On 10 September, following around 200 feedback contributions from stakeholders and an international conference on the subject, the EU Commission published a new Policy Brief (the “Brief”), accompanied by an official speech at the 25th IBA Competition Conference. This marks the next stage in its review as to how European competition law can support a more sustainable, environmentally friendly economy, thus fostering not just the implementation of the EU’s Green Deal and “Fit for 55” package but also the battle against climate change more generally.
A generational project with huge and immediate consequences for all sectors of the economy, this challenge has to be taken on by companies and consumers alike. While its exact implications for competition law have been hotly debated in recent years and a lot of the specifics still appear uncertain, the Brief clearly underscores that its sees competition policy as something that “supports and complements” its broader Green Deal policies. It also sketches out its thinking on specific legal aspects of European antitrust law, merger control and state aid. This article focusses on the Brief’s antitrust implications and describes our views on the Commission’s reasoning what to expect going forward
What the Commission says...
First and foremost, the Commission is eager to stress how much weight it is going to continue to put on rigorous enforcement of European antitrust rules. So while climate change presents a monumental threat to deal with, companies must not expect to be able to get away with a “greenwashed defence” when engaging in cartels. At the same time – and this is a first clarification hoped for by many observers – the Commission explicitly acknowledges “that in order to encourage companies to jointly invest, identify solutions, produce, and distribute sustainable products, more guidance is needed on the circumstances in which such cooperation complies with antitrust rules”, meaning: yes, it is definitely possible for competitors to engage in “green cooperation” without automatically falling foul of antitrust rules.
However, there won’t be any automatic “greenlighting” either. Rather, as has been the case for joint production, R&D cooperation and other projects for many years now, companies will generally have to make their own specific assessment as to the compatibility of their plans with EU antitrust rules. The Commission has identified several “pain points” in the assessment process where it aims to improve its guidance in the future, thus decreasing legal risk for companies’ “green” projects. These are:
- First, clarification as to when sustainability initiatives can be seen as potentially restricting competition. The Commission emphasizes that for a lot of activities, there may well be no restriction of competition within the meaning of Article 101(1) TFEU, meaning that they can be undertaken safely. The authority aims to present “[c]oncrete examples” for “different types of cooperation agreements, (e.g. joint production or purchasing agreements, standard setting, etc.)” where this may be the case.
- Second, clarification how sustainability benefits can be taken into account in the antitrust assessment and when such benefits can compensate consumers for the harm suffered. That would be important for all cases in which competition is restricted but the benefits of the project ultimately make it appear acceptable. In legal terms, “acceptable” means “eligible for an exemption under Article 101(3) TFEU” which primarily calls for the companies involved to demonstrate that their cooperation entails benefits for consumers (traditionally called “efficiencies”). Especially during last 12-18 months, diverging views have been articulated as to which types of efficiencies can or should be accepted here and whether and how they would have to be quantified. The Commission now seeks to “clarify that sustainability benefits can be assessed as qualitative efficiencies”. This is more good news for proponents of a more “eco-friendly” application of antitrust laws. It means that the Commission is open to not just considering “quantitative” benefits of a cooperation (e.g., the reduced materials, transportation and storage costs that may come with a new, more sustainable product stemming from competitor cooperation) but also the improvements in “quality or longevity of a product” which “increase the value that consumers attribute to that product”. In that regard, the Commission refers to the examples of new toys that contain wood instead of plastic or clothes made of recycled materials.
- Third, in what is legally the most interesting development so far, the Commission states that “sustainability benefits do not necessarily need to take the form of a direct or immediately noticeable product quality improvement or cost saving”. That means that even when there is no palpable qualitative or quantitative benefit in a certain cooperation, mere consumer preferences for the sustainable production or distribution of a product can still make the underlying cooperation eligible for an exemption – as long as these preferences translate to consumers being “ready to pay a higher price for this reason”. For instance, if competitors join forces to develop a new detergent that, while not providing for a better cleaning result, is produced more eco-friendly than previous products, this joint production may be compliant with antitrust laws if consumers are still willing to pay the (relatively higher) price for that new product.
