In line with its public commitment to promote environmental sustainability and help accelerate the transition to a net zero economy, the Competition and Markets Authority ("CMA") has recently published its draft guidance on the application of the Chapter 1 prohibition to environmental sustainability agreements ("Guidance"). If implemented, the Guidance will provide business with greater comfort in assessing the legality and risk profile of their environmentally focussed agreements – at least in the UK.
The future for UK environmental initiatives: CMA's green light to be part of the solution?
Whilst not being the first national competition authority to set out its agenda for the ESG debate, the headline points of the UK CMA's draft Guidance do not disappoint. As always, the devil is in the detail. Nevertheless the CMA is clearly signalling its commitment to playing its part in tackling the climate emergency alongside other competition regulators worldwide.
As explained in this briefing, in our view the CMA has gone a long way to achieve this. The Guidance will be welcomed by businesses and competition law practitioners alike. However, whilst much is given in the way of pro-collaboration steers, there are also some areas in which the CMA stands its ground on traditional competition law principles and imposes practical or legal limits on the flexibility that it is willing to offer.
It is worth noting at the outset that the Guidance applies only to ‘environmental sustainability agreements’ (with 'climate change agreements' being a sub-set deemed worthy of more permissive treatment): but, unlike the European Commission's ("Commission") stance, not to a broader notion of sustainability or ESG agreements.
- The term environmental sustainability agreements captures agreements (between actual or potential competitors) aimed at alleviating or assessing the adverse impact that economic activities have on environmental sustainability. Examples include agreements aimed at improving air or water quality, conserving biodiversity or promoting the sustainable use of raw materials.
- Climate change agreements are a sub-set of agreements which gain better protection from competition law under the Guidance. They are agreements which "contribute towards the UK’s binding climate change targets under domestic or international law". Examples include agreements between manufacturers to phase out a particular production process involving the emission of carbon dioxide, an agreement between delivery companies to switch to using electric vehicles, or an agreement not to provide financing or insurance support to fossil fuel producers.
Other than drawing the distinction between the two kinds of agreement, providing a small number of examples, and referring to some of the UK's binding climate change targets, the Guidance does not provide any further detail for parties on how to identify whether an agreement is an environmental sustainability agreement or a climate change agreement.
Whilst some agreements will clearly fall within one category or the other, there may turn out in practice to be cases where the attribution is not clear. For example, the link to the UK's binding climate change targets might be somewhat indirect or remote. It may also be the case that environmental collaborations pursue a mix of several objectives (including but not limited to the UK's binding climate change targets), and while in those circumstances it might be sensible to imagine that the CMA would look to where the 'centre of gravity' of the collaboration lies, that is not 100% clear from the Guidance as it presently stands.
Nevertheless, the pro-sustainability tone is welcome, and these uncertainties should be read in light of the CMA's offer of informal guidance where necessary (see below).
Perhaps the most controversial aspect of the competition law / ESG debate to date has been in the area of individual exemption: if your environmental collaboration restricts competition, it may still be exempted on the basis that it is delivering wider beneficial effects.
However, for the individual exemption to be applicable, it is necessary for 'consumers to receive a fair share of the benefits'. This is particularly challenging in an ESG context given that the wider environmental benefits of many such collaborations accrue to society as a whole, and often over a number of generations, but may not necessarily benefit the actual consumers of the goods in question (see our previous briefing here).
Whilst it remains the case that parties need to demonstrate that the benefits resulting from an agreement are passed on to the relevant UK consumers, and that those benefits outweigh the harm consumers will suffer, the Guidance now provides helpful material on how the exemption test is to be applied in practice - including by introducing a broad concept of 'relevant consumer', particularly if the agreement is classed as a 'climate change agreement' (see Section 3). In so doing, as signalled in its earlier public comment (e.g. see our briefing here), the CMA has arguably shown greater flexibility than the European Commission's current position.
Who do the relevant benefits need to accrue to?
Relevant consumers are generally considered to be the consumers of the products or services to which the agreement relates (i.e. consumers within the relevant market). However, the CMA acknowledges in the Guidance that:
- Where two markets are related, benefits achieved on separate markets can be taken into account, provided that the consumers affected by the restriction and receiving the benefit are substantially the same or substantially overlap.
The CMA gives the example of two airlines cooperating to achieve a sustainability benefit on a certain airline route, which leads to higher prices for passengers. For consumers who travel both on the relevant airline route and on connecting routes, it may be appropriate to take into account benefits to those consumers accruing over both sets of routes.
- Where benefits extend beyond the consumers of the relevant products, a proportion of those wider environmental benefits enjoyed by the consumers of the product in question can be taken into account.
The CMA gives the example of a societal benefit (arising now or in the future) to restricting plastic use, but only the proportion of this wider societal benefit that can be apportioned to consumers of the product in question (and, where appropriate, in related markets) is relevant for the assessment.
