As the EU Carbon Border Adjustment Mechanism (CBAM) moves from policy design into operational reality, industrial firms are finding that carbon compliance is no longer confined to factory gates. For exporters selling into the EU, the carbon footprint of production increasingly hinges on the electricity used to make products. That shift is changing procurement strategies well beyond traditional power-market considerations, particularly for heavy industries with high electricity demand.
CBAM extends the logic of carbon pricing to imports by requiring companies to declare embedded emissions in covered goods and purchase CBAM certificates priced in line with EU Emissions Trading System (EU ETS) allowances. The EU ETS already applies a carbon price to installations inside EU member states, with allowance prices around €60–€80 per tonne of CO₂ during 2025–2026. For EU-bound exporters outside the ETS system, this effectively links trade competitiveness to how electricity is generated in their home markets.
Electricity becomes a compliance variable for CBAM-covered exports
CBAM’s impact on industrial competitiveness is particularly pronounced where electricity is a major driver of embedded emissions. Sectors highlighted in the regional analysis include aluminium, steel, chemicals, fertilisers and cement—industries that rely on electricity-intensive processes and therefore carry significant indirect emissions exposure. In practice, this means that two producers with similar production volumes can face different compliance burdens depending on their power mix.
Industrial producers located outside the EU ETS—such as those in Serbia, Bosnia and Herzegovina, Montenegro, North Macedonia and parts of Turkey—have historically benefited from electricity systems dominated by lignite generation without explicit carbon pricing. While such systems can offer lower headline power costs, they also bring high carbon intensity. Under CBAM, exporters using electricity from carbon-intensive grids may face additional carbon costs tied to the emissions embedded in their products.
The mechanism’s effect can be illustrated through Serbia’s generation profile. Coal-fired plants operated by Elektroprivreda Srbije (EPS) produce roughly 65%–70% of national electricity output, with most capacity concentrated at the Nikola Tesla A/B complex near Obrenovac and the Kostolac power plants. Lignite combustion at these facilities typically produces around 1 tonne of CO₂ per MWh, placing them among Europe’s most carbon-intensive generation assets.
At a carbon price of €70 per tonne, lignite-based electricity with an emissions intensity of 1 tonne CO₂/MWh implies an implicit carbon cost of €70/MWh. For electricity-intensive operations consuming hundreds of gigawatt-hours annually, that exposure can translate into substantial financial liabilities when embedded emissions are accounted for under CBAM. The regulatory relevance is therefore not abstract: it directly affects cost structures for export-oriented manufacturing.
Renewable PPAs and Guarantees of Origin move from strategy to necessity
In response to these incentives, the regional shift is toward renewable electricity sourcing as firms seek to reduce their carbon exposure linked to imported-product compliance. Large industrial consumers are increasingly pursuing long-term renewable power purchase agreements (PPAs), typically structured over 10–20 year durations with fixed or indexed price terms. The policy-market connection is straightforward: lower-carbon generation reduces embedded emissions associated with electricity consumption.
Renewable PPAs also address a second constraint created by market volatility. Since the energy crisis of 2021–2022, wholesale electricity prices across Europe have shown significant variability, increasing budget uncertainty for industrial buyers. Long-term contracts allow industrial consumers to hedge this volatility while aligning procurement with decarbonisation expectations that increasingly influence access to capital and supply-chain partnerships.
Beyond PPAs, companies are exploring Guarantees of Origin (GOs) mechanisms as another compliance-supporting instrument. GOs certify that electricity consumed originates from renewable generation sources even though they do not physically deliver renewable power to a specific facility. In CBAM-linked reporting contexts, this matters because exporters may need to demonstrate the carbon intensity of their electricity consumption to EU authorities.
That demonstration requirement raises the importance of measurement, reporting and verification frameworks capable of documenting emissions characteristics of electricity supply. Energy traders and aggregators are beginning to play a larger role by structuring renewable portfolios, managing price risk and facilitating cross-border power contracts between renewable producers and industrial consumers.
Sector pressure: aluminium and steel face high electricity intensity
The aluminium sector provides a clear example of why procurement decisions have become central under CBAM-linked incentives. Primary aluminium production requires enormous electricity consumption, often exceeding 14–15 MWh per tonne of aluminium produced. With electricity prices in the €70–€100/MWh range, energy costs can represent a large share of total production costs—meaning that both price and carbon intensity can materially affect export competitiveness.
If that electricity is generated from coal, associated carbon intensity can significantly increase embedded emissions in aluminium exports. Under CBAM logic tied to declared embedded emissions and certificate purchases aligned with EU ETS levels, this carbon intensity can translate into financial liabilities rather than remaining an environmental accounting issue. As a result, aluminium producers are increasingly prioritising access to low-carbon electricity.
A similar dynamic applies to steelmaking. Electric arc furnace (EAF) steelmaking relies heavily on electricity rather than coal-based blast furnaces; while EAF technology reduces direct emissions, the carbon intensity of the electricity used remains a critical determinant of overall emissions footprints. Steel producers exporting into the EU therefore face growing incentives to secure renewable electricity supply as part of their competitiveness strategy.
