Europe stands at a crossroads: compete meaningfully in the AI race or stick to its world-leading climate goals.
“It’s like a fork in the road moment for Europe,” Wedbush Securities’ Dan Ives told CNBC. The bloc can either “play in the future” or risk “missing a big part of this technology wave.”
The dilemma is compounded by the region’s mandates for green energy.
Globally, energy is the biggest bottleneck for building out AI-related data center projects. While the U.S. fires up fossil-fuel plants to power its build-out, Europe requires developers to disclose energy and water efficiency measures, adding red tape that can slow project launches.
The European Union is often celebrated for its suite of agenda-setting environmental policies and how it has made strides with new mechanisms, such as the forthcoming carbon border tax. However, some critics argue it gets in the way of business. The continent is seen as “anti-entrepreneur,” Ives said, which pushes European technology names and startups to move to the U.S., Middle East, or Asia in pursuit of more favorable policies.
As Europe attempts to catch up in the AI race, the need for power-hungry infrastructure increases, demand for electricity surges — and that friction has become harder to ignore. Additional renewable energy capacity was intended to replace more polluting sources, but there are now concerns that this will play out differently.
“You can see in the U.K. that we’re already rowing back on some of our commitments,” Paul Jackson, regional Global Market Strategist at Invesco, told CNBC – and Europe will likely follow suit.
“This is a fairly regular process that when times are good, it’s easy to persuade individuals, businesses, governments, to move in the right direction on things like climate change, and to take some of the cost associated with doing that,” Jackson said. However, pushing the climate agenda down the priority list is one of the easiest things legislators can do when faced with tougher times and competing interests, he added.
The U.K.’s energy grid is free of coal, which is significantly dirtier than gas — Europe’s, however, is not.
“I’m worried that, at a certain stage, coal power plant closures might get actually postponed,” Jags Walia, head of global listed infrastructure at Van Lanschot Kempen, told CNBC.
Taking fossil fuels offline as renewables come online works when energy demand is flat, but that’s no longer the case, he said. Data centers also require constant connection, so the intermittency of wind and solar could prove tricky.
“Electricity wise, we might not be able to afford to close down coal power plants, which is going to be a real headache for the energy transition and energy security as well,” Walia said.
Over the course of the year, Europe has rolled back a number of environmental commitments.
On Dec. 16, the EU watered down its effective ban on new combustion-engine cars from 2035. On Dec. 9. it approved a one-year delay to the implementation of a fresh EU emissions trading system for buildings, road transport and small industries – though simultaneously committed to slashing emissions by 90% by 2040.
Earlier this year, the Corporate Sustainability Due Diligence (CSDDD) and Corporate Sustainability Reporting (CSRD) directives were also narrowed and pushed back.
A ‘pragmatic’ approach
Some have welcomed the moves as much-needed pragmatism rather than a retreat.
“We are always at the edge of navigating into a position where it becomes so unattractive to be present in Europe that it doesn’t make sense anymore. And on the other hand, a lot of the regulation is direly needed,” Nick de la Forge, a general partner at venture capital fund Planet A Ventures, which backs climate-related technology startups, told CNBC’s “Europe Early Edition” on Dec. 11.
“And luckily, what we are seeing is a pretty healthy revamp.”
The reshaping of directives, including the Sustainable Finance Disclosure Regulation (SFDR), which is currently undergoing review, is “quite pragmatic, and we think that’s an improvement,” De la Forge said.
AI advocates tout the technology’s ability to make energy systems more efficient and boost sustainability, positioning it as both a problem and solution to intensifying demands on the grid, and perhaps making it worth the investment.
“As AI rapidly advances, its potential to strengthen Europe’s energy resilience and accelerate the clean transition is becoming increasingly clear. At the same time, the growing electricity needs of AI technologies call for smart, forward-looking planning,” a European Commission spokesperson told CNBC.
They added that the economic bloc “is fully prepared to seize these opportunities while safeguarding the stability and reliability of Europe’s energy system.”
The Commission did not specifically address questions asked by CNBC around a rollback of sustainability legislation as a result of its AI push, or how it plans to meet the new legally binding target.
Instead, a spokesperson for the bloc referred to the region’s preparations for a roadmap for the use of AI in the energy sector, in line with its broader Apply AI Strategy, which was designed to fast-track the deployment of the tech.
‘We’re sort of toast’
If policymakers hold tight on sustainability requirements, AI infrastructure developers may instead offset their emissions with carbon credits or renewable energy certificates. One credit represents the removal of one metric ton of carbon dioxide, or the prevention of one metric ton from entering the atmosphere.
AI hyperscalers “do still have their headline decarbonization target” but are turning to such measures to meet them, according to Jim Wright, manager of the Premier Miton Global Infrastructure Income Fund. “Because, in reality, they will use some gas, and they may even use some coal,” he said, referring to variations in the makeup of energy grids.
That reality was recognized in the EU’s Dec. 9 deal, which included the use of carbon removal credits to reach the fresh reduction target. In all, it has created an era of energy addition rather than transition – a dynamic embraced by oil CEOs – as AI-driven demand for power outpaces supply from clean sources.
It’s also a question of energy security, not only abundance. The data center and AI race “puts a lot more strain on our energy infrastructure, and as we have seen in recent years, we’re not terribly resilient when it comes to that,” said Jackson. It means adding an almost base-level demand of energy to existing grids, which could make pricing more volatile and lead to energy rationing, he said.
Climate change is an infrastructure and business risk — which is not going away, experts have told CNBC.
For Kokou Agbo Bloua, global head of research at Société Générale, it’s “a massive elephant in the room” and one of his biggest worries looking forward.
Speaking to CNBC’s “Squawk Box Europe” on Monday, he said: “We’re sort of toast … pun intended, actually, because we’re on the path of two-and-a-half, three degrees [of warming above pre-industrial levels]. And if you look at green technologies, [they’re] being used for data centers, as opposed to replacing fossil fuels.”
But it could be some years before a formal scrapping of Europe’s environmental targets. “Sometimes on sustainability goals, what countries do is, if they are going to walk away from a goal, they try to leave it till the last minute,” Walia said.