- For 'climate change agreements', a more permissive approach to assessing consumer benefits is proposed. For these types of agreements, the totality of the benefits to all UK consumers arising from the agreement could be taken into account, due to the 'exceptional' nature of the harms posed by climate change (see further detail below).
What benefits can be taken into account?
The CMA takes a broad approach to the scope of potential benefits, and to their quantification.
- Benefits can include future as well as current benefits (with vital recognition from the CMA that it is not unusual for future benefits of environmental agreements to materialise over a long period of time).
- Those benefits can accrue to direct as well as indirect users (in other words, they can accrue not just the direct customers of the parties to the agreement, but also those who purchase from those customers).
- Consumers may benefit directly as a result of their consumption or use of the products covered by the agreement. For example, an agreement to replace plastic packaging with packaging made from other more environmentally sustainable material could benefit consumers directly by increasing the longevity of the products in question or because it reduces the price of the product.
- Consumers may also benefit indirectly, where they value the broader environmental sustainability benefits of the agreement and the benefits to others. For example, consumers may be willing to pay higher prices for furniture made from sustainable wood because they value the (indirect) benefit of not contributing to deforestation, and not (exclusively) because of any direct use benefit such as an improvement in furniture quality or longevity. Albeit, the CMA would expect to see evidence (e.g. surveys) that consumers do value these indirect sustainability benefits.
- Drawing on expertise from the Dutch and Greek authorities, benefits may be non-monetary – albeit the CMA suggests that these benefits will still need to be quantified by reference to established techniques if it is unclear the total benefits outweigh the total harm. Crucially, the door is expressly opened for parties to approach the CMA to discuss their approach, and the ways in which environmental benefits can be quantified. The CMA helpfully signals that it will take a pragmatic approach to quantifying non-monetary green benefits, commensurate to the size of the agreement's likely effect. This is welcome particularly as regards initiatives pursued by smaller market players which may not have the in-house expertise or resources to produce detailed evidence. However, the CMA has stopped short of the flexibility offered by Dutch competition authority, a trailblazer in the area, which provides that no quantification is needed if the firms involved have low combined market shares (or the disadvantages for competition are clearly less than the advantages for the agreement).
In a further step towards the CMA's stated commitments, the Guidance takes a more permissive approach to the third exemption condition (fair share of benefits to consumers) in the context of 'climate change agreements'.
- Departure from the normal approach to fair share – all benefits to UK consumers relevant, not just those in relevant markets
As set out above, the CMA therefore considers it appropriate, in the case of climate change agreements, to depart from the general approach and exempt such agreements if the ‘fair share to consumers’ condition can be satisfied taking into account the totality of the benefits to all UK consumers arising from the agreement, rather than apportioning those benefits. The CMA takes this view due to the 'exceptional' nature of the harms posed by climate change.
- First mover disadvantage
The CMA acknowledges the concern that only having regard to benefits accruing to consumers in the relevant market would have perverse and harmful effects. If, for example, an individual business is minded to switch to energy use that will reduce carbon emissions, which will be more costly in the short term (giving an immediate competitive disadvantage), it might be reluctant to do so unless its competitors in the same market do so too. The CMA expressly states that such cooperation to switch should be encouraged.
However, the CMA refers to the importance of quantifying direct and indirect benefits of climate change agreements, and whilst a nod is given to flexibility in a firm's chosen methods, the parties are nonetheless required to prove those benefits are "in line with" existing legally-binding commitments or national/international targets. The Guidance refers to some potential avenues to explore in this regard, but there will be many other possibilities open to parties given that there has now been several decades of literature on environmental economics.
It is also worth noting that, in order to prove that the benefits of the agreement exist, parties may well need to clearly demonstrate the extent of the consumer harm (e.g. higher prices) arising from the collaboration which is being offset by those benefits.
It remains to be seen exactly how much evidence the CMA is likely to require on that front, how closely green benefits need to align to pre-existing commitments/targets, and how the CMA's 'open door' policy may assist.
The Guidance also contains material on those agreements at either end of the spectrum that are either likely, or unlikely, to infringe competition law. Whilst the examples provided are helpful, perhaps unsurprisingly the specifics do not particularly turn the dial on what is already known or expected to be the case.
Environmental agreements unlikely to infringe competition law:
- Agreements which do not impact the parameters of competition, such as training and awareness campaigns.
- Agreements to do something jointly that no individual party could do on their own, such as joint ventures involving new technology coming to market.
- Cooperation required by law, but not merely 'encouraged' by law.
- Pooling information about suppliers or customers, such that businesses can assess their supply chain for ESG compliance.
- Standards, as long as they are framed in a fair, reasonable and non-discriminatory (FRAND) way.
- Phasing out of non-sustainable products, but only if such phasing out has no impact on prices in the relevant market.
- Industry-wide efforts to tackle climate change, such as non-binding targets and open source common methodologies for calculating impact.
Environmental agreements more likely to infringe:
- 'By object' restrictions of competition. The CMA notes that particular caution is needed in relation to environmental sustainability agreements which involve price fixing, market or customer allocation, limitations of output or limitations of quality or innovation, as these typically restrict competition 'by object’. This means that such agreements are regarded as by their very nature harmful to competition.
