The Carbon Border Adjustment Mechanism represents a turning point in the relationship between climate policy and electricity markets. For decades, electricity price formation in Southeast Europe was primarily determined by fuel costs, hydrological conditions and demand fluctuations.
CBAM introduces a new structural driver: carbon cost differentials between neighboring electricity systems.
The consequences for power markets across Central and Southeast Europe could be profound.
Electricity markets in a carbon-priced Europe
The EU Emissions Trading System has already transformed the economics of electricity generation within the European Union.
Since its introduction in 2005, the EU ETS has gradually increased the cost of emitting carbon dioxide for power plants and industrial facilities.
Today the system covers roughly 40 % of EU greenhouse gas emissions, making it the largest carbon market in the world.
As carbon prices increased over the past decade, they became a key component of wholesale electricity prices.
Coal-fired power plants now face substantial carbon compliance costs, while renewable generation benefits from zero emissions costs.
CBAM extends the influence of the EU ETS beyond EU borders.
Imports of certain carbon-intensive goods — including electricity — must now account for their carbon content when entering the EU market.
The goal is to prevent carbon leakage, where production shifts to countries with weaker environmental regulations.
But in electricity markets, the policy has additional effects.
Cross-border electricity trade under CBAM
Electricity markets across Southeast Europe are interconnected through a network of transmission lines linking EU member states and Western Balkan countries.
These interconnections allow electricity to flow between markets depending on price signals.
Historically, electricity exports from the Western Balkans often moved toward EU markets when coal-based generation provided lower marginal costs.
However, CBAM introduces an implicit carbon cost to such exports.
Electricity imported into the EU from countries without carbon pricing must account for its embedded emissions.
This effectively raises the cost of carbon-intensive electricity imports.
For coal-based electricity with emissions intensity around 1 tonne of CO₂ per MWh, the carbon adjustment could add €60–€80 per MWh depending on EU ETS prices.
Such costs fundamentally change the economics of cross-border electricity trade.
A potential reversal of power flows
If carbon adjustments significantly increase the cost of coal-based electricity exports, the direction of power flows across Southeast Europe may gradually change.
Instead of exporting electricity to EU markets, some Western Balkan systems may increasingly rely on imports from lower-carbon generation sources within the EU.
These sources include nuclear power, hydropower and renewable generation.
For example, Romania and Bulgaria operate large nuclear power plants capable of producing significant volumes of low-carbon electricity.
Wind and solar capacity across the region is also expanding rapidly.
Electricity produced from these sources carries minimal carbon intensity and therefore avoids CBAM adjustments.
As a result, the carbon cost differential could shift the competitive balance between electricity systems.
Industrial demand and green electricity
Another factor shaping electricity markets under CBAM is the changing behavior of industrial consumers.
Export-oriented industries increasingly seek low-carbon electricity to reduce the carbon intensity of their products.
Industrial companies exporting to the EU may face carbon costs if their production processes rely on carbon-intensive electricity.
This creates strong incentives for renewable electricity procurement through long-term power purchase agreements.
Large industrial consumers across Europe are already signing renewable PPAs with durations of 10–20 years to secure stable electricity prices and low-carbon supply.
As this trend spreads to Southeast Europe, renewable electricity could gain additional value in regional markets.
The emergence of carbon-linked electricity pricing
Over time, CBAM may lead to a convergence between electricity prices and carbon intensity across the region.
Markets with higher emissions intensity may experience declining competitiveness in cross-border trade.
Markets with lower carbon intensity could see stronger export opportunities.
Electricity price formation would therefore reflect not only fuel costs and supply-demand balances but also the carbon characteristics of generation portfolios.
This transformation is already visible in trading strategies.
Electricity traders increasingly incorporate carbon price forecasts into their price models.
The value of transmission capacity between markets may also change as carbon price differentials create new trading opportunities.
A structural transformation of regional power markets
The integration of carbon pricing into cross-border electricity trade represents a structural transformation for Southeast European energy markets.
For decades, electricity flows in the region were driven primarily by engineering and fuel economics.
Today, climate policy is becoming a central determinant of market behavior.
The Carbon Border Adjustment Mechanism effectively extends the EU’s carbon pricing system into neighboring electricity markets.
This development accelerates the integration of carbon costs into electricity price formation across the region.
As CBAM moves from its transitional phase toward full financial implementation later in the decade, its influence on electricity trading, investment decisions and power market structure will continue to grow.
For electricity traders, the Western Balkans have become a laboratory of carbon-driven market dynamics.
For policymakers and energy companies, the same dynamics highlight the growing importance of aligning electricity systems with Europe’s low-carbon energy transition.
Elevated by cbam.engineer & virtu.energy