- Fourth, while the above opens up the prospect of new and/or more clear-cut guidelines favouring “green cooperation” among competitors, the Commission’s policy does not exactly suggest a laissez-faire approach. Instead, it is underscored, that there needs to be rigorous assessment of the anticompetitive effects and benefits of a practice and that this assessment is to be made “within the confines of each relevant market”. That means that all the “benefits achieved” as set out above can generally only be taken into consideration to the extent they occur on the same market as the associated restrictions of competition (i.e. the respective price or cost increases, replacement of products, R&D alignment etc.). If instead the benefits occur on separate markets, they can only be taken into account if “the group of consumers affected by the restriction and the group of benefiting consumers are substantially the same”. In practice, that would mean that even based on the rather broad concept of “benefits” sketched out by the Commission, any such benefits would not be sufficient to remove antitrust risk if they only concern consumers which are not identical or at least “substantially the same” as those on the market affected by the respective restriction of competition.
- Fifth and lastly, the Commission stresses that even “green cooperation” must still pass the test of being “indispensable” in order to qualify for an exemption under Article 101(3) TFEU. That means: if the parties involved cannot prove that there is a market failure or other circumstance that “would prevent the free market from generating [the envisaged] benefits and would thus necessitate an agreement between companies”, the cooperation would, despite its palpable environmental benefits, still be considered illegal under EU antitrust laws.
It’s also worth pointing out that the Commission reiterates the importance of its agricultural policy. Green farming methods can play a pivotal role in the bloc’s endeavour to become carbon-free and more environmentally sustainable (e.g. by lowering pollution from pesticides and carbon emissions by livestock or efforts to better protect biodiversity). For that reason, a new provision in the Common Market Organisation Regulation was agreed on in June this year, exempting from the application of Article 101(1) TFEU sustainability agreements that are concluded between producers and/or other actors from the food value chain and which are aimed at achieving higher standards than required by law in terms of environmental protection, climate change prevention, animal health and animal welfare (see here, Article 210a). This in an agriculture-specific derogation overriding the general rule in Article 101(3) TFEU and providing farmers with the opportunity to adopt greener practices in agriculture in exchange for various benefits such as higher prices for their proceeds and longer-term supply relationships. However, and similar to Article 101(3) TFEU, this also requires that the restrictions of competition resulting from the sustainability agreements in place are indispensable for the achievement of the desired outcome. The Commission will issue guidelines on the conditions of applicability of this derogation by the beginning of 2024.
And what to think of it...
From a “saving the planet” perspective, the Brief broadly suggests a welcome and useful update to antitrust enforcement that may result in more legal certainty for companies engaging in projects that seek to improve sustainability, minimise the carbon footprint or to create other environmental benefits with an effect in the EU. Through the lens of antitrust doctrine, however, a number of points seem elusive and need to be fleshed out further in the months to come:
- The Commission is open to considering the mere fact that a cooperation may cater to consumers’ “eco-friendly” preferences an exemption-eligible “benefit”. This raises the question what makes this kind of preference different from other preferences that may be accommodated by competitors banding together, where cooperation is resulting in higher prices that consumers would be willing to accept. The intent to meet a specific market demand can be considered a viable starting point for any competitor cooperation. However, the Brief reads as if the Commission might be willing to rely on consumer perception alone and to accept the outcome of higher prices despite the product otherwise not showing any qualitative or other improvements. That would appear to run somewhat counter to the notion that competitor cooperation should not result in the fixing of prices and that non-tangible, subjectively perceived properties of a product generally do not play a role in the assessment of the applicability of Article 101(1) TFEU. For instance, many proponents of a more lenient approach to resale price maintenance have always argued that the fixing of prices or display of minimum advertised prices may be beneficial as such fixed or (high) advertised prices can signal a certain product image that consumers of branded products are interested in having maintained. However, the Commission has so far remained unmoved by that argument and considered resale price maintenance a hardcore restriction of competition in all sectors of the economy.
