Europe’s Carbon Border Adjustment Mechanism (CBAM) is beginning to reshape industrial supply chains by increasing the importance of near-sourcing, carbon traceability, and emissions verification for manufacturers supplying the European Union. While the mechanism is intended to prevent carbon leakage from basic materials industries, new analysis indicates it could expose downstream manufacturers to higher production costs if finished imported products remain outside CBAM coverage.
A recent assessment by Orgalim found that manufacturers of products incorporating steel, aluminium, cement, fertilisers, hydrogen, and electricity may face growing competitive pressure as the EU phases out free emissions allowances under the EU Emissions Trading System (EU ETS) while CBAM initially applies only to selected upstream materials.
Downstream manufacturing faces increasing carbon cost exposure
According to Orgalim, the interaction between CBAM and the gradual removal of free EU ETS allowances could increase production costs by more than 5% for over one-third of a sample of 15 industrial products, including electric motors, transformers, generators, water heaters, radiators, cookware, hand tools, forklifts, and industrial equipment. In the most exposed cases, production costs could increase by up to 48%.
The study also identified 8 of the 15 assessed products as facing immediate carbon leakage risk from 2026, with that number expected to rise to 11 products by 2034.
Because steel and aluminium form key inputs in machinery and industrial equipment, higher carbon costs become embedded throughout manufacturing supply chains, affecting product pricing, procurement contracts, warranties, and tender competitiveness.
Product scope creates competitive imbalance
CBAM imposes carbon costs on imports of covered materials entering the EU while domestic producers gradually lose free EU ETS allowances. However, finished or semi-finished industrial products imported from outside the EU may not face equivalent embedded carbon costs depending on their product classification.
This creates a situation in which the mechanism addresses carbon leakage in upstream materials while potentially exposing EU downstream manufacturing to increased competition from foreign producers of finished industrial goods.
As a result, procurement decisions are increasingly influenced by suppliers’ ability to provide traceable material origins, verified embedded emissions, electricity consumption records, batch-level carbon allocation, and audit-ready reporting systems.
Western Balkans positioned for near-sourcing opportunities
The analysis identifies Serbia, Montenegro, and the wider Western Balkans as potential near-sourcing locations for European manufacturers seeking geographically close suppliers capable of meeting CBAM documentation requirements.
The region combines lower manufacturing costs, proximity to EU markets, established industrial capabilities, logistics connections, and engineering capacity, but future competitiveness will increasingly depend on documented carbon performance rather than production cost alone.
Serbia has established manufacturing capacity in machinery, metals, automotive components, electrical equipment, fabrication, cables, and construction products, while Montenegro offers Adriatic port access, aluminium-related industrial experience, renewable energy potential, and logistics infrastructure. Bosnia and Herzegovina, North Macedonia, and Albania provide additional manufacturing, metals, automotive, energy, and logistics capabilities.
Electricity mix becomes a critical competitiveness factor
Carbon-intensive electricity generation remains a significant challenge for exporters across Southeast Europe. Manufacturers relying on high-carbon grid electricity without transparent emissions documentation may struggle to satisfy EU buyers’ CBAM reporting requirements despite lower production costs.
Future competitiveness is therefore expected to depend on renewable electricity procurement, traceable raw material sourcing, verified emissions accounting, and audit-ready documentation.
Supplier documentation framework gains importance
A proposed SEE CBAM-Ready Near-Sourcing Framework centres on a standardized CBAM supplier passport that would include:
- Product classifications
- Material composition
- Steel and aluminium origin
- Supplier certificates
- Electricity consumption
- Direct and indirect emissions
- Production allocation methodologies
- Management approvals
Such documentation would enable EU importers, authorised CBAM declarants, OEM procurement teams, and independent verifiers to evaluate emissions data without reconstructing complete supply chains.
The framework is particularly relevant for manufacturers producing transformer tanks, switchgear housings, cable trays, industrial frames, motor components, aluminium profiles, machined parts, heating equipment, metal enclosures, renewable-energy balance-of-plant equipment, HVAC systems, and automotive assemblies.
Industrial parks could integrate CBAM compliance
The proposal also recommends developing carbon-accounted industrial zones where power supply, metering systems, customs classification, environmental permitting, logistics, and emissions documentation are integrated into industrial operations.
Rather than competing solely through land availability and labour costs, such industrial zones would offer buyers greater confidence regarding product origin, embedded emissions, and supporting evidence.
Renewable power linked to export competitiveness
Industrial electricity procurement is becoming an increasingly important component of export competitiveness. Recommended measures include:
- Industrial power purchase agreements (PPAs)
- On-site solar generation
- Behind-the-meter battery storage
- Smart metering
- Guarantees of origin where accepted
- Transparent electricity accounting
These measures are particularly relevant for aluminium processing, steel fabrication, machinery manufacturing, chemicals, fertilisers, building materials, and energy-intensive component production. Serbia has a growing renewable energy project pipeline but continues to face grid connection limitations and curtailment concerns, while Montenegro possesses significant renewable potential requiring improved grid integration and industrial offtake arrangements.
Pre-verification becomes part of supplier qualification
Although EU importers generally remain the formal CBAM declarants, suppliers are increasingly expected to provide emissions documentation before procurement decisions are made.
Recommended pre-verification packages include:
- Emissions methodologies
- Data hierarchies
- Production boundaries
- Installation-level energy records
- Supplier declarations
- Material certificates
- Electricity documentation
- Allocation methodologies
- Internal responsibility matrices
These packages provide importers with documented evidence before formal verification requirements arise.
Financing requirements expand beyond decarbonisation
CBAM readiness requires investment in digital monitoring, reporting and verification (MRV) systems, metering infrastructure, process efficiency improvements, renewable energy procurement, rooftop solar, material substitution, procurement systems, and emissions accounting expertise.
The assessment suggests these investments should be treated as export competitiveness and market-access financing, rather than solely environmental expenditure. Banks, development finance institutions, and EU-supported funding programmes are identified as potential providers of financing for exporters seeking to strengthen CBAM compliance capabilities.
Governments encouraged to develop CBAM export infrastructure
The proposed policy framework recommends that Southeast European governments establish practical export support measures, including national CBAM readiness registries classifying companies according to reporting maturity, supplier documentation capability, installation-level MRV systems, renewable electricity evidence, and pre-verified export documentation.
Additional recommendations include support for customs classification, product code mapping, renewable energy procurement linked to industrial demand, and promotion of CBAM-ready manufacturing locations.
For Serbia, priorities include expanding renewable electricity procurement options and documentation systems to complement its established industrial base. For Montenegro, opportunities are centred on port logistics, renewable energy, aluminium-related industry, specialised manufacturing, green industrial zones, and documentation services supporting EU-bound exports.
The assessment indicates that the transition from the current CBAM reporting phase to the financial phase beginning in 2026, together with the gradual elimination of free EU ETS allowances through 2034, is expected to influence procurement strategies well before the full implementation timetable, increasing demand for suppliers capable of delivering carbon-documented, traceable, and CBAM-ready industrial products.
Elevated by CBAM.Clarion.Engineer
