Carbon pricing and renewable electricity: A stage-dependent analysis of the EU ETS

This paper investigates whether the effect of carbon pricing on renewable electricity generation depends on the maturity of the renewable sector. While most macro-level studies estimate the average impact of EU emissions trading systems (ETS), limited attention has been devoted to the extent to which renewable deployment and the existing structural penetration of renewable energy technologies condition policy effectiveness. Based on a balanced panel of 28 European countries over the period 1995–2023, I estimate a dynamic specification interacting ETS stringency with the lagged value of Renewable Energy Consumption (REC), which proxies the structural maturity of the renewable sector and helps mitigate endogeneity concerns. The results indicate that a one-unit increase in ETS stringency is associated with a 0.06% increase in renewable generation on average. However, by considering the interaction term I find that the effectiveness of carbon pricing appears stage-dependent: in countries with limited renewable diffusion, the estimated impact is weak, whereas it becomes economically and statistically stronger as renewable deployment expands. These findings suggest that carbon pricing reinforces ongoing structural transformation rather than initiating it. From a policy perspective, sequencing matters: early-stage transitions may require complementary support measures like grid capacity building to enable carbon pricing to exert a stronger effect.