Europe’s policy reset: A competitiveness turn and a more durable role for gas

This is a thought leadership report issued by S&P Global. This report does not constitute a rating action, neither was it discussed by a rating committee.

European countries are resetting established energy commitments. The long-standing consensus on rapid decarbonization has fractured. This policy reset comes as geopolitical tensions and rising affordability concerns push climate and the environment down voters’ list of priorities. At the political level, the long-term ambition to decarbonize the economy remains, but the mantra is now “do no harm.” A slower, more affordable transition is the implicit plan to improve Europe’s competitiveness. Yet electrification and the deployment of renewables are still viewed as critical elements of Europe’s energy security. 

Governments have revisited energy and climate legislation and softened targets. The result is reduced incentives to cut emissions and increased policy divergence across Europe. Legislative reviews designed to ensure that costs remain acceptable are likely to continue, although there is a lack of consensus on what acceptable means. As a result, while simplification of the regulatory environment is a declared political goal, the landscape for investors is becoming more complex. 

• Carbon markets: Several countries are concerned about the impact of carbon costs on industry and the public. The Emissions Trading System 2 (ETS2) — the carbon market for buildings and road transport — was delayed to 2028, and discussions on the future of ETS1 and ETS2 are expected to be contentious. 
• The transport sector: Regulation of road transport emissions is another point of tension between the established climate agenda and the protection of Europe’s industrial base. In 2025, the emissions requirements placed on car manufacturers were softened, and the EU is on track to cancel the 2035 ban on the sale of internal combustion engine cars. Concerns about the cost of sustainable aviation fuels suggest that related targets may be reviewed soon. 
• Long-term targets: The tension between cost and climate was also apparent in discussions on a 2040 emissions target. The EU approved an ambitious headline target — a cut of 90% below 1990 emissions — but the agreement was conditional on outsourcing part of the target to non-EU countries using international credits. 

The reset changes the outlook for oil, gas and electricity demand in the next 10 years. 

Increased electricity use is central to the EU’s legislative framework, but the reality does not yet match the planning. In contrast to markets in the US, China and India over the past two decades, power demand in Europe has been falling due to a combination of energy efficiency, weak economic growth and high prices. The high up-front cost of electrification is delaying expensive last-mile technologies such as electrolytic hydrogen, heat pumps for household use and electrification of industrial heat.

This situation is increasingly acknowledged by policymakers who are reducing electricity demand projections, as Germany and France have done. In time, we anticipate that lower demand expectations will translate into lower auction volumes for renewable capacity. 

With slow electrification, European gas demand is expected to remain broadly stable through the mid- to late 2030s. This represents a major shift, as high gas prices since the 2022 energy crisis have reduced demand by about 20%, according to S&P Global Energy. More affordable gas will support consumption.

Even though electricity demand growth expectations have fallen, S&P Global Energy anticipates that more than $1.5 trillion will be invested in Europe’s electricity sector in the next five years, a 50% increase from the previous five years. Europe’s clean investment opportunity is more than double that of North America’s and about 40% of China’s. Opportunities persist in renewables, nuclear, energy storage, gas-fired generation capacity, transmission and distribution grids, and LNG infrastructure. The landscape is challenging, but Europe welcomes investments.