The introduction of the Carbon Border Adjustment Mechanism (CBAM) into European electricity markets in 2026 has triggered a measurable but often misunderstood shift across South-East Europe (SEE). While widely framed as a carbon cost that would structurally increase prices, its immediate and most pronounced effect has been the reconfiguration of cross-border power flows, rather than a durable repricing of the regional market.
In practice, CBAM has created a dual-market structure within SEE, sharply differentiating EU-integrated markets such as Hungary and Romania from non-EU systems including Serbia, Bosnia and Herzegovina, and Montenegro. Electricity exported from these non-EU countries into the EU is now subject to an implicit carbon cost, effectively acting as an export fee tied to the generation mix of the exporting system.
This has had an immediate impact on price formation at the start of 2026. During the first quarter, non-EU SEE markets experienced significant price suppression, while EU markets cleared at a relative premium. The divergence was particularly visible in January and February, when non-EU prices fell below levels justified by underlying supply-demand conditions, largely because export routes into the EU became economically constrained.
The effect was amplified by two temporary factors. First, administrative procedures required to certify the origin of electricity flows under CBAM were not fully operational at the beginning of the year. This created inefficiencies and uncertainty, further discouraging exports from non-EU markets into the EU. Second, exceptionally strong hydrological conditions across the Western Balkans generated surplus electricity precisely at a moment when export pathways were restricted, deepening the oversupply and reinforcing downward price pressure.
Yet CBAM’s influence on absolute price levels remained asymmetric. While EU markets did register higher prices relative to a no-CBAM scenario, the increase was modest. This reflects a structural reality: non-EU SEE countries are rarely sustained exporters of electricity, with export surpluses typically limited to periods of high hydro generation. As a result, the volume of electricity exposed to CBAM remains relatively small on an annual basis, constraining its ability to drive prices across the broader European market.
Where CBAM has proven far more consequential is in its impact on trading behaviour and physical flows. Faced with reduced profitability of exports into the EU, market participants rapidly adapted by redirecting electricity toward alternative destinations not subject to the mechanism. In early 2026, a significant portion of surplus power from the Western Balkans was rerouted toward Ukraine and Moldova, often transiting through Hungary and Romania.
This redirection effectively established a new eastward corridor for SEE electricity, partially neutralising CBAM’s intended effect. Instead of constraining exports outright, the mechanism reshaped the geography of trade, shifting volumes away from EU markets while maintaining overall system balance. At the same time, it reduced the reliance of Ukraine and Moldova on EU hubs such as HUPX and OPCOM, indirectly easing pressure on those markets.
Within non-EU systems themselves, CBAM triggered a notable change in generation behaviour. With domestic prices suppressed during the first quarter, operators of lignite-fired plants—particularly in Serbia and Bosnia—chose to reduce output rather than dispatch generation into a low-price environment. This resulted in a temporary decline in fossil generation, with estimates suggesting reductions of several hundred megawatts relative to previous years during peak hydrological conditions.
However, this should not be interpreted as structural decarbonisation. The analysis indicates that lignite output was effectively deferred rather than displaced. As hydrological conditions normalised and prices recovered, stored fuel would be redeployed in later periods, limiting any long-term emissions impact. CBAM, in this sense, has not yet driven a sustained shift in the generation mix across SEE’s non-EU markets.
The temporal dimension of CBAM’s impact is equally important. Its strongest effects were concentrated in Q1 2026, when high hydro output coincided with administrative inefficiencies and constrained export channels. As conditions evolved into March and beyond, the influence of CBAM began to diminish. With hydrology returning to average levels and fossil generation resuming, the price gap between EU and non-EU markets narrowed.
Looking forward, the mechanism is expected to have minimal impact during the summer months, when non-EU SEE countries are typically net importers. In these periods, electricity flows predominantly from EU markets into the Western Balkans, meaning CBAM is not triggered. Even in export periods, improved administrative processes and established trading routes are likely to reduce the magnitude of early-year distortions.
An additional moderating factor has been the broader energy price environment. The rise in natural gas prices from March 2026 increased wholesale electricity prices across Europe, restoring profitability for lignite-fired generation in non-EU markets despite CBAM-related discounts. This reduced the incentive to curtail output and further weakened CBAM’s impact on generation decisions.
Taken together, these dynamics suggest that CBAM’s role in SEE electricity markets is best understood as a short-term distortion mechanism layered onto a fundamentally unchanged structural system. It introduces friction at the EU–non-EU interface, alters the direction of flows, and temporarily suppresses prices in exporting systems, but it does not fundamentally alter the region’s position within the European power balance.
For market participants, the key implication is that CBAM should not be treated as a primary driver of long-term price levels. Its influence is episodic, peaking in periods of surplus generation and declining when the region reverts to its typical import-dependent position. Instead, its importance lies in its interaction with hydrology, trading behaviour and cross-border infrastructure, where it can amplify existing imbalances or accelerate shifts in flow patterns.
The experience of early 2026 highlights both the power and the limitations of the mechanism. CBAM has demonstrated an ability to reshape market behaviour almost immediately, redirecting flows and altering dispatch decisions across multiple countries. At the same time, it has underscored the resilience of underlying structural factors—hydrology, generation mix and regional demand—which ultimately determine whether these distortions persist or fade.
As implementation matures and administrative systems stabilise, CBAM is likely to become a more predictable element of the market landscape. Yet its core characteristic will remain unchanged: it is not a blunt instrument for raising prices, but a targeted intervention that reshapes incentives at the margins, with effects that are highly contingent on broader system conditions.