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Carbon emissions prices are becoming a reality in Western Balkans and particularly in Bosnia and Herzegovina – will the countries pay to the EU or rather collect money in their own budgets?

Carbon emissions prices, CBAM, Bosnia and Herzegovina

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Published

November 6, 2023

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Published:

November 6, 2023

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The author of the text is Janez Kopač, a consultant and former director of the Energy Community Secretariat

The European Union introduced carbon pricing back in 2005. Coal-based electricity producers from non-EU countries have high profits due to the non-taxation of CO2 emissions. As a result, the European Union proposed a Regulation on Carbon Border Adjustment Mechanism (CBAM) which was adopted in May this year. This legal action is trying to equalize the carbon pricing burden between EU and non-EU producers. It will have a major effect on the economies of some Western Balkan countries, particularly in Bosnia and Herzegovina.

This article by Janez Kopač, consultant and former director of the Energy Community Secretariat, talks primarily about Bosnia and Herzegovina. It is relevant for any Western Balkan country with coal-based electricity generation, but Bosnia and Herzegovina are most exposed to all of them.

Development of carbon pricing in the EU

The European Union introduced carbon pricing back in 2005. The logic was that the price for emissions of greenhouse gases should move the production processes into more decarbonized technologies based on market forces. For many years prices of a ton of CO2 emissions were low, somewhere at 5 EUR per ton, and this hasn’t had a major influence on the behavior of coal power plants and other industries emitting greenhouse gases.

Prices of CO2 emissions jumped to somewhere around 85 EUR per ton with a tendency to grow further

The generation of a one-megawatt hour of electricity from lignite releases approximately one ton of CO2 emissions. If the price for one MWh was for years somewhere around 50 EUR, an additional 5 EUR was not too visible, e.g. for Croatia which jumped into EU ETS back in 2013. In the last five years, the EU became much more decarbonization-ambitious, and the prices of CO2 emissions, which are influenced by the decisions of the European Commission, jumped to somewhere around 85 EUR per ton with a tendency to grow further.

This price almost doubles the price of electricity from coal power plants. As a consequence, in the European Union power generation from cheaper renewables quickly exceeded the one from coal but one of the consequences was also an increased import of coal-based electricity from non-EU states, e.g. e. Bosnia and Herzegovina. Coal-based electricity producers from non-EU countries have historically high additional (windfall) profits due to the non-taxation of CO2 emissions from old, depreciated coal power plants, operating without costly filters which would prevent killing the neighboring population with sulfur dioxide and dust particles.

Carbon emissions “customs” tariff

Such a fairy tale cannot last long. It is unfair in decarbonization attempts and has no economic logic. As a result, the European Union proposed a Regulation on Carbon Border Adjustment Mechanism (CBAM) which was adopted in May this year.

This legal action is trying to equalize the carbon pricing burden between EU and non-EU producers. The payment obligation will enter into force on 1 January 2026, but the transitional period started already in October this year. It will have a major effect on the economies of some Western Balkan countries, particularly in Bosnia and Herzegovina.

CBAM requests that importers of goods into the EU pay an additional price for carbon embedded in the imported product. For now, the EU put on such a list of products subject to CBAM steel, aluminum, cement, fertilizers, and electricity. In the future, by 2030, there will be most probably all products that pay carbon price in the EU.

CBAM calculation – case of Bosnia and Herzegovina

Exporters of electricity, cement, and steel from Bosnia and Herzegovina will become less competitive due to coal components in their production. This export to the EU creates more than 40% of all exports from the country and Bosnia and Herzegovina is among the three most CBAM-impacted countries worldwide.

The average share of coal-based electricity in BiH electricity is around 60%. This means that importers in the EU will have to add some 60% of the EU carbon price on top of the purchase price. If Elektroprivreda BiH, RS, or HZHB is exporting one megawatt hour for around 100 EUR, which is currently close to market price in the neighboring EU market, the importer of this electricity will have to purchase CBAM certificates for around  60% of the assumed embedded CO2 emission in electricity produced in Bosnia and Herzegovina,  at EU ETS price of 85 EUR ( which would make additional costs of 51 EUR/MWh for importer).

