Regulatory implementation of the EU Carbon Border Adjustment Mechanism is increasingly visible not only in industrial supply chains, but also in how electricity is priced and traded across borders. In Serbia, the first quarter of 2026 has produced a clear signal that carbon-linked compliance costs are breaking the traditional link between regional price gaps and export decisions. The result is a market moving from arbitrage-led cross-border participation toward a more domestically anchored operating model.
Price decoupling and export compression
Serbia’s day-ahead pricing in Q1 2026 averaged €94.7/MWh, while neighbouring EU benchmarks were clustered at €120–130/MWh. In earlier conditions, a spread above €30/MWh would typically have supported stronger export flows toward markets including Hungary, Croatia and Romania. Instead, the spread persisted through the quarter without translating into sustained arbitrage activity.
The mechanism behind the shift is the carbon adjustment embedded in CBAM calculations for electricity exports. A default emission factor of 1.041 tCO2/MWh implies an import adjustment cost of approximately €78.45/MWh. That carbon-linked cost effectively raises the export price into a carbon-adjusted level that approaches or can exceed EU market prices, compressing margins to near zero or negative territory even when headline generation prices look favourable.
Liquidity changes on SEEPEX and localised price formation
Market behaviour is also showing up in trading volumes on SEEPEX, described as the largest power exchange in the Western Balkans. In Q1 2026, traded volumes fell by about 11%, diverging from growth patterns seen in hydro-dominated markets such as Albania and Montenegro. The contraction points to weaker transit-based trading strategies that previously relied on Serbia’s geographic position and relative price competitiveness.
With liquidity shifting away from Serbia, price formation becomes less influenced by regional dynamics and cross-border arbitrage and more driven by domestic supply conditions. Strong hydro output across the region suppressed prices in Western Balkans markets without producing a corresponding increase in exports from Serbia. This combination reinforces a localisation effect that reduces the ability of cross-border trade to act as a stabilising reference for prices.
Coal dependence meets carbon-adjusted competitiveness
Serbia’s generation mix remains central to its CBAM exposure profile. Coal output in Q1 2026 was 5.47 TWh, down from 6.08 TWh in the same period of 2025, reflecting both lower thermal demand linked to strong hydro availability and coal displacement in the merit order. Even with reduced coal generation, structural reliance on coal continues to define the carbon intensity of electricity supplied for export.
This creates a tension between domestic competitiveness and external constraints. Marginal generation costs can remain relatively low inside Serbia, but carbon adjustments apply when electricity is exported into EU-linked compliance contexts. The outcome is a system that can perform within domestic pricing conditions while becoming commercially constrained externally, limiting monetisation of surplus generation in higher-priced markets.
Physical flows persist while commercial value falls
Despite weaker export incentives, physical electricity flows continue through Serbia as part of the south–north corridor connecting Greece, the Western Balkans and Central Europe. However, divergence between commercial schedules and physical network flows means Serbia’s transit role is not fully reflected in trading activity. Electricity can pass through the system without generating equivalent commercial value for traders relying on arbitrage economics.
Operationally, this divergence can increase management complexity through unscheduled or loop flows driven by network conditions rather than trade intent. Transmission system operators must balance flows that do not align with scheduled trades, raising balancing costs and increasing congestion risk. Over time, these pressures could feed into higher network tariffs and additional system costs.
Carbon price volatility adds financial risk
The interaction between CBAM-linked electricity adjustments and EU ETS market dynamics further complicates planning for utilities and traders. Carbon prices averaged €75.36/tCO2 in Q1 2026 and showed volatility during the quarter, tying export economics to changing carbon market conditions rather than electricity pricing alone. That linkage introduces additional financial exposure that must be managed alongside electricity price fluctuations.
For industry participants preparing compliance strategies across sectors covered by CBAM—including cement, steel, aluminium, fertilisers, electricity and hydrogen—the lesson is that carbon-cost pass-through can alter trade incentives even when generation or production costs appear competitive at origin. In practice, compliance-driven cost components can dominate cross-border decision-making more quickly than physical capacity or headline price spreads would suggest.
Broader compliance and industry implications
The Q1 2026 evidence points to structural repositioning rather than a temporary adjustment: export compression alongside price decoupling and shifting liquidity patterns indicates a departure from earlier arbitrage-based market behaviour. For investors and operators, signals are mixed—coal-based generation faces a disadvantage under carbon-adjusted economics, while renewable investment prospects depend on market access and long-term contracting capacity that may be weakened if cross-border trade remains constrained.
Across Europe’s Green Deal implementation environment—where emissions trading continues to shape marginal costs—Serbia’s experience illustrates how CBAM can change not only importer/exporter calculations but also regional grid economics through reduced commercial utilisation of interconnection capacity. As CBAM continues to evolve alongside ETS-linked pricing signals, compliance planning for both exporters seeking market access and EU producers seeking competitive parity will increasingly hinge on how carbon intensity translates into tradable cost under real-time market conditions.