Sustainability and the revision of EU competition rules are among the hottest topics for 2021. The importance of sustainability projects and developments is eminent. How competition law influences sustainability initiatives may, however, be less obvious.
|Main points discussed in this article:
- Sustainability is one of the highest priorities of our times.
- Sustainability goals can only be achieved on time when companies will have more leeway to cooperate.
- Competition rules sometimes appear to present a barrier for much needed cooperation and progress towards a more sustainable economy.
- Competition authorities should provide more guidance and comfort to companies who wish to cooperate in achieving the sustainability goals.
- This outlook for 2021 explores the current available leeway under competition law and the potential ways in which (also) competition policy could and must adapt to meet the sustainability challenge.
It becomes clearer with the realisation that sustainability goals can only be achieved when companies – competitors – in the various sectors of the economy cooperate to establish industry-wide sustainability goals and put them into practice. Competition law is (sometimes) perceived to be a barrier for much needed cooperation and progress towards a more sustainable economy. A key challenge for 2021 is how to prevent competition rules standing in the way of sustainability initiatives.
Sustainability is a broad concept. In the announcement of its policy paper “Towards a Sustainable Europe in 2030”, the European Commission (“Commission”) describes sustainable development as ‘development that meets the needs of current generations without compromising the ability of future generations to meet theirs’. The economy, society and the environment are the three pillars of sustainability. Sustainability is one of the highest priorities of our times. The international community, for example, already in 2015 set Sustainable Development Goals as part of the UN 2030 Agenda for Sustainable Development.
Since achieving sustainability goals often requires collaboration between all sorts of parties in a given industry (most notably competitors), compliance with competition law is paramount. This article focusses on the obstacles and opportunities for sustainability initiatives in relation to the cartel prohibition as laid down in Article 101 Treaty on the Functioning of the European Union (“TFEU”). In short, relevant issues in this context are:
- It should be considered whether the collaboration initiative falls within the scope of the cartel prohibition. This is because not all initiatives will result in a restriction of competition or concern competition parameters.
- Sustainability initiatives could also be brought outside the scope of the cartel prohibition at the initiative of governments. For example, in the Netherlands currently a legislative proposal is pending which provides for a procedure on which a request to the relevant Minister could be submitted to incorporate a sustainability initiative into a generally binding regulation. Similar frameworks could enable governments to take the lead and provide legal certainty upfront on the legitimacy of sustainably initiatives. We expect more Member States to take a similar course in the coming year(s) to support sustainability goals.
- Based on the public interest - legal doctrine following the Wouters-case - it may be argued that a particular restriction of competition falls outside the scope of the cartel prohibition of Article 101(1) TFEU, as the restriction is considered to be inherent to the pursuit of a legitimate (public interest) objective. Companies would then have to demonstrate that their sustainability initiative is in the public interest. Alternatively, a restriction of competition could qualify as an ancillary restraint. In both cases the restriction falls outside of the scope of the cartel prohibition of Article 101(1) TFEU. However, the application of these doctrines in the context of sustainability initiatives are still to be tested in court.
- If the initiative falls within the scope of Article 101(1) TFEU, there could still be sufficient pro-competitive efficiencies for the initiative to be exempted from the cartel prohibition (following the criteria as laid down in Article 101(3) TFEU).
- Finally, it should be noted that competition authorities (at EU and national level) have a role to play by opening up to take part in constructive industry discussions on concrete sustainability initiatives and by giving market players formal or informal guidance on the compliance with competition law instead of referring to the obligation of ‘self-assessment’ under Regulation 1/2003.
Academic discussions on competition law and sustainability and legal opinions by competition lawyers for individual initiatives are widespread, but this will not be sufficient to take sustainability initiatives to the required next level of investment and implementation. What is needed is clear guidance from the Commission and national competition authorities for companies to have sufficient tools and – more importantly – the required legal certainty to undertake sustainability initiatives.
Although the historic precedents of sustainability initiatives that were assessed by national competition authorities (such as in the Netherlands the arrangements between supermarkets, poultry farmers, and broiler meat processors concerning the selling of chicken meat produced under enhanced animal well-being conditions and the agreement between energy producers to close down coal-fired plants) are discouraging, we do believe that the tables are turning. Both Member States and competition authorities – in some form of unison at EU level – are looking for ways to deal with sustainability initiatives constructively.
The Draft Guidelines ‘Sustainability Agreements’ (“Draft Guidelines”) of the Dutch competition authority (“ACM”) of July 2020 mark a first step in this respect. The major change proposed by the ACM in its Draft Guidelines is to distinguish between so-called ‘environmental-damage’ agreements and (all) other sustainability agreements. Environmental-damage agreements are agreements that aim to improve production processes that cause harm to humans, the environment and nature, such as agreements aimed at reducing emissions of pollutants or preventing the use of pollutive raw materials. For these agreements, the ACM advocates that it should be possible to consider the benefits for the society as a whole instead of only the benefits for the users of the products involved. According to the ACM, this means that for an environmental-damage agreement to be allowed under the competition rules ‘the benefits for society as a whole must be equal or greater than the disadvantages for users’. On the basis of this standard the benefits of an agreement will more quickly outweigh the competitive disadvantages compared to the current applicable standard under Article 101(3) TFEU. Under the latter current legal standard, the net welfare effect of only those consumers that are directly or likely affected by it should at least be neutral. For a more detailed discussion of the Draft Guidelines, please find an earlier article on this topic here.
