## 1. EU ETS and CBAM: Key Design Features

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### Overview and Rationale
- Carbon pricing described as the most economically efficient tool to realign incentives and reduce emissions through abatement.
- Carbon leakage and competitiveness concerns: Parry et al. (2025) cited leakage rates of 20–50 percent for a domestic carbon price of USD 50 per tonne of CO₂ in selected countries.
- Border carbon adjustments (BCAs) presented to charge embodied carbon of imports equivalent to domestic charges, reducing reliance on free allowance allocation or output-based rebates.

### EU ETS: Design Features
- Coverage: industry, power, and aviation within the European Economic Area.
- Cap trajectory: cap decreasing by 4.3-4.4 percent per year from 2024 onwards.
- ETS price historic reference: "has hovered around EUR 70 per tonne over the 2022-2025 period."
- Free allowances: historically granted to EITE industries; phased out starting in 2026 as CBAM phases in.
- Inclusion threshold for ETS participation: emissions of 25,000 CO2 tonnes annually.
- 2027 plan: separate ETS covering buildings, transport, and small industry with a soft price cap of EUR 45 per tonne and allowance cap set to an annual linear decline of 5 percent per year from 2024 emission levels.
- Exemption until 2031: member states with a national-level carbon tax equal to or above the ETS allowance price.
- A portion of ETS revenues earmarked to support vulnerable households and small businesses through a Social Climate Fund.

### CBAM: Key Design Features and Mechanics
- Timing: definitive, financial phase from January 1, 2026; transitional reporting phase from 2023-2025.
- Initial scope:
  - Scope 1 for iron and steel, aluminum, electricity and hydrogen.
  - Scope 1 and 2 for cement and fertilizer and certain iron and steel products.
  - Scope definitions: Scope 1 = on-site fuel combustion and process emissions; Scope 2 = emissions from electricity used in manufacturing.
- Proposed extensions:
  - EC proposals to extend coverage in iron, steel and aluminum downstream products from 2027; include Scope 2 emissions for all covered iron and steel, and aluminum products.
  - After 2030 expected to apply to all EU ETS sectors (including petroleum products, lime, glass, ceramics, pulp, paper, cardboard, acids and bulk organic chemicals).
- Price basis: tax rate equals the effective EU ETS price less any carbon price paid in producing country.
  - Non-electricity sectors: importers charged only for a percentage of emissions that accounts for free allocations to EU domestic producers; percentage starts at 2.5% of emissions in 2026 and increases annually to 100% by 2034.
  - Electricity importers: full CBAM price applies (no free allowances).
- Price mechanics:
  - 2026 CBAM certificate prices determined quarterly; Q1 2026 CBAM price was EUR 75.36 per tonne.
  - From 2027 prices determined weekly (based on EU ETS auction price during previous week).
- Inclusion threshold for CBAM registration: importers below de minimis of 50 tonnes of CBAM-covered goods per calendar year are exempt. No inclusion threshold for electricity imports.
- Emissions factors: actual verified installation-level data or default values where unavailable; include an annually increasing mark-up from 2026 to incentivize actual reporting; electricity uses grid-average intensity unless conditions met to use actual emissions.
- Exemptions for electricity exports (Article 2(7)): third-country exemption subject to conditions (apply EU law for electricity including renewables and market coupling; commitment to carbon neutrality by 2050; roadmap and progress to implement an EU-aligned ETS by 2030).
- Exports and rebates: EU CBAM does not rebate ETS payments for EU exporters (no origin-based rebate).
- Revenue split: 75 percent to EU budget and 25 percent to member state where customs declarant is registered. EU estimate: EU budget portion about EUR 1.5 billion per year from 2028.

### Operational Timing and Immediate Effects
- Payment liability deferred until 2027; Q1 2026 CBAM price published April 7, 2026 at EUR 75.36 per tonne and applied retroactively to Q1 2026 imports (importers must buy certificates covering Q1 2026 emissions).
- CBAM certificate sales begin in February 2027; first surrender of certificates (covering 2026 imports) due by September 30, 2027.
- Quarterly price publication in 2026; weekly publication from 2027 allows importers to time purchases.
- Importers anticipated CBAM costs and included expected CBAM cost in offer prices during Q1 2026.

### Bosnia and Herzegovina (BiH) Exposure to CBAM
- Current scope affects about 11 percent of BiH exports (or 3.2 percent of GDP).
- Detailed estimate: 10.7 percent of total BiH exports (equivalent to 3.2 percent GDP) will be subject to a CBAM charge under current coverage; figures dominated by iron and steel and aluminum sectors (approximately 9 percent of total export value).
- Potential expansions:
  - Proposed second phase: exposure increases to 13.2 percent of total exports.
  - From 2030 (all ETS sectors): exposure rises to 14.3 percent of total exports (4.3 percent of GDP).
- Sectoral notes:
  - BiH almost exclusively exports cement and CBAM-covered aluminum products to the EU.
  - Electricity and CBAM-covered iron and steel products have more diversified destinations.
  - Limited alternative markets: cement exports limited to Croatia and Montenegro; electricity alternatives limited by transmission to Serbia and Montenegro.
- Plant-level note: a plant accounting for "290.5 million KM, representing approximately 75 percent of total BiH iron and steel exports" — if closed, would reduce EU iron and steel exports by 5.2 percent of total exports and 1.6 percent of GDP.

### Emissions Intensity and Sector-Specific Factors (actual vs default)
- Emissions intensity differences (Scope 1 unless noted) and illustrative CBAM cost at EU ETS EUR 100 per tonne:
  - Iron and steel: Direct EF 1.46 (BiH) versus default 2.76; CBAM cost with actual EF 71 EUR/unit; with default EF 134 EUR/unit.
  - Aluminum: Direct EF 1.39 (BiH) versus default 3.73; CBAM cost with actual EF 67 EUR/unit; with default EF 181 EUR/unit.
  - Cement: Direct EF 0.8 (BiH) versus default 0.95; CBAM cost with actual EF 39 EUR/unit; with default EF 46 EUR/unit.
  - Electricity: Direct EF 0.83 (MWh, BiH) versus default 1.148; CBAM cost with actual EF 83 EUR/unit; with default EF 115 EUR/unit.
- Implication: Large gaps between actual and EC default factors imply value in investing in monitoring, reporting, and verification capacity to use actual factors.

### Electricity Sector: Generation Mix, Exports, and CBAM Impacts
- 2025 generation composition:
  - Thermal power plants: 55 percent
  - Hydropower: 30 percent
  - Solar and wind IPPs: 8 percent
  - Small and industrial PPs: 7 percent
- 2025 electricity exports:
  - Total exports in 2025: 8.45 GWh
  - Exports to the EU via Croatia: 26 percent (2.16 GWh)
- Price and CBAM interactions:
  - Reported average electricity supply costs for key exporters: EUR 50–70/MWh (excluding transmission costs).
  - HUPEX average price in 2025: EUR 108 per MWh.
  - Assumed CBAM charge example: EUR 86.1 per MWh (assuming CBAM price EUR 75 per tonne CO2 and EC default electricity factor 1.148 tCO2/MWh).
  - Result: Margins compressed or negative across most scenarios given HUPEX price and CBAM charge.
- Observed responses:
  - Generators/traders redirecting exports to non-CBAM markets, particularly Serbia.
  - Redirection contributed to a spread of approximately EUR 24 per MWh between SEEPEX and HUPEX day-ahead markets (SEEPEX average EUR 95 per MWh from January–May 2026 versus EUR 108 per MWh in 2025).
  - SERC (2025) reported auction revenue from cross-border transmission capacity allocation at the Croatian border was 44.3 percent less than the previous year.
- Market and policy constraints:
  - CBAM exemption requires strict conditions (congestion-free link, generation below ~550 g CO2/kWh, hourly metering validated by accredited verifier).
  - BiH has not fulfilled conditions for Article 2(7) exemption.
  - December 2025 EC proposal (not yet adopted) would amend default factor calculation to an overall average grid intensity over the previous 5 years as published by the IEA.
- Strategic considerations:
  - Short-term export redirection concentrates trade on fewer border points, increasing disruption risk.
  - Medium-term risk: regional generation capacity growth may reduce ability to absorb redirected exports.
  - Investment in capacities to demonstrate actual emissions for hydropower/renewables could allow exports to EU without CBAM charges.
  - Greater electricity market integration and a domestic power exchange are urgent priorities.

### Modeling Methodology and Key Assumptions
- Core model: IMF-World Bank Climate Policy Assessment Tool (CPAT), augmented with international trade data.
- Emissions and cost inputs: IIASA’s GAINS model (electricity sector), Parry et al 2025 (other sectors). EC-Default factors from EC Regulation 2025/2621 and Energy Community Q1 CBAM report.
- Trade flows and linkages: GLORIA’s multi-regional input–output dataset.
- Channels modeled:
  - Abatement costs, carbon price on unabated emissions, passthrough to EU consumers (industry), electricity assumed to bear CBAM costs fully by third-country producers.
  - Relative emissions intensity uses actual intensities in base-case; sensitivity uses default factors.
- Specific modeling assumptions:
  - Electricity exports to the EU assumed not viable; current redirection to other Western Balkans assumed to decline by 50 percent by 2035.
  - Analysis estimates medium-term impact of current CBAM scope until 2035; expansions not modeled.
  - Production coefficients treated as fixed; investment, labor market adjustments, and fiscal recycling abstracted.
- Elasticities and passthrough assumptions (as used):
  - Iron and steel: Domestic supply elasticity -0.5; Foreign supply elasticity 4.5; Passthrough to EU consumers 74 percent.
  - Aluminum: Domestic supply elasticity -0.5; Foreign supply elasticity 3.0; Passthrough 64 percent.
  - Cement: Domestic supply elasticity -0.2; Foreign supply elasticity 0.7; Passthrough 31 percent.

