The European Green Deal aims to transition the EU internal market into a sustainable economy. Public and private entities are rallying behind this green ambition and working towards a new circular economic model. Because of the additional cost (and unavoidable price increase), it is sometimes a competitive disadvantage to be the first undertaking to move towards a more sustainable product or production process. To overcome this dilemma, competitors might want to take the first step together and create a level playing field. In such cases, competition law must be taken into consideration, as such a joint sustainability initiative might have anti-competitive effects. Businesses are increasingly looking for specific guidance from competition enforcers on how they can cooperate in pursuit of sustainability goals. We obtained some insights from our recent sustainability webinar where we discussed the European Commission's new policy brief.
Buildup to a green competition policy
In 2020, the Commission's call for contributions on the crucial issue of making competition and sustainability policies work together to support the Green Deal, received a robust response. After a sustainability conference in February 2021, the Commission committed to setting out its conclusions in a separate paper. In early September 2021, it circulated a competition policy brief exploring how sustainability concerns could be integrated into ongoing competition reviews, in antitrust, merger control and in state aid.
By then, the Dutch competition authority (ACM) had already published draft guidance on the role of competition law in promoting sustainability agreements, championing a progressive stance towards pro-sustainability cooperation (see our previous article). In this context, the ACM has still not finalised its draft guidelines, because it prefers an EU-wide harmonised competition policy. It will nevertheless use these draft guidelines in the interim as a reference instrument in its review of sustainability initiatives and in its enforcement actions. The ACM extended an open invitation to companies to discuss the acceptability of their joint proposals. The ACM has reviewed four agreements under these new sustainability guidelines so far. Elsewhere in Europe, the public consultation on the Greek competition authority's sustainability "sandbox" has just concluded. In the UK, the Competition & Markets Authority (CMA) has issued information to help businesses reach environmental goals without breaching competition law, and has revised UK merger guidelines also to support sustainability considerations in merger review.
A debate is underway on the balancing of public interests in competition law assessments. In the Commission's enforcement practice, a restriction of competition can only be justified on the basis of improved consumer welfare. The question now is whether a restriction to competition, including a relatively lower standard of consumer welfare (higher prices, fewer choices), may be justified based on environmental protection considerations. When looking to exempt sustainability agreements with benefits that offset restrictions of competition, a key question is: in addition to immediately affected customers, can society as a whole be considered a beneficiary? Another, related question is whether consumers must receive only a fair share of the environmental benefits or if they need to be fully compensated for the competitive disadvantage. With its recently published policy brief, the Commission has finally given some signals indicating its current and expected competition enforcement policy on sustainability.
Reapplying "consumer welfare"
The competition policy indicates that the Commission will be moving forward on its stance to consider wider benefits to society in the competition law assessments of pro-sustainability agreements. While reiterating that its assessment is anchored to the consumer welfare standard, the Commission explains that, in some cases, businesses could conclude sustainability agreements that benefit society as a whole. It explains that if, for example, an agreement "leads to a reduction in pollution to the benefit of society, and assuming the benefits are significant, a fair share of them can be apportioned to the harmed consumers – the latter being part of society – and fully compensate them for the harm". Although this provides some acceptance of a wider test, it remains frustrating that the Commission still emphasises that consumers should continue to be fully compensated, as opposed to receiving a “fair share” (the latter being the wording of the law and therefore in the ACM's – and our view – the correct benchmark).
The ACM explains in its guidelines that as consumer/user demand is the reason which essentially creates the socio-environment problems sought to be mitigated by sustainability agreements, it is sufficient if society benefits while immediate users are not fully compensated (also known as the “polluter pays” principle). This will especially be the case where the group of polluters is relatively small and the group suffering the environmental consequences is high. For example, in air travel, where a very small percentage of the global population flies compared to the global population that suffers the consequences of increasing CO2 emissions and climate change. Therefore, while the Commission has nuanced its position on considering wider benefits to society, it differs from the ACM on the extent to which affected consumers need to be compensated for a restriction of competition. Similarly, regarding out-of-market efficiencies, the Commission policy brief states that benefits achieved on separate markets may not be taken into account unless the group of consumers affected by the restriction and the group of benefiting consumers are substantially the same. In contrast, the ACM's approach is not strictly dependent on these groups being substantially the same.
