Europe is at a crossroads. Compete meaningfully in the AI race or stick to world-leading climate goals.
“This is a watershed moment for Europe,” Wedbush Securities’ Dan Ives told CNBC. The block can be “future-proof” or risk “missing out on a big part of this technology wave.”
This dilemma is further exacerbated by regional mandates for green energy.
Globally, energy is the biggest bottleneck when building AI-related data center projects. While the United States ramps up fossil fuel plants to power construction, Europe requires developers to disclose energy and water efficiency measures, adding red tape that could delay project launches.
The European Union is often praised for how it has made progress with its set of agenda-setting environmental policies and new mechanisms such as the upcoming carbon border tax. But some critics argue that it gets in the way of business. Ives said the continent is seen as “anti-entrepreneurial”, forcing European technology companies and startups to relocate to the United States, the Middle East and Asia in search of more favorable policies.
As Europe tries to catch up in the AI race, the need for power-hungry infrastructure increases, power demand skyrockets, and the friction is becoming harder to ignore. The additional renewable energy capacity was intended to displace more sources of pollution, but there are now concerns that this could play out differently.
“You can see in the UK we’ve already rolled back some of our commitments, and Europe will follow suit,” Paul Jackson, regional global market strategist at Invesco, told CNBC.
“This is a fairly regular process, and in good times it’s easier to persuade individuals, businesses and governments to move in the right direction on things like climate change and to shoulder some of the costs associated with it,” Jackson said. But he added that pushing climate change down the priority list is one of the easiest things lawmakers can do in more difficult times and when faced with conflicts of interest.
The UK’s energy grid does not include coal, which is much dirtier than gas, but that is not the case in Europe.
“I’m concerned that at some stage the closure of coal-fired power plants will actually be postponed,” Jags Walia, head of global listed infrastructure at Van Ranschott Kempen, told CNBC.
Taking fossil fuels offline as renewable energy comes online works when energy demand is flat, but that’s no longer the case, he said. Data centers also require constant connectivity, which can pose challenges if wind or solar power is intermittent.
“From an electricity perspective, we may not be able to afford to shut down coal-fired power plants. This would be a real headache for energy transition and energy security as well,” Walia said.
Over the past year, Europe has rolled back many environmental initiatives.
On December 16, the EU watered down its de facto ban on new internal combustion engine cars from 2035. On December 9, the EU approved a one-year postponement of the introduction of a new EU emissions trading scheme for buildings, road transport and small-scale industry, but also pledged to cut emissions by 90% by 2040.
Earlier this year, the Directives on Corporate Sustainability Due Diligence (CSDDD) and Corporate Sustainability Reporting (CSRD) were also reduced and postponed.
A “realistic” approach
Some hail the move not as a setback but as much-needed realism.
“We’re constantly on the brink of a situation where being in Europe becomes so unattractive that it no longer makes sense, and at the same time, we desperately need a lot of regulation,” Nick de la Forge, general partner at Planet A. Ventures, a venture capital fund that backs climate-related technology startups, told CNBC’s “Early Edition of Europe” on Dec. 11.
“And fortunately, what we’re seeing is pretty healthy reform.”
Delaforge said the restructuring of the Directive, including the Sustainable Finance Disclosure Regulation (SFDR), which is currently under review, is “very practical and we think it is an improvement”.
Proponents of AI tout the technology’s ability to make energy systems more efficient and sustainable, positioning it as both a problem and a solution to increasing demands on the power grid, and perhaps worth investing in.
“As AI advances rapidly, it is becoming increasingly clear that it has the potential to strengthen Europe’s energy resilience and accelerate a clean transition. At the same time, the increased demand for electricity from AI technologies calls for smart, forward-looking planning,” a European Commission spokesperson told CNBC.
It added that the economy is “well prepared to seize these opportunities while safeguarding the stability and reliability of Europe’s energy systems.”
The committee did not specifically address CNBC’s questions about repealing sustainability laws as a result of the AI push, or how it intends to achieve new legally binding goals.
Instead, a spokesperson for the bloc noted that the region is preparing a roadmap for the use of AI in the energy sector, in line with a broader AI Application Strategy aimed at speeding up the adoption of the technology.
“We’re like Cheers.”
If policymakers strictly adhere to sustainability requirements, AI infrastructure developers could instead offset their emissions with carbon credits or renewable energy certificates. One credit represents one ton of carbon dioxide removed or one ton of emissions prevented from entering the atmosphere.
Jim Wright, manager of the Premier Mitten Global Infrastructure Income Fund, said AI hyperscalers “still have core decarbonization goals” but are looking to such measures to achieve them. “Because in reality, we’re going to use gas, and we might also use coal,” he said, referring to the changing composition of the energy grid.
That reality was recognized in the EU’s December 9 agreement, which included the use of carbon removal credits to meet new reduction targets. Overall, as AI-driven power demand outstrips supply from clean sources, we have created an era of addition rather than energy transition that oil industry CEOs are embracing.
It’s not just a matter of wealth, but also energy security. Competition between data centers and AI is “putting a huge strain on our energy infrastructure, and as we’ve seen in recent years, we’re not very resilient in this regard,” Jackson said. This would mean adding near-baseline energy demand to the existing grid, which could increase price volatility and lead to energy rationing, he said.
Climate change is an infrastructure and business risk that isn’t going away, experts tell CNBC.
For Coco Agbo Brua, Société Générale’s global head of research, that is “the huge elephant in the room” and one of her biggest concerns going forward.
“We’re kind of toast in a sense…I’m kidding, because the fact is we’re on a path to 2 1/2, 3 degrees warmer (above pre-industrial levels). And when you look at green technologies, (they’re) not replacing fossil fuels, they’re being used in data centers,” he told CNBC’s “Squawk Box Europe” on Monday.
However, it could be years before Europe’s environmental targets are formally withdrawn. “When it comes to sustainability goals, sometimes what countries do is if they move away from their goals, they try to leave them until the last moment,” Walia said.
