In the latest deployment of its new 'open-door policy' for green agreements, the Competition and Markets Authority ("CMA") has issued informal guidance to WWF UK concerning a proposed initiative to tackle supply chain emissions by UK supermarkets, approaching that proposal as a 'Climate Change Agreement' which qualifies for greater leeway under competition rules.
Background
In October 2023 the CMA published general guidance on how it would approach green agreements under the Competition Act 1998 (the "1998 Act"). While agreements between competing businesses are generally prohibited to ensure consumers benefit from competitive markets, the CMA outlined four categories of 'Environmental Sustainability Agreements' ("ESAs") which it considered were (already) permitted, for various reasons, under the 1998 Act.
The most novel of these categories is 'Climate Change Agreements' ("CCAs"). The CMA's guidance defined these as a sub-set of ESAs which contribute to the combating of climate change, generally by reducing greenhouse gases arising from the production, distribution, or consumption of goods and services. Under section 9 of the 1998 Act, there is scope for agreements which would otherwise be prohibited by competition law to be allowed where the benefit to consumers outweighs anti-competitive harm. In recognition of the importance of tackling climate change, the CMA committed to applying this exemption more generously in relation to CCAs (in particular by applying a more generous interpretation of what constitutes a benefit to consumers).
The guidance also outlined an 'open-door policy': an open invitation for businesses considering ESAs to approach the CMA for informal and non-legally binding guidance as to whether specific proposals were likely to be permitted under the 1998 Act. The CMA issued its first informal guidance under this policy in November last year, but concluded in that case that the ESA in question was unlikely to raise any competition concerns, and so that guidance was of limited use to others considering their own green agreements. By contrast the WWF proposal has given the CMA the opportunity to properly consider what counts as a CCA and what qualifying as one means for the businesses contemplating it.
The WWF-UK Proposal
In 2022, five UK supermarkets made a joint commitment with WWF-UK to require suppliers who accounted for at least 50% of each supermarket's supply chain greenhouse gas emissions to introduce science-based net zero targets ("SBTs"). The proposal referred to the CMA was to expand this commitment to cover suppliers accounting for 80% of the supermarkets' supply chain emissions and to implement incentives (such as preferred payment terms) and disincentives (such as de-listing) depending on whether suppliers meet milestones in relation to these long-term targets.
The CMA noted the strong competition in the UK supermarket sector, that suppliers are likely to cut their own emissions anyway, and that retailers would have sole discretion over which retailers were placed in the 80% "net zero" group and which in the residual 20% group. At a retail market level, the CMA concluded the proposal was unlikely to generate an adverse effect on competition. Retailers would remain free to determine the price and quality of products on offer and would retain existing incentives to compete.
At a supply level, however, the CMA found the proposal was likely to distort competition. It considered that suppliers subject to the new requirement may struggle to compete with suppliers not subject to the requirement, and therefore cut the range of products on offer, increase their prices, or decide to exit the market altogether. There was, therefore, a risk of harm to consumers even if this would likely be mitigated by participating retailers acting to maintain a competitive advantage. Considering this, the CMA concluded that the proposals did pose a risk of some harm to consumers but that the risk of significant harm was low.
Weighing this risk of distortion of competition and harm to consumers against the claimed environmental benefit, the CMA concluded that it was possible that the proposal could qualify for the exemption from prohibition under section 9 of the 1998 Act.
The CMA concluded that the proposal was a CCA because it "is designed to reduce GHG emissions from grocery supply chains by helping suppliers set SBTs more quickly and effectively and, as a result, make a demonstrable contribution to the UK’s binding climate change target." Taking that as its starting point the first question the CMA had to consider was whether there would be environmental benefits (conclusion: yes) and whether a fair share of those benefits would accrue to UK consumers as a whole (i.e. not just the consumers directly affected, which would have been the test if the proposal did not qualify as a CCA). The CMA concluded that the expected benefits to consumers of mitigating climate change outweighed the low risk of consumer harm.
The remaining section 9 tests were whether the proposal was indispensable to achieving those objectives (the CMA concluded it was on the basis of WWF-UK's submissions) and whether the affected market retained a measure of competition (the CMA concluded it did based on the keen competition in the UK supermarket space). On that basis the proposal appeared to be within the scope of the section 9 exemption and the CMA advised that it was unlikely to take enforcement action against it.
Conclusion
This latest informal guidance provides useful insight into how the CMA will approach its evaluation of CCAs. The test of whether a proposal qualifies as a CCA appears to be one that the CMA will apply in a fairly light touch manner. Where it accepts that a proposal qualifies as a CCA, the more competitive the relevant market is, and the more credible the submissions made on benefit and indispensability of collective action, the more likely the CMA will be prepared to issue favourable guidance on that proposal.
If would like to discuss anything raised in this blog, including whether an agreement your business is considering could be affected, please contact Jamie Dunne or Charles Livingstone.
