Europe’s carbon border policy is entering a decisive new phase, and its impact will extend far beyond emissions reporting. The Carbon Border Adjustment Mechanism (CBAM) was introduced to prevent carbon leakage and protect European heavy industry from unfair competition. While it is beginning to achieve that goal, a new challenge is emerging. The mechanism could shield European producers of steel, aluminium, cement, fertilizers, hydrogen, and electricity, while leaving thousands of downstream manufacturers facing rising costs and increased competition from imported finished goods.
This growing imbalance is highlighted in Orgalim’s latest assessment of CBAM, which warns that Europe’s technology and manufacturing sectors could become the next weak link in the industrial value chain. The report suggests that while basic materials are covered by CBAM, many products manufactured from those materials—including machinery, electrical equipment, industrial components, heating systems, transformers, motors, and fabricated metal products—remain outside its initial scope.
The result is a widening competitive gap that could reshape European supply chains and accelerate a new era of near-sourcing. For countries such as Serbia, Montenegro, and the wider Western Balkans, this presents an opportunity to become strategic manufacturing partners for the European Union—but only if they can offer more than lower production costs. The future belongs to suppliers capable of delivering CBAM-ready manufacturing, backed by transparent emissions data, traceable materials, renewable electricity, and audit-ready documentation.
CBAM is becoming an industrial competitiveness test
Orgalim’s research quantifies concerns that many European manufacturers have already begun to experience.
Across a sample of 15 industrial product categories, including electric motors, generators, transformers, forklifts, radiators, cookware, hand tools, and industrial machinery, the combined effect of CBAM and the gradual removal of free EU ETS allowances could increase production costs by more than 5% for over one-third of the products examined. For the most exposed industries, cost increases could reach 48%.
Even more concerning, Orgalim identifies eight of the fifteen products as facing immediate carbon leakage risks beginning in 2026, with that number expected to increase to eleven by 2034. These figures directly affect Europe’s industrial middle layer—the manufacturers that transform steel and aluminium into higher-value products.
Unlike raw materials, these inputs are deeply integrated into:
- engineering design
- product specifications
- warranty obligations
- procurement contracts
- long-term pricing agreements
As embedded carbon costs increase, European manufacturers become more expensive unless imported finished products are subject to equivalent carbon pricing.
A new policy gap is emerging
CBAM successfully applies a carbon price to covered imports entering the EU while domestic producers gradually lose their free emissions allowances. Products manufactured outside the EU using those same materials may still enter the European market without facing equivalent embedded carbon costs, depending on their customs classification.
This creates a new form of carbon leakage. Instead of relocating steel mills or aluminium smelters, production may increasingly shift toward foreign manufacturers producing finished industrial goods, leaving European downstream industries under growing pressure. CBAM is therefore evolving beyond climate policy. It is becoming a powerful signal influencing where manufacturing takes place.
Procurement is entering the age of carbon transparency
European buyers are beginning to ask entirely different questions when selecting suppliers.
Price and delivery remain important, but procurement departments increasingly need suppliers capable of demonstrating:
- verified product carbon footprints
- traceable steel and aluminium origins
- documented electricity consumption
- transparent production methodologies
- auditable emissions allocation
Companies unable to provide this information will become commercial risks rather than strategic suppliers. Those capable of doing so will enjoy a significant competitive advantage.
A major opportunity for Southeast Europe
This shift creates one of the most significant industrial opportunities for Serbia, Montenegro, Bosnia and Herzegovina, North Macedonia, and Albania in decades.
The Western Balkans already possess several competitive advantages:
- proximity to EU manufacturing hubs
- competitive labour costs
- experienced engineering talent
- established automotive and industrial supply chains
- efficient logistics corridors
Geography alone will no longer guarantee success. The region must become known not only for affordable manufacturing but for documented manufacturing.
Why evidence is becoming the new competitive advantage
The biggest challenge facing Southeast Europe is electricity. Much of the region still relies heavily on coal-fired power generation, making exported products significantly more carbon intensive.
A Serbian or Montenegrin manufacturer may offer lower prices than an EU competitor, but without transparent electricity accounting and verified material traceability, those savings may disappear under CBAM-related procurement requirements. The future winners will not necessarily be the lowest-cost producers. They will be the lowest-risk suppliers.