### Macroeconomic Results: Baseline Emission Factors (Projected impacts vs baseline)
- Assumed EU ETS price trajectory used:
  - EUR 75 per tonne in 2026
  - EUR 100 per tonne by 2030
  - EUR 138 per tonne by 2035
- Aggregate GDP impacts (change in percentage points of baseline GDP):
  - 2026: -0.06%
  - 2027: -0.06%
  - 2028: -0.08%
  - 2029: -0.12%
  - 2030: -0.21%
  - 2031: -0.26%
  - 2032: -0.31%
  - 2033: -0.36%
  - 2034: -0.42%
  - 2035: -0.43%
- Aggregate exports (total) vs baseline:
  - 2026: -0.11%
  - 2027: -0.11%
  - 2028: -0.13%
  - 2029: -0.21%
  - 2030: -0.40%
  - 2031: -0.49%
  - 2032: -0.59%
  - 2033: -0.69%
  - 2034: -0.80%
  - 2035: -0.82%
- By 2035 (range depending on passthrough and ETS price assumptions):
  - Real GDP projected to fall by 0.36-0.53 percent compared to baseline.
  - Total export volumes projected to fall by 0.82 percent relative to baseline.
  - Export volumes to the EU projected to fall by 1.73 percent.
  - Negative impact on exports alone estimated at 0.31 percent of GDP.
  - Real GDP factoring second-round effects projected at 0.43 percent below baseline.
- Sectoral 2035 changes vs BAU projected exports to the EU (selected):
  - Iron and steel: -12.02%
  - Aluminium: -2.75%
  - Cement: -74.87%
  - Electricity: -33.01%
- Change vs BAU projected total exports by product (2035 selected):
  - Iron and steel: -0.07%
  - Aluminium: -0.02%
  - Cement: -0.12%
  - Electricity: -0.11%
- Base MRIO year 2024: industries associated with four key products represent nearly 9.2 percent of the total in basic prices; nearly 48 percent of those went to the EU. Overall, around 4.5 percent of total exports would be subject to CBAM in the base MRIO.

### Sensitivity Results: Lower Passthrough / Higher ETS Price and Default Emission Factors
- With lower (and zero) passthrough and a higher ETS price, GDP effect could increase to 0.52 percent below baseline.
- Default emission factors scenario by 2035:
  - GDP reduction of -0.67 percent vs baseline.
  - Exports to the EU by product (2035 selected):
    - Iron and steel: -29.80%
    - Aluminium: -18.24%
    - Cement: -100.00% (economically unviable by 2034)
    - Electricity: -50.00%
  - Change vs BAU projected total exports by product (2035 selected):
    - Iron and steel: -0.17%
    - Aluminium: -0.14%
    - Cement: -0.14%
    - Electricity: -0.11%
- Policy inference: strong incentives for authorities and firms to invest in demonstrating actual emissions to avoid default factors.

### Carbon Pricing Options for BiH: Design Considerations and Practicalities
- CBAM credit mechanism: credit for any carbon price paid in the producing country deducted from CBAM certificates so carbon payments can remain in producer’s economy.
- ETS:
  - BiH NECP intends an ETS; progress limited due to entity concerns on competences and resistance to state/national operation.
  - Per CBAM regulations, electricity market integration and an EU-aligned, state-level ETS by 2030 could secure CBAM exemption for electricity; progress suggests this may be unlikely in required timeframe.
  - Practical challenges: institutional capacity for MRV and trading, legal architecture, national registry, enforcement, market liquidity (estimated coverage in BiH: 17 firms; devolution to entity level would be unviable).
  - Transitional option: fixed-price ETS as interim step to build capacity.
- Carbon tax:
  - Can be assessed similarly to existing fuel excises and integrated into current tax collection (midstream collection points).
  - BiH Indirect Tax Authority’s fuel excise infrastructure could be extended; current fuel excise applies only to liquid fuels and includes a toll fee earmarked for road/highway public enterprises.
  - No excise applied to coal use or electricity from coal; energy SOEs cross-subsidize loss-making coal mines.
  - Coal accounted for 95 percent of power and industry emissions in 2022; taxing coal is pragmatic and captures a large share of emissions subject to CBAM charges.
  - Design details: tax at single stage (import taxed at import point; domestic coal taxed at mine gate or processing); use default emission factors initially with burden on mines/processors to prove lower carbon.
- Alternative: taxing emissions from non-electricity CBAM sectors to offset CBAM charge; narrower revenue base and more administratively complex.
- Recommendations summary:
  - Pursue ETS development for EU integration.
  - Advance robust MRV to help firms demonstrate actual emissions and enable taxation of industrial process emissions.
  - Consider fixed-price ETS as interim capacity-building step.
  - Consider targeted carbon taxation on coal as a more expedient alternative.

### Policy Scenarios Modeled: Coal Tax and Emissions Tax on CBAM Sectors
- Coal tax scenario:
  - Phase out coal subsidies by 2030.
  - Economy-wide tax on coal starting at EUR 6.25 per tonne of CO2 in 2027, increasing to EUR 25 per tonne of CO2 by 2030 and linearly on same path thereafter until 2035.
- Emissions tax on non-electricity CBAM sectors:
  - Tracks expected CBAM trajectory.
  - Starts at EUR 12.5 per tonne of CO2 in 2027, increasing to EUR 50 per tonne of CO2 by 2030.
- Two passthrough assumptions for coal tax impacts on electricity prices:
  - Full passthrough: coal-tax inclusive price fully passed onto consumers.
  - Limited passthrough: only 50 percent of the impact passed onto end-user electricity prices.

### Macro-Fiscal and GDP Outcomes of Policy Scenarios
- Coal tax (EUR 25 scenario) additional revenues:
  - USD 0.29-0.32 billion in 2030.
  - About 0.6 billion in 2035.
  - Equivalent to 0.9-1 percent of GDP in 2030.
  - Equivalent to 1.6 percent of GDP in 2035.
- Emissions tax on CBAM sectors revenues:
  - USD 0.4 billion in 2030 (0.13 percent of GDP).
  - About USD 0.1 billion in 2035 (0.3 percent of GDP).
- GDP trajectory impacts by 2035 (percent change vs baseline):
  - EU CBAM without domestic policy response: -0.43 percent.
  - Coal tax scenario: approximately -0.29 percent relative to baseline.
  - Emissions tax scenario: approximately -0.37 percent relative to baseline.
- Revenue recycling assumptions in simulations:
  - 20 percent recycled through cash transfers.
  - 30 percent through labor tax reductions.
  - 50 percent through public investment.
- Note: Limited passthrough and compensation of SOE losses reduce GDP gains from recycling.

### Price, Emissions, and Energy Consumption Effects (Selected Exact Values)
- Electricity, weighted average (EUR/kWh):
  - Current (2026): 0.08
  - EUR 25 coal tax - 50% PT (2030): 0.09
  - EUR 25 coal tax - 100% PT (2030): 0.11
  - EUR 25 coal tax - 50% PT (2035): 0.1
  - EUR 25 coal tax - 100% PT (2035): 0.13
- Coal, power sector (EUR/GJ):
  - Current (2026): 2.02
  - EUR 25 coal tax - 50% PT (2030): 4.19
  - EUR 25 coal tax - 100% PT (2030): 4.19
  - EUR 25 coal tax - 50% PT (2035): 6.92
  - EUR 25 coal tax - 100% PT (2035): 6.92
- Coal, industry (EUR/GJ):
  - Current (2026): 2.00
  - EUR 25 coal tax - 50% PT (2030): 5.36
  - EUR 25 coal tax - 100% PT (2030): 5.36
  - EUR 25 coal tax - 50% PT (2035): 8.08
  - EUR 25 coal tax - 100% PT (2035): 8.08
- Proportional increases:
  - Coal inputs to power sector: 108 percent increase by 2030; 243 percent in 2035.
  - Coal consumed directly by industry for heat: 169 percent increase by 2030; 305 percent in 2035.
  - Electricity price increases relative to baseline:
    - Full passthrough: 42 percent in 2030; 68 percent in 2035.
    - 50 percent passthrough: 20 percent in 2030; 33 percent in 2035.
- Emissions reductions by 2030:
  - Coal tax: about 7 percent.
  - Emissions tax on CBAM sectors: about 3.3 percent.
  - EU CBAM without domestic policy: about 1 percent.
- Fossil fuel-based energy consumption changes:
  - Coal tax: decline about 6-7 percent in 2030; 11-14 percent in 2035.
  - Emissions tax: consumption decreases across all fuels by 3 percent in 2030 and 5 percent in 2035.

