Policy and Regulation

Sustainability debate rattles competition world

A growing movement in Europe contends that prohibitions on cartels are impeding companies’ participation in the fight against climate change. Others say making exemptions to antitrust rules presents greenwashing risk.

The initial wording of Race to Zero could not have been any clearer: “no new coal projects”. But the UN-backed global campaign – which guides businesses on how to halve their global carbon emissions by 2030 – hit a snag. Some of the largest US banks that back the campaign reportedly threatened to quit Race to Zero over fears of being sued for stringent decarbonisation commitments.

Thomas Hale, co-chair of the expert group that drafted the disputed phrase, says it received independent legal advice confirming that the text might put corporate signatories at risk of prosecution for anti-competitive behaviour. That is, antitrust authorities might view the ban on coal projects as a collective boycott and, as such, considered harmful to the public good, regardless of the green goals pursued.

In September, Race to Zero announced that the contentious wording had been dropped – “out of an abundance of caution”, Hale says – in favour of a watered-down commitment. The new phrasing is: “Each Race to Zero member shall phase out its development, financing and facilitation of new unabated fossil fuel assets, including coal, in line with appropriate global, science-based scenarios.”

While Hale, a professor in public policy at the University of Oxford, expresses relief that the final wording is “iron-clad”, he calls the belief that climate science and public good are in conflict “fairly preposterous”. “I was surprised that competition law was so blunt that it wasn’t obvious that this was above board,” he adds.

Collaboration or cartel?

Among sustainability advocates, debate is raging over whether antitrust rules stymie corporate efforts to combat climate change.

One side argues that laws that prohibit companies from colluding on prices and products also prevent corporate collaboration on projects that would benefit the environment. According to them, companies should, for example, be allowed to agree between themselves to use environmentally friendly packaging, or weed out polluting suppliers, even if any resulting premium is passed on to consumers. Proponents of such alliances call them “sustainability agreements”.

The other side – which calls the same alliances “green cartels” – argues that companies are exploiting public concerns around carbon emissions to undermine rules that ensure a fair marketplace, and for questionable environmental gains. 

The fright over Race to Zero’s coal guidance is just one example of businesses saying that regulation is overly restrictive. Executives have been clamouring for green exemptions to competition rules for some time.

In 2020, law firm Linklaters polled 200 “sustainability leaders” at large companies in the UK, the US, France, Germany and the Netherlands. Nine in 10 said they wanted to work closely with their peers to better respond to the climate emergency; 57 per cent said they had walked away from sustainability projects for fear of being rebuked by competition agencies.

Could companies not simply go green independently of one another? Jay Modrall, a senior competition lawyer at Norton Rose Fulbright in Brussels, says corporates are wary of going green – and of hiking their prices to do so – ahead of the pack, as the risk of losing customers would be too high. He believes that industry-wide agreements would alleviate these concerns and enable the business world to accelerate its low-carbon transition.

“We all agree that climate change is real and that the global costs are very significant,” Modrall says. “Should the antitrust authorities have the power to block companies from doing something which is demonstrably beneficial?”

While one might expect corporate lawyers to embrace this view, support has also come from some national enforcement chiefs. One such is Ioannis Lianos, president of Greece’s Hellenic Competition Commission, who tells Sustainable Views: “Competition authorities should play a proactive role in promoting the protection of the environment and sustainability goals.” 

To that end, in September the HCC launched a ‘sustainability sandbox’ – believed to be the first of its kind – that allows companies to explore potential agreements under the commission’s supervision without fear of prosecution. Lianos says that an association of Greece’s small and medium-sized enterprises was particularly supportive of the decision. “Most of our companies are very small. They cannot develop the green transition on their own, they don’t have the funds,” he adds. 

The HCC is soliciting corporate applications and intends to select the first batch of projects for inclusion in the sandbox by early next year. What of the risks to market fairness? “We’ll have checks and balances; we don’t want the companies that use the scheme to greenwash cartels,” Lianos says.

In the Netherlands, competition enforcer the Authority for Consumers and Markets has gone a step further. Last year, it published a set of draft guidelines on sustainability agreements and made it clear it would not fine any company that followed this text “in good faith” – an approach praised by those who support exemptions to cartel prohibitions. Norton Rose Fulbright’s Modrall calls the guidelines “the gold standard” and the ACM “the leading authority in the world in this area”.

ACM chairman Martijn Snoep says he is merely applying European law. But his interpretation of the bloc’s competition rules is far looser than that of either his national peers or of the European Commission. According to existing commission guidelines setting out the EU’s interpretation of these rules, such exemptions to competition law are permissible only if companies’ customers benefit directly from the anti-competitive behaviour.

The ACM, however, indicates that agreements aimed at reducing environmental damage are legitimate even if the anti-competitive behaviour otherwise harms the companies’ consumers, as long as environmental benefits are felt somewhere on the planet. “We do not say that competition law is the solution to the climate crisis, but competition law and competition law enforcement should play a role by not standing in the way either,” says Snoep. “Regulation is the best solution, but regulation takes time.”

Whereas Dutch efforts to promote sustainability agreements rely on a liberal interpretation of existing law, in Austria this thinking has been enshrined in new legislation. Last year, the Austrian parliament passed an extensive amendment to the country’s cartel act. It states that green cartels are allowed “if the agreement significantly contributes to an ecologically sustainable and climate neutral economy”. Freshfields dubbed this a “unique legislative development internationally”. 

Many are unhappy about this side’s wins. Maarten Pieter Schinkel, professor of competition economics and regulation at the University of Amsterdam, is one of the most vocal critics of sustainability exemptions.

