CMA proposes flexible approach to support environmental sustainability cooperation

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Out-Law Analysis | 29 Mar 2023 | 8:59 am | 12 min. read

Proposed new guidance issued by the Competition and Markets Authority (CMA) is intended to help businesses take coordinated action on climate change and environmental sustainability more generally, without undue fear of breaching competition rules in the UK.

The CMA’s draft guidance (32-page / 419KB PDF) concerning ‘environmental sustainability agreements’ between actual or potential competitors is open to consultation until 11 April 2023

Overview

The draft guidance sets out working examples that businesses can use to inform and shape their own decisions when working with other companies on environmental sustainability and climate change initiatives. It explains that the CMA is likely to look favourably on agreements between actual or potential competitors – so-called ‘horizontal’ agreements – that are in line with the draft guidance and is very unlikely to prioritise them for enforcement action. 

‘Environmental sustainability agreements’ include horizontal agreements aimed at, for example, improving air or water quality, conserving biodiversity, or promoting the sustainable use of raw materials; but they do not extend to agreements which pursue broader societal objectives such as human rights or improving working conditions.

The draft guidance also specifically covers ‘climate change agreements’ – a subset of environmental sustainability agreements – which contribute towards the UK’s binding climate change targets under domestic or international law. This would include, for example, joint agreements aimed at lowering greenhouse gas emissions in a particular industry sector.

Once finalised, the draft guidance will become a distinct chapter of the CMA’s broader guidance on horizontal agreements (horizontal guidance) and apply only to environmental sustainability agreements. The draft horizontal guidance, which itself was subject to separate CMA consultation between 25 January and 8 March, deals mainly with other more general types of horizontal agreements. The ‘centre of gravity’ of the particular agreement – for example, whether environmental sustainability is the main objective or incidental – will determine whether it is assessed under the specific ‘environmental sustainability’ or the more general provisions of the horizontal guidance.

Types of agreements covered

The draft guidance considers situations where environmental sustainability agreements would be unlikely to infringe the prohibition on anticompetitive agreements in Chapter I of the Competition Act 1998 (CA98); or could potentially infringe Chapter I and, if so; whether such agreements could nonetheless be exempted. Chapter I of CA98 prohibits anti-competitive agreements and is the UK competition law equivalent of Article 101 of the Treaty on the Functioning of the EU (TFEU) in EU competition law.

The draft guidance lists seven examples of environmental sustainability agreements that in the CMA’s view are unlikely to infringe competition law, either because they do not restrict competition law at all or have no appreciable effect on competition, subject to considerations outlined in the draft guidance. These are agreements:

  • which do not affect the main parameters of competition, such as price, quantity, quality, choice, or innovation;
  • to do something jointly which none of the parties could do individually;
  • where cooperation is required by law;
  • to pool information about suppliers or customer;
  • to develop industry standards or codes of practice aimed at making products or processes more sustainable;
  • to phase out particular non-environmentally sustainable processes or cease supplying certain non-environmentally sustainable products and agree to replace them with more sustainable alternatives; and
  • involving industry-wide efforts to tackle climate change.

Other types of environmental sustainability agreements, which could infringe competition law, will be assessed under established competition law principles, beginning with whether the particular agreement may restrict competition by object or by effect.

The CMA

Climate change represents a special category of threat that sets it apart and requires a different approach [which] reflects the sheer magnitude of the risk that climate change represents, the degree of public concern about it, and the binding national and international commitments that successive UK governments have entered into

‘Object’ restrictions are assumed to be inherently anti-competitive – for example, price fixing, market or customer allocation, limitations of output, or limitations of quality or innovation – and unlikely to meet the exemption criteria in section 9 of CA98. However, certain ‘ancillary restraints’ that restrict competition by object may be permissible provided they are necessary and proportionate and the wider agreement itself is not inherently anti-competitive. For example, a joint purchasing group may be unable to effectively negotiate lower prices for inputs with a low carbon footprint unless its members are prevented from participating in competing purchasing groups.

The draft guidance explains that certain restrictions could be considered by-object or by-effect infringements depending on their context. For example, in the CMA’s view a ‘vertical’ collective boycott by a group of competing purchasers agreeing only to purchase from suppliers that sell sustainable products, and thus intended “to eliminate unsustainable products from the supply chain”, would be “unlikely to restrict competition by object” on the basis that such agreement can be distinguished from ‘horizontal’ collective boycotts designed to eliminate a direct competitor.

