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.
This contribution to the D-Kart Spotlights: AGENDA 2025 is again concerned with the hot topic of sustainability agreements. Mariya Serafimova takes a look at the developments in the european antitrust community.
With the rise of the debate around sustainability agreements, especially since the publication of the new Draft Horizontal Guidelines of the European Commission, one cannot help but feel reminded of the quote by Margaret Mead to never doubt that a small group of thoughtful, committed citizens can change the world; it’s the only thing that ever has. Another Margrethe, more commonly known to the competition law world, has also stated that with the actual necessity of a “green revolution”, it is upon “all of us – including competition enforcers – […] to make sure that we’re doing what we can to help.”
The discussion on sustainability agreements often swings between a Neo-Brandeisian broad understanding of the antitrust goals and a more conservative approach towards consumer welfare (see Hovenkamp (2022); Glick (2022)). At the core of this debate lies the question whether or not competition law should allow for more coordination between companies to secure a green transition of the economy, in particular through sustainability agreements.
1. What are sustainability agreements?
As defined by the Commission’s draft Horizontal Guidelines, sustainability agreements refer to agreements between competitors that pursue one or more sustainability objectives, irrespective of the form of cooperation. Sustainability in itself is a broad term and is even an expressed goal of the EU (see Article 3(3) TEU).
According to the Commission’s guidelines, the term sustainability denotes both initiatives promoting behaviours that reduce the negative environmental impact, such as addressing climate change, reducing pollution, limiting the use of natural resources and reducing food waste, but also embracing positive behaviours such as facilitating a shift to healthy and nutritious food, ensuring animal welfare and others. Unlike other competition authorities, the Commission has not differentiated between agreements addressing climate change in particular and other types of sustainability agreements. Hence, the list of the sustainability objectives is long and non-exhaustive, so potentially any Fridays for Future follower can find something to cheer for in favour of sustainability agreements. Also in the industry there is a wide consensus that the current state of play of competition law does not provide sufficiently clear guidance on the coordination between competitors in the area of sustainability. In fact, some claim that the traditional – rather strict – approach of competition authorities towards collusion for “good purposes” has prevented competitors from collaborating with each other to achieve more ambitious and costly goals with regard to sustainability. The Commission’s draft guidelines thus seek to reduce the lack of guidance when it comes to sustainability agreements.
2. The problem: how to deal with negative externalities?
But is it really that simple to deal with sustainability issues at the level of competition law by allowing for more horizontal coordination?
The answer could possibly be – it depends. There are different types of sustainability agreements, which also have diverging effects on competition. In general, as the guidelines acknowledge, it is for public policy and regulations to take care of negative externalities and to ensure efficient market outcomes that account for sustainability goals. However, this does not exclude that under certain circumstances, cooperation agreements may be indispensable to reach the envisaged goal in a more cost-efficient way. (In fact, an early form of solidarity has existed in maritime trade long before the emergence of competition law, see a joint podcast on the topic).
In a nutshell, there are several different types of sustainability agreements that the Commission considers. On the one hand, there are sustainability agreements which are generally considered to not fall under the cartel prohibition. These agreements do not cover essential parameters of competition, such as price, quantity, quality or innovation. For instance, the Commission counts in that regard agreements between competitors to reduce single-use plastics or printed materials in their businesses, or under certain conditions data pooling agreements to ensure sustainable value chains.
However, these are not the most obvious types of sustainability agreements. The more prominent examples in the debate refer to agreements between competitors to improve the production process, for instance by agreeing on using processes that do not involve fossil fuels and thus exert less CO2 emissions, or reducing waste that comes with the packaging of the product (for example reducing the packaging size of cereals). Also the infamous Chicken of Tomorrow case dealt with similar agreements related to conditions improving animal welfare (such as the provision of caged animals with more space). For agreements setting sustainability standards, the new guidelines provide to some extent a soft safe harbour. These agreements must meet seven cumulative conditions to fall outside the scope of the cartel prohibition – inter alia to offer transparent, open and non-discriminatory access to the standard setting, voluntary participation and the freedom to adopt a higher standard. In any case, there should be no exchange of commercially sensitive information between competitors.
Still, the difficulty when dealing with such standard setting agreements is that the competitors need to prove that the agreement will not lead to a significant increase in prices or loss in consumers’ choice. As it is rather unlikely that such new changes would be brought about without any further costs (otherwise begging the question of why they were not brought into play in the first place), it is likely that such an agreement will lead to an increase in the price or the reduction of output or product quality. So, the main question remains – can these agreements still be exempted and do consumers need to be (fully) compensated for the harmful effects.
3. Consumer fair share vs. fair risk of greenwashing?
Under the test of Article 101(3) TFEU, in order to be exempted, the sustainability agreement generally needs to meet four cumulative conditions: (i) efficiency gains, (ii) consumer fair share, (iii) indispensability and (iv) pass on to consumers.