Expected actions from the Commission
As climate policy and sustainability have a transnational dimension, it is important that a uniform approach is taken (to start with, at the European level) in the enforcement of competition law rules with respect to sustainability initiatives. Therefore, we believe it is indispensable that further guidance is provided by the Commission on this topic. In our opinion, urgency in the matter is a given considering for example the ambition of the European Union to be climate neutral by 2050.
The Commission is currently developing further policies in the area of competition law and sustainability. Next year we will have the outcome of the consultation launched by the Commission regarding Competition Policy supporting the Green Deal. The Green Deal is the action plan to make the European Union economy more sustainable, while transforming the European economy to be more resource efficient and competitive. The Commission is, for example, also looking at state aid guidelines and tools to analyse ‘green efficiencies’ in merger control cases. Please find our update on these initiatives here.
Even though at this point in time there is a lack of guidance from the Commission, we do believe that competition law should not be the show-stopper for sustainability initiatives and we encourage companies to seek the available opportunities within the current legal framework to implement initiatives that clearly show great societal benefits.
During the Covid-19 pandemic, competition policymakers have shown their capability to quickly adapt to the changing economic and societal circumstances. To assist businesses, the Commission made clear that in this situation they were prepared to, in practice, revert to the old clearance scheme for co-operation (that was abandoned 16 years ago with the entry into force of Regulation 1/2003) to give some companies legal certainty that they are not infringing competition rules when working together. See our earlier article on this here and specifically with respect to Pharma and Medical Equipment companies here.
Given the sustainability challenge at hand, it is very likely that competition policy will adapt again in a meaningful way for which the competition policy experience during the Covid-19 pandemic could be a source of inspiration. Much is to gain by fully using the flexibility of the rules and applying them in a way which would enable instead of limit sustainability initiatives. At this point in time, the focus of the weighing assessment of pro- and anti-competitive effects under Article 101(3) TFEU lies on quantifying the actual and direct effects on consumer welfare and the objective and clearly perceptible benefits from an economic perspective. We expect that one of the key questions for competition policy in 2021 and beyond will be how (in addition to the economic benefits) also non-economic benefits of sustainability initiatives must be taken into account in this assessment.
And this is exactly where we believe that the Commission and national competition authorities could take a more open and constructive approach to support sustainability initiatives with more than general guidelines. Many of these initiatives may require industry-wide agreements, exchange of strategic information and significant investments, to which companies cannot be persuaded without the comfort that taking part in the initiatives is in compliance with competition rules. Requests for case-specific guidance to or comfort from the competition authority often meets with reservations or reluctance within the framework of self-assessment that governs competition law in the EU since Regulation 1/2003 and the abolition of individual exemptions for agreements restrictive of competition.
To finalise our outlook, we flag some issues on which more guidance and legal certainty in the coming year is desirable for companies but also for national authorities for the assessment of sustainability initiatives that may potentially restrict competition:
- What is a fair share of benefits to the respective consumers? How should this be balanced (costs and benefits), which type of consumer should be part of the reference group, how should the ‘willingness to pay’-principle be interpreted, how should long-term and short-term benefits relate to consumer welfare?
- Will there be a future role for the Wouters-doctrine and the ‘ancillary restraints’-concept in assessing sustainability initiatives?
- How does the use of regulatory tools legitimizing initiatives by bringing them outside of the scope of the competition rules relate to competition policy in general and will there be a preferred approach in achieving sustainability goals?
In short, we urge the Commission and national competition authorities to provide more concrete competition policy for sustainability initiatives as well as individual guidance and comfort to companies who wish to cooperate in achieving the sustainability goals. It could be worth considering whether the sort of clearance scheme as applied during the Covid-19 pandemic should also be put in place for sustainability initiatives.
Furthermore, we encourage companies to explore all available options and not to shy away from sustainability initiatives just because competition law could stand in the way. As indicated by a Commission official recently, the latter might actually be a requirement to develop more clarity, as sustainability guidance cannot emerge in a ‘vacuum’ of real-life cases. Although we fully endorse this, in our view the innovative proposals in the Draft Guidelines of the Dutch competition authority also show that a first step from the side of authorities could be even more helpful in solving this potential chicken-and-egg problem as soon as possible.
“To meet the sustainability challenge will inevitably require greater collaboration between companies and regulators, who need to provide greater clarity in 2021 to safeguard such initiatives.”