Climate change and sustainability: is competition law a barrier to progress?
Published on 9th Jul 2020
Businesses are increasingly looking to work with industry competitors to pursue environmental and sustainability objectives, particularly where going-it-alone would create a first-mover disadvantage. But how can well-meaning collaborators avoid piquing the interest of European competition authorities, who traditionally regard competitor alliances with a critical eye?
Collaborations between competitors pursuing sustainability and environmental objectives are on the rise. While use of green technology can achieve cost savings, sustainable options are not always the most commercially beneficial. This can put companies who choose to pursue them at a competitive disadvantage. Joining forces to pursue environmental objectives together creates a level playing field reducing those commercial barriers.
Sustainable and end environmental collaborations take many forms, including:
- Joint research and development of 'green' technologies, such as sustainable energy generation, environmentally friendly products and components, and production methods with lower carbon footprints.
- Commitment to minimum standards for example: using materials with a low environmental impact, taking minimum levels of energy from renewable sources or standardising technology (such as electric vehicle charging infrastructure) to facilitate the roll-out of innovative technologies (electric vehicles).
- Combining resources. This could involve co-ordinating stock, warehouse and transport management software interfaces to share warehouse storage and trucks for the transport of goods. Competitors may even agree to share assets, equipment or office space, or make purchases jointly.
Ordinarily, competitor collaborations are assessed against the general prohibition of agreements with anti-competitive effects (Article 101, Treaty on the Functioning of the European Union). Collaborations which dampen competition through alignment of commercial strategy or sharing of strategic information are usually caught by this prohibition, unless an exemption applies. Those exemptions are:
- where the cooperation complies with 'block exemption' criteria; or
- where (broadly) the pro-competitive effects of the arrangement outweigh any anti-competitive effects, satisfying the requirements of the 'individual exemption' (Article 101(3)).
Agreements that infringe competition rules are not enforceable and can be subject to significant sanctions, including fines of up to 10% of worldwide turnover.
The regulators' approach
Sustainability and environmental protection is a priority for a number of European competition authorities, who are actively considering how competition rules, including those relating to competitor collaborations, should be applied in light of this objective.
For example, in its 2020/21 annual plan, the UK's Competition and Markets Authority identified climate change as one of its top six priorities for the coming year, committing to: "develop our understanding of how climate change affects markets and consider how, when exercising our functions, we can act in a way that supports the transition to a low carbon economy".
Similarly, Margrethe Vestager, European Commissioner for Competition when addressing an audience in Brussels on 19 October 2019, stated that: "all of Europe’s policies – including competition policy – will have their role to play" in supporting sustainability… "it’s important that companies know about the opportunities which they already have, to work together for sustainability". But she warned that "what we can’t do – not even in the name of sustainability – is to turn a blind eye to agreements that hurt competition and consumers".
In an encouraging recent development, the Netherlands competition regulator has published for consultation draft guidelines that would expressly open up opportunities for businesses to collaborate to achieve climate goals. The Netherlands Authority for Consumers and Markets (ACM) wants to increase the opportunities for competing businesses to collaborate in pursuit of sustainability objectives. Businesses will have more scope to enter into agreements, particularly to achieve climate objectives such as carbon emissions reduction. ACM proposes to allow this in cases where the benefits for society as a whole outweigh the disadvantages of any restriction of competition.
Martijn Snoep, Chairman of the Board of ACM, explains: “We’re seeing that businesses are increasingly prepared to take responsibility for delivering a more sustainable society. We welcome that. The Guidelines give businesses more scope to collaborate to achieve that goal without breaching competition rules. We define that scope, but also set clear conditions to prevent ‘greenwashing’ and ensure that society as a whole benefits from the collaboration".
We hope that this inspires other competition regulators, including in the UK, to recognise the importance of collaboration to achieve climate change and sustainability goals.
Framing collaborations within the rules
While it is not yet entirely settled how regulators will apply competition rules to support sustainability collaborations, there are a number of options for shielding these agreements from competition law. Framed with care, the risk of tripping over the competition rules can be significantly mitigated.
Avoiding the competition rules entirely
It may be possible to design the collaboration so that it falls outside of the competition rules altogether. This might be achieved, for example, by ensuring that adequate information barriers are in place, setting up dedicated and ring-fenced project teams and allowing open participation by other players in the market.
