As the climate and biodiversity crises loom, coherent efforts are needed in all fields to get to “net zero”. Just as public action is needed, cooperation in the private sector may also prove indispensable to achieve sustainability goals in the short time available.
EU competition rules, as currently interpreted, are unclear and risk hindering virtuous private initiatives (as in the case of the Net Zero Insurance Alliance, whose signatories purposely limited the scope of collaboration to avoid violating antitrust). In a blog post dated January 2021, the UK Competition and Markets Authority acknowledged that businesses and NGOs tend to abandon sustainability initiatives that are unproblematic.
But there may be light at the horizon.
National competition authorities have begun to issue guidelines on sustainability-motivated cooperation:
- in 2020 and January 2021, the Dutch Authority for Consumers and Markets published guidelines to explain how it plans to deal with sustainability agreements between competitors, and a legal memo on the concept of “fair share for consumers”, advocating a more flexible interpretation of EU competition law. Based on these guidelines, two sustainability initiatives in the energy sector were cleared;
- in October 2020, the Greek Hellenic Competition Commission published a Staff Discussion Paper on Sustainability Issues and Competition Law which upheld sustainability agreements under certain conditions;
- in January 2021, the Greek and Dutch authorities commissioned a joint Technical Report on Sustainability and Competition, to quantify social benefits resulting from sustainability agreements;
- in January 2022, the German Federal Cartels Office examined two industry initiatives to show how competition law does not stand in the way of private cooperation genuinely aimed at achieving sustainability goals.
At the EU level, the Commission seemed initially focused on opposing greenwashing cartels, like in the Car Emissions case. Competition Commissioner Margrethe Vestager gave a speech on September 10, 2021, to mark the publication of a Competition Policy Brief. It provided some hope, but not much. While it invited companies to submit agreements for clearance, it also suggested that the Commission would stick to the principle that for an agreement to benefit from an exemption, consumers must be fully compensated for any price increases, and in the same market. Cooperation agreements benefiting society as a whole might not satisfy this condition.
This position is rooted in the idea that it would be unfair to make a limited set of consumers pay for a better environment. But if we consider greenhouse gas emissions as pollution, and apply the “polluter pays” principle enshrined in Article 191(2) TFEU, then we should instead ask whether it is fair to allow producers and consumers to impose costs on those who do not consume.
Many observers anticipated (and several advocated) that EU policy should recognise the importance of industry cooperation, to implement the EU Green Deal. It now looks like the trend may be gaining ground.
It started quietly in December 2021, with an amendment of Regulation 1308/2013 establishing a common organisation of the markets in agricultural products. This amendment excluded horizontal agreements between producers that pursue certain sustainability objectives from the application of competition law. In February 2022, the Commission then launched a consultation on new guidelines for sustainability agreements in agriculture.
Most recently, on February 23rd, the Commission issued a proposal for a Directive on Corporate Sustainability Due Diligence (which has been the subject of extensive debate on this Blog). If approved, Article 8(3)(f) will require companies to “collaborate with other entities, including, where relevant, to increase the company’s ability to bring the adverse impact [on human rights or the environment] to an end, in particular where no other action is suitable or effective.” This must be done “in compliance with Union law, including competition law”: nevertheless, this seems an important recognition that private sector cooperation may be needed to resolve market failures that harm sustainability.
Finally, on March 1st, the Commission published a much awaited draft of revised Horizontal Block Exemption Regulations concerning R&D and specialization agreements, and the accompanying Horizontal Guidelines. The Guidelines aim to provide greater clarity on how to assess sustainability agreements against competition concerns.
The Commission acknowledges that sustainability is an EU policy priority (para. 542), and that sustainability agreements may fall outside the scope of application of competition rules when they do not affect price, quantity, quality, choice or innovation. The Guidelines focus on “sustainability standardisation agreements” as an example (para. 568), and provide a safe harbour for such agreements that meet certain conditions (para. 572).
The Guidelines also address agreements that restrict competition, and guide firms’ self-assessment of when these can be justified in light of sustainability goals, under Article 101(3) TFEU.
A first question in this respect is when agreements can be deemed “necessary” for purpose of attaining a given sustainability objective. Where there is enough demand for sustainable products, cooperation may not be necessary, because companies will compete to be the greenest and cleanest. Even so, the Guidelines recognize that cooperation agreements can be indispensable to reach the sustainability goal faster, or in a more cost-efficient way (para. 582; 585), or to overcome demand-side market failures (para. 586). Private cooperation may be necessary, for instance, in cases where consumers are not able to balance future benefits against the immediate harm they may suffer by effect of the agreement (such as a price increase).
