Unpacking uncertainty: Market coupling and the EU Carbon Border Adjustment Mechanism

The Carbon Border Adjustment Mechanism (CBAM) is taking shape, but not every power trader is enthusiastic about it. Yusuf Latief speaks to FTI's Pierre Dechamps to find out more.

The CBAM has been in its transitional period since 2023, with December 2025 marking the cut-off date for reporting.

Ideally, the piece of legislation – the world’s first carbon border tax introduced by the EU – would reduce carbon emissions and enable the EU to match the carbon price of imports with that of domestic goods.

But CBAM has not been met with widespread glee. Rather, it has been creating an atmosphere of uncertainty, especially for power traders operating out of Central and South Eastern Europe, whose electricity markets await coupling with the EU.

Where does the legislation’s uncertainty come from? And, if overcome, what potential does it hold for improving trade flows and advancing the energy transition?

To find out, I spoke with Pierre Dechamps, a senior advisor at FTI Consulting, from the floor of ETCSEE this week in Vienna, Austria.

There’s clearly uncertainty on CBAM – why?

First, complex regulatory requirements. For example, there are big difficulties in calculating embedded emissions. That's one thing.

The second is reporting – its infrastructure is not entirely in place.

The third is a big one – the interaction between CBAM and regional market coupling, which is bringing additional uncertainties.

In an ideal world, these markets would be entirely coupled with European markets with a carbon price and would then not be subject to CBAM anymore, as if they were in the EU.

However, these transitions are happening simultaneously, which was not the initial idea.

The initial idea was that the market coupling would happen before the CBAM. Now, the CBAM is enforced from a reporting point of view, but market coupling is not complete.

Market coupling may progress in quite a few instances in 2027, but that's too late from a CBAM perspective.

Then there is a wider uncertainty around all of this, which is not specific to the region and not specific to the power sector - the bigger uncertainties around the CBAM itself. This involves WTO compliance, complaints, the review, the omnibus, simplification and all of these things.

It's like a pile of uncertainty: one on top of another.

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How will it affect Central and South Eastern European regional energy markets?

This is where the difficulties come in about the relationship between CBAM and market coupling.

One extreme case is total independence – these countries in the region stay on the other side of the border, full stop, with no discussions of market coupling; the CBAM applies with its difficulties.

The other extreme case, when everything is done, is that these countries become market-coupled with the EU markets. They become fully integrated - not subject to CBAM to the extent that power generation in these places have a carbon price similar to the EU ETS.

The trouble is that we are in between these two extremes. We have not totally coupled the markets yet and the CBAM is already starting. One transition is not helping the other; rather, they are colliding.

For them to happen efficiently, they would have had to take place in sequence, one after the other.

In terms of date, we know that 2025 is the reporting for the CBAM, payments in principle without the omnibus kicking in in 2026, and the coupling is going to progress quite substantially, probably in 2027.

So, there is a timing collision between the two transitions.

If effective, how will it affect cross-border electricity trade?

Given the difficulties of reporting and its uncertainties, in the short term, I wouldn't be surprised if it decreases cross-border trade.

But in the longer term - if it works and pushes neighbouring countries to become market-coupled with a carbon price, therefore no longer subject to CBAM – it then becomes a powerful tool for integration.

But it's going to take a while and I think that the legislator must be realising now that because of the difference in speed in market coupling and in the introduction of the CBAM, there is a risk that we find ourselves in a situation where we've put the cart before the horse.

Again, ideally, the idea of the CBAM should have accelerated market coupling – thereby enabling those countries to avoid the carbon price levied through the CBAM – so that it would be done now, but we are not at all in that situation yet.

How will it reshape the energy sector?

Well, the objective of the CBAM is to prevent carbon leakage, so will reshape it towards that end, lowering the carbon footprint of our energy.

It will hopefully provoke an acceleration of the energy transition to low carbon sources. It will do so in the EU, but also in neighbouring countries.

The thing is, though, and this is important, it's not just about energy sources.

It will also have an impact on all energy investments, including investment in infrastructure, for example on high voltage power lines.

It’s not just about energy generation, but rather all of the industrial sector, including infrastructure, which have so far been neglected by policy.

Is there potential friction from the US tariffs with CBAM taking shape?

They are not directly connected to VAT or other levies that we have here, but when there is a rather general trade negotiation, I would be very surprised if the CBAM does not come to the table or is not mentioned. It's almost inevitable.

And if it's done in the storm of global trade negotiations, you never know what could happen.