CMA Consults on Environmental Sustainability Agreement Guidelines

On February 28, 2023, the UK’s Competition and Markets Authority (“CMA”) demonstrated its thought leadership in the integration of sustainability and competition policy by publishing draft guidance (“Draft UK Guidelines”) on the application of competition rules to agreements between competitors to tackle environmental sustainability objectives.[1]

The guidance aims to provide legal certainty, and to ensure competition law does not impede legitimate industry collaboration on environmental initiatives.  The consultation on the Draft UK Guidelines is open until April 11, 2023.

In respect of Climate Change Agreements, the CMA’s contribution goes further than proposed guidelines from the European Commission on agreements that promote sustainable development (“Draft EU Guidelines”).[2] It reflects a push among antitrust regulators to ensure their enforcement efforts support the delivery of ambitious climate targets. Other national competition authorities have provided similar guidance, including Japan’s Fair Trade Commission, Germany’s Federal Cartel Office,[3] Austria’s Federal Competition Authority, the Dutch Competition Authority (“ACM”), and the Hellenic Competition Commission.

I.                   Scope of the Guidelines

The Draft UK Guidelines cover competitor agreements to achieve environmental goals, which include those aimed at reducing greenhouse gas emissions, improving air or water quality, conserving biodiversity, or reducing raw material consumption. Such agreements are gaining prominence across all sectors of the economy. They range from industry-wide examples such as the Net Zero Asset Managers Initiative and the Fashion Industry Charter for Climate Action, to company-level partnerships to develop greener production processes. In this respect, the Draft UK Guidelines are narrower than the Draft EU Guidelines, which extend to agreements pursuing sustainability objectives beyond just environmental objectives.[4]

The Draft UK Guidelines explain (A) when environmental sustainability agreements are unlikely to restrict competition and therefore present no antitrust concerns; (B) when environmental sustainability agreements that restrict competition might nevertheless qualify for an exemption; and (C) the specific treatment that would be accorded to “climate change agreements”, which are agreements that explicitly help reduce greenhouse gas emissions or otherwise contribute to achieving the UK’s climate change targets.

The CMA has published guidelines on other forms of horizontal agreements, such as R&D agreements and purchasing agreements.[5] In case of conflict, the Draft UK Guidelines on sustainability prevail.

A. Agreements which are unlikely to restrict competition

Environmental sustainability agreements do not necessarily appreciably restrict competition and so may fall entirely outside competition law. The CMA considers these agreements fall broadly into two categories:

1. Agreements which do not relate to the way businesses compete with each other as they do not impact the main parameters of competition, such as price, quantity, quality, choice, or innovation. In addition to examples that were already listed in the Draft EU Guidelines (such as agreements on internal corporate conduct like eliminating single use plastics; the creation of joint databases on sustainable suppliers; and the organisation of joint campaigns to raise environmental awareness), the Draft UK Guidelines suggest that agreements to pool funds for non-competitive uses (e.g., for training, or joint lobbying for policy/legislative changes) would fall within this category.
2. Agreements which do not appreciably affect competition, typically because they enable activities that could not be pursued individually or the collaboration is unlikely to have a material impact on price, choice, or other competitive parameters. Like the Draft EU Guidelines, the Draft UK Guidelines refer to standardisation agreements (with similar though not identical eligibility criteria),[6] but also lists as possible examples: (i) agreements to engage in joint activities the parties could not have engaged in individually(e.g., due to a lack of resources or technical capabilities), (ii) collaboration on non-binding industry targets or common methodologies to determine unilateral targets, and (iii) agreements to phase out non-sustainable products or processes.[7]

B. Agreements which may qualify for exemption

Environmental sustainability agreements may restrict competition because they lead to higher prices or reduced choice, quality, or innovation. In such situations, the CMA explains the environmental sustainability agreement may still be allowed if it satisfies the four conditions of Section 9 of the Competition Act 1998 (the UK equivalent to Article 101(3) TFEU):

1. The agreement must produce demonstrated environmental benefits, such as by reducing greenhouse gas emissions. These benefits need to be substantiated, objective, concrete, and verifiable. This means parties need to describe the expected benefits as concretely as possible and explain how likely they are to materialise and within what time frame. Benefits may include future benefits to offset present harm, although such benefits may need to be quantified using some discounting techniques. As discussed below, the CMA is willing to advise on quantifying benefits.
2. The agreement must be indispensable. There must be no alternatives that achieve the same sustainability-related goals with a lesser amount of coordination. This will normally require parties to demonstrate that, in the absence of the agreement, they could not otherwise achieve the same level of benefits, or could not achieve them with the same efficiency, at the same cost, or within the same time frame.
3. Consumers must receive a fair share of the benefit, meaning that the current or future benefits passed on to UK consumers must outweigh the harm they suffer as a result of the agreement. Where this requirement is not obviously satisfied, some quantification of benefits may be required. In general, only benefits (or proportions of benefits) accruing to current or future consumers of the particular product or services can be offset against the harm resulting from the agreement. The only exception to this is that, where two markets are related, and the respective consumers in each market substantially overlap, benefits accruing to consumers in one market may offset harms suffered by consumers in the other – although this requirement does not apply to climate change agreements.
4. The agreement must not eliminate competition entirely. This means there must remain some residual competition on the market(s) affected by the agreement. This would be the case where the agreement only affects certain products or competitors in the market, or where competitors still compete on other key parameters, such as price or quality.

