The dynamics of electricity pricing in Southeast Europe (SEE) are increasingly shaped by the European Union Emissions Trading System (EU ETS), which has become a pivotal factor in determining power market economics. While the Carbon Border Adjustment Mechanism (CBAM) garners attention as a new regulatory framework, it is the EU ETS that fundamentally influences electricity prices across Europe, including Hungary and indirectly throughout SEE. The ETS establishes the baseline for power generation costs, effectively embedding carbon pricing into the fabric of electricity markets.
At its core, the EU ETS imposes a cost on carbon emissions, compelling power generators to account for CO₂ in their operational expenses. This requirement leads to heightened marginal production costs for thermal plants, particularly those reliant on coal and gas, which in turn is reflected in wholesale electricity prices. Consequently, the ETS acts as a price floor within EU markets, especially where fossil fuels still play a significant role in balancing energy supply during peak demand periods.
In this context, the SEE region presents a complex landscape. EU member states such as Hungary, Romania, Bulgaria, and Croatia are fully integrated into the ETS framework, experiencing direct exposure to CO₂ pricing. In contrast, non-EU countries like Serbia, Bosnia and Herzegovina, and Montenegro operate outside this system, resulting in a notable divergence in pricing structures. While EU markets benefit from full CO₂ cost pass-through and higher generation costs, non-EU markets maintain lower marginal generation costs due to their lack of direct CO₂ pricing.
This apparent advantage for non-EU SEE markets is becoming increasingly tenuous as cross-border mechanisms like CBAM and market coupling come into play. CBAM aims to align carbon costs at the borders by adjusting trade conditions based on carbon exposure; however, it operates conditionally—activated only during export scenarios—unlike the continuous nature of the ETS.
The interaction between ETS and CBAM creates a layered pricing environment where EU internal price formation is defined by ETS while CBAM selectively transfers these costs to non-EU exporters. As a result, non-EU SEE markets find themselves indirectly influenced by ETS pricing during export periods, despite not being formal participants in the system.
In early 2026, this interaction was highlighted when high hydrology conditions in SEE coincided with incomplete implementation of CBAM. This led to a temporary disconnect where non-EU prices fell significantly below those in EU markets. However, as market conditions stabilized, the influence of ETS pricing re-emerged. Even discounted SEE electricity faced competition from EU power priced according to CO₂-inclusive marginal costs, thereby reducing arbitrage opportunities.
From a generation perspective, the implications of ETS pricing are profound. In EU markets, high CO₂ prices diminish the competitiveness of lignite coal, making gas or renewable sources more attractive. Conversely, lignite remains economically viable in non-EU SEE markets due to its exemption from ETS costs. However, this advantage is increasingly at risk; any electricity flowing towards the EU becomes subject to ETS pricing mechanisms through market coupling or CBAM adjustments.
This situation creates a paradox: while lignite remains cheap domestically within non-EU SEE countries, its competitiveness diminishes significantly when engaging in cross-border trade with EU nations. This divergence complicates operational strategies for utilities such as Elektroprivreda Srbije (EPS) and Elektroprivreda BiH as they navigate domestic dispatch versus export economics.
Moreover, the influence of ETS extends into forward markets where power futures across Central Europe—including Hungary’s HUPX—are closely tied to expectations surrounding carbon pricing rather than solely fuel prices. Traders incorporate anticipated EUA (emissions allowance) prices alongside gas and coal spreads into their forward electricity pricing strategies.
As gas prices rise alongside overall market conditions influenced by CBAM distortions, the dual cost structure reinforces ETS’s role as a critical price multiplier rather than merely an isolated factor. The rising gas prices observed in 2026 helped mitigate some distortions caused by CBAM while maintaining economic viability for discounted SEE generation; however, underlying cost structures remain closely linked to ETS dynamics within EU markets.
Looking ahead, it is evident that ETS will play an even more significant role in shaping pricing dynamics across SEE as integration with European electricity markets deepens. Several trends are emerging: first is the gradual alignment of non-EU countries with EU regulatory frameworks through accession processes or market coupling that will enhance indirect exposure to CO₂ pricing; second is the ongoing expansion of renewable energy sources that will alter but not eliminate the influence of ETS; third is the anticipated full operationalization of CBAM which will further narrow distinctions between ETS and non-ETS markets.
Ultimately, it becomes clear that ETS transcends its role as a regulatory mechanism; it serves as the central economic anchor for European electricity markets. It governs marginal generation costs and shapes forward price curves while increasingly impacting cross-border trade dynamics. For SEE markets specifically, understanding how deeply they are intertwined with ETS—and through which channels this exposure manifests—will be crucial for navigating future energy landscapes.
