EU ETS CO₂ pricing remains the baseline for power prices across Hungary and South-East Europe

CBAM may be the headline-grabber for cross-border trade, but the structural driver behind European power prices remains EU ETS CO₂ pricing. For Hungary—and indirectly for South-East Europe (SEE)—ETS defines the baseline economics of generation by forcing thermal plants to internalize carbon costs, which then flow through to wholesale markets and forward curves.

At its core, the EU Emissions Trading System places a price on carbon emissions. That requirement raises marginal production costs for thermal generators, especially coal and gas, because CO₂ expenses become part of the cost of producing each additional megawatt-hour. In practice, this creates a pricing floor in EU power markets: even when renewables are abundant, the marginal unit during tight hours is often gas or coal, so ETS cost becomes embedded in both spot pricing and forward expectations.

ETS exposure diverges between EU and non-EU SEE markets

The SEE region sits in a hybrid position. EU member states including Hungary, Romania, Bulgaria and Croatia are fully exposed to ETS pricing. Non-EU systems such as Serbia, Bosnia and Herzegovina and Montenegro operate outside the ETS framework—meaning they do not directly price CO₂. As a result, these non-EU markets can appear structurally “cheaper” on pure generation economics, particularly where lignite remains viable because it avoids ETS costs.

However, that apparent advantage is increasingly constrained by how carbon costs interact with cross-border mechanisms—most notably CBAM—and with market coupling. The relationship between ETS and CBAM becomes critical because CBAM is designed to mirror ETS-related costs at the border when exports occur. Unlike ETS, which operates continuously within EU markets, CBAM functions as a conditional overlay: it activates only when exports take place.

CBAM can pull non-ETS prices toward ETS levels during exports

This layered structure means that while ETS anchors internal EU price formation, CBAM selectively transfers carbon exposure to non-EU exporters during export periods. The consequence is an indirect “gravitational pull” toward ETS pricing levels for non-EU SEE electricity when it competes in cross-border trade.

That dynamic was visible in early 2026. 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. As mechanisms normalized, the pull of ETS reasserted itself—so even discounted SEE electricity faced competition against EU power priced on CO₂-inclusive marginal costs, narrowing arbitrage opportunities.

Carbon costs shape fuel hierarchy—and complicate dispatch economics

From a generation perspective, ETS influences fuel hierarchy differently across regions. In EU markets, higher CO₂ prices penalize lignite heavily, making gas or renewables more competitive. In non-EU SEE markets lignite can remain viable precisely because it avoids direct ETS charges.

Yet this advantage becomes fragile whenever electricity flows toward the EU. Because cross-border trade ties outcomes back to either market coupling or CBAM adjustments, domestic dispatch economics can diverge from export economics—creating a paradox where lignite stays cheap at home but loses competitiveness in cross-border sales. For utilities such as EPS or Elektroprivreda BiH, that divergence complicates generation strategies by separating what is economical domestically from what can clear in export-oriented trading windows.

Forward curves in Hungary reflect EUA expectations as well as fuels

ETS also matters beyond short-term spot moves through its influence on forward markets. Power futures in Hungary (HUPX) and across Central Europe are described as being anchored to CO₂ expectations—not only fuel prices. Traders incorporate anticipated EUA (emissions allowance) prices alongside gas and coal spreads and regulatory tightening into how they price forward electricity.

This helps explain why absolute price levels are largely outside short-term forecasting control: they are driven by CO₂ prices and regulatory shifts rather than by grid constraints or hydrology alone. While traders may focus on spreads—for example Hungary–Germany—those spreads still sit on top of an ETS-defined baseline.

Rising gas prices reinforce ETS as a “price multiplier”

The interaction between ETS and gas further amplifies its importance. When gas prices rise, marginal generation costs increase; at the same time gas-fired plants still emit CO₂, so the carbon burden rises too. The combined effect reinforces ETS’s role as more than just one component of power pricing—it acts like a multiplier on underlying fuel-driven marginal costs.

In 2026 specifically, rising gas prices helped offset distortions linked to CBAM by lifting overall market prices enough for even discounted SEE generation to remain economically viable. Still, the underlying driver remained tied to ETS-linked cost structures in EU markets rather than to hydrology alone.

What investors should watch next: deeper integration and shifting scarcity hours

Looking ahead, the article argues that ETS influence is likely to grow within SEE pricing dynamics as integration with Europe deepens. Several trajectories are already visible:

First, gradual alignment of non-EU countries with EU regulatory frameworks—through accession processes or market coupling—could increase indirect exposure to CO₂ pricing via convergence mechanisms that transmit carbon costs across borders.

Second, expanding renewables and battery storage may not eliminate ETS influence but will reshape when it matters most. As solar and wind dominate daytime output, fewer—and more volatile—hours will set marginal prices. That increases how intensely the CO₂ signal shows up during scarcity periods such as evening peaks.

Third, full operationalization of CBAM would narrow distinctions between ETS-linked EU pricing and non-ETS pricing outside the bloc by extending carbon-adjusted logic beyond EU borders into export scenarios over time.

The bottom line is that while CBAM may look like an intermittent constraint at the edges of Europe’s power system, ETS operates continuously inside it—embedding carbon cost into every megawatt-hour traded within the EU framework. For SEE markets outside formal participation in the system today, the challenge therefore shifts from whether they are exposed to how deeply that exposure transmits through coupling rules and border adjustments during exports.