- More importantly, the opening of a path to fostering “green cooperation” will likely be impaired by the Commission’s (still) rather strict view on which consumer groups to consider when assessing whether or not a cooperation “fully compensates” consumers for any harm suffered. To be clear: supporting “green washing” – where negative effects on competition occur without any genuine environmental impact – should be avoided and it is of course not objectionable as such that the Commission seeks to maintain the consumer welfare standard. And it is positive that the Commission suggests some openness to accepting the fact that “large scale” cooperation can benefit society as a whole (e.g., by leading to a reduction in overall pollution) and, on that basis, be eligible, for an exemption – the reason being that in case of pan-societal benefits “a fair share” of these could always be apportioned also to the group of consumers harmed on the relevant market directly affected by the cooperation consumers.
Still, the question remains if truly promoting the Green Deal would not call for a more flexible approach also allowing for mere cross-market efficiencies or out-of-market efficiencies, i.e. to exempt cooperation where the benefits outweighing the disadvantages only occur on another market and/or where benefits clearly exist but cannot be pinned to a specific market at all. Notably, there is nothing in the wording of Article 101(3) TFEU that would keep the Commission from doing so – in fact, one may argue that other provisions in the Treaty concerning the consideration of any environmental impact in EU policies and principles (i.e., Articles 191(2) and 11 TFEU) even require a very flexible approach in this area. Indeed, the concepts of “in-market efficiencies” and specific apportionment of benefits to certain consumers are based on the Commission’s own guidelines and nothing in the law or the case law of the European Courts would appear to prevent the Commission from changing its view. In fact, before the publication of the aforementioned guidelines in 2004, the Commission had already adopted a decision concerning more eco-friendly washing machines where it found: “Such environmental results for society would adequately allow consumers a fair share of the benefits even if no benefits accrued to individual purchasers of machines”.
By not reverting to that stance, the Commission objects to more progressive views expressed as part of its call for contributions. Respondents argued, inter alia, that the scope of relevant benefits needs to be extended to benefits that occur outside the relevant, investigated markets, that the notion of “consumers” needs to be expanded to encompass not only users of the products but also citizens and society as a whole and/or that a more flexible interpretation of the notion of “fair share” is warranted (in order to allow benefits from an agreement to be credited even if they do not fully compensate for the harm suffered by consumers in the market). Notably, the Dutch Competition Authority – which had published respective (recently renewed) draft guidelines last year already – is one of the most prominent proponents of such approach, with similar views being taken in Greece and the Austrian legislator having adopted a reform of its national competition law to the same effect.
- Also, continuing with a traditional interpretation of the “indispensability” criterion may prove to be another stumbling block for exempting sustainability-related cooperation under Article 101(3) TFEU. While the Commission acknowledges that “there may be instances where companies need to get together in order to override a first mover disadvantage and nudge consumers towards using more expensive sustainable products”, it also emphasises that “if consumers do value sustainable products, profit-maximizing companies are expected to offer such products independently rather than by cooperating”.
This deflates a bit the “green cooperation”-friendly notion that, generally, consumer preferences alone can be sufficient to generate the “benefit” required for an exemption under Article 101(3) TFEU. If the interpretation of “indispensability” set out in the Brief prevails, companies seeking to defend their cooperation based on consumers’ willingness to pay more for eco-friendly products may very well face an uphill battle, having to argue that despite consumer interest (and resulting lack of any first mover disadvantage) they still need to band together with competitors to achieve the desired outcome. Conversely, if consumers are showing no discernible interest in a sustainable product, an important potential “benefit” that might warrant an exemption under Article 101(3) TFEU – and which the Commission advocates in its Brief – could not credibly be achieved by any cooperation (hampering its implementation under antitrust rules). In that regard, it would help if the Commission were to give more specific guidance and in particular communicate clearly that proven consumer inertia (i.e., tentativeness to actually buy more sustainable products despite a general interest in them) can already be sufficient to exempt competitor cooperation from Article 101(1) TFEU – at least if it is clear that only a concerted change of product features or product ranges will actually change demand in a way promoting the “Green Deal”. This would be a meaningful way to navigate market failures while maintaining the integrity of competition law and supporting the EU’s green ambition.