Importantly, the Commission recognizes that individual production and consumption decisions can involve negative externalities –such as pollution or biodiversity loss – that are not sufficiently taken into account by the consumers or producers that cause them, and are not reflected in the price that is paid (para. 545). This would ordinarily be addressed through regulation or taxation. The Commission recognizes however that cooperation may become necessary where public policies and regulations do not fully resolve similar market failures (para. 546; 584). Cooperation that restricts competition may not be necessary where the law already requires firms to take steps individually, but it is on the other hand allowed “to the extent” that regulatory instruments or the European Emissions Trading System (which caps carbon emissions) do not already fully resolve the market failure, or where firms seek to exceed the regulatory targets (para. 583).
The Commission confirms that a restriction of competition can only be justified if consumers in the relevant market receive a fair share of the benefits resulting from the agreement. But what is a “fair share”? There will undoubtedly be debate about the statement in the Guidelines that consumers receive a fair share of the benefits “when the benefits deriving from the agreement outweigh the harm caused by the same agreement, so that the overall effect on consumers in the relevant market is at least neutral” (para. 588). This statement appears to be a compromise, in several respects.
First, the Commission no longer says that consumers in the relevant market should be fully compensated, within that same market. Instead, para. 603 of the Guidelines provides that “where consumers in the relevant market substantially overlap with, or are part of the beneficiaries outside the relevant market, the collective benefits to the consumers in the relevant market occurring outside that market, can be taken into account if they are significant enough to compensate consumers in the relevant market for the harm suffered.”
Second, the Commission acknowledges the existence of three different kinds of benefits that can be taken into account to determine whether overall effect is neutral or beneficial:
- (i) individual use value benefits, such as improvements in product quality or lower prices, which arise in the relevant market (para. 590);
- (ii) individual non-use value benefits, which include indirect benefits resulting from the consumers’ appreciation of the impact of their sustainable consumption on others (para. 594); and
- (iii) collective benefits on different markets, such as positive externalities that benefit society as a whole (para. 601).
The recognition of individual non-use benefits and collective benefits in particular marks a change in the Commission’s approach. Taking account of these benefits appears consistent with the Court of Justice’s holding in Mastercard (para. 234) that all “appreciable objective advantages” can be considered in the assessment. Climate change mitigation, the protection of biodiversity and the reduction of large scale pollution would easily qualify as such.
Much will depend on the interpretation of “substantial overlap”, “part of”, “significant”, and “neutral”. In principle, these benefits can be quantified (as discussed in the Dutch-Greek joint statement). But the Guidelines are silent about which collective benefits are “related” to the consumers of the products that are covered by the sustainability agreements, and whether a portion of those collective benefits must be allocated to such consumers. Consider, for instance, an agreement to reduce deforestation of tropical rainforests, or an agreement requiring airlines to use sustainable fuel: should we take into account for this purpose (i) all global collective benefits, (ii) any share of benefits that arises in the EU; or (iii) any share of benefits that are enjoyed by EU consumers? Use of non-sustainable fuels and deforestation are worldwide problems that affect everyone: counting only EU consumers’ portion of benefits would be unreasonable. If we were to apply this principle, some of the most necessary and beneficial agreements would not be allowed. All global collective benefits should count.
Another example: the Dutch Authority for Consumers and Markets proposed to allow agreements to comply with the law in countries where the law is not adequately enforced (deforestation rules in Brazil are one instance). The Guidelines unfortunately do not include this example. Yet they should. How can there be any restriction of competition in such a case? An agreement to comply with an unenforced law should be permissible, since firms are not supposed to compete on breaching the law and getting away with it.
It is problematic that the Commission would apparently not allow agreements that have only regional benefits – such as preventing the use of pesticides that harm pineapple or cotton growers, where these are legal in the country of production, but causes serious local harm. If the regional benefits help abate climate change, which is also a benefit to the EU, they are presumably permissible if the other conditions are met. But prohibiting agreements that reduce very serious pollution outside the EU creates the impression – which the Commission will want to avoid – that it is acceptable to cause harm so long as the harm does not affect EU citizens, and that it is appropriate to agree to limit serious harm but only if it benefits EU consumers. This approach is hard to defend from a moral and a sustainability perspective. The Commission should consider whether approval might still be possible taking into account non-use value.
Antitrust enforcers, at least in the EU and possibly the UK, appear willing to recognise the importance of cooperation in the private sector to achieve the goal of a more sustainable economy. They should be commended for that. While private actors would benefit from global guidelines, the recent draft Horizontal Guidelines provide a promise – a hope that EU competition law could enable private sector cooperation aimed at implementing sustainability goals. There is room for improvement, but it will now be for private actors to propose creative initiatives to help reach and exceed the EU’s (and the world’s) sustainability targets.
This post was originally published on the Oxford Business Law Blog (OBLB) and can be accessed here.