Fit within a block exemption
The European Commission has issued a series of block exemptions setting out criteria which, if satisfied, will render a collaboration automatically compliant with the competition rules. Block exemption criteria generally include market share thresholds, time limits on restrictions such as exclusivity arrangement (usually linked to the time needed to recoup investments) and the absence of "hardcore" restrictions.
Types of agreements that might be covered include research and development agreements, joint purchase/supply agreements, joint marketing and distribution arrangements and agreeing standards.
Consumer benefits outweigh anti-competitive effects
One requirement of this exemption, the Article 101(3) "individual exemption", is that consumers must receive a "fair share" of the benefits of the collaboration. At present, there is no clear precedent on whether the benefit must be for the specific consumer/purchaser or could be for society as a whole. This is an important distinction in the context of collaborations for environmental and sustainable objectives, where the positive impacts of the co-operation may involve price increases for the individual purchasing consumer (such as the purchaser of a vehicle fitted with sustainable fuel option that is more expensive than the diesel alternative and which is not fully offset by lower fuel costs) but are likely have benefits for society as a whole (lower fuel emissions).
The European Commission did decide in one case before it that the environmental benefits to society of an agreement between competing manufacturers of washing machines to phase out energy-intensive models were sufficient for the individual exemption to apply. This was so notwithstanding that the greener models were more expensive for the individual purchasing consumer. However, the case is 20 years old and there have been conflicting decisions in proceeding years. There have been calls from industry for more clarity from competition regulators on the availability or otherwise of this exemption for environmental and sustainable collaborations.
Another important factor is whether it would be commercially viable for a business to roll-out the environmentally preferential strategy/innovation alone, without engaging in a collaboration with a competitor. In the washing machine case, had just one of the manufacturers phased out its energy-intensive range, consumers may simply have switched to an energy-intensive alternative supplied by a competitor, rather than pay a higher price for the machine incorporating greener technology.
A green lens
While somewhat more speculative, and as yet untested, there may be scope for arguing that European competition law should be interpreted with environmental protection in mind. This is based on Article 11 TFEU, which provides that: "[e]nvironmental protection requirements must be integrated into the definition and implementation of the Union's policies and activities, in particular with a view to promoting sustainable development". This would support the (preferable) approach to application of the individual exemption – where the benefits of the collaboration can be for wider society rather than the individual purchasing consumer.
"Exceptional policy considerations"
National competition rules may contain provisions that allow for the relaxation competition rules for the greater good of environmental protection. In the UK for example, the competition rules can be relaxed where the Secretary of State is satisfied that there are "exceptional and compelling reasons in the public interest. The UK has recent form using this tool to enable competitors to collaborate to tackle the impact of Covid-19. This has included allowing retailers to co-ordinate and share services for the storage and distribution of food, and for the development, manufacture and distribution of products such as ventilators, masks and hand sanitiser.
Another option available to businesses wanting to de-risk proposed collaborations for sustainable and environmental objectives is to approach a competition authority directly to seek informal guidance on the regulator's likely approach to that collaboration. This might be done on a no-names basis, if desirable. While an initial view of a regulator will not be binding, it may serve to provide reassurance.
Osborne Clarke comment
European competition authorities are evolving their approach to the application of European and national competition law to sustainable and environmental collaborations between competitors. This looks set to become an area of increasing interest as more and more businesses explore the opportunities presented by environmental and sustainability collaborations and as environmental protection becomes an established core priority of competition regulators. If regulators are to overcome the first-mover disadvantage and encourage sustainable business, the competition rules will need to be applied with this objective in mind.
Authorities' approaches to Covid-19, enabling the (temporary) relaxation of competition law to enable businesses to take a co-ordinated response to the crisis, serve as a useful template for how competition law can be applied to tackle macro challenges. The European Commission's pending review of its horizontal guidelines, setting out the Commission's approach to competitor co-ordination, is likely to be the forum in which this developing area becomes codified in relation to sustainable and environmental collaboration. But those guidelines will not be published until 1 January 2023.
For now, businesses engaging with competitors to achieve sustainable and environmental objectives should strategically review and seek early advice on how to frame their collaborations to mitigate the competition law risks. Businesses where these collaborations are a strategic priority may also want to consider how to influence the developing thinking of the competition regulators. The Commission's review of the horizontal guidelines provides a focal point, but interim guidelines from the Commission would provide reassurance and greater certainty.