### Distributional and Labor Impacts; Revenue Recycling Effects
- Household energy spending:
  - Direct energy spending about 16 percent of household expenditure on average; electricity about 7 percent.
  - Lower income households spend almost 20 percent on energy.
- Coal tax household consumption effects in 2030:
  - Average reduction in consumption of 1.4-2 percent relative to baseline.
  - Absolute monetary burden largest on higher income households; relative burden largest for poorest households.
- Emissions tax scenario: households affected indirectly; relative effects relatively uniform across deciles.
- Revenue recycling outcomes (20% cash transfers to bottom four deciles; 30% labor tax reductions; 50% public investment):
  - Poorest households net benefit under coal tax scenarios: about 3.0-3.2 percent of pre-policy consumption.
  - Poorest households net benefit under emissions tax on CBAM sectors: about 1.4 percent of pre-policy consumption.
- Labor impacts (simulated FTE jobs by 2035):
  - EUR 25 coal tax - 50% PT: Total -1,719; % of BAU -0.09%
  - EUR 25 coal tax - 100% PT: Total -1,402; % of BAU -0.07%
  - Emission tax - CBAM sectors: Total -3,012; % of BAU -0.16%
  - EU CBAM - No domestic policy: Total -3,845; % of BAU -0.20%
- Recommended mitigation: active labor market policies, reskilling, regional investment.

### Sectoral Impacts and Support Options
- Sector impacts by 2030 and 2035:
  - Aluminum: not significantly impacted due to low carbon intensity.
  - Iron and steel: modest reduction up to 3 percent by 2030 and up to 6 percent by 2035.
  - Cement: up to 24 percent reduction by 2030 and 42 percent by 2035.
- Suggested recycling uses:
  - Targeted subsidies or investment tax credits for energy efficiency and decarbonization.
  - Technology-neutral subsidy or tax credit linked to verified emissions reductions (payment per tonne of CO2 abated) or conditional on achieving specified reduction outcomes.
- Abatement options:
  - Steel: shift from coal-based blast furnaces to electric arc furnaces conditional on low-carbon electricity.
  - Cement: reduce clinker-to-cement ratio, improve energy efficiency, fuel switching; CCS costly and not widely deployed regionally.
- Broader support: incentivize renewable energy investment and decarbonization to lower Scope 2 industrial emissions and electricity costs.

### Monitoring, Legal, and Structural Considerations
- MRV systems: invest in robust monitoring, reporting, and verification to support exporters demonstrating actual emissions and enable industrial emissions taxation.
- Structural barriers to power-sector decarbonization:
  - Solar and wind generation almost tripled over 2021-25 and comprise 8 percent of generation mix (SERC 2025).
  - Barriers: low domestic tariffs, limited transmission capacity, land use constraints, and 2024 Constitutional Court rulings limiting repurposing/disposal of state-owned land.
  - Southern Gas Interconnection with Croatia could modestly diversify mix via gas.

### Conclusions and Policy Recommendations (preserving source framing)
- A domestic carbon pricing response is warranted to offset CBAM effects.
- Coal tax advantages:
  - Simple extension of existing excise infrastructure.
  - Source of domestic revenues.
  - Incentivizes decarbonization away from coal.
  - Productive spending of revenues could partially offset GDP impact of CBAM over time.
- Emissions tax on CBAM sectors:
  - Collects revenues domestically but with narrower scope and more administrative complexity.
- Complementary measures:
  - Fiscal incentives for industrial energy efficiency and modernization.
  - Targeted household support via strengthened social safety nets.
  - Active labor market policies and regional investment for coal-dependent areas.
  - Invest in MRV to demonstrate actual emissions and reduce CBAM costs.

*Source: IMF staff calculations and analysis as presented in the chapter.*

### 1. EU ETS and CBAM: Key Design Features _________________________________________ 4

### 1. EU ETS and CBAM: Key Design Features

### Overview of CBAM and Rationale
- Carbon pricing is described as the most economically efficient tool to realign incentives and reduce emissions through abatement.
- Carbon leakage and competitiveness concerns arise because carbon pricing charges firms for unabated emissions; estimates cited indicate substantial leakage risks in energy-intensive sectors under unilateral domestic carbon pricing (reference: Parry et al. (2025) - leakage rates of 20–50 percent for a domestic carbon price of USD 50 per tonne of CO₂ in selected countries).
- Border carbon adjustments (BCAs) are presented as instruments to apply charges on embodied carbon of imports equivalent to those faced by domestic producers, reducing reliance on measures that erode domestic revenues (e.g., free allowance allocation or output-based rebates).

### Key Design Features of the EU ETS (as described)
- Coverage: industry, power, and aviation within the European Economic Area.
- Cap trajectory: cap decreasing by 4.3-4.4 percent per year from 2024 onwards.
- ETS price historic reference: "has hovered around EUR 70 per tonne over the 2022-2025 period."
- Free allowances: historically granted to EITE industries; phased out starting in 2026 as CBAM phases in.
- Inclusion threshold for ETS participation: emissions of 25,000 CO2 tonnes annually.
- 2027 plan: separate ETS covering buildings, transport, and small industry with a price stabilization mechanism (soft price cap of EUR 45 per tonne) and allowance cap set to an annual linear decline of 5 percent per year from 2024 emission levels.
- Exemption until 2031: member states with a national-level carbon tax equal to or above the ETS allowance price.
- A portion of ETS revenues earmarked to support vulnerable households and small businesses through a Social Climate Fund.

### Key Design Features of CBAM (as described)
- Timing: entered definitive, financial phase from January 1, 2026; transitional reporting phase from 2023-2025.
- Scope (initial): applies to Scope 1 emissions for iron and steel, aluminum, electricity and hydrogen; Scope 1 and 2 for cement and fertilizer and certain iron and steel products. Scope definitions: Scope 1 = on-site fuel combustion and process emissions; Scope 2 = emissions from electricity used in manufacturing.
- Proposed extensions: EC proposals to extend CBAM coverage in iron, steel and aluminum to downstream products from 2027; include Scope 2 emissions for all covered iron and steel, and aluminum products; after 2030 expected to apply to all EU ETS sectors (including petroleum products, lime, glass, ceramics, pulp, paper, cardboard, acids and bulk organic chemicals).
- Level (price basis): tax rate equals the effective EU ETS price less any carbon price paid in producing country. For non-electricity sectors, importers charged only for a percentage of emissions that accounts for free allocations to EU domestic producers: percentage starts at 2.5% of emissions in 2026 and increases annually to 100% by 2034. For electricity importers, full CBAM price applies (no free allowances).
- Price mechanics: 2026 CBAM certificate prices determined quarterly; for Q1 2026 the CBAM price was EUR 75.36 per tonne. From 2027 prices determined weekly (based on EU ETS auction price during previous week).
- Inclusion threshold for CBAM registration: importers below de minimis of 50 tonnes of CBAM-covered goods per calendar year are exempt. No inclusion threshold for electricity imports.
- Emissions factors: calculated from actual verified installation-level data or default values where unavailable; include an annually increasing mark-up from 2026 to incentivize actual reporting; for electricity the factor is a grid-average intensity unless certain conditions are met permitting use of actual emissions.
- Exemptions for electricity exports: Article 2(7) allows third countries to secure an exemption subject to conditions (agreement to apply EU law for electricity including on renewable energy and electricity market coupling with the EU; commitment to carbon neutrality by 2050; roadmap and progress towards implementation of an EU-aligned ETS by 2030).
- Exports and rebates: EU CBAM does not rebate ETS payments for EU exporters (no origin-based rebate), citing WTO rules differences between taxes and regulatory instruments.
- Revenue split: 75 percent allocated to EU budget and 25 percent to member state where customs declarant is registered. EU estimate: EU budget portion of CBAM revenues about EUR 1.5 billion per year from 2028.

### Operational timing and immediate effects
- Payment liability deferred until 2027; Q1 2026 CBAM price published on April 7, 2026 at EUR 75.36 per tonne and applied retroactively to Q1 2026 imports (importers must buy certificates covering Q1 2026 emissions).
- CBAM certificate sales begin in February 2027; first surrender of certificates (covering 2026 imports) due by September 30, 2027.
- Quarterly price publication will continue through 2026; from 2027 weekly price publication allows importers to time purchases.
- Reports indicate importers were anticipating CBAM costs and including expected CBAM cost in offer prices during Q1 2026.

### Bosnia and Herzegovina (BiH) exposure to CBAM
- Introductory summary: "current scope affects about 11 percent of BiH exports (or 3.2 percent of GDP)," reflecting significant sales of aluminum, cement, electricity, and iron and steel to the EU.
- Detailed estimate: "10.7 percent of total BiH exports (equivalent to 3.2 percent GDP), will be subject to a CBAM charge" under current coverage (figures dominated by iron and steel and aluminum sectors, approximately 9 percent of total export value).
- Potential expansions of coverage:
  - Under proposed second phase, exposure would increase to 13.2 percent of total exports.
  - From 2030, when CBAM expected to apply to all ETS sectors, exposure would rise to 14.3 percent of total exports (4.3 percent of GDP).
- Sectoral notes:
  - BiH almost exclusively exports cement and CBAM-covered aluminum products to the EU.
  - Electricity and CBAM-covered iron and steel products have more diversified destination countries.
  - Limited alternative markets: cement exports limited to Croatia and Montenegro (transport costs); electricity alternatives limited by transmission infrastructure to Serbia and Montenegro.
- Trade structure and firm-level context: until halting operations in April 2026, Arcelor Mittal Zenica (Nova Zeljezara) was main producer of semi-finished steel and steel products, exporting primarily to EU markets (noted export revenue context for 2024 mentioned in source).