- Examples. The CMA gives the example of an agreement between competitors on the price at which they will sell products meeting an agreed environmental sustainability standard; and also an agreement between competitors aimed at limiting their or others’ ability to innovate in order to meet or exceed a sustainability goal or to achieve that goal more quickly.
- Car Emissions case. The second example is drawn from the Commission's Car Emissions investigation (2021), in which three car manufacturers were fined for their conduct in connection with developing selective catalytic reduction (SCR) systems, which are used to remove Nox from car exhaust flows. The Commission found that the parties colluded to limit technical development in the field of Nox-cleaning and thereby limit customer choice.
- Pro-ESG messaging. However, even where the CMA acknowledges that some sustainability collaborations could be anticompetitive, it still holds out the possibility that: the pro sustainability context of an agreement may mean that the collaboration is not deemed anticompetitive 'by object' (e.g. as regards an industry-wide agreement not to purchase unsustainable inputs); and/or such collaborations may nonetheless be justified even if they are anticompetitive 'by object' (e.g. by reference to the individual exemption criteria discussed or certain kinds of joint purchasing activity).
The CMA's general messaging around its support for environmental initiatives continues in its discussion of procedures and enforcement action.
It signals that prioritisation of strict environmental agreements for enforcement action will be lower, encourages parties to seek informal advice, and voices a commitment to protect parties from fines in circumstances where fulsome discussions have been held with the CMA.
Nevertheless there are, perhaps unsurprisingly, some important limits to this approach.
- Informal guidance
The CMA says that it will operate an "open-door" policy (somewhat reviving its historical 'fireside chat' option), whereby businesses can approach the CMA for informal advice on their proposed collaboration.
This will surely be helpful to certain parties seeking clarity on their collaborations. However, in seeking advice, parties will need to be prepared to: (a) self-assess the agreement first before coming to the CMA; (b) highlight any issues that are not clear from the Guidance; (c) provide the CMA with information and presumably data relevant to the collaboration; (d) likely implement changes required by the CMA; and (e) engage in some degree of monitoring and subsequent adjustment.
In other words, akin to the CMA's response to the Covid-19 emergency, where parties decide to approach the CMA for informal guidance on a sustainability collaboration, in some cases this will involve trading off some freedom to design the scheme unilaterally (allowing the CMA the ability to propose changes), against the greater certainty that no enforcement action would be taken.
- Enforcement action
Whilst the CMA signals that it will not take enforcement action against environmental sustainability agreements, including climate change agreements, this only applies where the agreement: (a) clearly corresponds to the examples used in the Guidance, and (b) is consistent with the principles set out in the Guidance. The CMA's stance is that, if parties are in doubt, they should consider contacting the CMA.
It is therefore questionable how much comfort these provisions give in practice, as a lack of enforcement over conduct falling squarely within guidance and its handful of examples would in any event be unexpected.
- Protection from fines
The CMA will not issue fines against parties that implement an agreement which: (a) was discussed with the CMA in advance, (b) the CMA did not raise any concerns (or those concerns were addressed), (c) did not involve the parties withholding relevant information from the CMA, and (d) any required adjustments have been made to bring the agreement into line.
Again, whilst welcome, we query how far these provisions move the dial in practice.
- Publication of information
The CMA will, if approached for guidance, typically expect to publish a summary of each initiative, together with an assessment of the 'risks and solutions'. Whilst the CMA will take confidentiality representations from parties into consideration, businesses approaching the CMA should therefore be prepared for details of its initiatives to be made public.
The CMA is consulting on its Guidance until 11 April 2023. A final version is keenly awaited: however, given the numerous steps that the CMA has already engaged in, significant changes are not expected. The Commission is also set to publish its final, revised horizontal guidelines shortly, having consulted on its proposed draft. Both the UK and EU guidance are expected to come into force on 1 July 2023, when current rules expire.
Under the current drafts, the UK and EU positions are broadly consistent (see also here). However, important differences have emerged, for example in the CMA's explicitly more permissive approach to climate change agreements, similar to the additional flexibility shown by the Dutch competition law authority. The scope of the UK and EU guidance also differ: with the Commission covering the concept of sustainability to include not only environmental/'net zero' goals, but also other activities that support social development (including labour and human rights). The CMA's focus, by contrast, is specifically on environmental agreements. It remains to be seen how the UK competition authorities will treat that wider set of ESG-related initiatives.
It also remains to be seen what role private antitrust litigation may play in the extent to which businesses are keen to make full use of the CMA's 'open door' policy to environmental agreements. As noted previously, we are already seeing private (often funded) litigants bringing antitrust litigation in the UK Competition Appeal Tribunal without prior CMA intervention. Antitrust litigation risk will be one of the factors that businesses will want to consider given the CMA's stated intention to publish key facts on sustainability initiatives that come across its desk.
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