Cooperation on Sustainability in the Private Sector – Is Competition Law a Roadblock?

Introduction

Environmental policies are at the top of the European political agenda. The European Union and the Member States have all signed up to the 2015 Paris Agreement, which binds the Parties to an aim of limiting global warming to 1.5 degrees Celsius.[i] They also recently, in December 2022, agreed to wide-ranging biodiversity goals, including protecting 30% of their oceans, coastal areas and inland waters by 2030, under the Kunming-Montreal Global Biodiversity Framework.[ii]  

These commitments have been paralleled by a flurry of activity by the European Commission and European legislators, much of it under the overarching “European Green Deal”.[iii] This has included the adoption of both the European Climate Law setting out the aim of climate-neutrality by 2050 and a 55% reduction in the emission of Co2-equivalents by 2030, and a large set of specific legislation aiming to put those goals into practice.

While the primary responsibility for environmental policies must lie with the European Union and the Member States, the private sector also has an important role to play. Ensuring sustainability in the private sector requires a coherent policy which encourages private industry to work towards public aims. As stated by Margrethe Vestager, Executive Vice-President of the Commission and Commissioner for Competition, all of Europe’s policies – including competition policy – will have their role to play in the pursuit of these objectives.[iv]

Competition law and the environment

It can be difficult to incentivise private sector action on sustainability. Economically, the problem is that environmental damage constitutes so-called negative externalities, i.e., costs of the production or consumption of a good which is borne neither by the seller or the buyer – but by a third party, for example damage caused by climate change or plastic waste. Negative externalities represent a type of market failure, because relying purely on market forces will lead to a more expensive competitor winning out as long as they can push their higher costs onto third parties.

Undertakings wanting to remedy this, and take environmental responsibility in line with EU policy goals, face a dual challenge of the first-mover disadvantage, because of large costs to establish new sustainable technology and supply-chains, and a risk of competitors free riding on their work. For this reason, many undertakings will find that the most realistic way to improve their sustainability will be through cooperation, either to set minimum standards, to put pressure on their supply chain or to share the cost of expensive R&D.

Such cooperation can, however, risk distorting competition and therefore risk the ire of National Competition Authorities or the Commission. A too eager application of competition law by these institutions can risk precluding such agreements that could, overall, be of socio-economic benefit.  

Article 101(3) TFEU, and its counterparty in Article 53(3) EEA and § 10(3) of the Norwegian Competition Act, contain an exception by which agreements that distort competition will still be accepted if they contribute to increased efficiencies. This could in theory allow agreements that contribute to ecological efficiencies, but has traditionally focused only on the advantages efficiencies create for consumers in the same market, in the form of a cheaper, higher quality or otherwise more desirable product.[v]

Such a narrow approach, where only efficiencies benefiting direct consumer in the same market are considered, will leave little room to take into account the wider benefits that could be gained from cooperation on sustainability. Subsequently, such agreements will not be able to benefit from the exemption and will find themselves prohibited for distorting competition.  

This has led to worries that competition law as it currently stands might be a roadblock to climate action in the private sector.

The 2022 draft Horizontal Guidelines – a new approach?

The Commission took account of these worries and launched a review and evaluation process of the Horizontal Block Exemption Regulations and the Horizontal Guidelines in September 2019.[vi] One of the aims was to revise the rules on anti-competitive agreements to ensure that competition law would not be a hindrance to necessary cooperation on sustainability. As stated by Margrethe Vestager:

“Horizontal cooperation may lead to substantial economic and sustainability benefits, including support for the digital and green transition. The proposed revised rules aim to keep up with developments so that beneficial cooperation can take place, for example when it comes to sustainability or data sharing.”

New Draft Horizontal Guidelines were sent out for consultation on the 1^st of March 2022. The draft contained a new chapter 9 on “Sustainability Agreements”,[vii] which contained important clarifications that will make it easier and more foreseeable for companies to cooperate on issues of sustainability, including:

• An agreement which has sustainability as its object will be less likely to be seen as having an anticompetitive object under Article 101(1) TFEU.
• When considering if an agreement contributes to efficiencies benefitting the consumer, the Commission will consider not just the use-benefit, like higher quality products, but also consider non-use-benefits like the fact that consumers might appreciate a more sustainable product even if it does not improve its use.
• The Commission will not just take account of benefits to the direct consumer, but will also consider collective benefits to the larger group of consumers in the relevant market affected by the restriction on competition.