### Emissions intensity implications for BiH
- Emissions intensity varies by product and relative intensity is a key determinant of CBAM impact.
- Electricity: BiH grid is coal intensive; emissions intensity of electricity is higher than other Western Balkans countries (except Kosovo) and "almost three times the EU average."
- Emissions factors for calculation: default vs actual verified data distinctions noted; the use of default values can affect CBAM charges and incentives to adopt actual reporting.

### Macroeconomic and policy implications (as summarized early in the chapter)
- Macroeconomic impact under a 'no domestic policy response' scenario is quantified in the paper as "ranging from 0.4 to 0.7 percent of real GDP in 2035."
- Policy recommendation summary:
  - An ETS is planned in BiH over the medium term.
  - More immediate action: a modest carbon tax on coal or on emissions of key industrial sectors, phased in gradually, would allow BiH to retain carbon tax revenues domestically.
  - Revenue recycling priorities: protect vulnerable households, support energy-intensive trade-exposed (EITE) firms in adopting more energy-efficient technology, and incentivize decarbonization of the overall energy mix.
  - Productive use of revenues can partially offset macroeconomic costs of CBAM over time.
  - Complementary policy options to assist firms and households through the energy transition are proposed.

*International Monetary Fund — The Impact of the EU CBAM and Carbon Pricing in Bosnia and Herzegovina (chapter: 1. EU ETS and CBAM: Key Design Features).*

### 290.5 million KM, representing approximately 75 percent of total BiH iron and steel exports. If the plant remains

### 1bihea2026002 - 290.5 million KM, representing approximately 75 percent of total BiH iron and steel exports. If the plant remains

### CBAM exposure and sectoral emissions intensity
- A plant accounting for "290.5 million KM, representing approximately 75 percent of total BiH iron and steel exports" — if closed, would imply a significant reduction in EU iron and steel exports (5.2 percent of total exports and 1.6 percent of GDP) and thus CBAM exposure.
- Emissions intensity comparisons (Scope 1 unless noted):
  - Iron and steel: Direct emissions factor 1.46 (BiH) versus default 2.76; CBAM costs under EU ETS EUR 100 price: With actual EF 71 EUR/unit; With default EF 134 EUR/unit.
  - Aluminum: Direct emissions factor 1.39 (BiH) versus default 3.73; CBAM costs under EU ETS EUR 100 price: With actual EF 67 EUR/unit; With default EF 181 EUR/unit.
  - Cement: Direct emissions factor 0.8 (BiH) versus default 0.95; CBAM costs under EU ETS EUR 100 price: With actual EF 39 EUR/unit; With default EF 46 EUR/unit.
  - Electricity: Direct emissions factor 0.83 (MWh, BiH) versus default 1.148; CBAM costs under EU ETS EUR 100 price: With actual EF 83 EUR/unit; With default EF 115 EUR/unit.
- Key sectoral notes:
  - BiH aluminum activity largely focuses on casting of primary aluminum and scrap into billets and semi-finished products and does not conduct smelting operations; BiH’s largest aluminum producer reports consuming electricity entirely from renewable sources.
  - BiH cement intensity is 0.8 tonnes CO2 per tonne of output, slightly above the EU average (0.8 tonnes CO2 per tonne of output noted as EU average in the text), reflecting limited cross-country variation in this sector.
- Implication: Large differences between estimated actual factors and EC default factors imply investing in monitoring, reporting, and verification capacity (to meet EU standards) is an important lever to reduce CBAM costs in the near term.

### Electricity sector: generation mix, exports, and CBAM impacts
- 2025 electricity generation composition (based on 2025 data):
  - Thermal power plants: 55 percent
  - Hydropower: 30 percent
  - Solar and wind IPPs: 8 percent
  - Small and industrial PPs: 7 percent
- 2025 electricity exports and routing:
  - Total exports in 2025: 8.45 GWh
  - Exports to the EU via Croatia: 26 percent (2.16 GWh)
- Price and CBAM cost interactions:
  - Reported average electricity supply costs for key exporters: EUR 50–70/MWh (excluding transmission costs).
  - Hungarian exchange (HUPEX) average price in 2025: EUR 108 per MWh.
  - Assumed CBAM charge for electricity example: EUR 86.1 per MWh (assuming CBAM price EUR 75 per tonne CO2 and EC default electricity factor 1.148 tCO2/MWh).
  - Result: Margins would be compressed or negative across most scenarios given HUPEX price and CBAM charge.
- Observed behavioral responses:
  - Generators and traders have begun redirecting exports to non-CBAM markets, particularly Serbia.
  - Redirection contributed to an observed spread of approximately EUR 24 per MWh between SEEPEX (Serbia) and HUPEX (Hungary) day-ahead markets, with SEEPEX average EUR 95 per MWh from January–May 2026 versus EUR 108 per MWh in 2025.
  - SERC (2025) reported auction revenue from cross-border transmission capacity allocation at the Croatian border was 44.3 percent less than the previous year (auctions held beginning December 2025 for the next year), due to reduced demand at the Croatian border because of CBAM.
- Market and policy constraints:
  - All exporters using the BiH grid face CBAM charges tied to overall grid intensity; exemptions require strict conditions (direct or certified congestion-free link, generation below ~550 g CO2/kWh, hourly metering validated by an accredited verifier).
  - BiH has not fulfilled conditions to obtain a CBAM exemption on electricity exports (CBAM Regulation Article 2(7)).
  - A December 2025 EC proposal (not yet adopted as of the source) would amend the default factor calculation to an overall average grid intensity over the previous 5 years as published by the IEA, which would reduce the default factor nearer to the actual emissions intensity in Table 1.
- Strategic considerations:
  - Short-term redirection of exports concentrates trade on fewer border points, increasing disruption risk from transmission outages or potential future border adjustment taxes in Serbia or Montenegro.
  - Medium-term risks: Western Balkans countries developing generation capacity may reduce ability to absorb BiH redirected exports.
  - Investment in capacity to demonstrate actual emissions for hydropower and renewables could allow exports to the EU without CBAM charges if technically feasible.
  - Greater electricity market integration and a domestic power exchange are urgent priorities to enable market coupling and improved competition, transparency, and optimal use of interconnections.

### Quantitative modeling methodology and key assumptions
- Modeling tools and data:
  - Core model: IMF-World Bank Climate Policy Assessment Tool (CPAT), augmented with international trade data.
  - Emissions and cost inputs from: IIASA’s GAINS model (electricity sector, weighted by fuel usage) and Parry et al 2025 (other sectors, based on Climate Trace data). EC-Default factors from EC Regulation 2025/2621 and Energy Community Q1 CBAM report.
  - Trade flows and input-output linkages from GLORIA’s multi-regional input–output dataset.
- Channels modeled for CBAM impacts:
  - Abatement Costs: Firms undertake abatement where marginal abatement cost < carbon price faced.
  - Carbon Price on Unabated Emissions: CBAM charge = sectoral CBAM charge × country-level emissions intensity factor.
  - Passthrough: For non-electricity sectors during phase-in, market price increases (due to ETS phase-out and CBAM) allow some passthrough to EU buyers. Passthrough coefficient calculated as function of supply and demand elasticities (methodology based on Parry et al 2025). For electricity, model assumes CBAM does not increase EU electricity prices and is entirely borne by third-country producers.
  - Relative Emissions Intensity: Using actual emissions intensities is assumed for base-case; sensitivity analysis examines default factor application.
  - Export quantities determined by change in import prices and elasticities on demand and supply sides.
- Specific modeling assumptions and scenarios:
  - Electricity exports to the EU are assumed not viable; current redirection of exports to other Western Balkans countries is assumed to decline gradually by 50 percent by 2035.
  - The analysis estimates medium-term impact of current CBAM scope until 2035; expansions in scope to downstream products and to Scope 2 emissions from metals sectors are not modeled.
  - Analysis treats production coefficients as fixed (elasticity-based), abstracting from behavioral adjustments such as investment, labor market adjustments, and fiscal recycling; results are sensitive to EU ETS carbon price trajectory and passthrough rates.
  - For industry elasticity assumptions and passthrough to EU consumers (as presented):
    - Iron and steel: Domestic (BiH) supply elasticity -0.5; Foreign (RoW) supply elasticity 4.5; Passthrough to EU consumers 74 percent.
    - Aluminum: Domestic supply elasticity -0.5; Foreign supply elasticity 3.0; Passthrough to EU consumers 64 percent.
    - Cement: Domestic supply elasticity -0.2; Foreign supply elasticity 0.7; Passthrough to EU consumers 31 percent.
- Modeling scope and limitations:
  - The analysis tracks how export shocks propagate through supply chains via input–output linkages to capture multiplier effects.
  - The approach is not a full general equilibrium model; it does not capture investment responses, labor market adjustments, or fiscal revenue recycling effects.

