AGENDA 2025: Roadmap to Sustainability

AGENDA 2025: Roadmap to Sustainability

This article is part of the D’Kart Spotlights: AGENDA 2025, in which experts from academia and practice comment on aspects of the Competition Policy Agenda presented by the Federal Ministry of Economic Affairs and Climate Action (BMWK). The contributions already published can be found here.

The Competition Policy Agenda of the Federal Ministry for Economic Affairs and Climate Action (BMWK) describes sustainability as one of the key current challenges and wants to create a pro-active competition law framework. Elena Wiese sets out an initial roadmap.

Companies of all sizes need clear and manageable legal regulations to convince their decision-makers that a project complies with antitrust law. This applies all the more in cooperative antitrust law because after all, due to the considerable risk of sanctions, it has so far (mostly) deterred companies from entering into contact with their competitors. Cooperation is often only undertaken after close coordination with the legal department, external lawyers and possibly the competent competition authorities. Now, however, in view of the climate catastrophe, cooperation between competitors is (also politically) desired – at least to the extent this leads to more sustainable products, environmental protection and a more resource-efficient economy. For companies and legal advisors alike, however, the question arises: Where does the cartel begin and where does the desired cooperation end? What does it take for joint innovation to be compliant with antitrust law – and when is competition forinnovation (illegally) prevented?

In its Competition Policy Agenda, the BMWK ventures to square the circle, as it wants to provide companies with a clear legal framework for sustainability cooperation on the one hand, while preventing greenwashing of cartels or other forms of disguised restrictions of competition on the other. In fact, it will not be possible to resolve this conflict of goals without compromising. The BMWK will either be able to create clear regulations that invite proactive application of the law – at the risk of individual “green washers” profiting from this. Or it will have to carry on without such gain in knowledge and legal certainty – with the consequence that “green-minded” companies may find the risk of horizontal sustainability cooperation too high. So far, the legislature has shown somewhat of a wait-and-see attitude – even though Greta Thunberg demanded years ago: “I want you to panic!”.

1. Where does the road take us?

Panic is of course not a good advisor, but it is indisputable that time is pressing. So where to run to? It is quite likely that the German legislator and the BMWK will pay close attention to proposals made in Brussels. Any preview of what might come must therefore also consider the Commission’s draft of the new Horizontal Guidelines

In its draft, the Commission advocates a broad concept of sustainability, including combating climate change, preventing pollution, limiting the use of natural resources, respecting human rights, promoting innovation, ensuring animal welfare and much more. Those who simply comply with legal requirements in these areas do not enjoy any benefits under competition law. Likewise, the BMWK clarifies in its agenda that privileges can only apply “where companies want to jointly achieve sustainability goals or human rights standards beyond the state requirements”.

But what does “privileging” actually mean? The term often alludes to § 2 of the Act Against Restraint of Competition (GWB), i.e. the individual exemption from the ban of cartels. However, that exemption is not a panacea. For the rapid green transformation to work, companies should not bear the burden of examining efficiencies and quantitative advantages for certain consumer groups on a case-by-case basis (with lengthy expert opinions and little legal certainty by way of “self-assessment”) and, in case of doubt, arguing it out with the authorities. In view of the climate crisis, it will rather be necessary to establish that some sustainability cooperations are already “per se” not restrictive of competition. Companies must be able to judge quickly (and ideally with legal certainty) that an intended sustainability cooperation is within the limits of what is permissible and does not fall under the ban of cartels. This should apply in particular to R&D agreements or joint production agreements between individual competitors, as regulated by the BERs. However, the same should also apply to sustainability standards, which merely set minimum requirements while leaving it within the cooperating parties’ discretion to decide which technological means they use to implement the standards and to what extent they want to leave room for other (including less climate-friendly produced) products. Companies that want to engage in such standards should be clearly and unambiguously encouraged and not thwarted by currently (still?) justified concerns of their legal department or legal advisors. The same applies to the accompanying exchange of information, at least as far as it is necessary for the sustainability cooperation.

2. Transform me!

Admittedly, these (individual) cases can still be assessed quite easily. In practice, however, there are other scenarios that clearly set out the limits of legal advice to companies and their lawyers. Transformation processes of entire industries cry for legislative help. When all companies in an industry cooperate, when BER market share thresholds are clearly exceeded, and real industrial revolutions are imminent – then clear regulations are particularly necessary. After all, it is precisely these industrial revolutions that bring great progress. However, numerous questions arise: How, for example, will the exchange of information between competitors be assessed if this serves the creation of sustainable projects? Does the German “rule of 5” still apply then? What are the requirements for strategic uncertainty in the field of sustainability? What should apply if conventional products are jointly withdrawn from the market? How are sectors supposed to manage with legal certainty the green transformation and the considerable investments associated with it, e.g. if there is import pressure from non-sustainable companies or if a public contracting authority refuses to commit to demanding environmentally friendly manufactured products? And what happens when cooperation also relates to prices? 

