Environmental sustainability agreements under UK competition law

Earlier this year, the Competition and Markets Authority (‘CMA’) published for consultation its draft guidance on the application of the UK competition law rules to environmental sustainability agreements.

The CMA acknowledges that industry collaboration is likely to be necessary to meet the UK’s binding international commitments and legislative obligations to achieve a net zero economy and has stated that it is keen to ensure that businesses are not ‘unnecessarily or erroneously deterred from lawfully collaborating in this space due to fears about competition compliance’. The draft guidance therefore explains the circumstances in which collaboration to protect or enhance environmental sustainability may, or may not, be permitted under the UK competition law rules which prohibit anti-competitive agreements and practices (the ‘Prohibition’).It covers three broad situations:

• Environmental sustainability agreements which are unlikely to infringe the Prohibition;
• Environmental sustainability agreements which could infringe the Prohibition; and
• How environmental sustainability agreements which would otherwise infringe the Prohibition may still be permitted under an exemption.

While the final guidance has not yet been published, businesses currently participating in, or seeking to enter into, sustainability agreements with other businesses, should review the draft guidance carefully and seek specialist competition law advice.

Environmental Sustainability Agreements (‘ESAs’) 

The draft guidance defines ESAs as ‘agreements or concerted practices between competitors and potential competitors which are aimed at preventing, reducing or mitigating the adverse impact that economic activities have on environmental sustainability or assessing the impact of their activities on environmental sustainability.’Examples include agreements aimed at improving air or water quality, conserving biodiversity or promoting the sustainable use of raw materials.

The definition includes ‘climate change agreements’ i.e., agreements which contribute towards the UK’s binding climate change targets under domestic or international law.

Examples of climate change agreements include: an agreement between manufacturers to phase out a particular production process which involves the emission of carbon dioxide; an agreement between delivery companies to switch to using electric vehicles; or an agreement not to provide support such as financing or insurance to fossil fuel producers.

Agreements which pursue broader societal objectives (for example, improving working conditions), however, are outside the scope of the draft guidance.

(i) ESAs which are unlikely to infringe the Prohibition

The draft guidance provides the following list of ESAs which will generally be permitted:

• • Agreements which do not affect the main parameters of competition such as price, quantity, quality, choice or innovation. Examples include agreements which involve: the internal corporate conduct of businesses (such as to eliminate single-use plastic in their business premises); pooling funds to engage in activities to mitigate the effects of greenhouse gas emissions; and joint campaigning to raise awareness about sustainability issues or joint lobbying for policy or legislative changes;
  • Agreements to do something jointly which none of the parties could do individually (unless the initiative could have been undertaken involving co-operation which is less restrictive of competition);
  • Cooperation required by law;
  • Pooling information about the environmental sustainability credentials of suppliers or customers (without requiring the parties to purchase, or to refrain from purchasing, from those suppliers and without sharing competitively sensitive information about prices or quantities purchased from suppliers or by customers);
  • Creation of industry standards (provided that: (i) the participation criteria are transparent; (ii) no firm is obliged to participate in the standard; (iii) it is possible for any firm to participate or benefit from the standard on reasonable and non-discriminatory terms; and (iv) participating businesses can develop alternative standards, sell products that fall outside of the standard and/or go beyond the standard’s minimum targets;
  • Phasing out/ withdrawal of non-sustainable products or processes (where this does not appreciably increase the price for consumers or reduce product choice); and
  • Setting non-binding targets or ambitions for the whole industry with regard to environmental sustainability.

(ii) ESAs which could infringe the Prohibition 

This section captures ESAs which have the ‘object’ of restricting competition and those which infringe the Prohibition by having the ‘effect’ of restricting competition (which must be appreciable). These agreements will be prohibited unless they benefit from exemption (see below).

ESAs with the ‘object’ of restricting competition

These agreements, by their very nature, are regarded as being harmful to the proper functioning of normal competition. ESAs which involve price fixing, market or customer allocation, limitations of output or limitations of quality or innovation will typically restrict competition by ‘object’. For example, an agreement between competitors on the price at which they sell products meeting an agreed environmental sustainability standard.

ESAs with the appreciable ‘effect’ of restricting competition 

ESAs may lead to various types of restrictive effects, such as increased prices, reduced output, product quality/ variety and/or innovation. Any assessment for anti-competitive effects will be case specific. That said, the CMA has said that it will consider the following factors:

• • Whether the agreement covers all or only part of the relevant market(s);
  • Whether the businesses participating in the agreement, individually or collectively, have market power in the relevant market(s);
  • The extent to which the parties’ activities are constrained;
  • The ability for non-parties to participate;
  • Whether or not the agreement involves the exchange of unnecessary commercially sensitive information; and
  • The likelihood of an appreciable increase in price or reduction in output, product variety, quality or innovation.

(iii) Exemption

In order to benefit from exemption, the parties must be able to demonstrate that:

• 1. the ESA contributes to certain benefits, namely improving production or distribution, or contributes to promoting technical or economic progress;
  2. the ESA is indispensable to the achievement of those benefits;
  3. consumers will receive a fair share of the benefits; and
  4. the ESA does not eliminate competition in respect of a substantial part of the products concerned.

The draft guidance emphasises that the relevant benefits need to be objective, concrete, verifiable and substantiated; they cannot simply be assumed. It does note, however, that they may materialise in future, over a relatively long period of time and that it is legitimate to have regard to such future benefits.

In relation to climate change agreements, the draft guidance provides a permissive approach to assessing consumer benefits. More specifically, the ‘fair share to consumers condition’ above can be satisfied taking into account the totality of the benefits to all UK consumers arising from the ESA, rather than apportioning those benefits between consumers within the market affected by the ESA and those in other markets (as is standard practice under general competition law rules).

Practical pointers:

1. Be aware that good intentions (including environmental aims) are not a defence to a competition law breach;
2. Seek specialist competition law advice before agreeing to participate in joint/ collective sustainability initiatives or creating industry standards; and
3. Record details of all joint/ collective sustainability initiatives and remember not to share competitively sensitive information with current or potential competitors.

Conclusion

The widely anticipated draft guidance demonstrates the CMA’s commitment to promoting environmental sustainability and providing greater clarity for businesses seeking to collaborate on ESAs. While the final guidance has not yet been published, businesses currently participating in (or seeking to enter into) ESAs should review the draft guidance carefully and seek specialist competition law advice.

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If you have any queries on the topics discussed, get in touch with the Competition Team.