Impact of the EU Carbon Border Adjustment Mechanism on Electricity Trade with Energy Community Contracting Parties

The European Union Emission Trading System (EU ETS) is a market mechanism that prices CO2 emissions, driving decarbonisation in the EU energy sector and carbon-intensive industry. To further enhance the EU ETS and prevent carbon leakage, the EU has introduced the Carbon Border Adjustment Mechanism (CBAM). CBAM imposes a duty levy on importing certain CBAM goods, such as electricity, into the EU from third countries and territories without implementing the ETS mechanism or carbon pricing. This paper examines the impact of introducing CO2 pricing in Bosnia and Herzegovina (BA), a third country connected to the EU electricity market without an ETS, and its electricity trade with Croatia (HR), an EU member state with an established EU ETS. The analyses are conducted using the multi-zonal and multi-sector unit commitment optimisation model Dispa-SET, with the primary goal of providing insights into the implications of CO2 pricing on the energy market interactions between Bosnia and Herzegovina and Croatia under the CBAM framework. The study examines 100 scenarios, each considering various CO2, lignite, and fossil gas prices, and analyses factors such as electricity import/export dynamics, average electricity prices in the zones, total system costs, and load duration curves for fossil power plants in each zone. Results indicate that low fossil gas prices reduce lignite plant operations in Bosnia and Herzegovina, and introducing CO2 pricing causes a transition from an electricity exporter to an importer. Cross-border line congestion analysis reveals that higher CBAM factors increase congestion, necessitating infrastructure upgrades. Electricity costs in the HR-BA zone rise substantially under high CO2 prices, emphasising the need for balanced CO2 pricing strategies and more deployment of renewables.