Based on: Di Foggia, G., Beccarello, M., & Jammeh, B. (2026). EU ETS Price Signals in the Power Sector: Evidence on Decarbonisation and Policy Overlap. Energies, 19(18), 4333. https://doi.org/10.3390/en19184333
This research note analyzes the effectiveness of the European Union Emissions Trading System in fostering decarbonization and the deployment of renewable energy within the power sector. Although the traditional theoretical framework assumes that a high carbon price is sufficient to drive the green transition by internalizing negative externalities, empirical evidence highlights how this mechanism operates within a complex context of policy overlap. Indeed, the effect of allowance prices interacts with direct subsidies, long-term financial support mechanisms, and structural price formation dynamics in wholesale electricity markets.
Research Methodology
To evaluate the extent of these interactions, the study adopts a methodological approach based on the triangulation of three different data sources. The first component consists of a panel econometric analysis covering the period from 2013 to 2024 for a sample of European countries, aimed at measuring the impact of public spending on subsidies and carbon prices on installed renewable capacity. This is complemented by a field survey involving a sample of over one hundred professionals and corporate executives active across six key European markets, with the goal of identifying the main factors considered in investment decisions. Finally, the analysis includes an hourly market-based estimation for the 2021–2024 period, aimed at quantifying the pass-through of carbon costs onto electricity prices and the resulting generation of inframarginal rents for clean technologies.
Empirical Findings
The results of the econometric analysis indicate that subsidies and direct support schemes constitute the key driver for the expansion of renewable capacity. Conversely, emission allowance prices do not display a direct and independent effect on investment decisions when controlling for the presence of subsidies. The model highlights a relationship of decreasing complementarity between the two instruments, suggesting that as the carbon price increases, the marginal effectiveness of subsidies tends to decline, since part of the incentive signal is transmitted indirectly through higher wholesale electricity prices.
Survey findings confirm market participants’ perspectives, as they assign significantly higher priority to regulatory stability, long-term revenue predictability, and natural gas price trends than to the carbon price level alone.
In parallel, electricity market modeling demonstrates that the primary impact of the emissions trading system lies in marginal price formation. Because fossil fuel-fired power plants continue to set electricity prices frequently, carbon costs are passed through to wholesale prices, generating substantial and persistent inframarginal rents in favor of renewable assets that do not bear such emission costs. Furthermore, the investigation reveals a significant discrepancy between the emission factors used under European Union regulations for indirect carbon cost compensation and actual parameters measured in the market, showing that regulatory values based on structural averages are often higher than the actual cost pass-through calculated on an hourly basis.
Policy Implications
Because the carbon price acts primarily as a wholesale price transmission and revenue redistribution mechanism rather than a direct stimulus for new investments, regulation must move toward tighter coordination among different support measures. It becomes essential to consider the cumulative effect arising from both explicit subsidies and inframarginal rents accrued by renewables, in order to avoid inefficiencies in the allocation of public resources. Moreover, it is appropriate to develop long-term contractual instruments capable of stabilizing investor revenues and to periodically update state aid criteria based on actual market data rather than static parameters.