The Commission is signalling that it wants to stay on a rather strict path overall. Insofar as companies jointly consider how to convert the higher costs resulting from the introduction of a sustainability standard, for example, into higher sales prices, this is according to the draft of the new guidelines to remain a restriction of competition by object. The Commission also clarifies that it will view it as a restriction by effect if companies significantly increase their prices for the new, sustainable product merely as a result of the cooperation. The same should apply if a sustainability standard leads to a significant restriction of the choice of products available on the market. In practice, however, such consequences will be frequent: Companies will only invest in sustainable products if the return on investment is sufficient – how else are shareholders and other decision-makers to be convinced of the move? Unless subsidies, carbon contracts for difference or secured demand from a public purchaser absorb the investment, price increases will often be unavoidable, as will a reduction in the availability of other, less sustainable products that increases sales of the sustainable products.

In view of the Commission’s draft guidelines, it is thus to be feared that any sustainability agreement affecting the parameters price, quantity, quality, choice or innovation will still have to meet the requirements of the individual exemption. This concept sounds nice in theory – in practice, it is not. It is associated with legal uncertainty, with expert opinions, with loss of time, with pondering if, how and to what extent to consult with the authorities. All of this entails an extra effort – possibly resulting in the decision that the risks associated with a sustainability investment outweigh its benefits. It is hence no surprise that the BMWK’s Head of Competition Policy, Thorsten Käseberg, does not seem to find the new guidelines very helpful either.

The Bundeskartellamt (Federal Cartel Office) has recently shown that, even on the basis of current law, things can be done differently. Regarding more animal welfare in milk production, it has tolerated a reimbursement model whereby a more or less fixed price component is passed through the value chain to promote more animal-friendly milk production – increasing its price. The tolerance shown by the Bundeskartellamt was probably due to several facets of the individual case, namely the range of the price factor, the fixed quality criteria on which the production standard was based, the fact that only a part of the market was covered by the agreement, the voluntary participation of the companies and the fact that agreement might have been eligible for the application of the new Article 210a of the CMO, which contains an explicit exemption from the ban of cartels for sustainability agreements in the agricultural sector. In contrast, the Bundeskartellamt has clearly rejected projects such as the one proposed by the “Agricultural Dialogue Milk”, which did not offer a higher sustainability standard than that already required by law. The Bundeskartellamt rightly stated that cooperations must actually serve sustainability. They must “not only aim to increase the margins of a few companies“.

3. Environmental harm – who does consume environmental damage??

But one thing is clear: neither the possibility of consulting the authorities nor a “clean bill of health” under § 32c GWB will suffice to give companies the legal certainty that is particularly necessary for major industrial transformations. Nor will it be sufficient to refer companies to § 2 GWB in order to relieve them of the currently existing considerable assessment risk of proactive, climate-friendly horizontal cooperation. Rather, the legislator will have to make considerable adjustments – possibly in the spirit of the aforementioned Article 210a of the CMO. In this context, sustainability must become a legally recognised (overall) economic advantage. The main point of contention will be the extent to which out-of-market efficiencies are recognised. 

In its draft guidelines, the Commission states: “Consumers receive a fair share of the benefits when the benefits deriving from the agreement outweigh the harm caused by the same agreement, so that the overall effect on consumers in the relevant market is at least neutral.” The Commission therefore remains true to its position that out-of-market efficiencies, i.e. efficiencies that occur outside the market affected by the (anticompetitive) cooperation or a related market, are not taken into account and are therefore irrelevant for the exemption. However, should not every action that could still mitigate the climate crisis be rewarded within the scope of the exemption? With every purchase of a sustainable product, a consumer has not only made a decision in favour of the specific product, he or she has also made an altruistic decision in favour of all consumers, including those whose demand creates the very problem.

The BMWK might however also take as a model those legislators and authorities that recognise that the more sustainable (and not necessarily higher quality) product benefits not only the consumers in the relevant market, but ultimately everyone. Take Austria as an example: With KaWeRÄG 2021, Austria has, among other things, enshrined in law a regulation on the exemption from the prohibition of cartels for entrepreneurial cooperations for the purpose of an ecologically sustainable or climate-neutral economy. The legislator integrated this new provision into the exemption clause of § 2 para. 1 of the Federal Cartel Act (KartG), which is modelled after Article 101 (3) TFEU. In this context, the criteria of efficiency gains and adequate consumer participation will be fulfilled if the advantage “contributes significantly to an ecologically sustainable or climate-neutral economy“. Consumers are therefore also adequately involved if the restriction of competition is beneficial for climate goals – and thus not necessarily for the individual consumer in the market specifically affected by the restriction of competition. Austria has thus achieved a turn towards the recognition of efficiencies for society as a whole, in which the crucial question “Is it in or out of the market?” is no longer relevant. Austria has acknowledged by law that it is the general public that benefits from the promotion of climate goals.