- Generally, one may raise the question if “green cooperation” does not call for a (topical) revamp of Article 101(3) TFEU altogether, resulting in any such cooperation qualifying for an exemption more easily (similar to the agriculture-specific exemption mentioned above). Both the concept of (outweighing) market-specific benefits of a certain consumer group as well as the concept of indispensability make the antitrust risk for green cooperation hinge on the position and preferences of certain consumers in a given market. Continuing with that interpretation will mean that granular, local and group-specific effects will determine the legal viability of agreements, plans and projects that are supposed to solve a large-scale, global problem (and for which there is increasing political backing worldwide).
On the other hand, that line of thought may just underscore that competition law – of which market definition, effects analysis and consumer welfare are core elements –simply has its limits when combating climate change.
The road ahead
The above shows that there is still a lot of work to be done, with antitrust implications just being one angle considered in the Brief. There will likely also be significant developments in state aid and merger control laws.
- Concerning merger control, the Commission in particular discusses strengthening its enforcement whenever a transaction concerns possible harm to “green” innovation (including tackling green “killer acquisitions” where an incumbent industry player with no eco-friendly business buys smaller companies that innovate in sustainable products, technologies etc.) and reflecting on the impact of sustainability aspects and related regulations on consumer preferences, competitive effects, and market definition; in order to review green “killer acquisitions”, the Commission suggests to rely on its new referral policy under Article 22 EUMR.
- In state aid, the favouring of funding of non-fossil fuels and enhancing possibilities to support innovation are envisaged, based in particular on the Commission’s new Climate, Energy and Environment Aid Guidelines and its revision of the General Block Exemption Regulation.
With regard to antitrust law, the above has shown there are important changes to come and that the Commission can be expected to reflect on these issues together with national competition authorities, stakeholders and experts.
- Companies should be on the lookout to see whether and how more progressive stakeholders such as the Dutch competition authority will shape further discussions and result in a re-thinking on the Commission’s part.
- In any event, the need for more guidance remains. The Commission intends to continue down this path with a two-pronged approach: It seeks to provide more guidance in the context of the revisions of its block exemptions and guidelines on horizontal cooperation and vertical agreements, which are currently ongoing and are supposed to result in new rules by the end of December and May 2022, respectively. And to inform the policy revision and ensure that guidance can be as concrete as possible, the authority also encourages companies to approach its officials with their projects. In particular, the Commission would like to shed more light on when existing (environmental) regulation already incentivises companies to produce in a sustainable manner and therefore obviates the need for cooperation, and when such incentives are not sufficient to do so.
- It is important to note that the Commission has clearly voiced its intention to consider requests by companies for individual guidance letters even before it has finalized further general guidance. So whenever companies envisage any kind of “green cooperation” or consider sustainability initiatives that raise novel issues, they should now more than ever think of proactively approaching the Commission to gain legal certainty.
- In that regard, the Commission has also stressed that, where the public interest so requires, it will consider adopting decisions pursuant to Article 10 of Regulation 1/2003 finding that the competition rules are not applicable to certain sustainability initiatives.
A lot is at stake here: Companies need more clarity on how the pursuit of sustainability objectives affects antitrust assessment, as the risk of breaching competition rules can deter from investing in sustainable products or processes, such as industry-wide agreements to phase out unsustainable products and/or unethical modes of production, joint procurement of sustainable input products, joint R&D, innovation and production agreements, or the setting industry standards for the use of sustainable products and green technologies.
One can only hope that companies and regulators take on this challenge whole-heartedly and that the seeds they’re going to plant will yield the fruit needed to take on this massive task.
Authored by Christian Ritz, Elena Wiese, and Florian von Schreitter