Divergent climate policies to drive a chaotic transition

Different policy paths point to a bumpier transition

These February policy decisions should be interpreted against a backdrop in which the drivers of the energy transition are shifting. In many markets, renewable power has moved down the cost curve and is increasingly competitive on an unsubsidized basis. As a result, policy is no longer the only—or even the primary—driver of renewables deployment. However, the presence of a stable energy policy is still extremely important to ensuring stable and sustained investment in energy infrastructure (whether it is zero‑carbon or fossil). Both the EU and U.S. have aging power plants and grids, and renewing this energy infrastructure will be an important element of economic competitiveness for both.

Having a stable energy policy can also contribute to energy security—a concept that extends beyond the need to have molecules and electrons available today to ensuring reliable and affordable access to energy over decades. For both the U.S. and EU, energy security has re‑emerged as a dominant political objective, shaped both by geopolitics and the race to secure sufficient, reliable electricity supply for artificial intelligence (AI) and data‑center growth.

Given this backdrop, both the EU and U.S. would benefit from stable energy policies. While the additional flexibility included in the EU Climate Law amendment does introduce some uncertainties, we believe these will mostly center around decarbonizing hard‑to‑abate sectors. We expect that drivers underpinning the four largest areas of emissions (Figure 2) will remain intact (or at least largely intact). On the other hand, the U.S. repeal of the Endangerment Finding will most likely lead to a near‑term removal of GHG emissions regulation; it will also probably lead to a drawn‑out litigation process.

U.S. regulation of GHGs may be on ice for a long time

On February 12, the EPA rescinded the Endangerment Finding and simultaneously repealed existing vehicle GHG emissions standards. The immediate effect is to remove a key legal basis that supported a wide set of federal climate rules under the Clean Air Act. The administration’s rationale is framed primarily in legal terms rather than as a challenge to climate science.

In practice, these actions are likely to trigger prolonged legal disputes and the repeal could operate as a de facto policy freeze during years of litigation. It could also raise the risk that future administrations would need to rebuild both the scientific record and the legal case to re‑establish federal GHG regulation.

Unlike the EU, the U.S. has never passed any form of comprehensive climate or GHG emission legislation. Instead, it has relied on legal precedent to allow agencies to regulate GHG emissions or, in the case of the Biden administration’s marquee climate initiative (the Inflation Reduction Act or “IRA”), the reconciliation process, which only relies on majority vote and is therefore easier to repeal.

As the Supreme Court has not historically shown interest in removing the Endangerment Finding when ruling on related cases, the EPA’s regulatory action is in essence inviting the Supreme Court to come in and make a “landmark” ruling. Given the change in its composition, the current court may be a more sympathetic audience for the administration’s case than previous ones.

While it is still too early to understand how companies will react to this new regulatory shift, the U.S. energy market is dominated by the need to meet growing electricity demand affordably. The most binding security‑of‑supply question is increasingly about electricity and whether the system can reliably meet rising demand from AI and data centers. This helps explain why affordability, reliability, and permitting have become central to policy debates, and why a rollback of federal climate rules does not necessarily translate into a slower build‑out of infrastructure enabling electrification.

The EU doubles down on its climate agenda (sort of...)

On February 10, the European Parliament amended the EU Climate Law to establish a legally binding 2040 target: a 90% reduction in EU‑wide GHG emissions versus a 1990 baseline. The EU Climate Law (adopted July 2021) already set a 2050 net‑zero objective and a 2030 interim target of at least -55% versus 1990. This amendment fulfilled the law’s requirement to set a 2040 target.

Parliamentary negotiations introduced additional flexibility in implementation. The amendment allows the use of carbon credits to contribute up to 5% of the 2040 target after 2036. It also requires biennial progress reviews, with scope for adjustments based on scientific evidence, energy prices, competitiveness, technological progress, and the scale of net removals.

The adoption of the 2040 target passed by a wide margin, but the debate reflected increasing political contestation over the pace and cost of implementation—including fractures within Ursula von der Leyen’s European People’s Party that contributed to the inclusion of flexibility provisions. In our opinion, the addition of flexibility mechanisms could help make the policy more durable by helping to balance decarbonization goals with competitiveness and affordability—a good parallel could be the phased implementation of the EU Emissions Trading System (ETS1).¹

A key tool for achieving the next wave of emissions reductions is the second EU Emissions Trading System (ETS2), which applies carbon pricing to road transport and buildings. ETS2 is designed to accelerate adoption of electric vehicles and heat pumps, but its rollout has become politically sensitive amid cost‑of‑living pressures and member‑state concerns.

Europe has already made material progress on decarbonization since 1990, having already reduced absolute GHG emissions by 38% as of 2024.² This progress has been driven largely by energy efficiency improvements and a greener electricity mix. In fact, wind and solar electricity accounted for 30% of EU generation in 2025, which was higher than the contribution from fossil fuels (29%) for the first time.³

Similar pressures, different policy playbooks

A defining feature of the current environment is that the EU and U.S. are responding to similar energy‑system pressures with different policy instruments. Both face a trilemma of sustainability, security, and affordability, but the relative weight of each objective differs, as do market structures and legal constraints. The EU is structurally exposed as a net importer of oil and gas, while the U.S. is a net exporter. Yet U.S. energy security concerns remain acute and increasingly centered on the ability to supply reliable electricity.

Looking ahead, policy may remain volatile, but the underlying economics of renewables and the politics of energy security are likely to keep the transition moving. A plausible near‑term pathway is that the U.S. faces a chaotic transition in which some legacy fossil assets remain in operation longer than expected to maintain reliability, while investment accelerates in lower‑cost renewables and enabling infrastructure.