The introduction of the Carbon Border Adjustment Mechanism (CBAM) is set to have significant implications for power markets across Central and South-East Europe (CSEE). This policy, which is closely integrated with the EU Emissions Trading System (EU ETS), aims to address carbon leakage while also transforming the economics of electricity generation and cross-border power flows in the region.
As of 2023, the EU ETS has evolved into a fundamental regulatory framework for carbon pricing, covering around 10,000 industrial installations and power plants that contribute approximately 40% of total EU greenhouse gas emissions. The carbon allowance prices have surged from €5–€10 per tonne in the early 2010s to over €90 per tonne, stabilizing between €60–€80 per tonne during 2025–2026. This dramatic increase has imposed substantial costs on fossil fuel-based electricity generation within the EU.
CBAM extends this carbon pricing structure to imported goods, including electricity, thereby requiring importers to purchase CBAM certificates based on the carbon content of their products. Initially targeting sectors like steel, cement, aluminum, and fertilizers, CBAM’s inclusion of electricity is particularly pertinent for CSEE countries that rely heavily on coal-fired generation.
Countries such as Serbia, Bosnia and Herzegovina, and North Macedonia predominantly generate electricity from lignite, with Serbia’s state-owned Elektroprivreda Srbije (EPS) producing about 65%–70% of its electricity from lignite-fired plants. In contrast, EU member states like Hungary and Romania operate under the EU ETS framework where carbon allowances are mandatory for emissions. For instance, lignite generation exceeding 1 tonne of CO₂ per MWh incurs a cost of approximately €70/MWh due to carbon pricing.
The implementation of CBAM introduces comparable cost adjustments for imported electricity from non-EU nations. This shift fundamentally alters competitive dynamics in regional electricity trade. Historically, coal-based exports from Western Balkan countries were economically viable due to lower marginal costs compared to gas-fired generation within the EU. However, as CBAM imposes additional costs reflective of carbon content on these exports, their competitiveness may diminish significantly.
In light of these developments, traditional export patterns may change. Countries with high renewable energy outputs could gain an advantage in supplying lower-carbon electricity to EU markets. The potential reduction in coal-based electricity exports could lead to increased imports from EU nations with significant renewable and nuclear capacities—such as Romania’s Cernavodă nuclear plant or Bulgaria’s Kozloduy facility—which produce low-carbon energy without incurring CBAM adjustments.
The implications extend beyond trade dynamics; they also affect wholesale electricity price formation across Europe. If CBAM reduces coal-based imports into the EU market, there may be a shift toward higher-cost generation technologies setting marginal prices during peak demand periods. This could result in slightly elevated wholesale prices during specific intervals.
Furthermore, industrial consumers in CSEE are likely to face heightened pressure to secure low-carbon electricity supplies as they adapt to CBAM regulations. Industries such as aluminum smelting and steel manufacturing operate on narrow profit margins sensitive to energy costs. To mitigate exposure to carbon pricing adjustments under CBAM, many firms are increasingly turning towards long-term renewable power purchase agreements (PPAs) or investing directly in renewable energy assets.
As renewable capacity expands within the region—evidenced by ongoing projects like Serbia’s Čibuk 1 wind farm (158 MW) and Kovačica wind farm (104 MW)—the landscape for cross-border trading will evolve further. With an increase in renewable energy production reducing overall carbon intensity, these countries may regain competitiveness in export markets by avoiding CBAM-related costs.
The evolving regulatory environment necessitates that traders incorporate new complexities into their strategies as they navigate CBAM’s impact on cross-border transactions. The need for accurate measurement and verification of carbon content will become essential for maintaining profitability amid changing market conditions.
Overall, the interplay between CBAM and the EU ETS signifies a pivotal transformation within CSEE’s power markets. As carbon pricing becomes an integral component influencing trade flows and investment decisions across national borders, stakeholders must adapt strategically to remain competitive amidst this evolving landscape.
