COP26, sustainability agreements and competition law | Dentons - JDSupra - JD Supra

Introduction

Whatever the outcomes of the COP26 negotiations taking place in Glasgow, it will be for businesses to ensure that many of the agreed objectives are capable of being delivered. COP26 has four primary goals: (1) achieving global net-zero by mid-century and keeping 1.5°C within reach; (2) adapting to protect communities and natural habitats; (3) mobilising finance; and (4) working together to deliver the goals.¹ If the first three establish the roadmap, the latter is crucial to the implementation and depends on all stakeholders, particularly businesses, either collaborating or being simultaneously prepared to make the transition to a net-zero and sustainable economy.

Challenges for businesses

Any collaboration between or among businesses, particularly if they are rivals, requires careful management of risks to avoid infringing competition law. However, competition authorities themselves are still grappling with some key questions in relation to arrangements with wider environmental benefits, which makes any risk assessment challenging. For example, to what extent do such environmental benefits justify agreements which are otherwise restrictive of competition? Might competition law act as a barrier to collaboration intended to bring innovative solutions to the market or improve products/services through standards? Or will competition policy alone, rather than collaboration, produce the changes in behaviour and vision required? With the consequences of infringing competition law significant, businesses are looking for clear guidance and reassurance.

Using competition law to encourage sustainability

In the UK, the Competition and Markets Authority (CMA) referred to supporting the transition to a low carbon economy among its strategic objectives in its 2021/22 Annual Plan (link). The CMA also published information to help businesses assess whether their cooperation agreements for the attainment of sustainability goals (sustainability agreements) comply with competition law (link). However, perhaps in recognition that this may not in itself be sufficient, in September 2021 the CMA launched a call for inputs before advising the UK government on how the competition (and consumer) law tools can better support net-zero and sustainability goals (link, the call for inputs is open until 10 November 2021).

Competition authorities have also been considering environmental effects in their enforcement. In 2021, the European Commission stated that the abusive conduct of Public Power Corporation, the largest supplier of electricity in Greece, might have slowed down investment into the generation of greener energy.² The Commission also referred to the European Green Deal objectives in its decision to fine the car manufacturers, Daimler, BMW, Volkswagen, Audi and Porsche, who were found to have illegally colluded to prevent the introduction of new and available technology which would have reduced harmful emissions beyond the legal requirement.³ In the UK, the CMA conducted a market study into the electric vehicle charging sector, which is vital for reducing emissions as it provides the necessary infrastructure to electric cars. Its July 2021 report (Electric vehicle charging market study) made a series of recommendations to the UK government to improve capacity and choice (Final report). There is also an ongoing CMA investigation into suspected competition law breaches relating to long-term exclusivity in the supply of electric vehicle charging points at motorway service areas (link). Even in an embryonic sector, this demonstrates that the CMA expects competition to play an important part in its development.

The evidence so far suggests that, if competition is not working well, the competition authorities will take action. It is too early to tell how effective that policy can be in relation to encouraging sustainability. Can the competition authorities be any more than supporters of sustainability from the sidelines or can they really drive and facilitate change? The current CMA guidance on sustainability agreements and the Commission's recent Policy Brief in support of Europe's Green Ambition⁴ are steps in the right direction, but from a business perspective may not go far enough in allowing collaborative environmental initiatives to flourish.

Sustainability agreements – illegal collusion or pro-competitive collaboration?

Businesses must avoid sustainability agreements which are merely a disguised cartel – that is clear. Any arrangement which involves price fixing, the allocation of customers or markets, agreement on output or bid rigging will face severe penalties, including possible criminal prosecution for individuals in the UK. The following types of agreements among competitors are high risk: to reduce capacity or production, to slow the transition to net zero, to apply an agreed premium for certain green products, to phase out the purchase of specific unsustainable products or those which use unethical production processes (as this would be a collective boycott), or joint agreements to purchase certain sustainable products. In those examples, any benefits (if they exist) will not outweigh the distortion of competition caused by the collusion.

Any collaboration must also ensure that there is no exchange of strategic competitively-sensitive information between competitors (or even potential competitors in nascent markets). If the data reduces uncertainty about how a competitor will act, it is most likely competitively sensitive, such as future pricing, volumes, output, R&D plans, capital investment and capacity utilisation (unless it is in the public domain).

The problem is that progress in relation to sustainability will most likely require businesses to collaborate and exchange information. The UK government's ongoing competition in relation to cluster sequencing for carbon capture, usage and storage is a good example. The success of a cluster depends in part on the participation of independent carbon emitters, some of whom may compete in their primary day-to-day activities, and all of whom will compete for government funding as emitters. The Department for Business, Energy & Industrial Strategy's guidance to clusters is clear that breaches of competition law will not be tolerated, so clusters need a robust process which allows the required information to be gathered, whilst minimising competition law risks. Importantly, the involvement of government or any other public authority does not mean that the competition rules no longer apply. Competition law can be disapplied only by specific legislation.