BiH companies will have to reduce the selling price of electricity to stay competitive

Of course, BiH companies will have to reduce the selling price of electricity to stay competitive. Instead of 100 EUR per MWh, as they earn today, they will earn only 100-51 = 49 EUR per MWh. The rest will be the costs of CBAM certificates paid by the importer to the EU budget. This is relevant also for many renewable generators like Elektroprivreda HZHB despite producing electricity only from renewables.

It is about the state and its energy mix, not the individual company. In practice, there will be just much fewer exports due to no competitiveness. The prices of electricity, particularly for households currently subsidized by export profits, will have to increase substantially or the entity budgets will have to intervene. The question is only where this additional money will go: to Brussels or will it stay in the country?

The value of avoided costs of CO2 and unpaid CO2 allowances in the entity budgets is estimated to be around 900 million EUR in 2022 only from the electricity generation sector as it is now.  With the current volume of export of electricity, this sector would pay almost 3 billion EUR into the EU budget in the period 2026-2030 in case there will be no exemption – if the export would remain the same, but it will plummet.

Steel, cement, aluminum, and fertilizers exporters (i.e. Željezara Zenica, Cementara Lukavac, etc.) will also earn much less. CBAM without the domestic carbon pricing could dramatically worsen the situation in the BiH economy which will sell its products at lower prices, with the difference indirectly contributing to the EU budget for hundreds of millions of EUR annually.

How to avoid CBAM?

Bosnia and Herzegovina could avoid CBAM for electricity and reduce it for other industrial products if it introduces by 20303 its carbon price, equivalent to the EU’s, and collects money for CO2 emissions by itself (or by entities). The carbon price in Bosnia and Herzegovina will be deducted from the CBAM obligation. By signing the Sofia Declaration back in 2020 and being a part of the Energy Community Bosnia and Herzegovina promised to introduce EU ETS but now it really must deliver.

Steel, cement, and other industries cannot avoid CBAM anymore. On 1 January 2026, it will become a reality but the prices of CBAM for these products will enter into force with the 100% effect only in 2034. Only for the export of electricity, the CBAM will bite fully immediately. On the other hand, the electricity sector still has a chance.

Bosnia and Herzegovina can get a full exemption till 2030 if it fulfills certain conditions

Bosnia and Herzegovina can get a full exemption till 2030 if it fulfills certain conditions. The first one is the electricity market coupling with neighboring countries by mid-2025. The next one is a clear roadmap of gradually increasing carbon emission price to the EU level by 2030, and the established mechanism of monitoring, reporting, and verification of greenhouse gas emissions from coal power plants and some industrial installations by 2025.

Renewable generators can avoid CBAM by signing a purchasing power agreement and reserving cross-border capacity in the long run. However, this will also substantially decrease their profit and cause more problems for all the others in the country.

It is on politicians to decide

These preconditions require some political decisions. The first one is the appropriate electricity market legislation that will enable certification of the transmission system operator and designation of the nominated electricity market operator. The content of the law was prepared long ago and is even not controversial since BiH has had state-level electricity legislation for the last 20 years, but politicians cannot agree on what kind of a new law on the state level shall be adopted. The question seems only prestigious.

The second pre-condition requests appropriate legislation transposing the Energy Community climate-related legal framework introducing new competent authorities and greenhouse gas monitoring/reporting/verification processes. Legal acts, also prepared already for some time, shall be adopted this year, which seems unrealistic since the procedure did not even begin.

Without the CBAM exemption for the electricity sector, something tragic will happen: coal power plants in the country will continue harming the health of its population while indirectly contributing huge amounts of money to the EU budget instead of its own.

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