CBAM upends arbitrage across Southeast Europe’s power borders, reshaping trade and investment incentives

For much of the past decade, Southeast Europe’s electricity markets have leaned on a relatively simple commercial premise: differences in generation costs between the Western Balkans and neighbouring EU zones created persistent spreads that could be monetised through cross-border exports. That model is now being dismantled as the EU’s Carbon Border Adjustment Mechanism (CBAM) moves into its definitive phase at the start of 2026, altering the economics of trading in ways that directly challenge arbitrage-based strategies.

CBAM turns widening price spreads into weaker—or negative—trade incentives

CBAM imposes a carbon cost on electricity imports into the EU, calculated using default emission factors and tied directly to the EU Emissions Trading System (EU ETS). In Q1 2026, the relevant carbon price averaged €75.36 per tonne of CO₂. For electricity originating from coal-dominated systems in the Western Balkans, this translated into effective import costs of roughly €70–86/MWh.

The key market implication is that these additional costs do not just compress margins; they can eliminate them. The shift is visible in how physical flows respond to price signals. In a traditional arbitrage environment, a widening spread between two markets would typically lead to increased cross-border trade until the spread narrows. In Q1 2026, however, price differentials between Western Balkan markets and neighbouring EU zones widened—often beyond €30/MWh and sometimes over €40/MWh—while cross-border flows declined. The disconnect between spreads and trading behaviour is becoming a defining feature of the new reality.

Montenegro–Italy illustrates how carbon costs absorb the “opportunity”

The Montenegro–Italy corridor provides a clear example. Southern Italy recorded some of the highest day-ahead prices in the region, averaging above €130/MWh, while Montenegro’s prices hovered closer to €85/MWh. Under earlier conditions, a spread of about €43/MWh would have supported strong export flows from Montenegro to Italy via the submarine interconnector.

Instead, both scheduled and physical flows declined. The explanation offered is not capacity or demand constraints but CBAM-related cost absorption. With Montenegro’s default emission factor implying a carbon cost of approximately €73–74/MWh, what appears to be an arbitrage opportunity is effectively neutralised once CBAM is applied.

Beyond one corridor: regulatory uncertainty and compliance risk compound the problem

This pattern is not limited to Montenegro and Italy. On the Serbia–Hungary border—historically one of Southeast Europe’s most active trading interfaces—the spread was around €31/MWh in Q1 2026. Yet it did not produce the expected increase in Serbian exports to Hungary.

Here too, CBAM-related costs are cited as part of the explanation, alongside regulatory uncertainty about compliance and reporting requirements. Together, these factors reduce the economic attractiveness of cross-border trades even when price differentials look supportive on paper.

Traders adjust risk: less forward exposure despite continued capacity booking

The erosion of straightforward arbitrage also changes how traders structure their strategies. Traditional arbitrage depends on capturing predictable spreads between markets; with CBAM introducing policy-driven cost adjustments linked to carbon prices—and with implementation details still carrying uncertainty—the risk profile shifts materially.

Rather than focusing only on market variables such as fuel costs, demand patterns or weather conditions, participants must now incorporate regulatory risk and carbon price volatility into decision-making.

That increased complexity has already shown up in behaviour around cross-border capacity auctions. Evidence suggests participants reduced exposure to forward commitments even before CBAM entered into force: yearly auction prices for interconnection capacity fell by as much as 24–67% on key corridors. Daily allocation rates remained high—often above 95%—indicating that capacity continues to be booked, but at lower expected value.

Exchanges diverge: generation-led liquidity rises while transit trading weakens

The transformation can also be seen in regional power exchange activity. Total traded volumes across the Western Balkans rose modestly year-on-year from 2.16 TWh to 2.39 TWh, but exchange-level results diverged sharply.

Markets with strong domestic generation—especially hydro-rich systems—recorded substantial growth: Albania’s ALPEX saw volumes roughly double and Montenegro’s MEPX increased by 49%. By contrast, Serbia’s SEEPEX—described as historically functioning as a hub for transit-based trading—saw volumes decline by 11%. The divergence points to a broader shift away from arbitrage-driven liquidity toward activity anchored more directly in local generation profiles.

Transit routes lose appeal as CBAM complicates “through” trades

The decline in transit trading is particularly significant because it affects how Southeast Europe has served as a corridor for electricity moving between EU markets—for example flows that might move from Hungary through Serbia into Bulgaria by exploiting price differentials along the way.

With CBAM introducing uncertainty about how transit flows are treated—even when electricity originates outside one jurisdiction but is ultimately consumed within another—the economics of such routes become less attractive. Traders have begun avoiding transit paths involving Western Balkans countries, favouring routes that remain entirely within the EU or involve low-emission systems.

Interconnectors’ financial role weakens as auction revenues reset

The erosion of arbitrage also affects interconnectors as financial assets rather than just physical links. In liberalised markets, interconnectors can generate value through congestion rents and through capturing price differentials; this is reflected in what participants are willing to pay for capacity rights at auctions.

The decline in forward auction prices observed at end-2025 suggests market participants had already started reassessing interconnector revenue potential under CBAM conditions. That matters for future investment decisions—particularly for projects relying on merchant revenue models or congestion-rent assumptions.

System effects: less flexibility could raise costs over time

From a system perspective, reduced reliance on cross-border arbitrage can introduce new challenges. Cross-border flows have helped balance supply and demand across regions—smoothing volatility and supporting security of supply when constraints are not binding physically but economically discouraging trade becomes relevant instead.

If flows are curtailed by policy-linked cost structures rather than physical limitations, markets become more dependent on domestic generation options that may not always be efficient or cost-effective. Over time, this could translate into higher overall system costs and reduced resilience during shocks.

Carbon-price linkage adds volatility to power trading decisions

The interaction between CBAM and EU ETS further complicates forecasting because CBAM costs move with carbon prices. In Q1 2026, EU ETS prices declined sharply after an initial increase following political discussions about potential reforms—volatility that feeds directly into electricity trading economics for imports from non-EU systems where CBAM applies.

Traders therefore face both power-price risk and carbon-price risk simultaneously, effectively tightening connections between two markets that were previously more loosely linked from an operational standpoint.

Coal-heavy exporters face an immediate disadvantage; hydro-rich systems gain—but hydrology remains uncertain

The implications for coal-dependent Western Balkan systems are described as particularly stark: these markets have historically relied on their cost advantage to remain competitive in regional trade. CBAM erodes that advantage by attaching carbon costs reflecting higher emission intensity—creating a transitional challenge because investments in cleaner generation or emissions reduction take time while CBAM impacts are immediate.

At the same time, low-carbon systems gain relative advantage. Albania is highlighted as having a default emission factor effectively equal to zero, enabling exports without incurring CBAM costs under those assumptions. This creates incentives for traders to source power from such systems; however, competitiveness depends on hydrological conditions which can vary significantly year-to-year.

A new equilibrium will depend on policy clarity—and alignment with EU carbon pricing

Looking ahead, whether cross-border power trading stabilises will depend on how market participants adapt and how policymakers refine CBAM’s framework. The article points to several variables that could influence outcomes: clearer treatment of transit flows; potential adjustments to default emission factors; mechanisms for recognising actual generation characteristics; and development of regional carbon pricing mechanisms aligned with EU ETS that could reduce asymmetries between EU and non-EU markets.

What is already evident is that straightforward cross-border arbitrage is giving way to something more conditional and policy-driven. Arbitrage has not disappeared entirely—but it has become more complex and more tightly bound to regulatory dynamics at precisely the moment when Southeast Europe has relied heavily on cross-border trading for integration gains and efficiency improvements.