The Commission’s guidelines are fairly broad on the interpretation of efficiency gains. The guidelines recognise in particular individual use value benefits (relating to the improved quality of a product or its variety, one can think of a new product that uses a more durable material instead of plastics), individual non-use value benefits (when consumers are willing to pay more for an “altruistic” experience with a positive impact on consumption, e.g., paying more for less polluting detergents), and the so-called “collective benefits”. The latter are probably the hardest to pin down, as they go beyond the value of the product for the individual consumer but refer to positive externalities accruing objectively to a larger group of the society, e.g., when competitors agree on phasing out polluting technology for which consumers may not be willing to pay a higher price for a product. The market failure in this scenario typically consists in the fact that non-sustainable consumption exerts negative externalities on others (such as environmentally harmful gas emissions) which are not fully internalised by the market players. This poses however the main crux of sustainability agreements – will the negative externalities be indeed internalised by the companies taking part in a sustainability agreement? Or is there room for a “greenwashing cartel” through the backdoor?
There are some clear voices among economists that sustainability agreements that do not allow for coordination on prices would actually lower the incentive of companies to invest in sustainability efforts as compared to competition (Schinkel and Treuren (2021)). In the consequence, this would lead to a situation that is less favourable than competition – resulting in less sustainability as companies will not be able to recoup their investments.
Besides, there is another issue with regard to the willingness to pay of consumers. As previous commentators have pointed out (Wiese (2022)), it can be tricky to prove this in practice. It is hardly imaginable that the average consumer is always willing to pay more for a “greener” product in any given market, especially in case of increased inflation. Therefore, the Commission’s draft guidelines rightly point out that the willingness to pay boils down to that of a “representative fraction of all consumers in the relevant market”, i.e., the “thoughtful consumers” who are willing (and capable) to pay more for a specific product. This will not always be a given, one can think of the lack of willingness to pay of consumers for emission cleaning tanks which were subject to the fined AdBlue arrangements.
As for the third condition, the indispensability test, one can question the validity of the premise of the Commission’s draft guidelines referring to the necessity of a sustainability agreement to overcome the “first mover disadvantage”, i.e., the investments made to offer a sustainable product to consumers. The draft guidelines contend that due to market failures, sustainability benefits cannot be achieved (or not as cost-efficiently as with the agreement) if left to the free development of market forces. Again, it may be difficult to provide evidence for this in practice if competition generally leads to higher levels of innovation and more sustainability. This applies even more so if the profit maximization motivation is to be taken seriously (Schinkel and Spiegel (2017)). The drawing line between a “green” sustainability agreement and a greenwashing cartel may thus depend on proving the actual existence of a first mover disadvantage.
Finally, the last criterion of the exemption refers to the non-elimination of competition – i.e., there must be some competition left at least on one important aspect even if the agreement covers an entire industry. This may also prove to be difficult in cases related to collective benefits when quantitative data analysis is not possible, in which case the parties would need to present a positive impact on consumers that is not just marginal.
4. Competition between the NCAs
Sustainability agreements have in any case resulted in more competition, namely between the competition authorities. There is overall a huge discussion on the approach that competition authorities should adopt. Despite some proposals that the Commission should follow the pioneer example of the Dutch competition authority and move away from a strict approach requiring full compensation of consumers, the draft guidelines have kept this standard, yet allowed for a broad interpretation of the consumer benefits.
The Austrian NCA has also recently published draft guidelines exempting sustainable cooperation agreements from the national cartel prohibition, provided the agreements result in improvements that “contribute significantly to an ecologically sustainable or climate-neutral economy”. While this approach also goes further than the Commission’s guidelines, it leaves some leeway with regard to the finding of the significance of the contribution.
There are also further initiatives by the Greek and the Hungarian NCAs (see Malinauskauite, 2022). Of course, the existence of differing rules in the competition laws within the EU like a patchwork rug cannot help the already existing concerns over lack of legal certainty for companies. Still, the different national rules could also be seen as “testing models” given the general lack of case experience in that area, coupled with an increased political and social pressure to deal with climate change and at the same time to avoid spill-over effects on competition enforcement.
In any case, the debate can serve as a steppingstone for the German competition law policy, and potentially also lead to the adoption of best practices within the ICN in the future.
5. Would it all (dep-)end on the courts’ last word?
Certainly, courts will also play a role in the contribution to a sustainable development. Beyond competition law, courts have already handed down significant judgments in respect of environmental policy (see for example the Dutch Urgenda judgment or the German Climate change judgment). At EU level, some NGOs could bring claims against environmental measures (see Client Earth v Commission and in the near future possibly also more individuals like Carvalho a.o.).
Nevertheless, with regard to sustainability agreements, it remains to be seen how the EU courts will interpret the exemption under Article 101(3) TFEU. The CJEU has found in MasterCard that in order to determine whether coordination between undertakings must be considered to be prohibited by reason of the distortion of competition which it creates, it is necessary to take into account any factor that is relevant, having regard, in particular, to the nature of the services concerned, as well as the real conditions of the functioning and the structure of the markets, in relation to the economic or legal context in which that coordination occurs, regardless of whether or not such a factor concerns the relevant market. This has led some scholars to believe that out-of-market benefits are relevant under the case law. Still, it will be interesting to see whether the fair share of efficiency gains will require full compensation of affected consumers.
To sum up, for the German competition policy, there are probably more economic arguments on the cautious side of the Commission’s draft horizontal guidelines. It may also be reasonable to continue the debate within the ECN and ICN to ensure a more consistent approach to these issues by competition authorities worldwide. Until then, the burden of continuing sustainability efforts will likely lie on companies and above all on “thoughtful” consumers.
Mariya Serafimova is a legal assistant to the cabinet of Advocate General Juliane Kokott at the CJEU.
The article reflects solely the opinion of the author.