### Key implications and strategic recommendations (from analysis)
- Invest in monitoring, reporting, and verification capacity to enable use of actual emissions factors rather than EC default factors, which can materially reduce CBAM costs across sectors.
- Prioritize technical feasibility studies and investments to demonstrate actual emissions for hydropower and renewable generation (hourly metering, certified delivery) to regain access to EU markets without CBAM charges.
- Accelerate plans for a domestic power exchange to enable market coupling with neighboring countries, improve competition, transparency, and efficient use of interconnections.
- Develop a medium- to long-term strategy for electricity exports that accounts for declining feasibility of redirected exports as regional generation capacity expands and to reduce concentration risk at specific border points.
- Consider targeted policies to support industries exposed to CBAM (given differences between actual and default emission factors), recognizing that outcomes depend on EU ETS price trajectories and passthrough dynamics.

*Source: IMF staff calculations and analysis as presented in the chapter.*

### 18.      A key assumption underpinning the analysis is the assumed EU ETS price, which is used

### 18.      A key assumption underpinning the analysis is the assumed EU ETS price, which is used

### Assumed EU ETS price trajectory and CBAM phase-in
- CBAM benchmark: EU ETS price assumed at EUR 75 per tonne of CO2 in 2026 Q1.
- Price trajectory considered in the analysis:
  - EUR 75 per tonne in 2026
  - EUR 100 per tonne by 2030
  - EUR 138 per tonne by 2035
- CBAM phase-in:
  - Non-electricity sectors phased in per announced trajectory (Figure 7).
  - Power sector assumed to be charged the full CBAM cost from the start of 2026.

### Modeling results: macroeconomic and export impacts (baseline emission factors)
- Aggregate GDP impacts vs baseline by year (change in percentage points of baseline GDP):
  - 2026: -0.06%
  - 2027: -0.06%
  - 2028: -0.08%
  - 2029: -0.12%
  - 2030: -0.21%
  - 2031: -0.26%
  - 2032: -0.31%
  - 2033: -0.36%
  - 2034: -0.42%
  - 2035: -0.43%
- Aggregate exports (total) vs baseline (change with respect to BAU projected total exports):
  - 2026: -0.11%
  - 2027: -0.11%
  - 2028: -0.13%
  - 2029: -0.21%
  - 2030: -0.40%
  - 2031: -0.49%
  - 2032: -0.59%
  - 2033: -0.69%
  - 2034: -0.80%
  - 2035: -0.82%
- By 2035:
  - Real GDP projected to fall by 0.36-0.53 percent compared to baseline depending on passthrough and ETS price assumptions.
  - Total export volumes projected to fall by 0.82 percent relative to baseline.
  - Export volumes to the EU projected to fall by 1.73 percent.
  - Negative impact on exports alone estimated at 0.31 percent of GDP.
  - Real GDP (factoring in second round effects) projected at 0.43 percent below baseline.
- Sectoral changes with respect to BAU projected exports to the EU by product (selected 2035 values):
  - Iron and steel: -12.02%
  - Aluminium: -2.75%
  - Cement: -74.87%
  - Electricity: -33.01%
- Change with respect to BAU projected total exports by product (selected 2035 values):
  - Iron and steel: -0.07%
  - Aluminium: -0.02%
  - Cement: -0.12%
  - Electricity: -0.11%
- Notes on mechanism and scope:
  - For the base MRIO year of 2024, industries associated with the four key products represent nearly 9.2 percent of the total in basic prices; nearly 48 percent of those went to the EU.
  - Overall, around 4.5 percent of total exports would be subject to CBAM.
  - Results assume no behavioral adjustments other than those incorporated via estimated emission factors and are to be considered a worse-case scenario.

### Sector-specific findings and GDP contributions (baseline emission factors)
- Cement:
  - About 90 percent of total BiH exports of cement estimated to flow to the EU.
  - Assumed passthrough to EU consumers: about 30 percent.
  - Simulation results by 2035: exporter prices reduced by 82 percent and volumes contracted by nearly 83 percent relative to baseline.
  - Contraction in cement exports estimated at 0.12 percent of real GDP in 2035.
- Iron and steel:
  - Higher carbon intensity relative to the EU; Scope 2 emissions included for certain products.
  - Assumed passthrough to EU consumer prices: 74 percent.
  - By 2035: exporter prices decline by 7 percent and volumes to the EU decline by 12 percent.
  - Contraction in export volumes amounts to 0.07 percent of GDP in 2035.
- Electricity:
  - Assumed export volumes to the EU (or previously sold to EU and redirected) decline by 50 percent in 2035.
  - Contraction in electricity exports amounts to 0.11 percent of GDP.
  - Volume reductions for electricity relate to exports previously sold to the EU but subsequently redirected to Western Balkan markets.
- Aluminium:
  - Assumed passthrough to EU importers: 64 percent.
  - Initial small positive impact on exporter prices and volumes; eroded as EU ETS prices rise.
  - Contraction in aluminum exports estimated at 0.02 percent of GDP in 2035.
  - Modeled assumed import price for aluminum: about USD 2473 per tonne in 2030; a EUR 100 per tonne CO2 EU ETS price would imply a CBAM cost of USD 77 per tonne value, or 3 percent.

### Sensitivity: lower passthrough / higher ETS price and the role of default emission factors
- Sensitivity analysis:
  - With lower (and zero) passthrough levels and a higher ETS price, the GDP effect could increase to 0.52 percent below baseline (Figure 8).
- Default emission factors scenario (no demonstrated actual emissions):
  - By 2035 under default factors:
    - GDP reduction of -0.67 percent vs baseline.
    - Exports to the EU by product (selected 2035 values):
      - Iron and steel: -29.80%
      - Aluminium: -18.24%
      - Cement: -100.00% (becomes economically unviable by 2034)
      - Electricity: -50.00%
    - Change with respect to BAU projected total exports by product (selected 2035 values) under default factors:
      - Iron and steel: -0.17%
      - Aluminium: -0.14%
      - Cement: -0.14%
      - Electricity: -0.11%
  - Implication: using default emission factors significantly worsens contractions in volumes and GDP.
  - Policy inference used in subsequent analysis: incentives will exist for authorities and firms to invest in demonstrating actual emissions to avoid default factors.

### Carbon pricing options for BiH: incentives, design considerations, and practicalities
- CBAM credit mechanism:
  - CBAM allows a credit for any carbon price paid in the producing country; that cost is deducted from CBAM certificates so carbon payments stay in the producer’s economy.
- ETS (Emissions Trading System):
  - ETS vs carbon tax conceptual distinction preserved: carbon taxes tax carbon content of fossil fuel supply; ETS requires firms to acquire allowances with government control of supply and market trading establishing the emissions price.
  - BiH NECP states intention to establish an ETS; progress limited due to entity concerns on allocation of competences and resistance to state/national operation.
  - Per CBAM regulations, electricity market integration and an EU-aligned, state-level ETS by 2030 would allow BiH to secure a CBAM exemption for electricity; progress suggests this may not be likely in required timeframe.
  - Practical challenges for BiH implementing an ETS in the short term:
    - Institutional Capacity: monitoring downstream emissions and emissions trading markets; deciding allowances and allocation (auctions/free allocation); setting up secondary trading, tracing emissions, avoiding leakage.
    - Legal Considerations: requires tailored legislative architecture beyond existing tax/customs law; national registry; MRV framework; enforcement and penalties; market regulation for trading, settlement, clearing, conduct obligations.
    - Market Liquidity: an efficient ETS requires a liquid market with many covered firms. Estimated coverage in BiH: 17 firms (6 in FBiH and 11 in RS). Devolution to entity level would increase concentration and be unviable. Regional ETS may be more appropriate but is not currently under consideration.
    - International experience: establishing ETS legislative, institutional and administrative structure could take several years; requires sustained political commitment.
  - Transitional option:
    - A fixed-price ETS could be introduced as an interim step to build institutional capacity and support gradual transition to a market-based ETS.
- Carbon tax:
  - Carbon taxes can be assessed similarly to existing fuel excises and integrated into current tax collection systems (midstream points such as fuel processing or import).
  - BiH Indirect Tax Authority’s fuel excise infrastructure could be extended as an interim carbon pricing tool; current fuel excise applies only to liquid fuels and includes a toll fee earmarked for road/highway public enterprises.
  - Considerations:
    - Economy-wide carbon tax on liquid fuels may strain households/firms given elevated global petroleum prices.
    - No excise currently applied to coal use or electricity generated from coal; energy SOEs cross-subsidize loss-making coal mines.
    - Coal accounted for 95 percent of power and industry emissions in 2022; phasing out coal subsidies and introducing a carbon tax on coal is a pragmatic, relatively simple option that captures a large share of emissions subject to CBAM charges.
  - Design details for coal taxation:
    - Tax at a single stage in the supply chain: imported coal taxed at point of import; domestically mined coal taxed at mine gate or point of processing (washing).
    - Use of default emission factors initially, with burden on mines or processors to prove lower carbon via certified lab analysis for reduced tax rate.
  - Alternative: taxing emissions from non-electricity CBAM sectors (iron and steel, aluminum, cement) to offset CBAM charge.
    - Institutional complexity: indirect tax system is designed for goods and services; taxation of emissions requires MRV infrastructure and possibly new primary legislation or modification of indirect tax law.
    - Administrative design: include thresholds to exempt smaller firms; emissions tax could be proxied through upstream taxes on fuel inputs (e.g., coal, gas) or through clinker production/use charges in cement.
- Recommendation summary:
  - Continue pursuing ETS development as a forward-looking priority for EU integration.
  - Advance robust MRV system to assist firms in demonstrating actual emissions for CBAM calculations and to enable taxation of industrial process emissions under a carbon tax.
  - Consider a fixed-price ETS as an interim institutional capacity-building step.
  - Consider targeted carbon taxation (notably on coal) as a more expeditious alternative to respond to CBAM in the short term.

