AI capex cycle – war-proof for now? And the EU Emissions Trading System at a crossroads
From carbon pricing dysfunction (ETS) to AI capex sustainability, our publications this week scrutinize how structural transitions (climate + technology) are increasingly shaped by energy shocks, geopolitics, and capital allocation constraints. We’re also including 2-3 recently published papers that pertain to energy resilience, materials constraints, and geopolitical risk – in case you missed them.
AI capex cycle – war-proof for now
The full report at your fingertips here.
AI hype deflates amid the capex-monetization debate. Despite strong recent earnings, investor focus has shifted from profitability boost to revenue growth trajectory and cash-flow visibility, particularly given hyperscalers’ elevated capex plans (≈USD575bn, +50% expected in 2026) and weakening sentiment toward software amid risks of AI-driven revenue dilution. Our AI Bubble Risk Monitor continues to signal moderate bubble pressures: exuberant positioning has cooled but widening credit spreads send signals of a higher market sensitivity over balance-sheet quality. Rising geopolitical tensions in the Middle East have further reinforced a rotation away from high-valuation tech as risk-off dynamics regain prominence.
The higher volatility regime will test the AI development regime, but the capex super-cycle remains intact for now, supported by strong, counter-cyclical demand. Technology capex has historically been sensitive to the macroeconomic environment and notably energy shocks as new inflationary pressure often results in higher interest rates, and consequently higher investment costs. In the US, tech is among the capital-intensive sectors most negatively impacted by severe energy price variations (~-30% correlation) but unlike energy, basic materials and utilities, the drop in investment does not result from windfall benefits stirred up by price effects. Nevertheless, hyperscalers’ dominant market positions and substantial cash reserves reduce sensitivity to macroeconomic and geopolitical shocks. In parallel, public-sector investment is accelerating, driven by digital sovereignty and infrastructure build-out agendas. The data-center pipeline is robust (x2 at ~200GW by 2030) and momentum remains resilient despite geopolitical tensions, as illustrated by Germany’s plan to double its capacity over the same horizon.
Energy volatility may reshape capex allocation rather than overall scale. While near-term spending levels appear secure, the current concentration in data centers and cloud infrastructure could evolve. AI-related orders benefit from priority access within semiconductor supply chains, limiting immediate exposure to potential disruptions in South Korea and Taiwan linked to LNG and helium supply risks. However, a further ~50% increase in chip costs – as seen in Q1 2026 – could delay project timelines and accelerate the shift toward leasing models to share capital intensity (with estimated savings of 20–30%). At the same time, the case for expanding critical equipment and raw material production outside Asia is strengthening as current tensions expose the risks of supply-chain concentration and may rebalance investment away from the current bias toward software and computing services.
How are markets trading the “AI theme”? Focus is shifting from efficiency gains to revenue delivery. While consensus broadly reflects current momentum, it is increasingly exposed to execution risk on both capex discipline and revenue realization. Valuations – mid-20s P/E for large caps – remain broadly justified but are vulnerable to short-term rotations in a high-volatility environment. The long-term outlook remains supportive, with capex anchored in tangible infrastructure orders that are partly decoupled from the pace of AI adoption. However, value creation is likely to be uneven across the technology stack, with relative winners in semiconductors and telecom equipment, and more challenged segments in software and consumer electronics.
The full report at your fingertips here.
Signal without response: Why the EU ETS needs resolve, not redesign
The complete analysis can be found here.
The EU Emissions Trading System (ETS) is at a political and structural inflection point, with allowance prices falling sharply by around -24% in the first two months of 2026. The conflict in Iran and associated energy price and inflation expectations have additionally spurred proposals to use the ETS as a lever for short-term price relief. Unlike earlier episodes of price volatility rooted in energy-market fundamentals, the current turbulence reflects growing political questioning of the ETS’s long-term design, compounded by concerns over industrial competitiveness as free-allowance phase-outs begin. Geopolitical pressure around Iran adds to this risk. The use of ETS revenues for price support or direct market intervention risk defeating the steering purpose of the system or creating dangerous lock-in effects.
Three ETS fault lines: free allocation has shielded more than 90% of industrial emissions from direct carbon costs but this is set to change; the ETS has driven substantial emission reductions in the power sector but not in industry and revenue recycling is falling short of its potential. At current prices, full exposure would cost 0.9% of gross value added in the industry sector, a real burden for energy-intensive firms that cannot pass carbon costs through to customers given high energy costs, strong international competition, and the limited offsetting potential of the Carbon Border Adjustment Mechanism (CBAM). Since 2005, power sector emissions have fallen by -54%, while industrial combustion emissions declined by a more moderate -33%. Renewables have made decarbonization viable at prices below EUR50/tCO2, while industrial options such as green hydrogen and low-carbon steel carry abatement costs well in excess of EUR100/tCO2. Persistent price uncertainty, with allowances oscillating in a EUR50–98/tCO2 corridor since 2022, has further weakened the investment case for capital-intensive industrial transformation. Last, only 16% of recycled revenues flow back into energy and industry, the sectors directly covered by the ETS, while 51% is directed toward non-covered sectors. A cumulative EUR41bn went undeployed for climate action between 2013 and 2024, risking a financing trap where industry bears rising carbon costs without the capital needed to decarbonize.
ETS2 is better positioned than ETS1 but that advantage is eroding. Unlike ETS1, where abatement economics were the binding constraint, low-carbon alternatives in transport and buildings are already cost-competitive. The remaining barriers are political and financial: EUR113bn in annual fossil-fuel subsidies undermining the price signal, policy reversals on fossil boiler phase-outs, unaffordable EVs and financing frameworks still unequipped to meet household-level transition costs at scale. With household exposure potentially reaching EUR420 per year by 2030, these are policy choices that should be addressed before the carbon price arrives in 2028.
The ETS does not need a redesign but rather targeted reforms to restore price credibility and close the investment gap. Seven priorities stand out: establishing a credible long-run EUA price corridor; scaling up Carbon Contracts for Difference to bridge the abatement cost gap in hard-to-abate sectors; introducing binding revenue recycling standards linked to the new decarbonization bank; prioritizing shared infrastructure for CO2 transport, hydrogen and industrial clusters; conditioning the free allowance phase-out on the availability of abatement technologies and transition funding; expanding CBAM to cover downstream sectors currently left exposed and ensuring ETS2 revenues are transparently earmarked for households most exposed to its regressive cost distribution.
The complete analysis can be found here.
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