The implementation of the Carbon Border Adjustment Mechanism (CBAM) is reshaping the competitive landscape of electricity markets in Southeast Europe, creating a pronounced divide between low-carbon and coal-based power systems. This shift is not gradual; it is immediate and measurable, with significant implications for cross-border trade dynamics. The first quarter of 2026 marks a pivotal moment where the effects of CBAM are becoming evident, influencing trading behaviors and price structures across the region.
Central to this transformation are the default emission factors that determine carbon costs for electricity imports into the European Union. These factors, which quantify carbon intensity in tonnes of CO₂ per megawatt-hour, simplify the complexities of various generation mixes. In Q1 2026, stark cost differentials emerged: Albania reported a CBAM cost of €0/MWh due to its hydro-centric generation, while Serbia faced approximately €78.45/MWh, Bosnia and Herzegovina €86.5/MWh, and Montenegro around €73.8/MWh. Such discrepancies have the potential to dramatically alter the economics of regional electricity trade.
This divergence has led to a clear bifurcation in competitiveness within the region. Low-carbon systems, particularly those reliant on hydroelectric power, gain an advantage that extends beyond their already low operational costs. They can export electricity to EU markets without incurring additional carbon charges, positioning them as preferred suppliers in a CBAM-regulated environment. Conversely, coal-dependent systems are subjected to higher carbon costs that often negate any price advantages they might have had in traditional market conditions.
The contrasting export performances of Albania and Montenegro further illustrate this trend. Both benefited from robust hydro output in early 2026, which lowered domestic prices; however, Albania’s exports surged due to its zero emission factor. In contrast, Montenegro’s exports declined despite favorable price spreads with Italy—where the differential reached around €43/MWh—because the CBAM costs diminished its competitive edge. This situation highlights how CBAM can disrupt conventional market signals.
The implications for coal-reliant countries like Serbia, Bosnia and Herzegovina, and Montenegro are significant. Historically dependent on thermal generation for domestic supply and export capacity, these nations now face challenges as CBAM imposes costs based on carbon intensity rather than operational efficiency. This shift threatens to undermine the viability of existing coal assets and introduces uncertainty regarding their future utilization.
Moreover, this evolving landscape affects investment signals across the region. While CBAM aims to incentivize decarbonization by making carbon-intensive production less competitive, its uneven effects complicate matters. Low-carbon systems receive immediate benefits that enhance investment attractiveness in renewable technologies such as hydro, wind, and solar. In contrast, coal-heavy systems confront a more convoluted set of incentives that do not clearly facilitate a transition towards sustainability.
This asymmetry may inadvertently stifle overall investment in new renewable capacities as market participants adopt a cautious approach amid uncertainty surrounding future carbon pricing and regulatory changes. The risk is that existing coal assets face penalties without sufficient mobilization of replacement investments.
Additionally, CBAM’s impact on regional market integration cannot be overlooked. As Southeast European countries align their energy markets with EU standards, cross-border trade remains crucial for integration. However, CBAM introduces friction by treating markets differently based on their carbon intensity profiles. This divergence could lead to fragmented sub-markets within the region with varying levels of competitiveness.
The reconfiguration of trade flows is already apparent as traders seek to minimize exposure to CBAM costs by favoring lower-emission sources. This trend has enhanced Albania’s role as a transit hub while diminishing the attractiveness of traditional routes through coal-heavy systems. Consequently, trade activity is increasingly reflecting carbon intensity rather than geographical or infrastructural considerations.
From a pricing standpoint, this divergence adds complexity to market dynamics. Prices in low-carbon systems are primarily driven by supply conditions such as hydrology and renewable output, whereas coal-heavy systems find their pricing increasingly constrained by limited export capabilities. This disparity can result in low-carbon systems enjoying both competitive domestic prices and access to lucrative export markets while coal-based systems grapple with suppressed domestic prices.
The interplay between CBAM and the EU Emissions Trading System (ETS) further exacerbates these challenges. As CBAM costs correlate directly with carbon prices, any increase in EU ETS allowances disproportionately impacts coal-heavy exporters. In Q1 2026, a carbon price of €75.36/tCO₂ imposed significant burdens on these systems; projections suggest that rising prices could widen the gap between low-carbon and high-carbon systems even further.
The rigidity introduced by default emission factors complicates matters further since they apply uniformly at the national level without accounting for variations in generation mix over time. Even if a coal-heavy system relies on low-carbon generation during certain periods, it still incurs the same CBAM costs—creating disconnects between actual emissions and applied costs that distort investment decisions.
Policymakers now face the challenge of balancing decarbonization goals with market integration objectives. While CBAM serves as a tool for aligning carbon costs across borders, its implementation reveals difficulties in applying a uniform approach to diverse energy systems. More nuanced measures recognizing actual emissions could alleviate some observed distortions while aligning carbon pricing frameworks across the Western Balkans with EU ETS standards may help mitigate current asymmetries.
Looking forward, unless substantial changes occur in market design or generation portfolios, the divide between low-carbon and coal-based power systems is poised to deepen further. Electricity trade economics will increasingly favor those demonstrating low emission intensity through renewable generation or advanced technologies like carbon capture. Coal-dependent systems must either reduce their carbon footprints or concentrate efforts on domestic markets where CBAM does not apply.
The developments observed in Q1 2026 underscore a critical shift: competitiveness in Southeast Europe’s electricity markets is now intricately linked not just to cost efficiency but also to carbon intensity and regulatory frameworks governing it. As this transformation unfolds, it will redefine trade flows and investment decisions across the region’s energy landscape.
