CBAM’s early impact on South-East Europe power markets: episodic distortions, not a lasting pricing overhaul

For investors watching South-East Europe’s electricity market, the early lesson from CBAM is less about permanent carbon pricing and more about short-lived disruptions to how power is priced and where it flows. In 2026, CBAM has started to act like a conditional friction point—reshaping outcomes during surplus export windows—while leaving the region’s broader import dependence largely intact.

CBAM changes the economics of exports—and where carbon exposure is measured

CBAM imposes a carbon-adjusted cost on electricity exports from non-EU countries into the European Union. The key detail is that the charge is not set by where electricity physically originates; instead, it depends on the EU entry point through which power crosses into the bloc. That means markets such as Serbia, Bosnia and Herzegovina, Montenegro, North Macedonia and Albania can face different carbon exposure depending on cross-border routing.

This rule effectively creates a pricing wedge between EU and non-EU electricity markets. By breaking the traditional arbitrage logic that had long governed cross-border flows in the region, CBAM can temporarily suppress conventional generation in non-EU systems when exports become less competitive.

First-quarter 2026: hydrology, demand softness, and administrative teething amplified CBAM effects

The most visible impact came in the first quarter of 2026, when several factors converged. Exceptionally strong hydrological conditions across SEE boosted low-cost hydro output at the same time as unseasonably warm weather reduced demand. At the same time, CBAM administrative systems—particularly those needed to verify carbon content and origin—were not fully operational.

The combination produced a sharp divergence in market outcomes. Non-EU SEE markets saw significant price suppression, while EU markets recorded marginally higher prices than would otherwise have been expected.

The divergence was reflected in persistent discounts in places such as Serbia and Bosnia. Electricity there traded at levels materially below Hungarian or Romanian benchmarks even when physical interconnection capacity remained available.

Asymmetric burden: non-EU exporters absorb losses while EU markets stay insulated

CBAM’s burden has been highly asymmetric. Non-EU systems that rely on exporting during surplus periods lost competitiveness directly because their export economics were hit by CBAM-adjusted costs. EU markets were comparatively insulated because they are structurally net importers or internally balanced systems.

The result has been downward pressure on non-EU prices without a corresponding tightening of EU supply—reinforcing SEE’s role as a price-taking periphery during constrained export hours.

Fast adaptation: rerouting flows toward Ukraine and Moldova reduces CBAM exposure

However, this imbalance did not persist unchallenged. Market participants identified ways to bypass CBAM exposure altogether by redirecting electricity flows toward Ukraine and Moldova—markets outside the CBAM regime. These transactions could still transit through EU infrastructure, including Hungary and Romania, without triggering carbon costs so long as the final destination remained outside the EU.

This rerouting had two effects at once: it helped SEE exporters recover part of their margin while also reducing demand for electricity on EU power exchanges because Ukraine and Moldova sourced more directly from SEE rather than from HUPX or OPCOM.

Hydrology determines when CBAM bites—and when it effectively disappears

The intensity of CBAM’s impact has tracked hydrological conditions closely. When water inflows are high—a scenario consistent with SEE’s hydro-heavy structure—the region shifts into export mode and becomes directly exposed to CBAM constraints. Under those conditions, non-EU prices can collapse as surplus generation struggles to find competitive outlets.

When hydrology normalizes or falls below average levels, SEE countries typically become net importers instead of exporters. In those periods there are few or no export flows subject to carbon adjustment, making CBAM effectively irrelevant for day-to-day pricing.

This points to a structural limitation: CBAM binds only when SEE systems are long on energy. It does not influence most operating hours when the region remains import-dependent.

Thermal generation response: short-term lignite curtailment that reverses quickly

An immediate operational consequence of early-2026 price depression was pressure on thermal plants—especially lignite-fired units—in Serbia, Bosnia and Montenegro. During that period, market prices fell below lignite marginal cost levels.

That triggered temporary reductions in coal output estimated at up to 500 MW during peak hydrological conditions. But this was not framed as structural decarbonization: lignite reserves were conserved with an expectation of redeployment once market conditions improved. As hydrology normalized in March, coal generation recovered quickly, with output only 200–300 MW below historical averages—suggesting any fuel-switching effect from CBAM-linked pricing distortions was transient.

Commodity backdrop matters: rising gas prices restore profitability for lignite

The longer-term influence of these dynamics is further limited by broader commodity markets. From March 2026 onward, natural gas prices rose and lifted wholesale electricity prices across the region. That increase restored profitability for lignite plants even under discounted SEE pricing, effectively neutralizing much of CBAM’s suppressive effect on thermal generation.

Trading behavior shifts within SEE—but overall structural footprint remains limited

CBAM has also begun to reshape trading behavior inside SEE itself as exports to the EU became less attractive. Participants increasingly turned inward by expanding cross-border trade among non-EU countries—creating early signs of a more regionalized power market partially decoupled from EU pricing dynamics during certain periods.

Still, historical data suggest CBAM does not affect baseline system operation broadly enough to be structurally transformative. In 2025, exports exceeding 500 MW occurred in roughly 12% of total hours—highlighting that surplus conditions are episodic rather than constant.

In other words, CBAM appears to distort marginal pricing periods rather than redefine overall equilibrium across most hours of operation.

Outlook for late 2026 into 2027: diminishing inefficiencies as frameworks mature

Looking ahead through 2026 and into 2027, expectations are that CBAM’s influence will fade further as administrative frameworks mature and traders incorporate carbon costs more fully into their strategies—reducing early inefficiencies seen in early 2026. Seasonal normalization of hydrology should also reduce how often SEE enters export mode under CBAM constraints.

Under those conditions, CBAM is likely to remain a situational constraint shaping specific hours and flows rather than a dominant driver of regional market trajectory.

The emerging picture is therefore one of economic significance without sustained structural change: CBAM introduces friction into cross-border electricity trade and temporarily alters dispatch decisions while leaving SEE’s underlying dependence on imports largely unchanged. For market participants—and for investors assessing policy risk—the key takeaway is that South-East Europe has shown an ability to reconfigure flows and preserve margins when faced with new constraints, often diluting how strongly policy signals translate into lasting decarbonization outcomes.