The implementation of the Carbon Border Adjustment Mechanism (CBAM) has significantly impacted electricity pricing and trade flows in Southeast Europe (SEE) as of early 2026. Initially intended as a straightforward carbon pricing tool, CBAM has instead emerged as a short-term market distortion mechanism, reshaping price formation and redirecting trade flows across the region. This development has raised critical questions about the long-term implications for non-EU countries such as Serbia, Bosnia and Herzegovina, Montenegro, North Macedonia, and Albania.
At its essence, CBAM imposes a carbon-adjusted cost on electricity exports from non-EU nations entering the European Union. This cost is determined not by the origin of the electricity but by the entry point into the EU, creating a pricing wedge between EU and non-EU markets. As a result, traditional arbitrage practices that previously governed cross-border electricity flows have been disrupted.
The first quarter of 2026 highlighted these shifts dramatically. A combination of strong hydrological conditions and unseasonably warm weather led to increased hydro generation in SEE, coupled with lower demand. During this time, CBAM’s administrative systems were still being established, leading to significant price suppression in non-EU markets while EU prices remained marginally elevated.
This divergence manifested in notable price discounts in Serbia and Bosnia, where electricity traded at levels considerably below those in Hungary and Romania, even with available interconnection capacity. The asymmetrical burden of CBAM has placed non-EU systems at a competitive disadvantage during surplus periods, while EU markets have remained insulated due to their net importing status.
Market participants quickly adapted to these challenges by redirecting electricity flows toward Ukraine and Moldova—regions not subject to CBAM regulations. This rerouting allowed SEE exporters to recover some lost margins while simultaneously reducing demand on EU exchanges. Such strategies highlight the adaptability of market players in response to new regulatory constraints.
The impact of CBAM is closely linked to hydrological conditions. When water inflows are high, SEE countries typically shift into export mode, exposing them to CBAM constraints. Conversely, during periods of normal or below-average hydrology, these nations often become net importers from EU markets, rendering CBAM largely irrelevant.
Moreover, CBAM’s influence extends to thermal generation operations. In early 2026, operators of lignite-fired plants faced market prices that fell below their marginal costs, resulting in a temporary reduction of coal output by up to 500 MW during peak hydrological conditions. However, this reduction was driven by short-term economic factors rather than a structural shift toward decarbonization.
As natural gas prices began to rise from March 2026 onward, wholesale electricity prices across the region increased as well. This trend restored profitability for lignite plants despite discounted prices in SEE markets, effectively neutralizing some of CBAM’s suppressive effects on thermal generation.
The evolving landscape also indicates a shift toward more regionalized power trading within SEE itself. As exports to the EU became less appealing under CBAM constraints, market participants have increasingly engaged in cross-border trade among non-EU countries. This trend suggests an early formation of a regionalized power market that operates partially independently from EU pricing dynamics.
Despite its immediate effects, historical data indicates that SEE countries are net exporters only during a minority of hours—approximately 12% of total hours in 2025 saw exports exceeding 500 MW. Consequently, CBAM primarily influences marginal pricing periods rather than baseline operations within these markets.
Looking ahead through 2026 and into 2027, it is anticipated that CBAM’s influence will further diminish as administrative frameworks mature and traders adapt their strategies accordingly. The normalization of seasonal hydrology and ongoing export channels toward Ukraine and Moldova will likely reduce instances where CBAM constraints become significant.
Ultimately, while CBAM introduces friction into cross-border electricity trade and redistributes value between EU and non-EU markets temporarily altering dispatch decisions, it does not fundamentally alter the region’s import dependence or enforce sustained decarbonization efforts. The ability of SEE electricity markets to adapt under new constraints will be crucial for maintaining balance and operational efficiency moving forward.
