Europe Faces Pivotal AI vs. Climate Choice

Europe faces a pivotal moment, caught between accelerating its ambitions in the artificial intelligence race and upholding its established leadership in climate goals. This dilemma is amplified by the continent’s stringent environmental mandates, which are increasingly clashing with the burgeoning energy demands of AI infrastructure.

“It’s a classic fork in the road for Europe,” commented Dan Ives, managing director at Wedbush Securities. “The bloc has to decide whether to fully embrace the future of AI, or risk being left behind by this significant technological wave.”

Globally, energy supply is emerging as the primary constraint for developing AI data centers. While the United States has leaned on fossil fuel power to fuel its expansion, Europe’s requirement for developers to disclose energy and water efficiency measures introduces a layer of regulatory complexity. This can, in turn, slow down the rollout of crucial AI projects.

The European Union has long been lauded for its pioneering environmental policies, including innovative mechanisms like the upcoming carbon border tax. However, some industry observers contend that these regulations can stifle business growth. “The continent is perceived as somewhat anti-entrepreneur,” Ives noted, a sentiment that reportedly encourages European tech talent and startups to seek more accommodating policies in the U.S., the Middle East, or Asia.

As Europe endeavors to narrow the AI gap, the escalating need for power-intensive infrastructure directly translates to surging electricity demand. This friction between environmental commitments and technological expansion is becoming increasingly difficult to reconcile. While the intention was for new renewable energy capacity to displace more polluting sources, concerns are mounting that this transition may not unfold as planned.

“We’re already observing a recalibration of commitments in the U.K.,” observed Paul Jackson, regional Global Market Strategist at Invesco. “It’s a predictable pattern: when economic conditions are favorable, it’s easier to rally support for climate action and absorb associated costs. However, when faced with economic headwinds and competing priorities, scaling back on climate agendas becomes a more palatable option for policymakers.”

The U.K. has successfully transitioned its energy grid away from coal, a significantly dirtier fuel than natural gas, which still plays a role in Europe’s energy mix. “There’s a real concern that coal power plant closures might be postponed,” said Jags Walia, head of global listed infrastructure at Van Lanschot Kempen.

The delicate balance of phasing out fossil fuels as renewables come online typically works best when energy demand is stable. This is no longer the case, with data centers requiring a consistent and reliable power supply, which poses a challenge for the intermittent nature of wind and solar energy. “From an electricity supply perspective, we may find ourselves unable to afford the closure of coal power plants, creating a significant hurdle for both the energy transition and energy security,” Walia elaborated.

Throughout the past year, Europe has made several adjustments to its environmental commitments. On December 16th, the EU modified its proposed ban on new combustion engine cars from 2035. Earlier, on December 9th, the implementation of a new emissions trading system for buildings, road transport, and smaller industries was delayed by one year. Despite these adjustments, the bloc reaffirmed its commitment to slashing emissions by 90% by 2040. Additionally, directives such as the Corporate Sustainability Due Diligence (CSDDD) and Corporate Sustainability Reporting (CSRD) have seen their scope narrowed and implementation dates pushed back.

### A ‘Pragmatic’ Shift

Some market participants have welcomed these adjustments, viewing them not as a retreat from climate goals, but as a necessary dose of pragmatism. “We’re constantly navigating the fine line where Europe becomes too unattractive for businesses, while simultaneously recognizing the critical need for much of its regulation,” stated Nick de la Forge, a general partner at venture capital fund Planet A Ventures, which invests in climate tech startups. “Fortunately, we’re seeing a substantial revision process underway.”

De la Forge described the ongoing review of directives, including the Sustainable Finance Disclosure Regulation (SFDR), as “quite pragmatic, and we believe it represents an improvement.”

The narrative surrounding AI also highlights its potential to enhance energy system efficiency and accelerate the clean energy transition. This positions AI as both a contributor to and a solution for the escalating demands on the grid, potentially justifying the significant investment required.

“As AI technology continues its rapid advancement, its capacity to bolster Europe’s energy resilience and expedite the clean energy transition is becoming increasingly evident. Simultaneously, the growing electricity requirements of AI technologies necessitate intelligent, forward-looking planning,” a spokesperson for the European Commission conveyed. They added that the bloc is “fully prepared to capitalize on these opportunities while safeguarding the stability and reliability of Europe’s energy system.”

When questioned by this publication about any rollback of sustainability legislation to accommodate the AI push or how the new legally binding targets would be met, the Commission did not provide specific details. Instead, a spokesperson referred to the region’s ongoing development of a roadmap for AI deployment in the energy sector, aligning with the broader “Apply AI Strategy” aimed at accelerating the adoption of the technology.

### Facing the Energy Conundrum

Should policymakers maintain strict adherence to sustainability requirements, AI infrastructure developers might opt to offset their emissions through carbon credits or renewable energy certificates. Each credit represents the sequestration or prevention of one metric ton of carbon dioxide.

“AI hyperscalers still maintain their headline decarbonization targets, but they are increasingly relying on such measures to achieve them,” explained Jim Wright, manager of the Premier Miton Global Infrastructure Income Fund. “This is because, in reality, they will inevitably utilize some natural gas, and potentially even some coal, depending on the energy mix available.”

This reality was implicitly acknowledged in the EU’s December 9th agreement, which included provisions for the use of carbon removal credits to meet emission reduction targets. Consequently, this has ushered in an era of energy addition rather than outright transition—a dynamic that has resonated with oil industry leaders—as AI-driven power demand begins to outstrip the supply from clean energy sources.

Beyond sheer abundance, energy security is also a paramount concern. The race for data center and AI dominance “places considerable strain on our energy infrastructure, and as we’ve witnessed in recent years, our resilience in this regard is not particularly robust,” noted Jackson. This translates to the addition of a substantial, baseline energy demand on existing grids, which could lead to increased price volatility and potential energy rationing.

Climate change represents both an infrastructural and a business risk, and according to experts, it is a challenge that is unlikely to diminish. For Kokou Agbo Bloua, global head of research at Société Générale, it’s “a massive elephant in the room” and a significant concern for the future.

Speaking on CNBC’s “Squawk Box Europe,” he expressed his apprehension: “We’re on a trajectory for two-and-a-half to three degrees of warming above pre-industrial levels. And ironically, green technologies are being deployed for data centers rather than to replace fossil fuels.”

However, a formal abandonment of Europe’s environmental targets may still be some years away. “Often, when countries decide to deviate from sustainability goals, they tend to postpone any formal changes until the last possible moment,” Walia observed.