Serbia’s export-oriented heavy industry is entering a new economic reality as European carbon border measures begin to affect trade flows between the Western Balkans and the European Union. Early data from 2026 suggest that the introduction of the EU’s Carbon Border Adjustment Mechanism (CBAM) is already eroding the competitiveness of energy-intensive Serbian exporters and altering electricity trade patterns across Southeast Europe.
According to industry representatives and corporate disclosures, exports from Serbia’s energy-intensive sectors to the EU have fallen by nearly 30 percent since the beginning of 2026, reflecting the cost impact of the EU’s carbon border system on companies producing steel, aluminium, cement and other carbon-intensive materials.
The new policy has also had immediate implications for electricity trading. Serbia’s state-owned utility Elektroprivreda Srbije (EPS) confirmed that it has not exported any electricity to the European Union since 1 January 2026, a stark change from previous years when cross-border electricity exports formed a modest but symbolically important part of regional power trading flows.
The early effects of CBAM highlight a broader transformation underway across Europe’s industrial landscape. Designed as a climate policy instrument, the mechanism aims to equalise carbon costs between EU producers subject to the EU Emissions Trading System and foreign producers operating under weaker climate regulations. In practice, however, the policy is reshaping trade flows across Europe’s industrial periphery.
For Serbia—an EU candidate country with deep economic ties to the European single market—the implications are particularly significant.
The EU accounts for roughly two-thirds of Serbia’s total exports, making the bloc by far the country’s largest trading partner. Many of Serbia’s most important export sectors are energy-intensive industries that rely heavily on electricity generated from lignite-fired power plants. This production structure now places Serbian companies at a competitive disadvantage compared with EU producers that are gradually decarbonising their electricity supply.
Under CBAM, importers of certain goods into the EU must purchase carbon certificates reflecting the embedded emissions in the production of those goods. The cost of these certificates is linked to the EU carbon price.
Industry representatives estimate that the effective CBAM cost applied to Serbian electricity exports would amount to approximately €78 per megawatt-hour, dramatically increasing the price of exported power and effectively eliminating Serbia’s competitiveness in EU electricity markets.
For electricity trading desks across Southeast Europe, this development represents an early example of how climate policy is beginning to reshape cross-border power flows.
Serbia’s electricity system remains heavily reliant on coal. The country operates approximately 4.4 GW of lignite-fired generation capacity, most of it operated by EPS, alongside a growing but still relatively modest portfolio of renewable energy projects. Lignite plants provide baseload power at relatively low domestic production costs, but their carbon intensity makes exports to the EU increasingly difficult under carbon border rules.
In effect, CBAM is introducing a new price signal that reflects not only the cost of electricity generation but also the carbon footprint associated with that generation.
For Serbian electricity exporters, the impact is immediate. If the carbon cost associated with coal-fired electricity approaches €78/MWh, the price of exported power becomes uncompetitive relative to electricity generated in EU markets where renewable capacity and gas-fired generation increasingly set the marginal price.
The result is a structural shift in regional electricity trading patterns. Instead of exporting power into EU markets, Serbia may increasingly focus on supplying electricity to neighboring Western Balkan countries where carbon border measures do not yet apply.
This shift is occurring at a moment when electricity markets across Southeast Europe are already undergoing rapid transformation. Renewable energy capacity—particularly wind and solar—has been expanding across the region as governments introduce auction schemes and international financial institutions support energy transition projects.
However, the pace of renewable deployment remains uneven. Coal still plays a central role in electricity generation across several Western Balkan countries, including Serbia, Bosnia and Herzegovina and Kosovo.
CBAM effectively introduces a new layer of economic pressure on this generation model.
The decline in Serbian industrial exports reflects similar dynamics in manufacturing sectors. According to the Association of Serbia’s energy-intensive industries, exports from member companies fell by 27 percent between 1 January and 1 March 2026 compared with the same period a year earlier.
Although CBAM formally requires EU importers to pay the carbon cost, industry representatives say the burden ultimately affects exporters because the additional cost becomes embedded in product prices. If the final price of a product becomes too high relative to competitors, buyers simply switch to alternative suppliers.
In practice this means Serbian exporters are losing market share in the EU.
The situation is compounded by other trade restrictions that already affect Serbian exports. Steel exports to the EU remain subject to quotas introduced under EU safeguard measures, while other industrial products face regulatory barriers linked to environmental standards and technical certification requirements.
When combined with CBAM, these policies create a complex trade environment for Serbian manufacturers.
From the EU’s perspective, CBAM serves two policy objectives. The first is preventing so-called carbon leakage—where production shifts from the EU to countries with weaker climate regulations. The second is encouraging trading partners to introduce their own carbon pricing mechanisms or decarbonisation policies.
For Serbia, which is negotiating EU membership, the mechanism could accelerate domestic climate policy reforms.
Aligning with EU climate regulations would likely require introducing carbon pricing in Serbia’s electricity sector and expanding renewable energy capacity more rapidly.
However, the economic transition required to achieve this shift is substantial. Serbia’s electricity system has historically been built around lignite resources that provide relatively cheap domestic energy. Transitioning away from this model will require major investments in renewable energy, grid infrastructure and flexible generation capacity.
Recent government plans envision expanding wind and solar capacity through competitive auctions, with several hundred megawatts of new renewable projects expected to enter operation over the next few years. Yet these projects will only gradually reduce the carbon intensity of the electricity system.
For energy-intensive industries such as steel and aluminium production, the transition could be even more complex. These sectors depend heavily on electricity prices and stable power supply. If carbon border costs increase export prices without corresponding changes in domestic energy policy, companies may struggle to remain competitive.
This creates a strategic dilemma for policymakers. On one hand, aligning with EU climate policy is essential for Serbia’s EU accession ambitions and long-term economic integration with the European market. On the other hand, the transition risks imposing short-term costs on industries that form an important part of the country’s export base.
The situation also raises broader questions about the future structure of electricity trading across Southeast Europe.
Historically, cross-border electricity flows in the region have often involved exports from coal-heavy systems toward higher-price EU markets. CBAM effectively reverses this dynamic by penalising carbon-intensive electricity exports.
As a result, electricity trading patterns may increasingly favour renewable-rich systems capable of producing low-carbon power.
Hydropower-dominated countries such as Albania and Montenegro could potentially benefit from this shift because their electricity generation carries a lower carbon footprint. Meanwhile, coal-dependent systems may find themselves increasingly isolated from EU electricity markets.
Over the longer term, the impact of CBAM will depend on how quickly energy systems across Southeast Europe decarbonise.
If renewable deployment accelerates and carbon pricing mechanisms expand across the region, the cost differential between EU producers and neighboring exporters may narrow.
Until then, however, the early experience of Serbian exporters suggests that carbon border measures are already reshaping the economic geography of European industry.
For policymakers and investors alike, the message is clear: climate policy is no longer just an environmental issue. It is rapidly becoming a central factor in determining the competitiveness of industrial economies across Europe’s wider neighborhood.
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