Serbian Companies on the Changing Power Market: carbon taxation is inevitable and must be discussed publicly

Carbon taxation in the region is inevitable, whether in the form of the EU’s planned carbon border tax or through national carbon pricing schemes, and it will affect both businesses and citizens. This calls for an urgent public discussion in order to avert consequences such as factory closures and rising electricity prices, according to businesspeople and experts who took part in a panel titled What Serbian companies need to know about CO2 taxation.

The panel discussion on the Carbon Border Adjustment Mechanism (CBAM), a CO2 tax the EU is preparing to impose on imports of cement, iron, steel, fertilizer, aluminum, and electricity from countries without a national carbon pricing scheme, was held as part of the conference Serbian Companies on the Changing Power Market, organized by Balkan Green Energy News.

The conference was opened by Artur Lorkowski, Director of the Energy Community Secretariat, Urs Schmid, Ambassador of Switzerland to Serbia, and Zorana Mihajlović, Serbia’s Deputy Prime Minister and Minister of Mining and Energy.

The moderator of the panel titled What Serbian companies need to know about CO2 taxation was consultant Stevan Vujasinović.

Milka Mumović (photo: Đorđe Tomić)

Milka Mumović of the Energy Community Secretariat recalled that the carbon border tax regulation had been in preparation for over two years before a proposal was unveiled in July 2021. Its adoption is expected by the end of this year.

The carbon border tax will take effect on January 2026, or even a year earlier

The CBAM aims to prevent “carbon leakage,” the situation where businesses move from the EU to countries where there is no CO2 taxation or where such taxation is more favorable, as well as to discourage imports of carbon-intensive goods by making them more expensive, according to her.

The tax will be paid by importers, who will also be required to follow a number of demanding administrative procedures, including verification whether a CO2 tax has been paid in the country of production, she explained.

Electricity imports may be exempt from the CBAM, but the requirements will be stringent

Mumović said that electricity may be exempt from the CBAM, but under certain conditions: the integration of the national power market with the EU’s; the adoption and implementation of the EU’s regulations on the electricity market, environmental protection, climate, as well as emissions monitoring, reporting and verification; the adoption of a national energy and climate plan (NECP) with a clear decarbonization plan until 2050; and the introduction of a CO2 emissions tax for power plants.

Countries will be required to prove they have met these requirements through reports which will be due in 2025 and 2029, Mumović added.

Damir Miljević (photo: Đorđe Tomić)

Damir Miljević, an energy transition consultant, noted that the European Commission wants the CBAM to take effect on January 1, 2026, while the European Parliament is in favor of its introduction a year earlier. A transitional period for exporters and importers to adapt to the new rules would last from 2023 to 2025 according to the European Commission’s proposal, but the European Parliament’s position is that it should be a year shorter.

Miljević: exemption for electricity appears to be in the EU’s interest, not the region’s

Talking about the possible exemption from the CBAM for electricity imports, Miljević said he suspects the EU has allowed such an option in order to be able to import “dirty” but cheap electricity from the Balkans until 2030. He also noted that Bosnia and Herzegovina is the sole electricity exporter in the region.

When it comes to other products affected by the CBAM – cement, iron, steel, fertilizer, and aluminum – it is obvious that these are produced by large companies, whose fate should be everyone’s concern.

“We don’t have a clear picture how the CBAM will harm exports from the Balkans, and that’s why the issue must be discussed publicly in these countries,” he said. If companies go out of business due to the carbon tax, it would result in massive job losses, he warned.

Knjeginić (Lafarge Serbia): CO2 taxation would not be a problem if cement makers in Serbia had the same options for emissions cuts as those in the EU

Milka Mumović, Dimitrije Knjeginjić and Slobodan Minić (photo: Đorđe Tomić)

Cement production is one of the industries that will be affected by the first wave of carbon taxation. Dimitrije Knjeginjić, Director of Lafarge Serbia, said the cement maker is ready to pay for CO2 emissions in the part where they depend on its own activities, but not in the part where they depend on others. To prepare for carbon taxation, Lafarge will convert all of its diesel trucks to compressed natural gas early next year, and the company has already signed a preliminary agreement on installing a 27-28 MW solar power plant that will supply green energy.