More concrete guidance from the Commission can only be expected in the context of the ongoing revisions of its guidelines on horizontal cooperation and vertical agreements. Until then, businesses will do well to refer to the Commission's current enforcement practice. The Commission has made clear that it primarily intends to support the green transition by enforcing competition rules more vigorously than before. It has already imposed a EUR 875 million fine on a group of car manufacturers for colluding to inhibit technical development in the area of nitrogen oxide cleaning. Against this backdrop, the Commission plans to identify instances where companies need to cooperate to overcome a first-mover disadvantage and where they may offer sustainable products independently. Similarly, it will evaluate whether existing regulation incentivises companies to produce sustainably and the extent to which this can be achieved without cooperation. However, the Commission has expressed that it is open to individual guidance letter requests for sustainability agreements that raise novel issues. It is equally willing to consider publishing decisions when competition rules are not breached by the sustainability initiatives concerned - to serve as precedents for similar cooperation between others. The Commission is mindful that examples of different types of cooperation agreements, such as joint production or purchasing agreements or standard setting, will be needed to give businesses more assurance.
Businesses must come forward
Close on the heels of the release of the Commission's policy brief, De Brauw organised its second sustainability webinar", this time on "Climate Change and Competition", on 14 September 2021. Speaking on the panel, the ACM's chair, Martijn Snoep, warned against exaggerating the "dilemma" faced by businesses concerning making sustainability agreements without breaching competition rules. He explained that after the publication of its guidelines, the ACM expected many businesses to come forward to discuss their proposed joint initiatives. However, the ACM received queries regarding only four proposed sustainability agreements. This sentiment is echoed by the Commission in its policy brief, noting that stakeholders are not providing sufficient real-life examples of pro-sustainability initiatives that are hampered by competition rules.
Another panellist, Professor Anne Gerbrandy, had a different view on the limited response to the ACM's call to discuss proposed joint sustainability initiatives. According to her, companies may already have received comfort and clarity from the ACM guidelines, removing the need to discuss their issues further. This also confirms the view that, in many instances, joint initiatives may not even restrict competition rules and are as such permissible. Alternatively, companies may remain nervous about pushing innovative ideas forward by talking to regulators, particularly given hefty fines can be imposed if cooperation is not considered as legitimate and necessary.
However, discussions with regulators on proposed joint initiatives are nonetheless necessary for continued compliance with the competition rules. For example, sometimes joint purchasing/joint production in a transitional phase may be required to solve a hold-up issue, but once that is resolved, cooperation may need to be discontinued. Here, as explained by Martijn Snoep during the webinar, the time-scale of the agreement is relevant. Joint production or purchasing by competitors for an unspecified time might go further than necessary to achieve the sustainability goal, whereas allowing it for the start-up phase might be allowed. These aspects, among others things, are better discussed with authorities. So while expected guidance from the Commission on the competition law assessment of sustainability agreements will provide some comfort, it is equally worthwhile for companies to come forward with real examples.
The panellists at De Brauw's webinar agreed that now is the ideal time to settle the ongoing debate on sustainability and competition to achieve optimum policy changes. The Commission's competition policy brief is a step in the right direction but is not enough. For now, businesses must factor in the ramifications of a non-harmonised approach as not all regulators, in the EU and beyond, are currently aligned. For example, in the context of global supply chains, the question remains as to how benefits will be assessed. These benefits may be enjoyed in a third country where the product is produced, not in the EU where it is consumed. It is for such reasons that the ACM prefers at least an EU-wide harmonised competition policy. This is because while the positive effects on society will be taken into account in the Netherlands, the same agreement might attract fines in other member states that intend to continue taking the traditional approach. This will, in turn, result in multinational companies finding it difficult to benefit from the ACM guidelines with a high degree of comfort. Let's hope for further clarity and bold steps forward from the Commission in upcoming revisions to the EU horizontal and vertical block exemption regulations.