Environmental sustainability and competition law in Europe – where are we now?

It is tempting to expect consensus around the principle that the existential threat of climate change should trump the economic concerns of competition law. However, there is a rising tide of debate over the issue:

• Should businesses be allowed to cooperate for this purpose, even if it results in less competition?
• Should we sit back and rely on the competitive process to drive firms to innovate toward an environmental panacea?
• Or do the existing rules allow for a nuanced approach that can balance environmental benefits against any harm to competition?

This note provides a short overview to the topic, first describing how competition agencies in Europe are responding to these questions, and then introducing the most important issues at a technical level. 

Agency reaction

The response from European governments and their competition agencies has varied considerably.

The Dutch Authority for Consumers & Markets (the ACM) has proved the nimblest agency, proactively publishing several materials including a draft set of guidelines on sustainability agreements in January 2021 which many are looking to for inspiration.  They suggest a relatively open approach to several technical issues, commit the agency not to impose fines where businesses follow its guidance in good faith, and contain an invitation to discuss proposed agreements with businesses. Elsewhere in Europe, Austria, Greece, and Spain stand out: recent changes to Austrian competition law acknowledge that sustainability benefits can justify certain restrictions; the Hellenic Competition Authority has proposed a sandbox for companies to experiment in this area without running the risk of violating competition laws; and the Spanish Comisión Nacional de los Mercados y la Competencia has called for competition policy to “play a more active role in promoting sustainability.”

The European Commission has been more cautious, both in pace and policy. Following a year’s consultation and deliberation, the Commission started to make its case in September 2021 with a briefing note and parallel speech from Vice-President Vestager. The detail of its emerging views remains unclear, but the broad contours of the Commission’s position appear to emphasise the importance of the competitive process over environmental concessions:

“a green competition policy still has to be – well, a competition policy … Companies today face powerful incentives to find more sustainable ways to do business … But it’s competition that actually transmits those pressures to the boardroom. It’s the need to compete that pushes companies to do more to meet consumers’ needs, and use less costly resources … And so one of the main messages from our consultation and the conference was the need to support the green transition by enforcing our rules more vigorously than ever.”¹  

In other words, the climate crisis requires more (not less) intervention; the competitive process itself guarantees that firms will innovate to achieve the necessary progress; and competition agencies should contribute by enforcing their rules “more vigorously than ever”. As the Commission’s position develops, we may see increasing tensions between this apparently more formalistic approach, and the more liberal ideas proposed by the Dutch ACM and others. These may start to fracture when the Commission publishes an eagerly awaited draft update to its guidelines on horizontal co-operation agreements in the coming months.

Meanwhile, the recent implementation of Brexit could provide the UK Competition and Markets Authority (the CMA) with an opportunity for UK competition law (or at least its enforcement) to diverge from the European Union. A CMA briefing issued earlier this year largely limited itself to a recitation of how established competition law principles should apply to sustainability agreements; and recent guidance focused on consumer protection issues stemming from inappropriate greenwashing. However, the CMA recently launched a consultation on the issue, along with related points around the intersection between sustainability and merger control, State Aid, market investigations, and consumer protection law. Feedback to that consultation is requested by November 10, 2021. Hopefully this will prove the start of a productive debate about the direction of travel in the United Kingdom.

How is environmental collaboration assessed?

Article 101(1) of the Treaty of the Functioning of the European Union (the TFEU) and Section 1 of the Competition Act 1998 (the CA 1998) prohibit certain agreements and practices that have “as their object or effect the prevention, restriction, or distortion of competition”. Not every agreement between competitors falls foul of these provisions. But even where the threshold is breached, Article 101(3) TFEU and Section 9 CA 1998 can exempt agreements that “contribute to improving the production or distribution … or to promoting technical progress, while allowing consumers the fair share of the resulting benefit” provided they do not impose any restrictions that are not indispensable to achieving those objectives and do not eliminate competition. 

The application of these principles to sustainability agreements has led to three main areas of debate.

