its second phase. From then on, importers in the EU will need to purchase CBAM certificates for the embedded emissions in imported goods.
The immediate financial burden imposed on Kosovo’s economy by CBAM will be relatively small, as goods exports to the EU play only a minor role for it. However, CBAM impacts Kosovo in a different way: it makes it harder for Kosovo to couple (i.e. integrate) its electricity market with neighbouring countries and the EU. This is because integrating into the EU electricity market is incompatible with CBAM, unless Kosovo aligns with EU carbon pricing rules and secures an exemption. Electricity market coupling with the EU is crucial for Kosovo, because it offers benefits such as improved energy security, increased market liquidity, and better integration of renewable energy sources. To advance this goal, Kosovo must continue progressing toward meeting the exemption criteria outlined in the CBAM Regulation.
Phase-in of CBAM payment obligations
Payment obligations under CBAM will be phased in gradually, following the phase-out of free allowances in the EU.
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Kosovo’s exports: low share of CBAM-covered goods
Between 2019 and 2024, Kosovo’s goods exports to the EU accounted for 30-35% of its total annual goods exports. However, these exports only accounted for about 2-4% of the country’s GDP during the same period, because Kosovo exports relatively few goods. CBAM-covered goods to the EU make up an even smaller fraction of GDP – around 0.4% to 1.2%. This suggests that Kosovo’s direct exposure to CBAM based on its export profile will be relatively small.
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CBAM cost on Kosovo’s manufacturing exports
CBAM is being phased in gradually for manufacturing exports, while it applies fully to electricity exports from 2026. In the short term, the financial burden on Kosovo’s manufacturing exports will be limited, but it will rise as the CBAM coverage rate increases each year. By 2034, when all emissions are covered, the annual cost to Kosovo’s exports could reach an estimated EUR 36.4 m.
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EU importers may pass part of the CBAM cost onto Kosovar businesses, depending on price elasticity and market sensitivity, or they may shift to suppliers with lower embedded emissions. The long-term impact will therefore depend on several factors, including potential trade diversion, fluctuations in the EU ETS carbon price, and changes in product-level emissions intensities.
Impact of CBAM on Kosovo’s electricity sector
According to Kosovo’s Energy Regulatory Office, Kosovo exported 747 GWh of electricity in 2024. While Kosovo is a net importer of electricity (636 GWh in 2024), its electricity exports to the EU will still be subject to CBAM.
CBAM will fully apply to embedded emissions in electricity exports from 2026. Kosovo’s electricity exports could face an annual CBAM cost of up to EUR 40 m by 2026, rising to an estimated EUR 57 m by 2034, if CBAM exemption for electricity is not secured. These values may vary depending on changes in future electricity exports to the EU, fluctuations in the EU ETS carbon price, or significant changes in the emissions intensity of domestic generation. However, the financial burden on electricity exports is not the most significant consequence of CBAM for Kosovo’s electricity sector -more critical are the implications for its ambitions of market coupling with the EU.
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Implications for electricity market coupling with EU
Kosovo has expressed plans to advance electricity market coupling with Albania, North Macedonia, and Greece. This is particularly important for Kosovo, as integrating with regional markets and with the EU electricity market would increase market liquidity, facilitate the integration of renewable energy sources, improve grid stability, and enhance transparency and competition.
However, market coupling may be incompatible with CBAM, since electricity is traded on power exchanges through anonymous auctions. In coupled markets, it becomes difficult to identify the source of electricity, making it challenging to trace embedded emissions and assign CBAM payment obligations accurately. Therefore, to proceed with market coupling with the EU, Kosovo and its neighbours must meet a set of preconditions. This includes fully transposing and implementing the Electricity Integration Package and securing an exemption for electricity under CBAM.
CBAM allows for such an exemption, as outlined in the Regulation (EU) 2023/956. To qualify, Kosovo must meet the list of criteria specified in Article 2.7 of the Regulation. Ensuring compliance with these criteria is essential for compatibility with the EU electricity market, which enables proceeding with the market coupling. As of July 2025, Kosovo fully meets only one of the six conditions outlined in Article 2.7.
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Next steps: preparing Kosovo for CBAM
To be prepared for the roll-out of CBAM’s definitive phase in 2026, both the Kosovar private sector and the public sector need to take some important steps in the coming months. Exporters of goods to the EU should improve their monitoring, reporting, and verification (MRV) systems, as reliable MRV is crucial to avoid inflated CBAM costs due to overestimated emission and to ensure transparency when trading with the EU. The Kosovar Ministry of Economy, in close cooperation with the Energy Regulatory Office (ERO), the Transmission System and Market Operator (KOSTT), and the private sector, must accelerate its efforts to support the country’s electricity sector towards meeting CBAM exemption criteria. This would be crucial to enable market coupling. If this is not achieved, indirect effects, such as shifts in regional electricity trade and higher generation costs due to then reduced exports, would carry significant implications for the country.
This Newsletter is based on the Policy Briefing “CBAM and Kosovo: Economic implications and potential exemption for electricity exports to EU”.