*Source: Authors.*

### 37.      The analysis which follows considers two scenarios: The first carbon tax option models

### 1bihea2026002 - 37.      The analysis which follows considers two scenarios: The first carbon tax option models

### Scenarios analyzed
- Coal tax scenario:
  - Phase out of coal subsidies by 2030.
  - Economy-wide tax on coal starting at EUR 6.25 per tonne of CO2 in 2027, increasing to EUR 25 per tonne of CO2 by 2030 and linearly on the same path thereafter until 2035.
- Emissions tax on non-electricity CBAM sectors:
  - Broadly tracks expected trajectory of CBAM charges.
  - Starts at EUR 12.5 per tonne of CO2 in 2027, increasing to EUR 50 per tonne of CO2 by 2030.
  - Both scenarios include gradual removal of coal subsidies by 2030.
- Two pass-through assumptions for coal tax impacts on electricity prices:
  - Full passthrough: coal-tax inclusive price signal fully passed onto consumers.
  - Limited passthrough: only 50 percent of the impact is passed on to end-user electricity prices.

### Macro-fiscal impacts and revenue findings
- Coal tax (EUR 25 scenario) additional revenues:
  - USD 0.29-0.32 billion in 2030.
  - About 0.6 billion in 2035.
  - Equivalent to 0.9-1 percent of GDP in 2030.
  - Equivalent to 1.6 percent of GDP in 2035.
- Emissions tax on CBAM sectors revenues:
  - USD 0.4 billion in 2030 (0.13 percent of GDP).
  - About USD 0.1 billion in 2035 (0.3 percent of GDP).
- GDP trajectory impacts (percent change vs baseline by 2035):
  - EU CBAM without a domestic policy response: largest GDP decline at 0.43 percent relative to baseline.
  - Coal tax scenario: approximately 0.29 percent decline relative to baseline.
  - Emissions tax scenario: approximately 0.37 percent decline relative to baseline.
- Revenue recycling assumption used in simulations:
  - 20 percent of revenues recycled through cash transfers.
  - 30 percent through labor tax reductions.
  - 50 percent through public investment.
- Note: If passthrough to electricity prices is limited and some revenues compensate SOE losses, GDP gains from recycling would be lower.

### Price impacts (selected values preserved)
- Current (2026) and modeled price impacts under EUR 25 coal tax in 2030 and 2035 (partial table reproduced with exact values):
  - Electricity, weighted average (EUR/kWh)
    - Current (2026): 0.08
    - EUR 25 coal tax - 50% PT (2030): 0.09
    - EUR 25 coal tax - 100% PT (2030): 0.11
    - EUR 25 coal tax - 50% PT (2035): 0.1
    - EUR 25 coal tax - 100% PT (2035): 0.13
  - Coal, power sector (EUR/GJ)
    - Current (2026): 2.02
    - EUR 25 coal tax - 50% PT (2030): 4.19
    - EUR 25 coal tax - 100% PT (2030): 4.19
    - EUR 25 coal tax - 50% PT (2035): 6.92
    - EUR 25 coal tax - 100% PT (2035): 6.92
  - Coal, industry (EUR/GJ)
    - Current (2026): 2.00
    - EUR 25 coal tax - 50% PT (2030): 5.36
    - EUR 25 coal tax - 100% PT (2030): 5.36
    - EUR 25 coal tax - 50% PT (2035): 8.08
    - EUR 25 coal tax - 100% PT (2035): 8.08
- Proportional price increases noted:
  - Coal inputs to the power sector: 108 percent increase by 2030; 243 percent in 2035.
  - Coal consumed directly by industry for heat: 169 percent increase by 2030; 305 percent in 2035 (due to phase-out of subsidies).
  - Electricity price increases relative to baseline:
    - Full passthrough: 42 percent in 2030; 68 percent in 2035.
    - 50 percent passthrough: 20 percent in 2030; 33 percent in 2035.

### Emissions and energy consumption impacts
- Emissions reductions by 2030:
  - Coal tax: decrease in CO2 emissions by about 7 percent by 2030.
  - Emissions tax on CBAM sectors: about 3.3 percent by 2030.
  - EU CBAM without domestic policy: about 1 percent by 2030.
- Fossil fuel-based energy consumption changes:
  - Under coal tax:
    - Decline about 6-7 percent in 2030.
    - Decline about 11-14 percent in 2035 (mostly from coal; natural gas and oil products also decline).
  - Under emissions tax:
    - Consumption decreases across all fuel types by 3 percent in 2030 and 5 percent in 2035.

### Distributional impacts and revenue recycling effects
- Household exposure:
  - Direct energy spending represents about 16 percent of household expenditure on average (including electricity at about 7 percent).
  - Lower income households spend almost 20 percent of their total budget on energy.
- Coal tax household consumption effects in 2030:
  - Average reduction in consumption of 1.4-2 percent relative to baseline.
  - Absolute monetary burden largest on higher income households.
  - Relative burden (percent of consumption) largest for the poorest households.
- Emissions tax scenario:
  - Households affected only through indirect channels (tax applies to three industrial sectors: iron and steel; cement; aluminum).
  - Relative effects relatively uniform across income deciles.
- Revenue recycling to offset distributional effects (simulation):
  - Using 20 percent of revenue for targeted cash transfers to the bottom four deciles, 30 percent for labor tax reductions, and 50 percent for public investment:
    - Poorest households net benefit under coal tax scenarios: about 3.0-3.2 percent of their pre-policy consumption.
    - Poorest households net benefit under emissions tax on CBAM sectors: about 1.4 percent of their pre-policy consumption.
- Policy implication: strengthen social safety net to allow targeted transfers to identified and registered vulnerable households.

### Support for industrial sectors and policy design options
- Sectoral production impacts by 2030 and 2035:
  - Aluminum: not significantly impacted due to low carbon intensity.
  - Iron and steel: modest reduction up to 3 percent by 2030 and up to 6 percent by 2035.
  - Cement: largest impact—up to 24 percent reduction by 2030 and 42 percent by 2035 (high emissions intensity and limited abatement options).
- Suggested recycling uses to support industry:
  - Finance targeted subsidies or investment tax credits linked to energy efficiency and decarbonization.
  - Technology-neutral subsidy or tax credit efficiency:
    - Link support directly to verified emissions reductions (payment per tonne of CO2 abated).
    - Or condition eligibility on achieving a specified reduction outcome.
- Abatement options by sector:
  - Steel: shift from coal-based blast furnaces to electric arc furnaces, conditional on access to low-carbon electricity.
  - Cement: reduce clinker-to-cement ratio through blending, improve energy efficiency, fuel switching; CCS possible but cost-intensive and not widely deployed in region.
- Broader support:
  - Incentivize renewable energy investment and decarbonization of energy mix to lower Scope 2 industrial emissions and electricity costs and improve CBAM competitiveness.

### Monitoring, legal, and structural considerations
- MRV systems:
  - Need to invest in robust monitoring, reporting, and verification (MRV) systems to measure emissions accurately across sectors and support exporters in demonstrating actual emissions for CBAM determination and for taxing industrial emissions.
  - MRV work is part of BiH’s current plan in developing an ETS and should be expedited.
- Structural barriers to power-sector decarbonization:
  - Renewable generation growth noted: according to SERC (2025), solar and wind generation almost tripled over 2021-25 and comprise 8 percent of the energy generation mix.
  - Barriers: low domestic tariffs, limited transmission capacity, potential land use constraints.
  - 2024 BiH Constitutional Court rulings limit repurposing or disposal of state-owned land by entities—may create legal obstacles to new generation, transmission, and distribution infrastructure.
  - Southern Gas Interconnection with Croatia could modestly diversify energy mix by enabling greater use of gas.

### Regional labor impacts and mitigation
- Coal-dependent regions concentrated in Tuzla and Zenica (FBiH) and Ugljevik and Gacko (RS).
- Simulated job impacts for 2035 (full-time-equivalent jobs) under simplifying assumptions:
  - EUR 25 coal tax - 50% PT: Total -1,719; % of BAU -0.09%
  - EUR 25 coal tax - 100% PT: Total -1,402; % of BAU -0.07%
  - Emission tax - CBAM sectors: Total -3,012; % of BAU -0.16%
  - EU CBAM - No domestic policy: Total -3,845; % of BAU -0.20%
- Under the CBAM scenario with no domestic policy, around 3,850 jobs could be affected by 2035 (0.20 percent reduction of full-time-equivalent jobs versus baseline).
- Coal tax with revenue recycling reduces job losses (range between 1,400 and 1,900 depending on passthrough).
- Recommended mitigation policies:
  - Active labor market policies, reskilling and reallocating displaced workers.
  - Initiatives to diversify and direct new investment into coal-dependent regions.

