The implementation of the Carbon Border Adjustment Mechanism (CBAM) by the European Union marks a significant shift in the regulatory landscape of power markets across Central and South-East Europe (CSEE). This mechanism, designed to mitigate carbon leakage, interacts closely with the EU Emissions Trading System (EU ETS), which governs carbon pricing for approximately 10,000 industrial facilities contributing to around 40% of total EU greenhouse gas emissions. The integration of CBAM is expected to have profound implications for electricity generation economics, cross-border trade dynamics, and industrial energy procurement strategies in the region.
Historically, the EU ETS has evolved from a compliance tool with low carbon prices to a critical cost component for energy-intensive industries. Carbon prices have surged significantly over the past decade, rising from €5-€10 per tonne in the early 2010s to over €90 per tonne in 2023, with projections stabilizing between €60-€80 per tonne through 2026. This escalation has altered the cost structure for fossil fuel generation, particularly affecting countries heavily reliant on coal.
CBAM extends the carbon pricing framework to imported goods, including electricity. Initially targeting sectors such as steel and cement, its relevance for electricity imports is particularly pronounced in CSEE, where many countries maintain high levels of lignite-fired generation. For instance, Serbia’s Elektroprivreda Srbije operates coal plants that account for 65%-70% of its electricity output, while Bosnia and Herzegovina’s lignite plants contribute approximately 60% of its generation mix.
The introduction of CBAM means that electricity imported into the EU from non-EU countries with carbon-intensive generation will incur additional costs reflective of their carbon content. This adjustment effectively embeds the EU carbon price into cross-border electricity transactions, altering the competitive landscape for power exports from regions like the Western Balkans. As a result, electricity exports from these areas may become less attractive due to increased costs associated with carbon emissions.
Countries such as Serbia and Bosnia and Herzegovina have traditionally benefited from lower direct fuel costs associated with lignite generation. However, as CBAM applies a comparable carbon price adjustment to their electricity exports, this competitive edge diminishes. The structural implications could lead to a shift in regional electricity flows; instead of exporting coal-based power into EU markets, CSEE countries may increasingly import lower-carbon electricity from EU member states that utilize renewable or nuclear energy sources.
Wholesale electricity prices across Europe are influenced by marginal generation costs. If CBAM reduces low-cost coal imports from neighboring countries, it may shift the marginal cost structure toward higher-cost generation technologies within EU markets. This could result in slight increases in wholesale prices during periods of tight supply. Conversely, CBAM may incentivize investments in renewable energy sources within CSEE as countries seek to maintain their export revenues amid rising carbon costs.
Industrial sectors in CSEE are also likely to face new challenges under CBAM. Industries that rely heavily on electricity—such as aluminum smelters and steel mills—will encounter carbon cost adjustments if they utilize carbon-intensive power sources. This situation creates a strong impetus for these companies to secure low-carbon electricity through renewable power purchase agreements or direct investments in renewable energy infrastructure.
The evolving regulatory environment necessitates that power generators and traders adapt their strategies accordingly. Coal-based assets in non-EU jurisdictions may see declining profitability as carbon adjustments erode their competitiveness in European markets. In contrast, renewable energy generators may find new opportunities as demand for clean electricity rises.
As CSEE navigates these changes, significant investments are already underway to expand renewable capacity. Projects like Serbia’s Čibuk 1 wind farm (158 MW) and various solar parks are indicative of this trend. Increased renewable capacity could enhance export competitiveness by lowering the carbon intensity of exported electricity, thus reducing CBAM-related costs.
In summary, the interplay between CBAM and EU ETS is poised to redefine the economic landscape of electricity trade across Central and South-East Europe. As carbon pricing becomes a central determinant of market dynamics, stakeholders must recalibrate their strategies to align with this evolving paradigm characterized by an increasing emphasis on low-carbon energy solutions.