Building a CBAM-ready near-sourcing framework
To capitalize on this transformation, Southeast Europe needs an integrated CBAM-ready industrial strategy rather than isolated climate initiatives.
1. Supplier Carbon Passports
Every exporter should provide standardized documentation covering:
- product classifications
- material composition
- steel and aluminium origin
- supplier certifications
- electricity consumption
- direct and indirect emissions
- emissions allocation methodology
- management verification
Such documentation should allow European buyers to integrate suppliers into their compliance systems without rebuilding emissions data from scratch.
This is particularly valuable for manufacturers producing:
- transformer housings
- switchgear
- cable systems
- industrial frames
- aluminium profiles
- machined components
- HVAC equipment
- renewable-energy infrastructure
- automotive assemblies
2. Carbon-accounted industrial zones
Industrial parks must evolve beyond offering inexpensive land and tax incentives.
Future industrial zones should integrate:
- renewable electricity
- digital metering
- customs compliance
- environmental permitting
- emissions monitoring
- standardized supplier documentation
Instead of simply selling factory space, these zones would offer supply-chain certainty.
European manufacturers increasingly value confidence as much as production capacity.
3. Renewable electricity as an export advantage
Electricity has become more than an operating expense.
It is now part of a product’s marketability.
Industrial exporters will increasingly depend on:
- renewable Power Purchase Agreements (PPAs)
- on-site solar generation
- battery storage
- smart metering
- guarantees of renewable origin
- transparent electricity accounting
This is especially important for industries such as:
- steel fabrication
- aluminium processing
- machinery manufacturing
- fertilizer production
- construction materials
- industrial equipment
For Serbia and Montenegro, renewable energy investments are no longer simply energy projects—they are industrial competitiveness projects.
4. Pre-verification before exports
Although EU importers remain legally responsible for CBAM declarations, much of the practical work shifts upstream to suppliers.
Exporters should prepare complete pre-verification packages containing:
- emissions methodologies
- production boundaries
- energy records
- supplier declarations
- material certificates
- electricity documentation
- emissions allocation logic
- internal governance procedures
Suppliers that already possess these files will become preferred partners for European manufacturers.
5. Financing CBAM readiness
Preparing for CBAM requires investment.
Manufacturers need:
- digital emissions monitoring systems
- advanced metering
- energy-efficiency upgrades
- rooftop solar installations
- renewable electricity contracts
- supplier management platforms
- emissions accounting expertise
These are not optional ESG projects.
They are investments in market access.
Banks, development institutions, and EU financial programs should increasingly treat CBAM readiness as a form of industrial competitiveness financing, helping exporters maintain access to European markets.
Governments must support industrial adaptation
Governments throughout Southeast Europe also have an important role to play.
Rather than introducing additional climate strategies, policymakers should focus on practical export infrastructure, including:
- national CBAM readiness registries
- supplier maturity assessments
- customs-code guidance
- emissions reporting assistance
- renewable-energy procurement support
- export-focused industrial promotion
Investment agencies should market the region as a CBAM-ready manufacturing destination, rather than relying solely on lower labour costs.
Serbia’s industrial advantage
Among Western Balkan countries, Serbia is particularly well positioned. Its manufacturing base already serves European automotive, electrical equipment, machinery, logistics, and metal-processing industries. Serbia’s electricity mix remains relatively carbon intensive, and renewable grid capacity continues to face connection challenges. Its next competitive step is clear:
connecting industrial exporters with reliable renewable electricity and internationally accepted carbon documentation. Without those systems, wage advantages alone will become increasingly insufficient.
Montenegro’s niche opportunity
Montenegro cannot compete with Serbia on industrial scale.
Instead, it can specialize in:
- Adriatic logistics
- green industrial services
- renewable-energy integration
- aluminium-related industries
- documentation services
- premium industrial supply chains
Its EU accession process also strengthens its reputation as a trusted European manufacturing partner, provided policy commitments translate into operational reliability.
The Western Balkans should compete on trust—not subsidies
Rather than competing through larger subsidies or lower wages, the region should position itself as Europe’s most reliable near-sourcing platform.
European manufacturers increasingly seek:
- shorter supply chains
- geopolitical resilience
- regulatory compliance
- transparent emissions reporting
- trusted suppliers
The Western Balkans can satisfy all of these requirements—but only if carbon documentation becomes a regional industrial standard.
Elevated by CBAM.Clarion.Engineer