Regional renewable build-out changes supplier options—and trading models
Central and South-East Europe’s renewable expansion is creating new opportunities for industrial procurement at scale. Wind capacity has grown steadily over the past decade: Serbia hosts more than 500 MW installed wind capacity including Čibuk 1 (158 MW) and Kovačica (104 MW). Additional wind projects are under development, including new capacity expected from Serbia’s renewable energy auction framework.
Solar deployment is expanding even faster across South-East Europe, where several gigawatts of photovoltaic capacity are in development pipelines. Declining technology costs have made solar generation increasingly competitive even without extensive subsidy frameworks. For industrial consumers, these projects broaden the pool of potential suppliers for PPAs and other contractual arrangements designed to reduce embedded emissions exposure.
For energy traders operating across borders in Central and South-East Europe, CBAM adds further complexity to cross-border trading strategies built on price differentials between neighbouring markets. Transmission interconnectors enable arbitrage opportunities by moving power from lower-price markets to higher-price markets; however, carbon pricing mechanisms influence marginal generation costs that underpin those differentials.
When CBAM adjustments apply to imports from carbon-intensive systems, the effective price of imported electricity increases. Traders therefore need carbon cost modelling integrated into price forecasts and dispatch strategies alongside analysis of carbon intensity profiles, fuel price dynamics, renewable generation patterns and transmission constraints.
Generators and investors recalibrate portfolios under CBAM-linked economics
The combined effect of CBAM alongside EU ETS is reshaping investment logic for generators and infrastructure investors across Europe’s power system. Coal-fired power plants already operate under EU ETS cost structures: at allowance prices around €60–€80 per tonne CO₂, coal plants emitting roughly 1 tonne CO₂ per MWh face compliance costs approaching €70/MWh. This has already reduced coal generation competitiveness relative to gas, nuclear and renewables.
CBAM extends similar carbon-cost pressure to certain cross-border contexts involving imports originating outside EU ETS coverage. For generators in neighbouring countries—particularly in the Western Balkans—coal-based exports may face carbon adjustments when entering EU markets, reducing competitiveness through higher effective marginal costs. In Serbia’s case specifically, coal-fired generation accounts for roughly 65%–70% of national output with installed lignite capacity exceeding 4 GW.
If CBAM introduces adjustments equivalent to EU ETS prices, exporting lignite-based electricity could see effective marginal costs rise by €60–€80/MWh depending on prevailing carbon price levels. Such increases would reduce export margins and strengthen incentives for accelerated investment in lower-carbon technologies such as wind, solar and hydropower—generation types with negligible direct emissions that avoid both EU ETS-related costs and CBAM adjustments tied to embedded emissions.
Flexibility assets gain value as renewables expand
As renewables expand across Europe—where more than 70 GW of new renewable capacity was installed in 2023—electricity markets experience greater variability in supply relative to fossil-heavy systems. In Central and South-East Europe this transition remains uneven but is gaining momentum through auctions allocating more than 1 GW of new wind and solar capacity in Serbia through competitive bidding processes. Similar programmes are emerging across neighbouring countries seeking alignment with EU climate policy frameworks.
This variability increases the importance of energy storage assets for system stability as renewable output fluctuates between periods of surplus generation and peak demand needs. Battery storage and pumped-hydro systems help stabilise grids by absorbing excess generation during high-output periods and releasing power during demand peaks. Large storage projects across Europe are attracting investment as a result.
In the Western Balkans specifically, planned pumped-storage hydropower such as Bistrica—with potential capacity exceeding 600 MW—illustrates infrastructure needs associated with integrating higher shares of renewables into power systems dominated by legacy thermal generation profiles. For asset managers evaluating long-term investments under evolving carbon-cost conditions linked to CBAM and EU ETS interactions, flexibility-enhancing projects may become as valuable as new generation assets themselves.
Analytical synthesis: CBAM turns procurement choices into trade competitiveness
Taken together, CBAM’s requirement for declared embedded emissions priced against EU ETS levels makes electricity sourcing a direct determinant of export competitiveness for industries including cement, steel, aluminium, fertilisers and chemicals—and potentially hydrogen where production relies on high-power inputs under similar embedded-emissions logic. The regulatory signal is reinforced by EU ETS allowance prices around €60–€80 per tonne during 2025–2026 and by quantified implications such as an implicit €70/MWh carbon cost for lignite at 1 tonne CO₂/MWh when allowances trade near €70 per tonne.
The market response described across Central and South-East Europe is therefore not limited to corporate reporting: it drives long-term contracting toward renewables via PPAs over 10–20 years and supports verification pathways through Guarantees of Origin mechanisms where measurement quality matters for demonstrating carbon intensity to EU authorities. At the same time, generators and traders adjust strategies as coal-based assets face declining economics under combined EU ETS pressure and CBAM-linked adjustments affecting cross-border competitiveness.
Under this framework—and alongside broader European Green Deal decarbonisation expectations—the region’s ability to expand low-carbon generation while maintaining competitive power pricing becomes an industrial strategy rather than only an environmental objective. Exporters that integrate low-carbon electricity into production processes reduce exposure to carbon pricing mechanisms while strengthening positioning within European supply chains shaped by tightening emissions regulation economics.