“Firms certainly do way too little, but it’s not restriction of competition that is going to solve this problem,” he tells Sustainable Views. In his view, competition encourages firms to speed up their green transition as each company seeks to tap consumers’ growing environmental conscience ahead of its rivals. Exemptions produce an incentive for companies to do less for the planet, he says.

Schinkel calls Martijn Snoep “too enthusiastic” and the ACM’s draft guidelines “dangerously wide”. He argues that by promoting corporate agreements that value hypothetical environmental gains over clearly defined consumer interests, the ACM is making major policy decisions that should be left to politicians.

On this point, Schinkel has found an ally in French economist Jean Tirole. At an EU competition conference held in Brussels in October, Tirole – the recipient of the 2014 Nobel Memorial Prize in Economic Sciences – warned of “mission creep” by enforcement agencies. “You’re worried about climate change? You have to use carbon pricing, use an ambitious green R&D policy, which we don’t have in Europe yet – we need to have green investment,” he said. “There is a huge amount to be done by the politicians on those grounds, and not try to actually pass it back to independent agencies.”

More broadly, Schinkel argues that exemptions are a solution in search of a problem. He says more and more consumers are willing to pay a premium for sustainably produced goods, and that he knows of no genuinely green endeavours that were made impossible by competition law.

A compromise solution?

Some voices advocate a middle ground. OECD competition and sustainability expert Cristina Volpin agrees with Schinkel that competition is mostly a driver of sustainability. But she aligns herself with Snoep in believing that consumers do sometimes switch to competitors that offer cheaper but more polluting options.

“Regulation would ideally be preferable – but if it really is taking time and the business community is willing to cooperate to offer a solution to that, with the due guarantees, that kind of cooperation is indeed a way to make the transition to greener products happen sooner,” Volpin says. However, she stresses that these agreements must be “a last resort”.

Yet even those who favour looser competition enforcement struggle to cite examples of sustainability projects that have been hindered by antitrust laws. Modrall says that he does not receive any such enquiries from his corporate clients. “We would love to have a case, but nobody is coming to us with a case,” he says, blaming enforcement risk for the lack of engagement.

Before he became chair of the ACM, Snoep was a competition lawyer for 28 years. During that time, he says, only “a couple” of corporate clients came to him with sustainability initiatives that they worried might not pass muster with competition authorities. Those projects were able to happen. “I cannot say from personal experience as a lawyer that actual initiatives were killed by competition law,” he concedes.

He further reveals that the ACM’s new guidelines have not generated a spate of carbon-reduction projects in the Netherlands. “We had expected more businesses to come forward with their agreements,” he says. “In light of the outcry from businesses, government and NGOs that competition stood in the way, we were prepared to give guidance in many more cases per year.”

Of the few prospective projects put before the ACM, four sustainability agreements have so far secured the authority’s go-ahead. One of these is an agreement between soft drink suppliers, including Coca-Cola, to discontinue plastic handles on all soft-drink and water multipacks. Could regulators not simply ban unnecessary plastic handles? “It would be great, but that’s already very difficult,” Snoep says.

Another involves Shell and TotalEnergies collaborating to store CO₂ in the North Sea, as well as jointly setting the price for this service for a limited period of time. Shell and Total are generating record profits from the recent oil price surge. Why help them collaborate when each has the resources to independently realise such a project? “We don’t give them extra help,” Snoep says.

Volpin agrees that so far, the ACM has only backed legitimate projects. “They’ve picked the cases with a lot of care,” she says.

Snoep himself acknowledges that not all corporate accords are advisable. ‘Chicken of Tomorrow’, a proposed deal to marginally increase the size of chicken cages in the Netherlands, was rejected by the ACM before he took office. He tells Sustainable Views that he would also have rejected it, even under current ACM guidelines, because the benefit to the birds was relatively modest relative to the price increase. He adds that his focus is on agreements that reduce carbon emissions, rather than on animal welfare.

European Commission view

The European Commission is in the process of producing new guidelines on the enforcement of competition rules, as it does once a decade. The current draft, which few expect will undergo major changes before adoption in the first half of 2023, includes a new chapter on sustainability agreements. In it, the commission clarifies that exemptions can be granted on the basis of sustainability. However it reaffirms that competition principles should be upheld in all but the most exceptional cases, where there is no other way to achieve the sustainability benefits sought and where consumers will receive a fair share of the exemption’s benefits.

“They [the European Commission] remain very suspicious of companies cooperating, even for environmental objectives,” comments Modrall. “The sustainability chapter is a step forward compared to the current guidelines, which don’t deal with sustainability agreements at all. But it doesn’t go as far as it could, or should, in my view. Because those guidelines will be in place for the next 10 years, there’s a risk that they will cut off the experimentation that the Dutch and others have tried to spark.”

Snoep concedes that the ACM will have to amend its guidelines to reflect the EU’s position, but says the authority will continue its supportive policy toward green exemptions, regardless of the commission’s position. “We are independent,” he adds.

Outside Europe, however, no country looks set to change its competition laws or enforcement practices on the back of the current debate. The Japan Fair Trade Commission showed an interest in sustainable agreements by hosting a symposium on them earlier this year, but no transformative change of policy is expected in Japan any time soon.

Meanwhile, in the US the regulatory pushback is particularly strong. “Collusion is unlawful,” Federal Trade Commission chair Lina Khan said at a congressional hearing in September. “We’ve seen firms come to us and try to claim an ESG exemption, and we’ve had to explain to them clearly that there is no such thing.”

Photo credit: Bloomberg

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