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Sustainability and antitrust – EU and Dutch consultations

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Ensuring that global economic development is sustainable in light of climate change and other challenges is key to the European Union’s (the EU’s) Green Deal as well as EU Member State policies.   Europe is taking the lead in this debate, which will be taken up in December 2020 at an OECD roundtable debate on sustainability and competition.

The European Commission (the Commission) launched a consultation on competition policy supporting the European Green Deal (the EU Consultation) on October 13, close on the heels of the Dutch Competition Authority (the ACM), whose July 2020 consultation on draft guidelines (the ACM Guidelines) on the assessment of sustainability agreements (the ACM Consultation) closed on October 1. Other European authorities are also focusing on this area: the Hellenic Competition Commission (the HCC), published a working paper on competition law and sustainability on September 17, 2020 and the Bundeskartellamt convened a meeting of its Working Group on Competition Law to discuss the issue on October 5, 2020.

These initiatives vary significantly in approach, scope and level of detail, but they all focus attention on ways competition policy can (and must) adapt to take account of sustainability goals.

EU Consultation

Not surprisingly, the EU Consultation foregrounds the European Green Deal, one of Commission President Von der Leyen’s signature initiatives, noting that competition policy “is not in the lead when it comes to fighting climate change and protecting the environment.” The question is rather how competition policy can most effectively complement regulation.

State aid. Also not surprisingly, the Commission Consultation focuses first on State aid control, an exclusive EU competence and an area not addressed in the ACM Consultation.   The EU Consultation notes that many public investments for environmental projects have been approved under EU State aid rules and that these are already being updated to help public authorities contribute to the transition to a green economy. The Commission asks for additional input on changes needed in the State aid rulebook, such as lowering the levels of State aid, or approving fewer State aid measures, for activities with a negative environmental impact, or building mitigating measures into aid approvals for such projects. Alternatively, the Commission asks whether the EU should allow more State aid to support environmental objectives, for example by allowing aid on easier terms for environmentally beneficial projects than for comparable projects which do not bring the same benefits (“green bonus”). If so, how should this green bonus, and environmental benefits more generally, be defined?

Anti-competitive agreements. As regards the antitrust prohibition of anti-competitive agreements, the EU Consultation notes that traditional EU antitrust rules already contribute to the Green Deal objectives by sanctioning behavior such as restrictions in the development or roll-out of clean technologies or foreclosing access to essential infrastructure for the roll-out of renewable energy sources. The Commission asks for examples of desirable cooperation that could not be implemented due to EU antitrust risks and why cooperation rather than competition between firms would lead to greener outcomes. The EU Consultation also asks whether clarifications are needed on agreements that serve the objectives of the Green Deal without restricting competition. The Commission is already reviewing its long-standing guidance on the antitrust assessment of cooperative agreements (horizontal and vertical), so similar questions may come up in broader consultations in the coming months.

Merger review. Finally, in connection with merger review, the EU Consultation notes that one form of competitive harm under the EU Merger Regulation could be the elimination of pressure between firms to innovate on sustainability where consumer preferences for environmentally friendly and sustainable products are an important competitive factor. The Commission asks for input on situations when a merger between firms could be harmful to consumers by reducing their choice of environmentally friendly products and/or technologies and ways merger enforcement could better contribute to Green Deal objectives. Interestingly, the EU Consultation does not address the question of how sustainability benefits can be included in the assessment of efficiency benefits that may counterbalance competitive harms and lead to approval of otherwise anti-competitive mergers.

ACM Consultation

The ACM Guidelines address the assessment of “sustainability agreements,” defined as agreements “aimed at the identification, prevention, restriction or mitigation of the negative impact of economic activities on people (including their working conditions), animals, the environment, or nature.” Although this definition may seem narrow, ACM officials have said that the same criteria should be applied in assessing commercial projects with environmental benefits, even if promoting sustainability is not the only (or even main) objective. ACM officials have indicated that a new version of the ACM Guidelines will be published in connection with the EU Consultation.