C. Climate change agreements

The Draft UK Guidelines adopt a more permissive approach to climate change agreements.[8] These agreement can satisfy the “fair share of benefits” condition by taking into account the benefits accruing to all UK consumers, regardless of whether they also buy products or services in the relevant market affected by the agreement. However, applicants must still demonstrate such benefits, and in some cases quantify them using best industry practices, such as carbon pricing.[9]

The CMA explains it would be “perverse and harmful” to only take account of benefits to the specific consumers, as coordination is required to overcome the costs of “first mover disadvantage”: “If, for example, an individual business is minded to switch to energy use that will reduce carbon emissions, such as abandoning fossil fuels, which will be more costly in the short term (giving an immediate competitive disadvantage), it might be reluctant to do so unless its competitors in the same market do so too. […] It is only if that business can coordinate such a switch of energy use with its competitors, that this constraining factor is removed and the business is willing to make the (beneficial) switch. Such coordination between competitors is to be encouraged.”

This exceptional treatment for climate change agreements goes further than the Draft EU Guidelines, which (a) did not recognise such a departure from the rule that any harm arising from an agreement must be offset by benefits to substantially the same set of consumers, and (b) count only the share of the benefits experienced by EU consumers who pay, rather than all EU consumers. The CMA’s approach is inspired by the Dutch Competition Authority’s guidelines, which introduced this principle for all agreements aimed at tackling environmental damage, because the reduction of negative externalities benefits the society as a whole.[10]

The CMA explains that climate change agreements merit an exception due to “the sheer magnitude of the risk that climate change represents, the degree of public concern about it, and the binding national and international commitments [on the UK]” as well as “the immeasurable long-term effects […] once certain tipping points are reached”.[11]  It is expected that during the consultation, similar arguments will be made to justify counting benefits arising outside the UK, and benefits associated with other worldwide systemic threats, such as biodiversity loss and damage to essential elements of ecosystems.

II.               Informal consultations with the CMA

The CMA is operating an open-door policy that encourages parties to seek informal advice for environmental sustainability agreements. The CMA affirms it will not issue fines for agreements that were discussed with the CMA in advance and where it did not raise any competition concerns, or where any concerns identified were addressed.

III.            Conclusion

The Draft UK Guidelines are an important step in delivering important clarity to businesses as they seek to adapt to the opportunities and challenges arising from the global transition to net zero. While some issues remain to be debated (such as the precise assessment of benefits to future generations of consumers), the CMA’s specific guidance on climate change agreements marks a particularly welcome step forward beyond the proposal of the European Commission, that may help drive a more effective policy worldwide, and harmonisation between the Commission, the ACM, and other antitrust agencies. Given the potentially multi-jurisdictional nature of environmental sustainability agreements, consistency will be key to promoting commercial initiatives of this nature. Stakeholders wishing to advance this regulatory dialogue should consider responding to the consultation.

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[1] See Competition and Markets Authority Press Release, New guidance to help businesses co-operate on environment (February 28, 2023).

[2] Section 9 of the EU’s draft horizontal guidelines published for consultation from March to April 2022 covers sustainability agreements, discussed in our blog post. The EU is now consulting on guidelines specific to the agricultural sector, in a consultation running from January 10 to April 24.

[3] The FCO has, for instance, provided guidance on two food retail initiatives, see our blog post.

[4] See, Draft EU Guidelines, para. 543.

[5] From January 25 to March 8, 2023, the CMA also consulted on draft guidance on horizontal agreements to replace the EU’s horizontal guidelines.

[6] There is substantial overlap between the requirements for standardisation agreements under the two sets of guidelines but also some differences. Unlike the Draft UK Guidelines, the Draft EU Guidelines specifically require that the standardisation agreement (a) does not lead to (i) the exchange of commercially-sensitive information or (ii) a significant price increase or significant reduction in the choice of products, and (b) is accompanied with a monitoring system to ensure compliance. Unlike the Draft EU Guidelines, the Draft UK Guidelines require that participating businesses remain free to develop alternative standards (Draft UK Guidelines, para. 3.11 andDraft EU Guidelines, para. 572).

[7] Unlike the Draft EU Guidelines which treat phase-out agreements as a type of standards agreement, the Draft UK Guidelines discusses them separately and appears to simply require that they do not lead to an appreciable increase in prices or an appreciable reduction in product choice (Draft UK Guidelines, paras. 3.11, 3.13 and Draft EU Guidelines, para. 561).

[8] For a discussion of an example of a climate change agreement, see Maurits Dolmans, If we can’t do what we must, we must do what we can… (December 6, 2022).

[9] See Draft UK Guidelines, paras. 5.6, 5.16, 5.23-5.25 and 6.6; Draft ACM Guidelines, paras. 41-42 and 53-63. Both the CMA and the ACM consider quantification unnecessary if the sustainability benefits clearly outweigh any harms to competition. The ACM also considers quantification unnecessary if the involved undertakings’ combined market share is limited, which the Draft UK Guidelines do not specify.

[10] See Draft ACM Guidelines, paras. 8, 36, and 46-48.

[11] See Draft UK Guidelines, para. 6.4.