There are examples of successful industry-wide collaboration in the UK, which show it can be done. A highly ironic example in this context, at the other end of the carbon scale, when the oil industry was being encouraged to collaborate to maximise economic recovery (MER) in the North Sea, the CMA expressed concerns, cautioning against arrangements which would lead to collusion and the exchange of competitively-sensitive information. The Oil and Gas Authority subsequently provided tailored guidance to the industry on how these issues could be managed and the benefits unlocked.

Generally, this involves the use of firewalls and clean teams (i.e. third parties or those in the business who are either not involved in a market-facing role or who have been removed for an appropriate period of time). Information can also be aggregated and/or anonymised as a way to minimise risks, or historic data which is no longer sensitive can be used.

Getting the balance right

If the risks above can be avoided, collaboration between businesses will not infringe the competition rules unless the parties have market power. There are different block exemptions (covering, for example, vertical agreements between suppliers and buyers, research and development agreements, technology transfer and specialisation agreements) that might offer a safe harbour for sustainability agreements which would otherwise breach competition law. These work on the basis of market share thresholds and are available so long as the agreement has no defined "hard-core" restrictions. However, these exemptions were not specifically tailored for sustainability agreements, which can create uncertainty and significantly impede the speed and scope of sustainability initiatives. The CMA recently announced that it will provide specific guidance in relation to environmental sustainability in new Verticals Guidance which will accompany the proposed new Vertical Agreements Block Exemption Order (and it would be helpful if all block exemptions had guidance which considered the specific issues arising in relation to environmental sustainability).

If block exemptions are not available, businesses may utilise the individual exemption⁵ to prevent the application of the competition rules to sustainability agreements when their benefits outweigh the restrictive effects on competition. Although, in theory, any agreement could benefit from the individual exemption, it is not easy to satisfy all four of its conditions in practice. Those claiming the benefit of the individual exemption need to prove by means of concrete evidence that: (1) the agreement contributes to improving the production or distribution of goods or to promoting technical or economic process; (2) a fair share of the benefits are passed on to consumers; (3) all the restraints are indispensable; and (4) the agreement does not eliminate competition in respect of a substantial part of the products in question. Although the first condition seems to focus on economic efficiency, the case law indicates that a broader range of socio-political benefits, including those related to the environment, might be sufficient. However, there is no clarity on how indirect sustainability benefits revealing themselves in the long term (e.g. reduction in CO₂ emissions) and out-of-market benefits (rather than those benefits which are passed on directly to the consumer of the specific product in the form of lower prices) would meet criterion (2). Also, it is unknown how these benefits can be meaningfully quantified. Businesses may be unwilling to take a leap of faith in the absence of clear guidance on this issue.

There is no reason why the CMA cannot provide further, more detailed and specific guidance on sustainability agreements, including on its enforcement priorities, as other competition authorities have recently done. In January 2021, the Netherlands Authority for Consumers and Markets (ACM) published the second draft of the Guidelines on Sustainability Agreements which takes a more favourable stance towards sustainability initiatives while assessing their benefits. For instance, the Guidelines propose considering the benefits of certain sustainability agreements for the wider society as a whole, rather than focusing only on the benefits for consumers of the specific product. If the beneficiary concept is expanded, it would be easier to show that the benefits of an agreement outweigh its anti-competitive effects. The Guidelines also clarify that the ACM aims to find solutions, rather than imposing fines while using its enforcement powers in relation to sustainability agreements. The ACM also published a Technical Report on Sustainability and Competition jointly with the Hellenic Competition Commission (of Greece), another competition authority setting ambitious sustainability goals.

Whilst the CMA's recent guidance on sustainability agreements is useful in setting out the general framework, it focuses only on using the tools of the existing regime without addressing how to show that the benefits of the agreement are passed on to the consumer. Does this need to be in the form of lower prices, or can wider benefits be taken into account? How would the CMA approach enforcement in relation to sustainability agreements? Further guidance is likely to be needed to provide legal certainty and this is almost certainly going to be the message delivered to the CMA by stakeholders in response to its current consultation.

Conclusion

If COP26 is the beginning of the transformation of the global economy, competition policy needs to keep pace to give businesses the confidence to grasp the opportunities to further their sustainability goals. Competition authorities may need to take bolder action to facilitate the transition to a sustainable economy, rather than just focus on enforcement. With the MER strategy mentioned above, the CMA was aware of the need to guard against an unduly risk-averse approach to the potential application of competition law which might put beneficial collaboration at risk. This is even more imperative in relation to sustainability agreements.

The authors would like to thank Cansin Karga, Associate in the Competition team, for her assistance in connection with this article.

1. Greek wholesale electricity market (Case no. AT.40278).
2. Car Emissions (Case no. AT.40178).
3. Competition policy brief, "Competition Policy in Support of Europe's Green Ambition" accessed 3 November 2021.
4. The individual exemption is provided in Chapter 9 of the Competition Act 1998.

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