### Conclusions and policy recommendations (preserving source framing)
- A domestic carbon pricing policy response is warranted to offset CBAM effects.
- Coal tax advantages:
  - Simple extension of existing excise collection infrastructure.
  - Valuable source of domestic revenues.
  - Incentivizes decarbonization away from coal to cleaner sources in industry and electricity generation.
  - Productive spending of tax revenues could partially offset the GDP impact of CBAM over time.
- Emissions tax on CBAM sectors option:
  - Collect revenues domestically but has narrower scope, lower revenue base, and more limited decarbonization incentives.
  - May be legally, institutionally and administratively more challenging to implement.
- Complementary measures to consider:
  - Support to industries via fiscal incentives for energy efficiency and modernization.
  - Targeted household support through strengthened social safety net to mitigate price impacts.
  - Active labor market policies and regional investment initiatives for coal-dependent areas.
  - Invest in robust MRV systems to demonstrate actual emissions and reduce CBAM-related costs over time.

*Source: IMF staff calculations and analysis as presented in the supplied content unit.*

### Annex I. Quantitative Methodology

### Annex I. Quantitative Methodology

### A. Impact of CBAM on EU Prices
- CBAM will affect the price of exports of CBAM-covered goods that go to the EU.
- In industrial sectors (iron and steel, cement and aluminum), during the phase-in period, the additional CBAM price faced by importers is the same as the additional EU ETS price faced by domestic exporters; the model assumes the overall market price in these sectors faced by price-takers exporting to the EU increases.45
- Consumer price in the EU after CBAM is calculated as:
  - Equation 1: 푝푡푀 = 푝̅푡푀 + 훼퐹 ∗ {퐶퐵퐴푀푡푎푣}
    - 푝̅푡푀 = regional market price of aluminum, in USD/t
    - 훼퐹 = fraction of CBAM price that is passed forward to EU consumers (see below)
    - 퐶퐵퐴푀푡푎푣 = average CBAM (ETS) payment imposed by the EU on all producers of CBAM covered goods, in USD/t.
- Average CBAM (ETS) payment is calculated as:
  - Equation 2: 퐶퐵퐴푀푡푎푣 = 퐸푇푆푡퐸푈 ∗ (1 − 휖푡푖푛푑) ∗ 퐸퐹푡푎푣 + 훽푖 ∗ 퐸푇푆푡퐸푈 ∗ 휃푡푎푣 ∗ 푃퐸퐹푡푎푣
    - 퐸푇푆푡퐸푈 = EU ETS permit price in year t, in USD/tCO2
    - 휖푡푖푛푑 = share of free allowances for industries in year t
    - 퐸퐹푡푎푣 = weighted average direct CO2 emissions factor of demand for CBAM-covered goods in the EU, in tCO2/t
    - 훽푖 = coefficient indicating if indirect emissions are covered by CBAM: 0 for aluminum and hydrogen, 1 for cement and fertilizers, and 0≤훽푖≤1 for iron and steel (HS code 260112 is not exempt from indirect emissions payments)
    - 휃푡푎푣 = weighted average electricity input per unit of production, in kWh/t
    - 푃퐸퐹푡푎푣 = weighted average emissions factor of power generation, in tCO2/kWh
- The new regional market price is assumed the same for all trade into and within the EU and is calculated based on the average emissions intensity of EU imports and production in each sector.
- Footnote: The model assumes a competitive market for CBAM commodities.45

### Passthrough Coefficients to EU Consumers
- The passthrough to EU buyers depends on:
  1. price elasticity of demand of EU consumers,
  2. price elasticity of non-EU supply,46 and
  3. price elasticity of EU supply.
- Concept: The share of costs passed into higher consumer prices increases with supply elasticity and decreases with demand elasticity; the remainder is absorbed by exporters (exporters with higher emissions factors absorb higher shares of CBAM payments).
- Passthrough coefficient formula:
  - Equation 3: 훼퐹 = (휀푓 ∗ 휀푓) / (휀푑 + 휀푓) ∗ (휀푓 + |휂|)
    - 휀푓 = price elasticity of foreign supply
    - 휀푑 = price elasticity of domestic supply (in the EU)
    - 휂 = price elasticity of domestic demand (in the EU)
- Electricity: since the EU ETS already applies to EU electricity producers, the introduction of the CBAM is assumed not to increase EU electricity prices and is entirely borne by third-country electricity producers.
- Effects on EU demand and exporters:
  - Part of CBAM costs passed forward reduces EU demand (e.g., for aluminum).
  - Part lowers export/production prices, lowering production.
  - Changes in export volumes are calculated using assumed elasticities of EU demand and BiH exporters’ supply elasticity (see Parameterization).

46 This depends on international mobility of products and openness of the economy to global trade.

### B. Impact of CBAM on BiH Exporters
- Per tonne CBAM payment on BiH exports is based on the projected ETS price.
  - Equation 4: 퐶퐵퐴푀푡퐵푖퐻 = (퐸푇푆푡퐸푈 ∗ (1 − 휖푡푖푛푑) − 휏푡퐵푖퐻) ∗ 퐸퐹푡퐵푖퐻 + 훽푖 ∗ (퐸푇푆푡퐸푈 − 휏푡퐵푖퐻) ∗ 휃푡퐵푖퐻 ∗ 푃퐸퐹푡퐵푖퐻
    - 퐸푇푆푡퐸푈 = EU ETS permit price in year t, in USD/tCO2
    - 휏푡퐵푖퐻 = explicit domestic carbon price (tax or ETS) in year t, in USD/tCO2
    - 휖푡푖푛푑 = share of free allowances allocation for industrial installations in the EU in year t
    - 퐸퐹푡퐵푖퐻 = BiH direct CO2 emissions factor, tCO2/t of aluminum
    - 훽푖 = coefficient indicating if indirect emissions are covered by CBAM (same definitions as above)
    - 휃푡퐵푖퐻 = electricity input per unit of production in BiH, in kWh/t
    - 푃퐸퐹푡퐵푖퐻 = emissions factor of power generation in BiH, in tCO2/kWh
- Domestic supply price, net of mitigation costs, is:
  - Equation 5: 푝푡푆 = 푝푡푀 − (1 − 훼) ∗ 푍푡
    - 푝푡푀 = regional market price
    - 0 ≤ 훼 ≤ 1 = fraction of domestic mitigation costs passed forward in higher domestic consumer prices; 1 − 훼 is fraction passed backwards in lower domestic producer prices
    - 푍푡 = domestic mitigation costs per unit of production
- Domestic producer price (in policy scenario) is calculated as:
  - Equation 6: 푝푡푃 = 푝푡푀 + 푍푡
- Domestic mitigation costs per unit of production are:
  - Equation 7: 푍푡 = {휏푡 ∗ 퐸퐹푡 ∗ 훥푒푡2} + {휏푡 ∙ 퐸퐹푡} + {휃푡퐸 ∙ 훥푝푡퐸}
    - 휏푡 = explicit price on CO2 emissions (domestic mitigation policy, if applicable), in USD/tCO2
    - 퐸퐹푡 = CO2 emission factor from direct use of fuels/processes, in tCO2/t
    - Δ푒푡 = proportionate change in emissions intensity of production induced by domestic mitigation policy relative to baseline intensity
    - 휃푡퐸 = electricity input per unit of domestic production, in kWh/t
    - Δ푝푡퐸 = proportionate increase in (domestic industrial) electricity prices caused by mitigation policies in the power sector, in USD/kWh
- Import price to the EU is the same for all exporters and derived from Equation 1.
- Impact on profits per unit of production for BiH exporters:
  - Equation 8: 휋푡퐵푖퐻 = 훼퐹 ∗ CBAM푡av − CBAM푡퐵푖퐻
    - This measures difference between average CBAM payment that can be passed forward to EU consumers and actual CBAM payment BiH must pay.
- Exporters’ export price:
  - Equation 9: 푝푡푋퐸푈 = 푝푡푃 + 휋푡퐵푖퐻
- Export quantities to the EU from BiH are determined by changes in domestic prices and EU demand elasticity, and by changes in exporters’ prices and production elasticity:
  - Equation 10: 푋퐸푈푡퐵푖퐻 = 푋퐸푈0퐵푖퐻 ∗ (푝푡푀 / 푝0푀)^휂 ∗ (푝푡푋퐸푈 / 푝0푋퐸푈)^휀푑
- Volumes of exports from BiH to EU are calculated by multiplying export quantities and import prices in the EU.
- CBAM and domestic mitigation policies (if applicable) affect domestic supply price, export price, and profits of BiH exporters.