Lafarge Serbia’s transportation activities, namely its diesel trucks, will be converted to compressed natural gas

Carbon emissions in the manufacturing segment have already been cut by 20-50%, according to Knjeginić. Also, Lafarge Serbia is the first company in the Lafarge group to introduce concrete with 30-50% less CO2, and is about to start packaging cement with CO2 emissions reduced by 50%.

However, the problems arise from regulations that do not allow the re-use of construction waste, such as concrete, bricks, tiles, mortar, gravel, and stone, as well as the poor shape of roads, preventing the company from cutting CO2 emissions significantly. All this is possible in the EU, he added.

The cement industry in Serbia cannot use construction waste or import alternative fuels, while all this is allowed in the region and the EU

Moreover, the cement industry in Serbia cannot use alternative fuels, which emit less CO2 and sulfur oxides, while this is allowed in the EU, according to Knjeginić.

Companies in Serbia emit 400 grams of CO2 for each EUR 1 of GDP, compared with 20 grams in the EU

Introducing a tax would not be a problem if companies in Serbia had the same options for cutting CO2 emissions as those in Croatia or Hungary, he noted.

According to Milka Mumović of the Energy Community Secretariat, companies must recognize the social cost of their emissions of CO2 and other harmful gasses. The energy intensity in Serbia is huge, she said, noting that companies in the country emit 400 grams of CO2 for each euro of GDP, compared with 20 grams in the EU.

CO2 taxation will affect all sectors of the economy in some way

Consultant Damir Miljević said that the list of goods subject to the CBAM, which currently covers six sectors, will be expanded, adding that manufacturers of other products should not get too comfortable.

The EU is also considering imposing the carbon border tax on indirect emissions, which means that manufacturers would not be able to use electricity produced from fossil fuels without paying the tax.

In this scenario, green energy produced in the region, mainly by hydropower plants, would be purchased by companies seeking to avoid the carbon tax. This, in turn, would push up the prices of electricity for the rest of the economy and for households, because state power utilities would no longer have cheap, green electricity in their energy mix.

“Make no mistake, the CBAM or a national CO2 tax will affect all sectors of the economy, not just some of them,” Miljević warned.

CO2 taxation can’t be avoided, but what is the solution?

Photo: Đorđe Tomić

Initial estimates by Serbia’s Fiscal Council put the cost of the CBAM’s introduction at between EUR 50 million and EUR 100 million. Slobodan Minić, Special Advisor at the Fiscal Council, noted that cement, iron, steel, fertilizer, and aluminum together account for 5% of Serbia’s exports to the EU.

Miljević: countries in the region must start taxing CO2 for their own sake

Even though the cost does not seem too high, it would be good if Serbia could create a system to keep that money and use it to finance decarbonization and help vulnerable groups through the energy transition, said Minić. Carbon taxation is an inevitability since only a few countries in Europe do not have it at the moment, according to him.

Consultant Damir Miljević believes that countries in the region need to understand that carbon taxation must be introduced “for us, not for them, if we want to live in a clean environment.”

The Energy Community proposes introducing carbon taxation from 2025, and bringing the CO2 price to the EU level by 2040

The Energy Community Secretariat has prepared a proposal for CO2 taxation in contracting parties, which envisages introducing internal carbon pricing right away, developing national systems by 2025, combining them into a single regional system by 2030, and reaching the EU’s carbon price by 2040. The phased introduction of carbon pricing would involve free carbon allowances.

The approach takes into account the discrepancy between the GDP of countries in the region and the EU members states.

According to Milka Mumović of the Energy Community Secretariat, this mechanism would ensure the security of supply and avert dramatic cuts and the collapse of businesses across the economy.