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EU’s carbon border tax must become mainstream topic in Western Balkans

EU carbon border tax must become mainstream topic in Western Balkans

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February 9, 2022

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Published:

February 9, 2022

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The purpose of the upcoming Carbon Border Adjustment Mechanism is to prevent carbon leakage and promote decarbonization, so the measures accompanying the scheme must also be directed to helping the Western Balkans adjust to the system, according to participants at a discussion on the impact of the electricity sector in the region. Experts are warning that the topic hasn’t yet grown into a mainstream debate among stakeholders in the six countries.

The Climate Strategy 2050 Institute organized an online event called ‘An EXcEMPTIONal challenge – how CBAM affects the electricity sector in the direct neighbourhood of the EU’. Experts and officials discussed the possible impact on the Western Balkans from the phased introduction of a carbon levy for imports of goods into the European Union.

The event’s title itself placed the focus on the plan to delay until 2030 the implementation of the Carbon Border Adjustment Mechanism for electricity coming into the EU from the region. But the six contracting parties of the Energy Community must make substantial progress in the integration with their neighbors from the member states to be exempted.

Carbon pricing leaves decarbonization funds at home

Some of the speakers at the panel stressed that there is still no mainstream debate in the Western Balkans about what should be done to prepare for CBAM. One of the main messages from the event, backed by the European Climate Foundation, is that by introducing carbon pricing and complying with the Emissions Trading System (EU ETS), the governments of the six countries can hold on to the revenue from the payments and use them for their own energy transition.

Energy Community contracting parties have strict conditions to meet to be exempted from CBAM for electricity until 2030

The participants agreed the CO2 border tax is intended to prevent carbon leakage and promote decarbonization, pointing out that the measures accompanying the scheme must also be directed to helping the region to adjust to the changes, including funds and technical support.

The CBAM is set to be phased in in 2026 for electricity, fertilizers and some commodities. Carbon leakage is the case for the EU’s industrial producers to move to countries with looser climate rules. The administration in Brussels intends to level the playing field and prevent imports of products and electricity that would be cheaper just because the goods don’t include carbon emission costs.

Buschle: CBAM is Green Deal border

Deputy director of the Energy Community Secretariat Dirk Buschle said the idea behind the establishment of the organization was to “overcome borders” by integrating the Western Balkan six and the EU in the sector. “When we talk about CBAM, we talk about the border of the Green Deal,” he underscored.

It is not a border between Energy Community contracting parties and EU member states but rather between the fast transitioning and the slower transitioning Europe, in his view. Buschle said it shouldn’t become a so-called hard border and that CBAM would incentivize electricity market coupling between the Western Balkans and their neighbors in the EU and promote domestic carbon pricing “for the sake of further decarbonization.”

Market coupling is one of the best ways for integrating the regional market with EU countries

The countries of the region have great potential for the deployment of renewable energy but there are not enough wind turbines and solar parks yet, the Energy Community official warned. The Western Balkans showed high commitment to fully decarbonize by 2050 and introduce carbon pricing, but “little action” has been seen so far with the exception of Montenegro, Buschle pointed out.

Market coupling is one of the best ways for integrating the regional market with EU countries, he asserted. Buschle added the CBAM is envisaged to make the said border permeable for the Western Balkans to export renewable energy and not be penalized with the CO2 border tax.

Electricity sector is most advanced in EU integration

The electricity sector in the Energy Community showed the biggest progress in the integration with the EU, said Nicolas Kuen from the European Commission’s Directorate-General for Energy (DG ENER), who is responsible for the eastern and southern neighborhood.

In order for the Western Balkans to be exempted from the CBAM, they must work on market coupling and adopt legislation to enable it, he noted and stressed there is still much to be done on a national level including in transparency of the electricity sector.

The six countries of the region are being told to do a lot of work until the end of the decade, Nicolas Kuen from the European Commission says

It is especially important to calculate emissions with accurate data and prevent indirect imports of electricity from the region if the energy is coming from countries with looser policies, Kuen underscored. He said the Western Balkans should develop carbon pricing schemes by January 2030 that are equivalent to the EU ETS to avoid paying the border tax.

The six countries are being told to do a lot of work until the end of the decade, Kuen acknowledged and said the EU is ready to help to optimize the system, arguing the 27-member bloc has learned from its mistakes.

As for the flow of renewable electricity into the EU, he reminded the participants at the event that it can be arranged with verification via guarantees of origin. All in all, the EU should explain the energy market integration’s benefits to its counterparts in the region by emphasizing the security of supply, energy independence and the use of carbon pricing revenue to tackle air pollution and improve energy efficiency, Kuen said.

CBAM alone would even lower power prices initially

Enikő Kácsor, senior research fellow from the REKK Regional Center for Energy Policy Research, presented a modeling study for the introduction of the CBAM and ETS. She said the CBAM, if it is introduced alone, brings a real risk for a drop in profitability for power companies.

The introduction of CBAM hardly decreases the production of power from coal, but the output drops 85% to 90% with a carbon price of EUR 70 per ton in 2030 if market coupling is included in the calculations.

An ETS compliance scenario is expected to bring a sharp drop in emissions, in contrast to CBAM alone

Also, with CBAM alone, the combined emissions in the Western Balkans and the EU grow by a million tons as a result of a coal-to-gas switch, which is unfavorable for decarbonization. The scenario with sufficiently high carbon prices results in a drop of more than 22 million tons per year.

According to the same study, the introduction of ETS in 2030 results in a power price increase of EUR 5 to EUR 6 per MWh, while just with CBAM they drop by as much as EUR 20 per MWh.

The event participants pointed to the risk of the loss of support for decarbonization and EU integration in the Western Balkans, particularly in the case of a sharp rise in electricity prices for households. REKK concluded the EU should find the right incentives for the region for the process and that the six countries should be able to cushion the blow for the people affected by energy poverty.

The key is in closely tracking progress and placing the focus on decarbonization and climate goals, Kácsor said.

Lessons learned from failure of LCPD implementation

On the other hand, Damir Miljević from the Center for Sustainable Energy Transition – RESET from Bosnia and Hercegovina estimated power exporters are likely to continue with business as usual until the last moment if the Western Balkans are exempted until 2030.

He compared the situation to the difficulties in the implementation of the Large Combustion Plants Directive (LCPD) and said the CBAM and carbon pricing issues must be discussed with all stakeholders in the region and not just governments, as they affect every citizen and company.

Progress in power sector’s integration with EU must be closely tracked and verified so that Western Balkans don’t fall behind on the path toward 2030

Sonja Risteska from Agora Energiewende is of the opinion that progress must be tracked and verified on a regular level, also pointing to the case of LCPD, where polluting plants keep breaching regulations. She added CBAM alone is still valuable, citing projections that it would make new lignite-fired power plant projects financially unsustainable.

The Western Balkan governments are “at a crossroads,” said Péter Pozsgai from the Energy Community Secretariat. In his view, they can either delay compliance, “run their plants until they fall apart and continue to poison people,” or try to get funds and political support now and build a low-carbon or zero-carbon generation fleet.

The countries of the region may soon run out of time to change the course of action, Pozsgai asserted.

The CBAM will be one of the topics at the Serbian Companies on Changing Power Market conference. The event will be organized by Balkan Green Energy News and held in Belgrade on February 22.

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