While CBAM has drawn attention as a new cross-border mechanism, the underlying reality is that EU ETS (Emissions Trading System) CO₂ pricing remains the dominant structural driver of electricity price levels across Europe, including Hungary and, indirectly, South-East Europe (SEE). If CBAM creates distortions at the margins, ETS defines the baseline economics of power generation.
At its core, the EU ETS places a price on carbon emissions, forcing generators to internalize the cost of CO₂. For thermal power plants—particularly coal and gas—this translates directly into higher marginal production costs, which are then reflected in wholesale electricity prices.
In practical terms, the ETS establishes a floor for power prices in EU markets, especially in systems where fossil generation still plays a balancing role. Even when renewable output is high, the marginal unit during tight hours is often gas or coal, meaning CO₂ cost becomes embedded in forward curves and spot pricing.
The SEE region occupies a hybrid position in this framework. EU member states such as Hungary, Romania, Bulgaria, and Croatia are fully exposed to ETS pricing, while non-EU systems such as Serbia, Bosnia and Herzegovina, and Montenegro operate outside the ETS framework. This creates a structural divergence.
EU markets reflect:
- Full CO₂ cost pass-through
- Higher marginal cost of generation
- Elevated forward price expectations
Non-EU SEE markets, by contrast:
- Do not directly price CO₂
- Maintain lower marginal generation costs, particularly for lignite
- Appear structurally “cheaper” in pure generation terms
However, this apparent advantage is increasingly constrained—not by ETS directly, but by its interaction with cross-border mechanisms such as CBAM and market coupling.
The relationship between ETS and CBAM becomes critical in electricity markets. CBAM effectively attempts to mirror ETS costs at the border, translating carbon exposure into a trade adjustment. But unlike ETS, which operates continuously and predictably within EU markets, CBAM acts as a conditional overlay, activated only when exports occur.
This creates a layered pricing system:
- ETS defines internal EU price formation
- CBAM selectively transfers that cost to non-EU exporters
The consequence is that non-EU SEE markets are indirectly “pulled” toward ETS pricing levels during export periods, even though they are not formally part of the system.
In early 2026, this interaction became visible in a distorted way. During Q1, high hydrology in SEE combined with incomplete CBAM implementation created a temporary disconnect. Non-EU prices fell well below EU levels despite the ETS-driven cost base in neighboring markets.
But as market mechanisms normalized, the gravitational pull of ETS pricing reasserted itself. Even discounted SEE electricity—when exported—had to compete with EU power priced on CO₂-inclusive marginal cost, narrowing arbitrage opportunities.
From a generation perspective, ETS pricing plays a decisive role in fuel hierarchy. In EU markets, high CO₂ prices penalize lignite heavily, making gas or renewables more competitive. In non-EU SEE markets, lignite remains viable precisely because it avoids ETS costs.
Yet this advantage is increasingly fragile. Whenever electricity flows toward the EU, ETS pricing becomes unavoidable—either directly through market coupling or indirectly through CBAM adjustments. This creates a paradox:
- Lignite remains cheap domestically in non-EU SEE
- But loses competitiveness in cross-border trade
The result is a system where domestic dispatch and export economics diverge, complicating generation strategies for utilities such as EPS or Elektroprivreda BiH.
Another critical dimension is the influence of ETS on forward markets. Power futures in Hungary (HUPX) and across Central Europe are heavily anchored to CO₂ expectations, not just fuel prices. Traders price forward electricity based on anticipated:
- EUA (emissions allowance) prices
- Gas and coal spreads
- Regulatory tightening
This means that even when short-term spot prices are driven by grid constraints or hydrology, the forward curve reflects carbon pricing fundamentals.
The presentation highlights that absolute price levels are largely outside short-term forecasting control because they are driven by:
- CO₂ prices
- Regulatory shifts
Instead, traders focus on spreads (e.g. Hungary–Germany), but those spreads sit on top of an ETS-defined baseline.
The interaction between ETS and gas prices further amplifies its importance. When gas prices rise, the marginal cost of generation increases, but so does the CO₂ burden, since gas-fired plants still emit. This dual cost structure reinforces the role of ETS as a price multiplier, not just a standalone component.
In 2026, rising gas prices helped offset CBAM-induced distortions by lifting overall market prices, allowing even discounted SEE generation to remain economically viable. But the underlying driver remained ETS-linked cost structures in EU markets.
Looking forward, ETS is likely to become even more influential in SEE pricing dynamics, particularly as the region moves toward deeper integration with the European electricity market. Several trajectories are already visible.
First, the gradual alignment of non-EU countries with EU regulatory frameworks—whether through accession processes or market coupling—will increase indirect exposure to CO₂ pricing. Even without formal ETS participation, price convergence mechanisms will transmit carbon costs across borders.
Second, the expansion of renewable energy and battery storage will not eliminate ETS influence but reshape it. As solar and wind dominate daytime generation, the marginal unit—and therefore the CO₂ price signal—shifts into fewer, more volatile hours. This increases the price-setting intensity of ETS during scarcity periods, particularly in evening peaks.
Third, as CBAM becomes fully operational, the distinction between ETS and non-ETS markets will narrow further. CBAM effectively extends ETS logic beyond EU borders, meaning that over time, non-EU generators will face carbon-adjusted pricing indirectly in all export scenarios.
What becomes clear is that ETS is not just a regulatory instrument but the central economic anchor of European electricity markets. It determines the marginal cost of generation, shapes forward curves, and increasingly influences cross-border trade dynamics.
In contrast to CBAM—which acts as a visible but intermittent constraint—ETS operates continuously, embedding carbon cost into every megawatt-hour traded within the EU system. For SEE markets, the challenge is no longer whether they are exposed to ETS, but how deeply and through which channels that exposure materializes.
Elevated by ctxsee.eu