• First, should an agreement fall within Article 101 TFEU or the Chapter 1 Prohibition if its genuine aim is to achieve environmental progress? As the draft Dutch sustainability guidelines note, a line of EU Court rulings support the argument that it does not, provided “the anticompetitive restrictions in question are inherent in or necessary for the pursuit of a legitimate objective.”²  However, the extension of this EU doctrine to sustainability agreements is untested and unclear, all the more in the United Kingdom following Brexit. Moreover, competition agencies are unlikely to welcome the premise that an entire category of arrangements falls outside their review. The Commission’s recent briefing note remained entirely silent on the point and it seems doubtful that clear guidance at a European level will arrive in the near term absent a ruling from Luxembourg.
• Second, if an agreement is caught by Article 101 TFEU or the Chapter 1 Prohibition, how should its environmental benefits be weighed against any competitive harm under Article 101(3) TFEU and Section 9 CA 1998? This raises three interrelated issues.
  • Is it possible or desirable to quantify the benefits of environmental goals and weigh them against price increases or quality degradations? This is inherently difficult and has not yet been subject to significant economic analysis or guidance by the Courts.
  • If that is not required, what degree of environmental progress is sufficient to meet the standard in Article 101(3) TFEU and Section 9 CA 1998 requiring that consumers receive a “fair share” of the benefits of an otherwise anticompetitive agreement?
  • Can environmental benefits that accrue to society at large outweigh the burden of an anticompetitive distortion that is only suffered by a narrow group of customers (e.g., through paying higher prices for the goods concerned). The European Commission’s current horizontal co-operation guidelines limit themselves to the narrower set of “in-market benefits”. However, a broader reading is arguably supported by EU precedent.³

The Commission’s recent briefing does provide some helpful noises on these issues, acknowledging that benefits need not take the form of cost reductions or product improvements “as long as the users of the product concerned appreciate the sustainability benefit” and suggesting that out-of-market benefits may be taken into account provided “the group of consumers affected by the restriction and the group of benefiting consumers are substantially the same”. However, these ideas remain somewhat inchoate and do not move the debate meaningfully beyond relevant EU jurisprudence.    

• Third, how should the indispensability criterion under Article 101(3) TFEU and Section 9 CA 1998 be interpreted where businesses are unwilling, but not unable, to take certain action absent cooperation with their rivals? This criterion is generally subject to a high threshold and agencies may question why a set of competitors need to collaborate to achieve environmental benefits. It is here that the Commission’s briefing note offers most ground, in acknowledging that there may be instances where “companies need to get together to override a first mover disadvantage and nudge consumers towards using more expensive sustainable products”. But there is likely to be extensive debate over when a specific arrangement meets the relevant standard.

These somewhat esoteric issues could have a profound impact on the ability of competition agencies and courts to take account of environmental sustainability goals in evaluating collaboration agreements. In turn, this could make a real difference to environmental progress. Meanwhile, there is a clear need for parties to consider competition law at an early stage of any collaborative environmental initiatives.

Despite the urgent need for societal change, the debate is still at a relatively early stage. The Commission’s updated draft horizontal co-operation guidelines will herald a flurry of discussion in the European Union. That debate will doubtless have implications for UK competition law and enforcement, but there is scope for divergence following Brexit. The prospects of relaxations to UK competition law for this purpose are probably low, though this could be a useful tool in response to short-term or localised issues caused by climate change (in much the same way as the Government responded to the recent petrol crisis). However, proactive and effective feedback to the CMA’s consultation could start to move the needle, at least as to the technical assessment under Section 9 CA 1998. 

¹ Competition policy in support of the Green Deal, Executive Vice-President Vestager’s keynote speech at the 25th IBA Competition Conference of September 10, 2021, delivered by Inge Bernaerts, Director, DG Competition.

² Autoriteit Consument & Markt Guidelines on Sustainability Agreements of January 26, 2021, paragraph 12. See, for example, Case C-309/99 (Wouters/Nederlands Orde van Advocaten), Case C-519/04 (Meca Medina), Case C-1/12 (OTOC), and Case C-136/12 (CNG).

³ A recent notice from the Dutch ACM provides some useful analysis in this area.