The Minimum Effective Carbon Price: Threshold Effects in the EU ETS–Renewable Energy Nexus

The European Union Emissions Trading System (EU ETS) has experienced dramatic price fluctuations since its 2005 inception, raising questions about whether carbon pricing effectiveness exhibits threshold behaviour—specifically, whether there exists a minimum carbon price level below which market signals fail to stimulate renewable energy investment. This study applies the Hansen threshold regression methodology to investigate regime-dependent dynamics in the relationship between EU ETS carbon prices and renewable energy consumption over 2005–2024. We identify a statistically significant threshold at €20.71/tCO2 (bootstrap p = 0.048), which partitions the sample into distinct low- and high-price regimes. Below this threshold, carbon prices exhibit no significant positive effect on renewable deployment (β1 = −36.16, p = 0.246); above the threshold, a positive relationship emerges (β2 = +7.20, p = 0.081), with each additional euro associated with 7.20 TWh of additional renewable consumption. Technol-ogy-specific analysis reveals that solar electricity exhibits particularly strong respon-siveness to above-threshold carbon prices (β2 = +1.71, p = 0.019). The threshold estimate is robust to alternative trimming specifications, functional forms, and outlier exclusion. These findings suggest that the EU ETS achieved effectiveness as a driver of renewable energy only after carbon prices exceeded approximately €21/tCO2—a transformation that coincided with the implementation of the Market Stability Reserve. The results provide empirical support for carbon price floor mechanisms and validate structural reforms aimed at strengthening the credibility of the carbon market.