The introduction of the Carbon Border Adjustment Mechanism (CBAM) marks a significant shift in the dynamics of electricity markets in Southeast Europe. Traditionally, electricity pricing in this region has been influenced predominantly by fuel costs, hydrological conditions, and demand variations. However, CBAM introduces carbon cost differentials as a new structural factor that could dramatically alter power market operations across Central and Southeast Europe.
Since its inception in 2005, the EU Emissions Trading System (EU ETS) has progressively raised the costs associated with carbon dioxide emissions from power plants and industrial facilities. Currently, it encompasses approximately 40% of the EU’s greenhouse gas emissions, establishing itself as the largest carbon market globally. Over the past decade, rising carbon prices have become integral to wholesale electricity pricing, imposing significant compliance costs on coal-fired power plants while favoring renewable energy sources that incur no emissions costs.
CBAM extends the reach of the EU ETS beyond its borders, requiring that imports of specific carbon-intensive goods—including electricity—reflect their carbon content upon entering the EU market. This policy aims to mitigate carbon leakage, which occurs when production relocates to jurisdictions with less stringent environmental regulations. In the context of electricity markets, this regulation introduces additional complexities.
Electricity markets in Southeast Europe are interconnected via transmission lines that link EU member states with Western Balkan countries. These interconnections facilitate electricity flow based on price signals. Historically, exports from the Western Balkans surged towards EU markets when coal-based generation offered lower marginal costs. However, with CBAM in effect, an implicit carbon cost is now applied to these exports. Electricity imported into the EU from nations lacking carbon pricing must account for its embedded emissions, effectively elevating costs for carbon-intensive imports.
For coal-based electricity with an emissions intensity of approximately one tonne of CO₂ per MWh, CBAM adjustments could add between €60 and €80 per MWh, depending on current EU ETS prices. Such financial implications fundamentally reshape the economics surrounding cross-border electricity trade.
If these carbon adjustments significantly inflate the costs associated with coal-based electricity exports, a potential reversal in power flows could occur across Southeast Europe. Rather than exporting electricity to EU markets, some Western Balkan countries may increasingly depend on imports from lower-carbon sources within the EU. Notably, Romania and Bulgaria possess substantial nuclear power capacity capable of generating considerable volumes of low-carbon electricity. Additionally, wind and solar energy capacities are rapidly expanding throughout the region.
Electricity generated from these low-carbon sources avoids CBAM adjustments due to its minimal carbon intensity, potentially shifting competitive dynamics among regional electricity systems. This shift is further influenced by changing industrial demand patterns; export-oriented industries are increasingly prioritizing low-carbon electricity to enhance their product sustainability and reduce overall carbon intensity.
Industrial firms targeting EU markets may incur carbon costs if their production relies on high-emission electricity sources. Consequently, there is a growing trend toward securing renewable energy through long-term power purchase agreements (PPAs), with many large industrial consumers across Europe committing to PPAs lasting between 10 and 20 years to stabilize prices and ensure low-carbon supply chains.
Over time, CBAM may catalyze a convergence between electricity prices and carbon intensity across Southeast Europe. Markets characterized by higher emissions intensity could see diminished competitiveness in cross-border trade compared to those with lower emissions profiles that might capitalize on enhanced export opportunities. The formation of electricity prices will increasingly reflect not only traditional factors like fuel costs but also the carbon attributes of generation portfolios.
This transformation is already evident in evolving trading strategies where traders are integrating carbon price forecasts into their models. The valuation of transmission capacity between markets may also shift as new trading opportunities arise from carbon price differentials.
The integration of carbon pricing into cross-border electricity trade signifies a structural transformation for Southeast European energy markets. Historically driven by engineering considerations and fuel economics, today’s market behavior is increasingly influenced by climate policy considerations. As CBAM transitions from its pilot phase toward comprehensive financial implementation later this decade, its impact on trading practices, investment decisions, and overall market structure is expected to intensify.
For stakeholders in the energy sector—including traders, policymakers, and energy companies—the Western Balkans are emerging as a critical testing ground for market dynamics shaped by carbon pricing strategies. This evolving landscape underscores the necessity for aligning regional electricity systems with Europe’s broader low-carbon energy transition goals.
