As the EU Carbon Border Adjustment Mechanism moves from design into measurable market effects, electricity trade in Southeast Europe is showing a structural split that goes beyond short-term price spreads. In the first quarter of 2026, the carbon cost attached to imported power began to act as a competitiveness filter, separating low-carbon generation portfolios from coal-heavy systems on a consistent basis. The result is a new compliance-driven hierarchy for cross-border electricity flows into the EU.
Default emission factors create immediate cost gaps
The mechanism’s impact is anchored in default emission factors used to calculate the carbon cost for electricity imports into the EU. These factors, expressed in tonnes of CO₂ per megawatt-hour, are intended to approximate the carbon intensity of exporting systems. Because they apply a simplified representation of complex generation mixes, they can produce large and immediate differentials between countries.
In Q1 2026, the CBAM cost applied to electricity imports differed sharply across the region: Albania recorded €0/MWh, while Serbia was at approximately €78.45/MWh, Bosnia and Herzegovina at €86.5/MWh, and Montenegro around €73.8/MWh. Such magnitudes are not incremental adjustments; they directly alter the economics of cross-border sales by adding a carbon charge that tracks system classification rather than marginal dispatch.
Low-carbon systems gain structural export advantage
This design translates into a bifurcation of regional competitiveness. Low-carbon systems—especially those dominated by hydro—can export into EU markets without incurring additional CBAM-related carbon charges beyond what their default factor implies. Coal-heavy systems face a dual penalty: higher emission intensity reflected in the default factor and an added carbon cost that can outweigh market price differentials.
The divergence was visible even when domestic conditions were broadly supportive. Both Albania and Montenegro benefited from strong hydro output in Q1 2026, which supported lower domestic prices; however, their export outcomes diverged. Albania increased exports across multiple borders by leveraging both surplus generation and its zero emission factor, while Montenegro saw exports decline despite favourable price spreads with Italy reaching approximately €43/MWh.
Coal-dependent exporters face revenue compression and utilisation risk
For coal-dependent power systems, the compliance burden changes how existing thermal fleets perform economically in cross-border trade. Serbia, Bosnia and Herzegovina, and Montenegro have historically relied on thermal generation to supply domestic demand and provide export capacity. Under CBAM calculations for electricity imports, these assets are assessed through carbon intensity rather than operational efficiency, reducing competitiveness even when production costs are relatively low.
The implications extend beyond export volumes into the economic lifecycle of coal-based generation. As access to higher-priced markets becomes constrained by CBAM-related costs, revenues can fall while cross-border transactions require accounting for carbon pricing effects. Over time, this can translate into lower capacity utilisation, reduced cash flow, and reassessment of asset value for utilities and investors.
Investment signals may weaken during transition
CBAM is intended to incentivise decarbonisation by making carbon-intensive production less competitive at the border. Yet the signals can be uneven across power portfolios: low-carbon systems receive an immediate advantage that reinforces investment attractiveness in hydro, wind, and solar generation. Coal-heavy systems face higher carbon costs but may not receive a clear pathway for transition where capital access, regulatory readiness, and grid infrastructure constraints limit project delivery.
This asymmetry can contribute to a wait-and-see posture among market participants. Uncertainty around future carbon costs and regulatory refinements can deter long-term commitments for large-scale projects that require stable revenue expectations. In this sense, CBAM may produce a transitional gap where existing assets are penalised before replacement investment is fully mobilised.
Trade flows and regional integration become carbon-conditioned
The mechanism also introduces friction into Western Balkans efforts to align energy markets with those of the EU. Cross-border trade has been a key integration channel; under CBAM logic, differential treatment based on carbon intensity can pull low-carbon-aligned markets closer while pushing coal-reliant systems further away. This creates risk of fragmentation into sub-markets with different levels of integration and competitiveness.
Market behaviour reflects this compliance pressure through reconfigured trade routes described as “CBAM-efficient” corridors—where electricity sourcing or routing favours lower emission intensity pathways. Albania’s role as a transit and export hub expanded accordingly, while traditional transit routes through coal-heavy systems became less attractive. The net effect is a redistribution of trade activity driven as much by carbon intensity as by geography or infrastructure.
EU ETS link amplifies differences as allowance prices move
CBAM costs for electricity are directly linked to EU ETS carbon prices, which means movements in allowance values can widen or narrow competitiveness gaps between low- and high-carbon exporters. In Q1 2026, the carbon price was €75.36/tCO₂, already imposing significant costs on coal-heavy exporters under CBAM calculations for electricity imports. If EU ETS allowances rise further—as long-term projections often suggest—the relative disadvantage for higher-emission portfolios would increase.
Default emission factors add rigidity because they are applied uniformly at country level rather than reflecting changes in generation mix over time. Even if a coal-heavy system temporarily relies on lower-emission generation during periods such as high hydro output, it still faces the same CBAM cost under its default factor classification. This disconnect between applied costs and actual emissions can discourage efficient dispatch patterns and distort investment decisions.
Policy implications across CBAM-covered sectors
While this evidence focuses on electricity import competitiveness under CBAM calculations using default factors, the compliance logic matters across other covered industrial sectors under the broader CBAM framework: cement, steel, aluminium, fertilisers, electricity, and hydrogen. For importers arranging cross-border supply chains into the EU market, these sectoral coverage areas raise the importance of documentation quality and emissions accounting approaches aligned with EU ETS-linked pricing signals.
For policymakers seeking to reconcile decarbonisation objectives with market integration goals, current implementation highlights challenges in applying uniform border rules to diverse energy systems. More granular recognition of actual emissions—such as plant-level reporting or certification of low-carbon generation—could mitigate some distortions observed in electricity flows. In parallel, aligning carbon pricing frameworks across the Western Balkans with EU ETS structures could reduce asymmetry that currently drives divergence.
Analytical synthesis: compliance-driven hierarchy is emerging
The first quarter of 2026 indicates that competitiveness in Southeast Europe’s electricity markets is no longer determined solely by cost efficiency or resource availability; it is increasingly tied to carbon intensity as operationalised through CBAM default factors and linked EU ETS pricing dynamics. Low-carbon portfolios gained structural advantages through lower or zero applied CBAM costs such as Albania’s €0/MWh outcome in Q1 2026, while coal-heavy systems faced higher applied costs including Serbia’s approximately €78.45/MWh and Bosnia and Herzegovina’s €86.5/MWh levels.
Because these effects are embedded directly into cross-border trade economics—through default emission factor application that does not adjust for short-term generation shifts—the competitive order is likely to deepen unless market design changes or generation portfolios evolve materially. The measured divergence observed in Q1 2026 therefore functions as an early indicator of how CBAM compliance requirements can reshape trade flows, revenue potential, and investment incentives across both power exporters and EU-facing importers operating under the European Green Deal framework.