An agreement that is not inherently anti-competitive – i.e. does not restrict competition by object – will only breach competition rules if it has an appreciable negative effect on competition, such as increased prices, reduced output, product quality, product variety or innovation, market allocation, or anti-competitive foreclosure of other competitors. This involves a fact-specific assessment and various factors will be considered, including:

  • market coverage of the agreement;
  • market power of the parties involved;
  • to what extent parties are free to act outside the agreement;
  • anti-competitive foreclosure effects – for example, can non-parties participate on fair, reasonable and non-discriminatory (FRAND) terms in any new standard that is developed;
  • exchange of competitively sensitive information beyond what is necessary for the agreement to function; and
  • any appreciable increase in price or reduction in output, product variety, quality or innovation that results from the agreement.

Exemption

An agreement that restricts competition may nonetheless be exempted under section 9 of CA98 if the harm resulting from reduced competition is outweighed by consumer benefits the agreement generates. To be exempted the agreement must:

  • contribute to certain benefits, namely improving production or distribution or contribute to promoting technical or economic progress (benefits);
  • restrict competition no more than is indispensable to achieve those benefits (indispensability);
  • result in consumers receiving a fair share of the benefits (fair share); and
  • ·not eliminate competition in respect of a substantial part of the products or services concerned (no elimination of competition).

The CMA has explained in its draft guidance how it envisages the four cumulative exemption criteria may apply to environmental sustainability agreements. 

Benefits

Benefits, in the context of environmental sustainability agreements, may include eliminating or reducing harmful effects arising from the production or consumption of certain goods or services, such as reducing greenhouse gas emissions; or improving product variety or quality, such as developing new or improved products that have are more environmentally friendly; or production or distribution processes, like introducing new cleaner technologies.

They may also include reducing production and distribution costs, such as by combining resources to create economies of scale for producing of new more environmentally sustainable inputs that enables products to be produced or distributed more cheaply, and increasing innovation, like through the development of new, more energy-efficient processes.

Benefits need to be objective, concrete and verifiable, so they can be substantiated. Environmental sustainability benefits that only materialise in the future, over a long period of time, may be considered provided they can be appropriately quantified – as explained in the draft guidance.

Indispensability

To meet the indispensability condition, the parties must demonstrate that there is no less restrictive, but equally effective, alternative, to achieve the benefits.

An example might be an agreement between manufacturers to collectively use a new, more environmentally sustainable, material to overcome the so-called ‘first-mover disadvantage’ and ensure that the environmental benefits can materialise.

‘First mover disadvantage’ can arise where a business is reluctant to be the first to adopt a new process or technology because that would be more costly in the short term and result in an immediate competitive disadvantage. However if, as part of a cooperation agreement, companies collectively decide to adopt a new technology or process that benefits environmental sustainability, such as by switching to more climate-friendly but more expensive technology or inputs, the first mover disadvantage can be overcome and business may therefore be willing to make such change.

Conversely, a restriction may not be indispensable if demand already exists for a new sustainable product – but this depends on the specific facts. For example, restrictions may still be indispensable if there is limited market coverage and the agreement leads to greater, collective, economies of scale enabling the benefits to materialise more quickly or more cost-efficiently or lead to wider market coverage. Likewise, a cooperation agreement may be considered necessary to exceed certain sustainability goals covered by the public policy or regulation, or to achieve them more quickly or cost-efficiently, provided parties can explain shortcomings of the policy or regulation and why the cooperation is indispensable to achieve the benefits claimed.

Fair share

Consumers who receive a fair share of benefits resulting from the agreement must typically be in the same market where competition is restricted, or in a related market where the consumers affected by the restriction and received the benefit are substantially the same or substantially overlap. Where the benefits arise across multiple markets, only the proportion of the benefits which accrues to the consumers harmed by the agreement is taken into account. The benefits must be substantial and demonstrable, and sufficient to offset harm caused by reduced competition.

In its draft guidance, the CMA has recognised the challenges of quantifying environmental and competitive benefits and negative effects, and pointed to established techniques that can be utilised, as well as its willingness to informally engage with businesses via its ‘open door policy’.

No elimination of competition

Competition will not be eliminated if some competition remains on the market(s) affected by the agreement – for example if the agreement only covers some, but not all, businesses within the market. Where an agreement covers an entire market, competition will not be eliminated if scope remains for businesses to compete on key parameters, such as price or quality.

Climate change agreements get special treatment

The CMA plans to adopt a more permissive approach specifically when assessing climate change agreements by taking a broader view when assessing whether the “fair share to consumers” exemption criterion is satisfied. In particular, “the totality of the benefits to all UK consumers arising from the agreement” may be taken into account in such agreements, rather than apportioning benefits between consumers within the market affected by the agreement and those in other markets. 