The ACM Guidelines outline three “opportunities” for sustainability agreements to be compatible with EU and Dutch competition laws.

Agreements not considered anti-competitive. First, sustainability agreements may not be caught by the prohibition against anti-competitive agreements at all where they concern less important competition parameters and the impact on competition is negligible. Examples include (i) non-binding agreements where individual undertakings determine their own contributions and the way in which they wish to realize them; (ii) codes of conduct promoting environmentally or climate-conscious practices, provided the participation criteria are transparent, access is granted on the basis of reasonable and non-discriminatory criteria, and it is possible to have alternative standards or certification labels of equal standing and to sell products that fall outside of such codes; (iii) agreements aimed at removing less sustainable products from the market, provided these do not appreciably affect price and/or product diversity; and (iv) agreements whose sole purpose is to help respect local law (e.g., laws banning child labor, paying a minimum wage, protecting the environment, and respecting fair-trade rules), provided they do not unnecessarily restrict competition and that participants do not publish competitively sensitive information.

Agreements eligible for exemption. Second, an otherwise anti-competitive agreement may qualify for an exemption if it generates efficiencies that outweigh the potential anti-competitive effects. The ACM Guidelines rephrase the EU exemption criteria as follows: (i) the agreements offer efficiency gains, including sustainability benefits; (ii) the users of the products in question are allowed a fair share of those benefits; (iii) the restriction of competition is necessary for reaping the benefits, and does not go beyond what is necessary; and (iv) competition is not eliminated in respect of a substantial part of the products in question.

For this purpose, the ACM will only take account of “objective” sustainability benefits, meaning benefits that are substantiated as being useful not only to consumers, but also to society (or parts thereof) in a broader sense. Examples include the reduction of negative externalities, reducing operational costs, increasing innovation, improving quality or encouraging greater diversity of products. The ACM Guidelines show a strong preference for quantifying sustainability benefits, but note that a qualitative assessment may be sufficient where the undertakings involved have a combined market share of no more than 30% and the harm to competition is obviously smaller than the benefits of the agreement.

In a quantitative analysis, benefits are measured using so-called “environmental prices,” or “shadow prices,” which indicate the harm of, among other things, pollution and greenhouse gas emissions. Cost-benefit guidelines applicable to governmental agencies can be used as the starting point to determine how environmental prices should be determined. An environmental price set with an eye to realizing a concrete policy objective is called a shadow price based on prevention costs. For “other” sustainability agreements, a value can be assigned to improvements, for instance by revealing consumers’ willingness to pay for a certain product or product feature, such as an improvement in terms of human, animal or environmental friendliness.

In determining whether users are allowed a fair share of the benefits, the ACM takes a broad approach. Future users can be taken into account as well as current users (taking account of an agreement’s duration), and indirect users taken into account as well as direct users. The ACM deviates from the Commission’s standard approach where the agreement aims to prevent or limit obvious environmental damage and the agreement helps comply with an international or national standard to prevent environmental damage to which the government is bound.

The ACM thus distinguishes between environmental-damage agreements (which aim to improve production processes that cause harm to humans, the environment, and nature) and other sustainability agreements, such as agreements setting requirements for labor conditions or animal welfare. In the case of environmental-damage agreements, the ACM would take account of benefits for others than merely the users. For example, if undertakings in a certain sector jointly decide to use carbon-neutral energy only, greenhouse gas emissions will decrease as a result, benefiting both customers of the producers and society at large. In these situations, users may not need to be fully compensated for the harm caused by an agreement, because their demand for the products essentially created the problem for which society needs to find solutions. In that context, however, the agreement must contribute to a policy objective that has been laid down in a binding international or national standard. Moreover, the contribution must be efficient, so that users will, as a rule, reap the benefits in the same way as the rest of society.

With regard to other sustainability agreements, too, the ACM follows the basic principle that users must be fully compensated by the benefits of the sustainability agreements for the harm that they suffer from a restriction of competition. For example, if a sustainability agreement leads to a quality improvement in production, but also leads to a price increase, the users (as a group) will have to attach sufficient value to those quality improvements to offset the price increase.

