Competition law: a suitable tool to achieve a greener economy?
Achieving greater sustainability is the central driver behind the European Green Deal, a set of policy initiatives launched by the European Commission with the overarching and ambitious aim of making Europe climate-neutral by 2050.
Competition policy is expected to play its part in the achievement of this sustainability goal. The Directorate General for Competition recently published a call for contributions on a set of questions designed to explore how the EU’s competition rules can be applied in support of sustainability policies. This call followed a speech delivered by Executive Vice-President Margrethe Vestager on how EU competition policy can contribute towards the achievement and success of the Green Deal. While EVP Vestager stressed that regulation remains the main instrument at the European Union’s disposal to achieve its sustainability goals, she outlined a number of ways in which competition law can contribute to realisation of these objectives.
The European Union’s sustainability goals will increasingly affect the Commission’s enforcement policy in all areas of competition law. State aid will be used to finance green initiatives. The Commission’s approval last year of a plan for seven EU countries jointly to invest more than €3bn in a common scheme to develop innovative, greener batteries provides a good example of such support. The state aid rules are also expected to play a vital part in ensuring that the green transition is affordable. In the field of mergers, the Commission may be more willing to take environmental considerations into account when assessing the efficiencies to which proposed transactions may give rise. Finally, cooperation between industry players may be an efficient way to achieve certain sustainability objectives. There is a perception in some quarters that competition law as currently enforced is a hindrance preventing such cooperation. However, competition law can be an enabling, rather than obstructive, force. In the remainder of this article, we will consider under what conditions that may be the case.
Are (restrictive) agreements appropriate to achieve sustainability goals?
Article 101(1) TFEU prohibits agreements and arrangements that are restrictive of competition, unless they can be shown to meet the four cumulative conditions of Article 101(3) TFEU (see below, section 2(b)). Competitors seeking to cooperate in order to achieve certain sustainability goals will therefore need to assess the compatibility of their proposed cooperation with Article 101 TFEU.
It is worth noting upfront that plenty of sustainability initiatives are possible without requiring a detailed competition law assessment. For example, the incorporation of an ‘environmental quality label’ that is (a) based on objective criteria, (b) transparent, and (c) open to all who meet the objective criteria and wish to subscribe, is highly unlikely to raise any competition concerns. The same applies to agreements on non-binding standards, where individual companies voluntarily opting to adhere to a standard can freely devise their own strategies to meet the standard.
It is also important to acknowledge that sustainability may well be an important factor of competition. Before contemplating entering into an agreement to realise certain sustainability goals, market players should therefore ask themselves whether competition rather than cooperation would be the most efficient way to achieve these goals. The ‘Chicken of Tomorrow’ case illustrates this point. In January 2015, the Dutch Authority for Consumers and Markets (ACM) rejected a request for exemption of an agreement between chicken meat producers and supermarkets that aimed to ensure that chicken meat sold in supermarkets came from chickens that were reared using farming methods providing higher animal-welfare standards than was the case at the time.
The ACM refused to grant an exemption because it was not convinced that the envisaged welfare improvements were sufficient to offset the expected price increase. An ex-post analysis earlier this year vindicated the ACM’s position at the time. It showed that chicken welfare had increased during the period under review and the improvements more than exceeded the planned arrangements of the ‘Chicken of Tomorrow’ initiative. These results also proved that it was not necessary for the sector to conclude an agreement to realise better animal-welfare conditions for chickens whose meat was being sold in Dutch supermarkets.
However, there will be circumstances where cooperation (rather than competition) between competitors is the most efficient way to achieve certain sustainability goals. For example, collaboration may be the best way to deal with free-riding issues where, but for the agreement in question, competitors are able to benefit at no cost from the sustainability investment made by a given market player. Similarly, cooperation may be the most efficient way to overcome a first mover disadvantage where, absent an agreement, the first company replacing a less sustainable product with a greener, more expensive alternative risks losing out to competitors that continue to sell the less sustainable but cheaper version (for a more detailed discussion, see the Hellenic Competition Commission’s Draft Staff Discussion Paper on Sustainability Issues and Competition law). The question therefore arises as to how to assess the compatibility of such agreements with competition law.
How can sustainability agreements be justified?
