Adapting to Carbon Costs: North Macedonia’s Strategy for a Low-Carbon Economic Future

The World Bank's analysis highlights the EU’s Carbon Border Adjustment Mechanism (CBAM) as a significant challenge for North Macedonia, with risks to key industries, exports, and jobs due to higher emissions costs. Strategic carbon pricing, renewable energy investments, and policy reforms are recommended to mitigate economic impacts and align with EU climate goals.

The World Bank, supported by the Austrian Government through the Western Balkans Climate Support Facility, has delivered an in-depth analysis of the economic implications of the European Union’s Carbon Border Adjustment Mechanism (CBAM) for North Macedonia. Spearheaded by Senior Economist Sanja Madzarevic Sujster and her team, the study draws from the findings of North Macedonia’s Climate Public Finance Review. CBAM, a key component of the EU’s Green Deal, is designed to prevent carbon leakage by imposing a carbon price on imports from countries lacking comparable carbon pricing policies. Initially focused on carbon-intensive products like cement, aluminum, and steel, the CBAM will be fully operational by 2026. With North Macedonia’s significant reliance on EU markets for exports, the study reveals critical vulnerabilities and opportunities tied to this transformative policy.

Industry Vulnerabilities in a Carbon-Intense Economy

The analysis, conducted using the World Bank’s MINDSET macroeconomic model, assessed two scenarios: the phase-out of free emissions allowances within the EU and the introduction of the CBAM. While the overall economic impact on North Macedonia may seem modest, with GDP projected to decline by 0.3%, the industry-specific consequences are significant. Key sectors, including aluminum and steel, are particularly at risk due to their high emissions intensity relative to EU standards. Projected losses in output for these industries could approach 2%, driven by the additional costs associated with CBAM fees levied on exports exceeding EU emissions benchmarks.

These effects extend beyond individual industries to disrupt value chains. North Macedonia’s reliance on exports to EU markets means supply chain repercussions for industries such as transportation and services, which depend on these heavy manufacturing sectors. Without adjustments to align with EU carbon pricing, the nation risks losing competitiveness in these crucial industries.

Job Losses and Economic Ripple Effects

The CBAM’s impact will also be felt across North Macedonia’s labor market, with an estimated 1,500 job losses anticipated, primarily in male-dominated industries like mining, aluminum, and steel production. These losses stem from declining exports and production in sectors heavily dependent on EU trade. The reduction in wages and employment could further ripple through the economy, leading to decreased household incomes and constrained consumer spending, which in turn affects service and retail industries.

The gender disparity in these impacts is noteworthy. Male-dominated sectors, such as mining, are expected to bear the brunt of job losses, further exacerbating income inequalities in affected communities. With men holding most jobs in these industries, the broader socioeconomic effects are likely to ripple through families and regions reliant on these workers.

Pathways to Mitigate Risks

To counter these challenges, the report outlines a series of proactive policy recommendations. Introducing carbon pricing in sectors covered by the CBAM is a critical step to reduce fees paid directly to the EU and instead generate revenue for domestic decarbonization efforts. Investments in renewable energy and energy efficiency measures are equally important to lower emissions, enhance industrial competitiveness, and create new economic opportunities.

Another key recommendation involves aligning North Macedonia’s electricity market with the EU’s single electricity market. Such integration could help reduce emissions from energy generation, a significant contributor to CBAM costs for exported goods. Additionally, implementing a Just Transition Action Plan would ensure support for workers and communities most affected by the CBAM, offering retraining opportunities and other socioeconomic protections.

Turning Challenges into Opportunities

While the CBAM poses significant risks, it also highlights opportunities for North Macedonia to align with global climate goals and modernize its economy. By reducing its carbon intensity and investing in green technologies, the nation can improve its standing in EU markets and attract investments in sustainable industries. For instance, decarbonization efforts in sectors like cement and aluminum could position North Macedonia as a regional leader in low-carbon production, creating competitive advantages in the long run.

The CBAM also underscores the interconnectedness of trade, energy, and labor policies in a carbon-conscious global economy. By adopting a comprehensive approach to emissions reduction, North Macedonia can navigate the short-term challenges while building resilience against future policy changes in international markets.

Building a Resilient Future

The World Bank’s analysis underscores that the CBAM is not merely a policy challenge but a critical opportunity for transformation. By addressing emissions through strategic investments and policy reforms, North Macedonia can mitigate immediate risks and unlock long-term growth potential. The implementation of carbon pricing, renewable energy initiatives, and labor transition strategies are essential steps toward this goal.

With the right mix of policies, North Macedonia can not only reduce the adverse impacts of the CBAM but also emerge stronger in a decarbonized global economy. This proactive approach will protect vulnerable sectors and jobs while positioning the country as a competitive player in the EU’s evolving trade landscape. By seizing this opportunity, North Macedonia can transition to a greener, more sustainable future, ensuring economic resilience and environmental stewardship in the years to come.