With respect to the necessity criterion, the parties to a sustainability agreement should be able to make a plausible case that no other, less anticompetitive alternative is available for realizing the same objective, or if the parties would only be able to realize the objective to a demonstrably less efficient degree, for example because of a lack of expertise or scale, so that the sustainability objective can be reached sooner or more effectively.

If sustainability objective can be realized in a less anticompetitive manner without taking anything away from the effectiveness of the collaboration, then that route should be taken. In some sectors, for example, market participants may agree on quality standards with regard to sustainability aspects of products and services that would be less anticompetitive than an agreement to stop producing or selling certain products and services.

Similarly, the determination of whether a sustainability agreement eliminates competition in respect of a substantial part of the products in question depends on the market share attributable to companies participating in the agreement, as well as the influence of the sustainability agreement on the key competition parameters, such as price.

Companies considering entering into a sustainability agreement are encouraged to “self-assess” the legality of their agreement based on the ACM’s guidelines, requesting advice from the ACM if necessary.   The ACM commits not to impose fines where an agreement has been made public, and the ACM’s guidelines have been followed in good faith as much as possible, even if the agreement later turns out to violate Dutch competition law.

Other solutions. Even if a sustainability agreement does not qualify for an exemption, other solutions may be available (opportunity 3).  Even if the ACM comes to the conclusion that a sustainability initiative cannot be made compatible with the Dutch Competition Act, the parties may request the Dutch legislature to turn their initiative into regulations. Such regulations would fall outside Dutch competition law. The ACM also notes that companies may in future be able to seek an order from the Minister of Economic Affairs and Climate Policy, declaring a sustainability initiative statutorily binding on the entire sector under the Bill on Room for Sustainability Initiatives. These may include initiatives benefitting predominantly those outside the circle of users on the relevant market(s) that are affected by the initiative.

Conclusion

The role of sustainability in competition policy is a priority for European authorities, in particular in view of the key role of the European Green Deal in EU policy. This topic is likely to become even more significant in the coming months and years, following the OECD discussion in December 2020. So far, the Commission and the ACM are taking the lead on this issue, though the HCM and Bundeskartellamt are also playing important roles.

The EU Consultation takes a broad approach, covering the role of sustainability in State aid policy, assessment of anti-competitive agreements and merger control. The EU Consultation will close shortly before the OECD roundtable and put the Commission in a position to play a leading role in those discussions. But the questions are general, and more specific guidance on these issues may have to await more detailed consultations on the EU State aid rules and block exemptions on cooperative agreements. The EU Consultation also has some surprising gaps, such as how to measure and apply efficiency benefits in the assessment of cooperative agreements or in the merger review context when an “efficiency defense” is raised.

The ACM Consultation is prima facie more narrow than the Commission’s, focusing on “sustainability agreements” entered into for the specific purpose of promoting sustainability. However, ACM officials have said that similar principles would apply to the assessment of ordinary commercial agreements and even in the merger review context. The ACM Guidelines are considerably more specific, for instance regarding the use of environmental prices. The ACM has indicated that numerous companies have taken advantage of its invitation to seek guidance on specific initiatives. The ACM is committed to publishing such guidance wherever possible to guide companies and the antitrust community, not only in the Netherlands but elsewhere in Europe and beyond.

Many aspects of the role sustainability can play in antitrust policy and enforcement remain to be defined. However, European authorities are determined to take this discussion forward. Companies in many sectors, including energy, food and agriculture, and transport, will be watching closely.

Jay Modrall - 100
Jay Modrall
James R. Modrall is an antitrust and competition lawyer based in Brussels. A US-qualified lawyer by background, he is a member of the bar in New York, Washington, D.C. and Belgium.Mr Modrall has extensive experience with EU financial regulatory reform, advising the world’s leading private equity groups in connection with the new EU directive on alternative investment fund managers and leading banks and investment firms on EU initiatives including EU regulation of derivatives, EU reforms in financial market regulation and the creation of a new EU framework for crisis management, among others.

 

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