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Green agreements and competition law: how can businesses collaborate?

Green agreements and competition law: how can businesses collaborate?

Overview

The climate emergency has had a profound impact on political and economic agendas globally. Sustainability considerations are now firmly embedded in the legal and regulatory environment in which businesses operate, and in the expectations that investors and customers increasingly place on corporates.

Businesses are re-examining their policies, processes and supply chains in light of this, searching for ways in which they can not only meet best practice standards but also actively contribute to a more sustainable world.

However, sustainability projects are often expensive, involving the implementation of time-intensive and complex processes. This may mean that some environmental initiatives are simply out of reach for individual businesses and can only effectively be put into practice through cooperation. The question many are asking is whether the competition rules pose a threat to businesses seeking to pursue green initiatives, or whether they can be used to complement, and support, the fight against climate change. Guidance from competition authorities to date has been scant. However, more is expected in the coming months to shed light on how businesses can best ensure the compliance of their sustainability agreements with UK and EU-wide competition rules.

Sustainability and the competition rules

Many sustainability agreements won’t raise competition concerns at all, for example those that don't lead to increased prices, reduced choice or innovation, or the sharing of competitively sensitive information between competitors. However, at the other end of the scale, some may seek to highlight sustainability goals as a means of so-called "greenwashing" cartel agreements (although their ability to do so in the future may be hindered by the EU's, and eventually UK's, introduction of requirements to report green taxonomy-aligned turnover and investments – see our briefing here as regards the EU and see the UK Government's update here).

Those agreements that fall in the middle require a more detailed analysis: i.e. projects that impact the parameters of competition but also pursue genuine green objectives. For example, how is an agreement to be viewed in competition law terms if it involves businesses agreeing to confine their ranges to a more sustainable product line? On the one hand (and as highlighted by the Dutch competition authority) agreements aimed at removing less sustainable products from the market are unlikely to raise competition issues provided they do not appreciably affect price or product diversity. However, what about those agreements that do affect prices, due to an arguably higher product quality or increased production costs?

The European Commission recently found that three car manufacturers had infringed competition law for taking technical cooperation in relation to emission cleaning technology beyond what was considered legitimate, and imposed fines totalling EUR 875,189,000. In the Commission's words, its decision was "about how legitimate technical cooperation went wrong". The Commission noted that it was the first time it had found that collusion on technical development amounted to a cartel, indicating that the case should perhaps be seen as an exception rather than indicative of a hardened stance in relation to technical cooperation. The Commission also noted that, given the novelty of the case, it had provided the parties with guidance on aspects of their cooperation which raised no competition concerns – indicating that the Commission was keen not to dissuade companies from legitimate cooperation.

Even if agreements do raise competition concerns, they may be exempted from competition law rules if they generate benefits that outweigh their harm, if consumers receive a fair share of the benefits, and if the benefits could not have been achieved in a less restrictive way (e.g. through individual action rather than market collaboration).

But many questions remain unclear, for example:

  • How do businesses quantify the environmental benefits generated by an agreement? Historically, European case law has focused on the direct cost savings achieved by a green initiative, or the willingness of consumers to pay for the environmental benefit. However, this approach does not adequately encompass the wider, and unquantified, environmental benefits. This is something a number of UK businesses (including certain listed companies, large private companies, asset managers, insurers and FCA-regulated pension providers) may well be turning their minds to in the context of the climate-related disclosures they will be required to make once UK regulators fully implement the recommendations of the Task Force on Climate-Related Financial Disclosures (or TCFD) – see our briefing here

  • And who do the benefits need to accrue to? The protection of consumers has traditionally been considered synonymous with ensuring lower prices or increased quality for customers in the relevant market. However, when considering climate change, the approach should arguably be broadened to include all consumers, wider society, and even future consumers.

Given these current uncertainties, businesses may have been dissuaded from taking the vital action they could be taking to contribute to achieving a sustainable society. 

What are the UK CMA and European Commission doing to increase legal certainty in the field of green agreements?

In terms of the applicable legal framework, nothing has changed yet (at least in the EU and UK). However, a number of national competition authorities across Europe have issued guidance or statements clarifying their support for genuine sustainability initiatives.

As regards the UK Competition and Markets Authority (CMA):

  • The transition to ‘net zero’ carbon emissions is one of the strategic priorities for the CMA. Its Annual Plan makes clear its aim to support businesses in adapting to climate change and expresses support for businesses engaging in sustainability initiatives. Indeed, earlier this year, the CMA published a high level document seeking help businesses better understand how competition rules apply to sustainability agreements.[1]

  • Further guidance is expected following completion of the CMA's review of the retained EU block exemptions on vertical and horizontal agreements. In relation to vertical agreements, the CMA intends to cover environmental sustainability issues in its eventual guidance on the topic, a draft of which is expected to be issued for consultation later this year or early 2022. Given that environmental sustainability is more likely to raise competition concerns in the context of horizontal agreements, the CMA's review of the retained EU horizontal block exemptions is eagerly awaited: due to be completed before the end of 2022.

  • The CMA has recently been asked by Kwasi Kwarteng, the Department for Business, Energy & Industrial Strategy (or 'BEIS') Secretary of State, to advise how the UK can better use the tools available under competition and consumer law to achieve the Government's 'net zero' and sustainability goals. The CMA has been asked to provide its advice in this regard in early 2022.

  • The final report in the CMA's market study into electric vehicle charging was published in July 2021, in which the CMA made certain recommendations aimed at boosting roll-out of chargepoints, opening up competition between charging providers and building public confidence in the sector. The CMA has also launched a competition law investigation into long-term exclusive arrangements between Electric Highway (a chargepoint provider) and three motorway service station operators.

At the EU level, the ongoing review of the horizontal cooperation rules has identified a need for European Commission guidance on collaborations pursuing sustainability goals. In line with the questions raised above, stakeholders have identified a need for clarity on the type of benefits (e.g. out of-market efficiencies including CO2 reductions and animal welfare) that can be taken into account in weighing against the possible restrictive effects of a green agreement. The Commission currently plans to publish draft revised rules for consultation at the start of 2022, with a view to having the new rules and guidance in place before the end of 2022.

 

[1]  https://www.gov.uk/government/publications/environmental-sustainability-agreements-and-competition-law/sustainability-agreements-and-competition-law.

Conclusion

Views diverge as to the precise role that competition law can, and should take, in addressing climate change. What is clear, however, is that the sustainability debate is set to continue and that the competition authorities are looking to play their part. The ongoing review of the vertical and horizonal block exemption regulations should provide welcome guidance as to how businesses can self-assess their green agreements. However further clarification is needed in order to support, and incentivise, businesses to pursue 'net zero' goals.

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