In essence, the draft gives more leeway for companies to enter into sustainability agreements and has important clarifications which will let Competition Authorities more correctly take into account the total efficiencies of sustainability agreements on the markets which they affect.

Some issues solved – some issues remain?

Despite important clarifications that will likely be welcomed by private industry, the Commission draft guidelines can also be criticised for not giving any leeway allow reductions of negative externalities to be taken into account where that only benefits non-consumers in other markets. In essence, it seems the environment only matters where it can benefit the European consumer.

The approach of the Commission can be contrasted with that of the Dutch Autoriteit Consument & Markt (ACM), which has published their own Guidelines on Sustainability Agreements.[viii] The ACM introduced a new category of so-called environmental-damage agreements, for which they find it necessary to adopt a different interpretation of Article 101(3) TFEU where the relevant consumers do not need to be fully compensated for the distortion of competition.

The logic of the ACM is that the negative externalities represent a market failure, the consequences of which is partly to blame on the demand of consumers for damaging products. As the ACM states:

“In such situations, it can be fair not to compensate users fully for the harm that the agreement causes because their demand for the products in question essentially creates the problem for which society needs to find solutions”.

The ACM is of the opinion that the downsides to the relevant consumers, like higher prices, can be offset by the ecological improvements where those benefits accrue not just to the relevant consumers but also to wider society, in light of the global nature of the environmental problems. The ACM therefore suggests that so-called environmental-damage agreements should be accepted, even if the relevant consumers are not fully compensated, where they fulfil two criteria:

• The agreement must be an environmental-damage agreement, meaning agreements which seeks to reduce damage to the environment in the production or consumption of a good which primarily benefits the wider-society. Examples given include limiting emissions of air pollutants or the waste of raw materials.
• The agreement helps, in an efficient manner, compliance with international or national standards, or the realization of national policy goals.

That second criteria aligns competition law with public climate policy. Anti-competitive agreements seeking to achieve sustainability will only be accepted when pursuing goals set by the international community, the European Union or at least the Member States. These are public policy goals people – including consumers – have democratically supported, which could help justify consumers not needing to be fully compensated for any distortion of competition.

The Austrian Bundeswettbewerbsbehörde (BWB) has taken a similar approach to the Dutch. In September of 2021 the Austrian Cartel Act § 2(1) was amended with an exemption from the prohibition on restrictive agreements where the agreement substantially contributes to an ecologically sustainable or climate-neutral economy. The exemption was made subject to EU competition law where that applies.   

In September 2022 the BWB released their final version of the guidelines on the application of that provision.[ix] The BWB states that some cooperation on sustainability might lead to increased production costs, meaning it is hard to justify them in the traditional benefit-to-consumer manner. In that case:

“The examination schema for the sustainability exemption may be used to justify a sustainability cooperation if efficiency gains connected with ecological benefits are attained as a result of that cooperation. It is then to be assumed ex lege that consumers enjoy a fair share of the benefits.”

In other words, it is clear that also the BWB sees need to clarify an exemption from the traditional consideration of a benefit to the consumer, to clarify that efficiencies in the form of reduced negative externalities, i.e., ecological benefits, can be included. As the BWB states, such ecological benefits typically benefit everyone, so it can be assumed that the relevant consumers receive a fair share of this benefit too.

A more moderate example is the approach taken by the British Competition & Markets Authority. They have not yet released their guidelines on sustainability but have indicated in a published advisory note to the government[x] that they are leaning towards a position closer to that of the Commission. They state that some wider benefits can be taken into account, but ultimately that the consumers must be fully compensated for any detriment if the efficiencies are to be acceptable under Article 101(3) TFEU.

“If a particular agreement or practice restricting competition leads to environmental benefits to a broader group of consumers than just those adversely affected by the restriction of competition, such benefits, in principle, can be taken into account in the ‘fair share’ assessment (…).However, based on existing case law, a share of those benefits must accrue to those consumers who suffer from the restriction of competition, and those consumers must also be fully compensated for the detriment they suffer.”