### C. Parameterization
- Parameterization draws from Parry et al (2025).
- Demand and supply elasticities:
  - Adopted domestic demand elasticity 휂:
    - For steel, aluminum, and chemicals: -0.5
    - For cement: -0.2
  - Domestic supply elasticity is assumed to be unitary.
- Foreign supply elasticities:
  - Benchmark values: 3 for steel and chemicals; 1 for cement.
  - Multipliers based on trade intensity:
    - Multipliers are 50, 66 or 100 percent for cases where trade is less than 40 percent, 40–70 percent, and 70—200 percent of domestic production.
    - If trade is more than 200 percent of domestic production, the multiplier is 150 percent.
- Emissions factors, electricity usage, and MAC curves:
  - For cement, aluminum, and ammonia baseline emissions factors 훽̅푡 mainly come from Climate Trace datasets (other sources include IPCC (2006), default CBAM values from the European Commission (2023), and IEA (2021)), based on averaging plant-level emissions factor data by country.
  - For steel, baseline emissions factors are obtained by technology (blast furnaces and electric arc furnaces) and respective steel output for these technologies.
  - Autonomous rate of reduction in emissions factor 훿: 0.2 for steel, and none for cement and chemicals (based on historical data).47
  - Weighted average emissions factors for EU demand are calculated from emissions factors of EU producers and EU imports weighted by quantities.
  - Electricity parameters:
    - Ratio of electricity inputs to production 휃푡퐸 obtained from several sources and depends on technological processes.
    - Electricity consumption data for steel and aluminum from Climate Trace plant-level data.
    - For cement, main source is IEA (2018) country-specific and regional per unit electricity consumption.
    - For ammonia, per-unit electricity consumption based on default values from IEA (2021).
    - Electricity inputs change if technology shifts; Δ푝푡퐸 (proportionate increase in electricity prices) is calculated endogenously in CPAT under carbon pricing scenarios.
  - Parameters of emissions/price relation:
    - For each industry, marginal abatement cost curve scalar and concavity (Γ and 훾) chosen based on abatement costs and potential of available and possible technologies, parameterized to Blok et al. (2021), Scott et al. (2023), McKinsey (2013), and Woodall et al (2022).

47 See IEA: https://www.iea.org/energy-system/industry

*Source: Annex I. Quantitative Methodology (1bihea2026002) — IMF staff report content provided in the source PDF.*

### 9.      BiH corporate sector has remained moderately leveraged over the past decade, while

### 9.      BiH corporate sector has remained moderately leveraged over the past decade, while creditworthiness has improved

### Overview
- Gross corporate debt reached 53.1 percent of GDP in 2024, after peaking at 56.0 percent at the start of the pandemic.
- Corporate liabilities have shifted toward shorter maturities: short-term financial liabilities rose from 35.5 percent of the total in 2015 to 39.8 percent in 2024.
- Corporate financing is bank‑dominated; debt securities remain scarcely used.

### Indebtedness and debt structure
- Aggregate corporate indebtedness (debt-to-GDP) is:
  - Well below the EU-27 average and the euro area average.
  - Slightly below the median EU country.
  - Broadly stable and comfortably below the indicative threshold of 85 percent for NFC debt.
- Debt concentration by firm size and DTA:
  - Cross-firm average debt-to-asset (DTA) ratio has hovered around 26 percent since 2011.
  - DTA concentrated in the 20-80 percent range across firms.
  - In 2024, only 5 percent of firms had DTA above 80 percent.
  - Electricity and gas sector: higher and rising DTA between 36 and 57 percent over the sample.
- Short-term debt composition:
  - Short-term to total debt ratio is highest for small NFC firms and increasing across all firm sizes.
  - Small firms’ short-term indebtedness ratio around 60 percent for most of the sample period, increasing to 64 percent in 2024.
  - Share of firms with short-term-to-total debt ratio above 90 percent is increasing.

### Liquidity and profitability
- Liquidity indicators:
  - Cross-firm average ratio of current (liquid) assets to total assets (CAR) stable at around 60 percent between 2011 and 2022, increasing to 68 percent in 2023-2024.
  - Tail liquidity risks (CAR less than 20 percent) restricted to about 12 percent of firms by 2024.
  - Cash-to-short term debt (CTD_st) ratios increasing across all firm sizes.
  - NFC fixed assets represent less than 2/3 of liquid assets and are on a declining relative path.
- Profitability:
  - Median return on equity (ROE) rose from 9 percent to 29 percent over the sample period.
  - Small companies historically most profitable, holding little equity and assets.
  - In 2024, average equity: large KM1 million, medium KM1.7 million, small KM340 thousand.
  - In 2024, average assets: large KM174 million, medium KM22 million, small KM1.3 million.
  - Profitability increased across all sectors, notably in “Other services,” electricity and gas, and construction.

### Debt‑servicing capacity and debt‑at‑risk (DAR)
- Interest Coverage Ratio (ICR) used to assess debt-servicing capacity (EBIT / interest expenses).
- ICR trends:
  - Median ICR for small and mid-size firms increased three-fold since 2011.
  - Large-firm ICR increased by about 50 percent since 2011.
- Debt-at-risk (DAR) outcomes:
  - Firms with ICR lower than 1.5 considered debt-at-risk.
  - Share of firms facing debt-servicing risk declined from about a quarter in 2011 to 9 percent in 2024.
  - Cross-firm average ratio of DAR to total debt declined for all sizes to about 10 percent by 2024 (from about 15 percent in large firms and 25 percent in small and medium firms).
  - By 2024, about half of the DAR stock is held by:
    - Small firms: 36 percent (divided amongst 7 thousand firms).
    - Midsize firms: 14.6 percent (666 firms).
  - Manufacturing and trade sectors combined hold about 2/3 of the DAR stock.
  - Of total DAR stock, between 80 and 90 percent historically held by firms with less than KM10 thousand.

### NFC–banking sector interlinkages and sectoral concentration
- Banking sector role and exposures:
  - Bank lending accounted for about 45 percent of corporate debt in the post‑pandemic period.
  - Banking exposure to non‑financial companies rose by about 50 percent in nominal terms over the past decade, accelerating recently.
  - Bank exposure to corporates as a share of GDP fell from about 25 percent to 20 percent over the same period.
  - Corporates have increasingly relied on external borrowing, including trade credit and intercompany loans from abroad.
  - Overall, bank exposure has broadly kept pace with total corporate liabilities.
- Sectoral concentration of bank credit (approximate shares):
  - Wholesale and retail trade: about 30 percent.
  - Manufacturing: around 21 percent.
  - Construction: rose from about 6 percent in 2020 to nearly 10 percent in 2025.
  - Electricity, gas, steam, and air conditioning supply: increased from about 4 percent to nearly 7 percent.
  - Transportation and storage: around 4 percent.
- Risk implications:
  - High exposure to trade increases sensitivity to domestic demand.
  - Manufacturing exposure raises vulnerability to external demand shocks and competitiveness pressures.
  - Rising construction exposure adds cyclical investment risk.
  - Greater lending to electricity could increase indirect exposure to carbon‑transition risks, including from the EU’s CBAM.
  - Concentration in a few sectors could lead to correlated increases in credit risk and NPLs.

### Financing conditions and interest‑rate exposure
- Composition of new lending:
  - Fixed rate borrowing became increasingly prevalent post‑pandemic.
  - Fixed rate loans accounted for about 70 percent of new NFC lending in 2025.
- Pass‑through and rates:
  - Lending rates in BiH showed limited passthrough from the most recent ECB tightening cycle.
  - BiH lending rates have at times remained below comparable euro area rates, supporting credit growth and limiting near‑term refinancing risks.

### Stress‑test framework, scenarios, and results
- Stress-test design:
  - Simulates sector‑specific shocks to EBIT and interest expenditures components of ICR.
  - Shock to EBIT calibrated as the pandemic decline in EBIT plus an additional 0.6 percentage point GDP growth difference multiplied by elasticity ξ=6 (i.e., additional 3.6 percentage points subtracted from sectoral EBIT growth observed during the pandemic).
  - Interest payments increased to reflect a 0.7 percentage point higher lending rate applied to the stock of NFC debt in 2024.
- Post‑shock ICR and DAR outcomes:
  - Share of firms with debt-at-risk would increase from 9 percent in 2024 to 13.6 percent under the described severe shock.
  - DAR ratio to total debt would move from 6.5 percent to 9.6 percent.
  - DAR stock would increase by about 50 percent.
  - Impact asymmetric across sectors: DAR stock would increase more than three-fold in mining and electricity and gas sectors; agriculture and mining impact nearly null given already low median ICR and low DAR.
- Mapping to bank losses and capital impact:
  - Increase in DAR mapped into NPLs using observed 2024 NPL-to-DAR ratio, then into losses using probabilities of default and loss‑given‑default.
  - Banking sector impact expressed via changes in Capital Adequacy Ratio (CAR).
- Stress-test headline results and banking resilience:
  - Under the severe shock, debt‑at‑risk in the corporate sector could increase significantly—by 48 percentage points (relative phrasing in source).
  - If NPLs increased by the same amount, the CAR would decline by 1.5 percentage points.
  - Banking sector CAR was above 18 percent in 2024.
- Bank capital table (KM (millions)):
  - Tier 1 capital (1): 4,790
  - Stock of provisions (2): 653
  - Existing NPL stock (3): 813
  - Risk-Weighted Assets: 25,596
  - Capital before shock (1+2-3): 4,629
  - Capital after shock: 4,236
  - Capital Adequacy Ratio before shock: 18.1%
  - Capital Adequacy Ratio after shock: 16.5%

### Policy implications and recommendations
- Continue close monitoring of corporate balance sheets and granular risk assessment, given uneven vulnerabilities across firms and sectors.
- Strengthen firm resilience and diversify sources of growth and financing to reduce reliance on short-term funding and bank lending concentration.
- Monitor rising short-term indebtedness of small firms and the increasing share of firms with short-term-to-total debt ratio above 90 percent to mitigate rollover and liquidity risks.
- Track sectoral credit concentration—especially in trade, manufacturing, and construction—and potential indirect exposures to transition risks in electricity and gas.
- Maintain strong bank capitalization and provisioning to contain macro‑financial spillovers from corporate stress.

*Sources: CBBH; and IMF staff calculations.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2026/english/1bihea2026002.pdf_