The Competition and Markets Authority (CMA) has published new guidance on how it will approach 'green agreements'. It aims to give greater clarity to businesses on when cooperation in pursuit of environmental sustainability is, and is not, prohibited by competition law and to draw attention to circumstances in which otherwise prohibited conduct may be permitted by virtue of its environmental benefit.
Competition law prohibitions
The Competition Act 1998 ("the 1998 Act"), generally prohibits agreements between businesses (of any kind or level of informality and including exchanges of information) which have as their object or effect the prevention, restriction, or distortion of competition within the UK. This is intended to ensure consumers benefit from innovation and pricing driven by competitive markets. However some agreements are not prohibited: for example under section 9 of the 1998 Act there is scope for otherwise prohibited agreements to be exempt where they deliver benefits, provided consumers will receive a fair share.
This recognises that not all cooperation between businesses is bad for consumers. As sustainability and net zero ambitions continue to sit high on corporate agendas, there has been significant demand for competition regulators to clarify when competition law might permit collaboration in pursuit of those aspirations. This new guidance from CMA (and similar guidance from the European Commission in relation to EU competition law) seeks to provide some more certainty on how and when businesses can coordinate their strategies to deliver environmental benefits.
Environmental Sustainability Agreements
The guidance is concerned with 'environmental sustainability agreements' ("ESAs"), which are defined as agreements between competitors aimed at preventing, reducing, or mitigating the adverse impact economic activities have on the environment or assist with the transition to environmental sustainability. The guidance breaks this down into four categories.
The first category is ESAs which are, by their nature, unlikely to infringe competition law because they are unlikely to have the object or effect of distorting competition. These are agreements which do not relate to the ways in which businesses compete or which do not have an appreciable adverse effect on competition. The CMA gives as examples agreements relating to the creation of non-binding industry wide environmental targets, joint lobbying for legislative changes, and the phasing out of non-sustainable products or processes. In an update from the draft guidance published earlier this year, agreements between shareholders of a single company to vote for pro-environmental corporate policies are also listed within this category.
The second category is ESAs which mayotherwise infringe competition law because they have as their effect a restriction of competition, for example an agreement on environmental standards. Such an agreement might well lead to an appreciable increase in price or reduction in output, variety, quality, or innovation, but it may be permitted where the part of the agreement with a distortive effect on competition is ancillary to (i.e. necessary to the operation of) the broader agreement that is not aimed at restricting competition. By contrast an ESA that had the object of distorting competition (for example by agreeing a common increase in price to pay for environmental improvements) would be prohibited.
The third category of ESA is those which, despite otherwise infringing competition law, may be exempt under section 9 (as noted above) because their environmental benefit outweighs their anti-competitive harm. To benefit from this exemption, parties must be able to demonstrate that their agreement meets four conditions.
- The agreement must contribute to certain benefits, either improving production or distribution of the product or promoting technical or economic progress.
- The agreement and any restrictions of competition must be indispensable to the achievement of this identified benefit.
- The consumer must receive a fair share of this identified benefit.
- The agreement must not eliminate competition in respect of substantial parts of the products concerned.
In assessing whether the consumer receives a sufficiently fair share of the benefit under an ESA to qualify for an exemption, the CMA will apply its ordinary approach and will generally only be concerned with those consumers who are in the market for a given product.
This exemption is designed to support agreements which restrict competition but in a way that benefits the consumers who buy the products or services the agreement relates to, for example an agreement to use a new kind of sustainable packaging which allows the producers of that packaging to achieve economies of scale and bring down costs for consumers in the longer term. Absent such an agreement a single manufacturer may have little incentive to introduce a more sustainable but more expensive process and pass the costs on to its own customers.
The fourth category identified by the guidance is 'Climate Change Agreements ("CCAs)". These are a fairly narrow sub-set of ESAs which contribute to the combating of climate change, typically by reducing the negative externalities of greenhouse gases arising from the production, distribution or consumption of goods and services. In recognition of the 'special category of threat' posed by climate change, the CMA has committed to applying the exemption criteria under section 9 of the 1998 Act more generously in relation to these agreements. In particular, to reflect the wider benefit to society of addressing climate change, the CMA will consider the benefit to all UK consumers (and not just the consumers of the relevant product or service) in its assessment of whether the benefit is sufficient to outweigh the harm.. That special approach to CCAs is not replicated in the equivalent guidance issued by the European Commission, so businesses that operate in the EU should proceed with additional caution.
This guidance, and similar guidance issued by the European Commission, will be welcomed by businesses as they continue to seek more ways to promote environmental sustainability and combat climate change. Also welcome is the CMA's open invitation to businesses to approach it with proposed ESAs to seek high-level but case-specific guidance. That guidance will be made available publicly so that, over time, businesses will gain a clearer view of what sort of sustainability arrangements the CMA thinks competition law allows and which remain out of bounds.
However, and importantly, the guidance does not change the law but is rather aimed at giving some comfort to those looking to collaborate in ways that current competition law permits. The CMA has committed to using its enforcement powers in line with this guidance, but it will remain possible for third parties (such as competitors, suppliers or customers) to bring their own enforcement action against anticompetitive agreements, and so again it will be important to proceed with a degree of caution. Proposed ESAs will still have to be approached and evaluated on a case by case basis, the balance between environmental and competition aims remains a fine one and, as ever, the best defence for any business against getting it wrong is to have a robust approach to competition compliance in place.
If would like to discuss anything raised in this blog, particularly whether an agreement your business is considering falls could be affected by this new guidance, please contact Charles Livingstone or Jamie Dunne.