Sustainability agreements entered into between competitors may well be compatible with competition law. The following two possible justifications merit further assessment:
- A public interest justification; and
- Compatibility of the proposed agreement with the exception criteria set out in Article 101(3) TFEU
We will deal with both these justifications below. Before doing so, it is important to note that a sustainability objective can never justify naked cartel-type arrangements such as, for example, price fixing. Indeed, the Commission has been adamant that it will not tolerate any ‘greenwashing’ attempts and that it will bring the full force of competition law to bear on parties engaging in such illegal activities.
a) Public interest justification
Certain authors have argued that, in line with the Wouters case law, a sustainability agreement that restricts rivalry between competitors party to the arrangement could nevertheless escape the Article 101(1) TFEU prohibition on restrictive agreements if it can be shown to be directly related to, and necessary for, the implementation of a legitimate public interest. While it cannot be excluded that certain cases could benefit from this line of case law, the European Commission and national competition authorities are expected to be sceptical as to its application. A more likely route to find a sustainability agreement compatible with EU competition law is where the parties can demonstrate that the agreement meets the conditions of Article 101(3) TFEU.
b) The Article 101(3) exception
A sustainability agreement that is restrictive of competition within the meaning of Article 101(1) TFEU may nevertheless be compatible with EU competition law if it meets the exception criteria set out in Article 101(3) TFEU, namely: (a) the agreement must create efficiencies, (b) a fair share of the benefits generated as a result of those efficiencies must be passed on to consumers, (c) the restrictions of competition must be necessary for the realisation of these efficiencies and (d) the agreement must not lead to a total or substantial elimination of competition.
Two particular challenges arise in the context of the application of the second condition – that consumers must be allowed a fair share of the benefits:
- Producing goods in a more sustainable way often results in higher prices because the overcharge (e.g. the higher wage paid to workers to enable them to make a living income, or compensations paid for greenhouse gas emissions) is often passed on to consumers. This raises the issue of whether the sustainability gains are sufficient to offset the increase in prices resulting from the agreement. This in turn leads to the question of how to measure the short and long term sustainability benefits, quantitatively and/or qualitatively. The ACM’s July 2020 Draft Guidelines on Sustainability Agreements (ACM Draft Guidelines) discuss possible ways in which these issues can be approached (see further below).
- The second challenge is that, in principle, the benefits must flow to consumers in the same market where the harm occurs. But sustainability agreements may well create benefits that are broader in scope and not limited to the markets in which the parties to the sustainability agreement are present. Can these wider societal benefits be taken into account, and if so, under what conditions?
In principle, the second condition of Article 101(3) TFEU – that consumers obtain a fair share of the benefits – will be met if the consumer benefits the agreement creates outweigh (or at the very least match) the harm suffered by those same consumers. The burden of proof rests on the parties seeking to rely on the Article 101(3) exception. In order to do so, the parties must be able to measure both the harm and the benefits. In a number of cases, a qualitative assessment will suffice to demonstrate that any harmful consequences (e.g., higher prices) are manifestly outweighed by the benefits the sustainability agreement creates. This will be the case, for example, where it is obvious that the harm to competition is smaller than the benefits of the agreement, or where the impact on competition will necessarily be limited given the combined market share of the parties involved. In other cases, however, a more detailed quantitative assessment of both the costs and benefits will be required. In this context, the ACM Draft Guidelines indicate that the methods used by governmental agencies when carrying out societal cost-benefit analyses provide a good starting point.
Certain sustainability agreements may not generate sufficient consumer benefits in the market where they apply, to negate any harmful anti-competitive effects, but may provide wider societal benefits such as, for example, a reduction in greenhouse gasses. Can the parties to such an agreement argue that, taking into account those wider benefits, the second condition of Article 101(3) TFEU is met? In its Draft Guidelines, the ACM states that “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”. However, for that to be the case, the following two conditions must be met: (a) the wider societal benefits must “efficiently” contribute to a policy objective and (b) that objective must have been laid down in an international or national standard “binding” upon the Dutch government (see paragraph 41 of the ACM Draft Guidelines).
The application of the Article 101(3) TFEU exception to sustainability agreements is a complex area and one where further guidance from the Commission and other competition authorities would be very helpful. In this context, both the Commission and the ACM have stressed their willingness to have a dialogue with companies contemplating the conclusion of a sustainability agreement. The Commission has also indicated it is prepared to issue comfort letters (as it did in the context of the COVID crisis; see, e.g., the April 2020 European Commission comfort letter to Medicines for Europe). Those letters will provide further insights into the Commission’s assessment of sustainability agreements.
Competition law issues to consider in concluding a sustainability agreement
If you are involved in discussions with other market players relating to the possible conclusion of a sustainability agreement, the following issues should be considered:
- What are the objectives of the agreement and why is the agreement necessary? Can the objectives be better realised through the normal competitive process?
- If some form of cooperative arrangement is required, how is it best to structure this cooperation to achieve the objectives? Is competition law even at stake?
- If yes, what is the impact of the agreement? What is the combined market share of the parties to the agreement?
- Does the agreement assist in the realisation of specific obligations taken on by the country in question under international law?
- Does the agreement lead to higher costs (e.g., higher input prices) that are likely to be passed on to consumers? What efficiencies and sustainability benefits are created by the agreement? What is the true value of both the costs and benefits?
- Would it be beneficial to reach out to the Commission or relevant national competition authority and possibly seek to obtain a comfort letter (or the national equivalent where available)?
Geert Goeteyn is Partner at ReedSmith.
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