This exceptional approach, which does not apply when assessing other types of environmental sustainability agreements, is said to be justified “because of the exceptional nature of the harms posed by climate change (and therefore the exceptional nature of the benefits to consumers from combating or mitigating climate change or its impact)”. The CMA notes that “climate change represents a special category of threat that sets it apart and requires a different approach” which “reflects the sheer magnitude of the risk that climate change represents, the degree of public concern about it, and the binding national and international commitments that successive UK governments have entered into”.

Business will need to demonstrate that the claimed benefits align with existing legally binding requirements or well-established national or international targets, that UK consumers benefit from the agreement, and that the benefits offset the harm resulting from reduced competition. Both the direct and indirect benefits to the consumers in the relevant market and the benefits to UK consumers in general are potentially relevant. Such assessment will require an appraisal of both environmental benefits and negative effects – their quantification may require the use of appropriate techniques, as explained in the draft guidance.

Encouraging businesses to ‘go green’

The CMA is “determined to help businesses who genuinely try to do the right thing in relation to environmental sustainability”, and invites parties to approach it as part of its ‘open-door policy’ if they require additional guidance or clarity. Conceivably, this could include joint initiatives not covered in the draft guidance, or concern specific queries on quantifying certain environmental sustainability benefits and offsetting them against competitive harm.

Agreements that closely follow examples and align with principles in the draft guidance will not face CMA enforcement action. Business may also seek the authority’s informal assessment to gain further comfort on their proposed endeavours. Provided the parties have not withheld information or misled the CMA, agreements informally ‘greenlighted’ by the CMA will not face fines for breaching competition law, and the CMA will approach the parties to seek any adjustment that may be required to ensure continued competition law compliance before it considers taking any enforcement action.

Where the CMA completes informal assessments, it will aim to publish non-confidential summaries to help guide similar initiatives. It may also update or supplement the guidance as the CMA builds up experience in assessing environmental sustainability agreements.

The bigger picture

The draft guidance aligns with the CMA’s broader work aiming to help the UK economy become more environmentally sustainable and transition to net zero – as stated in the CMA’s annual plan for 2023-2024. Alongside the CMA’s efforts – set out in the draft guidance – to help ensure businesses are not inhibited by fears of competition law non-compliance from using cooperation agreements to achieve environmental sustainability goals, the authority’s other relevant key workstreams include:

International context

Competition authorities across Europe are increasingly focused on how environmental sustainability goals should be considered in competition law assessment, particularly where horizonal agreements are involved, and increasingly recognise the need for clear guidance to encourage sustainable business practices. National competition authorities in the Netherlands, Greece and other European jurisdictions have led the way in this respect.

The European Commission’s own draft horizontal cooperation guidelines, last published in March 2022, feature a dedicated chapter on sustainability agreements. In that draft, the Commission adopted a wide concept of “sustainability”, encompassing broader objectives beyond environmental protection considerations. This also meant that, due to their wider scope, the draft EU guidelines were not as flexible as the CMA’s own draft guidance – the UK approach is more permissive when assessing climate change agreements

The Commission’s draft guidance has not yet been finalised. The timeframe for the Commission’s final horizontal cooperation guidelines was extended by six months, so that stakeholder feedback received by the Commission during 2022 can be reflected in the final version. The final EU guidance is now expected by the end of June 2023. It will be interesting to see if the final EU guidelines also make special, and more flexible, provision for climate change agreements and take into account broader, out-of-market, consumer benefits as in the proposed UK approach.

The approach taken by European national competition authorities varies. For example, the Dutch authority has taken an even wider approach to sustainability agreements than the CMA or the Commission. This fragmentation will increases compliance challenges for multinational businesses.

Next steps

The CMA consultation on the draft sustainability guidance runs until 11 April 2023. Once finalised, the guidance will be integrated into the CMA’s broader horizontal guidance. It will be interesting to see if the final guidance provides further examples of permitted environmental sustainability agreements, and whether it clarifies the CMA’s approach to ‘mixed’ sustainability agreements. Mixed agreements may address both ‘climate change’ as well as also other environmental sustainability goals, such as conserving biodiversity.

The finalised guidance will help give businesses more legal certainty in developing and implementing joint initiatives intended to pursue environmental sustainability and climate change objectives, in a manner that is competition law compliant. Businesses will also be able to seek further informal guidance from the CMA if this is considered necessary.

UK businesses that trade within the EU must also comply with EU competition laws and therefore should be mindful of parallel developments in the EU concerning environmental sustainability agreements, including any future divergence between UK and EU rules and guidelines.

Co-written by Tadeusz Gielas of Pinsent Masons.

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