Interestingly, the Authority notes that its newfound scope to depart from EU competition law, in the wake of Brexit, will leave it more room to flexibly apply or evolve this criterion in the future, in order to facilitate necessary cooperation on sustainability.

Considering environmental efficiencies – the way forward

Considering the clear disagreements between the Commission and some of the National Competition Authorities it is hard to say where the final version of the Horizontal Guidelines will land. The public consultation received a large number of replies – many of which were critical.[xi] The complexity of the question and the divided opinions seems to have led the Commission to delay the new Horizontal Block Exemptions and Guidelines, which were supposed to be finished by the start of 2023 but are now expected by the summer of 2023.[xii]

The Commission will likely take this time to carefully consider the issues, responses and the ongoing debate on the degree to which sustainability-related efficiencies can justifying anti-competitive cooperation in the private sector. Regardless of outcome, it is clear that the new Horizontal Guidelines will clarify that the private sector has some leeway to cooperate on sustainability and will increase the foreseeability of such cooperation compared to the existing framework.

That said, if the final Guidelines are adopted in line with the draft version there will likely remain some tension between EU competition law and EU environmental policies. The approaches of the Dutch or Austrian Authorities illustrate a more flexible and suitable path for the Commission if it wishes to align its policy aims in these two key areas of European policy.  

For now, it unfortunately remains unclear to what degree undertakings can cooperate on environmental efficiencies. The new Guidelines will be of central importance, and SANDS are continuously monitoring these developments.

[i] The agreement is available at https://unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement.

[ii] See the official press release, https://www.cbd.int/article/cop15-cbd-press-release-final-19dec2022.

[iii] An overview of the European Green Deal is available at https://commission.europa.eu/strategy-and-policy/priorities-2019-2024/european-green-deal_en. 

[iv] Competition and Sustainability, speech of 24 October 2019, GCLC Conference on Sustainability and Competition Policy, Brussels. Cited in the Report on Competition Policy 2020, SWD(2021) 177 final, page 26.

[v]  See, in general, the 2004 Article 101(3) Guidelines and the 2011 Horizontal Guidelines.

[vi] See for an overview of the process: https://ec.europa.eu/commission/presscorner/detail/en/ip_22_1371

[vii] See the 2022 Draft Horizontal Guidelines, available at https://competition-policy.ec.europa.eu/public-consultations/2022-hbers_en. Sustainability objectives can course justify vertical restraints as well, see the recently adopted Vertical Guidelines (2022) paragraph 9.

[viii] It is currently in its second draft version, see https://www.acm.nl/sites/default/files/documents/second-draft-version-guidelines-on-sustainability-agreements-oppurtunities-within-competition-law.pdf. See also the ACM Guidelines on the “fair share” to consumers-criterion, https://www.acm.nl/sites/default/files/documents/acm-fair-share-for-consumers-in-a-sustainability-context.pdf and its reply to the Commission consultation, https://www.acm.nl/sites/default/files/documents/acm-respons-to-the-european-commission-proposal-with-particular-regard-to-sustainability-agreements.pdf. The approach of the ACM has been echoed, inter alia, by the Hellenic Competition Commission, see its Draft Staff Discussion Paper on Sustainability Issues and Competition Law (https://www.epant.gr/files/2020/Staff_Discussion_paper.pdf) para 64 following.

[ix] See https://www.bwb.gv.at/fileadmin/user_upload/AFCA_Sustainability_Guidelines_English_final.pdf

[x] https://www.gov.uk/government/publications/environmental-sustainability-and-the-uk-competition-and-consumer-regimes-cma-advice-to-the-government/environmental-sustainability-and-the-uk-competition-and-consumer-regimes-cma-advice-to-the-government#fnref:10

[xi] Critical replies include, inter alia, the American Bar Association, the German Insurance Association and the Netherlands, all of whom worried that the draft Guidelines did not give sufficient leeway to consider out-of-market benefits when it came to the “fair share” to consumers-criterion. The replies to the consultation can be found here https://competition-policy.ec.europa.eu/public-consultations/2022-hbers_en.

[xii] See C(2022) 8874 final,  https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/13570-EU-Competition-rules-specialisation-agreements-extending-the-validity-_en.