EU ETS Price Signals in the Power Sector: Evidence on Decarbonisation and Policy Overlap
Year: 2026
Type: article
Abstract: The energy transition requires substantial investments in renewable energy sources and in policy tools that effectively guide market participants' decisions. We examine whether the European Emissions Trading System has effectively driven renewable energy deployment in the power sector. Combining panel econometric analysis of installed renewable capacity across European Member States, a cross-country survey of 127 firms in six EU ETS countries, and an hourly, market-based estimation of inframarginal rents across a panel of eight Member States, we find that public support mechanisms consistently drive renewable-capacity expansion. The EU Allowance price does not exhibit a significant direct effect on renewable deployment after controlling for structural and market variables. In electricity markets, the ETS primarily operates through mechanisms that shape wholesale electricity prices and carbon-cost pass-through, generating persistent inframarginal revenues for low-carbon technologies through marginal price formation. A comparison between regulatory CO₂ factors used for indirect ETS cost compensation and observed market-based pass-through indicators reveals materially divergent magnitudes across Member States, with regulatory-to-observed ratios ranging from 1.2x in Italy to 46.2x in Sweden. The evidence suggests that, in European electricity markets, the ETS currently operates more directly as a wholesale-price transmission and revenue-redistribution mechanism than as an autonomous driver of renewable investment deployment.
Source: Energies
DOI: 10.3390/en19184333
Institution: University of Milano-Bicocca
Language: English
Subfield: Economics and Econometrics
Domain: Social Sciences
Open Access status: gold
Estimated APC paid: $3,137
OpenAlex ID: W7213118793