4. Fair, fairer, fair share

The Commission also clarifies in its draft guidelines that the overall impact of an agreement on consumers in the relevant or related market must be at least neutral. In other words, and as already announced by Competition Commissioner Vestager at the IBA conference in September 2021: “That’s why we think that these agreements should only be legal if the consumers of the product get a fair share of the benefits they produce – a share that outweighs the extra price that they pay.” 

The problem is that all of us are (also) consumers. And no one (really no one) finds price increases worth cheering for. Consumers who are directly affected by price increases are often quite indifferent to whether and what fair share of the benefits there is through cooperation; they are seldom prepared to accept price increases – even if these are necessary to achieve the sustainability goals. In the Commission’s view, however, the cooperating companies should, in case of doubt, have to prove by means of e.g. customer surveys that consumers are actually willing to pay higher prices for the more sustainable products resulting from the agreement. This is not going to help us solve the problem we are facing: the refusal of a limited group of customers to pay a (possibly significantly) higher price for a sustainable product cannot be a yardstick for the feasibility of solutions to avert the global climate crisis. In addition, “price” is a variable concept, where up to now, and precisely where more sustainability would be particularly urgent, there has all too often been a free lunch for consumers. This is because e.g. the price of the conventional pork cutlet does not reflect the social costs of the emissions associated with its production; it does not reflect the burden on resources, the environment and society – and is therefore too low. The real economic price is different from the one we pay at the supermarket checkout.

The Dutch ACM has been emphasising this for a long time: negative externalities must be taken into account. For the ACM, this is one more reason to repeatedly underscore – most recently in its opinion on the draft Horizontal Guidelines – that only a fair share of the higher sales prices needs to be compensated in order to maintain the exemption: “Consumers within the relevant market need only enjoy an appreciable objective advantage under Article 101 (3) TFEU. They need not be compensated in full. Hence, collective benefits that accrue to parties that are not (also) consumers within the relevant market can count towards the fair share for consumers.”

Incidentally, the ACM recently underlined its own progressive claims when it gave its blessing to a cooperation of several Dutch energy suppliers in which a uniform CO2 price was set in the calculation models for investments in electricity grids by the grid operators. These calculation models also have an indirect impact on tariffs paid by electricity customers. Nevertheless, the ACM concluded that even with a higher CO2 price, the sustainability benefits outweigh the potential costs for users: All consumers benefit as CO2 emissions fall. Thus, the project was good to go.

5. The legislator’s finest hour

It is now up to our legislators to act goal-oriented, pro-active and long-term – in other words, sustainably. This is not to say that guidelines from the authorities and consultations with the authorities do not work: The competition authorities are open for consultations and extremely eager to use the applicable law to condone ESG-cooperation. The number of case reports published in this regard, especially by the Bundeskartellamt in the recent past, stands testament to that. The Bundeskartellamtalso emphasises its intention to provide guidance for other cooperation projects. 

But as already mentioned: consultations alone are not a solution for the necessary green transformation. While they can be a complementary instrument for borderline cases or risk-averse companies, they should not become a comfort zone legitimising the legislator’s inaction. This is because when tackling the climate crisis, both public authorities and legal advisors can only ever operate within the limits of the applicable law. And antitrust law still follows the principle of self-assessment, which especially in this challenging area confronts companies and legal advisors with time-consuming, costly and frustrating issues . Above all, the necessary balancing of interests cannot be left to the authorities. It is the primary task of the legislator, our elected representatives, to reconcile the goals of “free competition” and “preserving our planet”. Now is the time to focus on the latter – also within the framework of competition law. This requires a bold step forward. Without it, competition law runs the risk of discouraging sustainability. To quote Kirsi Leivo, head of the Finnish Competition Authority: “When we are on the verge of catastrophe, we should not be sticking to old principles of competition law but be more creative in interpreting the treaty“. 

The German legislator should therefore not be too concerned with the risk of greenwashing by individual companies. Quite to the contrary, companies that no longer want to produce unscrupulously at the expense of the general public should be given the benefit of the doubt. Instead of fearing some black sheep, it’s the green sheep that should guide action. To conclude, it’s once again Tom Friedman’s adage: “Pessimists are usually right and optimists are usually wrong – but all the great changes have been accomplished by optimists.”

Dr. Elena Wiese is a lawyer and counsel at Hogan Lovells in Düsseldorf.

One thought on “AGENDA 2025: Roadmap to Sustainability

  1. Vielen Dank für den schönen Artikel! Für mich ist die große Frage (welche über das Thema dieses Artikels hinausgreift), ob am Ende des Tages die Beschränkung des Kartellrechts und wettbewerbsbeschränkende Kooperationen oder die Internalisierung von Klimaschäden bei den Wettbewerbern und daraus entstehender Wettbewerbsdruck zu besseren Lösungen für den Klimaschutz führen.

Leave a Reply

Your email address will not be published. Required fields are marked *