EU ETS Price Signals in the Power Sector: Evidence on Decarbonisation and Policy Overlap

Abstract

Understanding the role of carbon pricing and complementary support schemes in renewable energy deployment is increasingly important for the decarbonisation of power markets. The analysis employs a mixed-methods approach: a panel econometric analysis of installed renewable capacity across European countries from 2013 to 2024, a cross-country survey involving 127 firms, and an hourly market-based estimation of inframarginal rents. Econometric evidence indicates that energy and fuel subsidies consistently drive the expansion of renewable energy capacity. The survey results corroborate that investors prioritise subsidies, regulatory stability, and long-term revenue certainty over the price of EU allowances in renewable energy investment decisions. The market-based analysis demonstrates that the system primarily influences the power sector through wholesale electricity price formation and carbon cost pass-through, thereby generating persistent inframarginal revenues for low-carbon technologies. A comparison between the regulatory carbon factors used for indirect cost compensation and the observed market-based pass-through indicators reveals substantial cross-country differences. The evidence suggests that the system currently functions more as a mechanism for wholesale price transmission and revenue redistribution than as an independent driver of renewable energy investment, underscoring the importance of complementary support policies and electricity market design.