Greening Competition Law – The European Commission’s Draft Horizontal Guidelines and Sustainability Agreements

Background

Competition law has traditionally turned a cold shoulder to agreements restricting competition, even with climate-friendly objectives, or only rarely considered the benefits from such agreements. However, this is soon to be changed as a result to the forthcoming EU rules on horizontal cooperation, coming into force from January 2023. (Update: the currently applicable rules have recently been prolonged until 30 June 2023).

The Draft Horizontal Guidelines (“Guidelines”) are in line with the European Green Deal, which aims to transform the union into a modern, green society with a competitive economy, as the Guidelines contains a new 18-page chapter on how to self-assess horizontal sustainability agreements.

Sustainability agreements, as they are referred to by the European Commission, are any type of horizontal cooperation agreement that genuinely pursues one or more sustainability objective (including not just environmental initiatives, but also social objectives, e.g., labour and human rights), irrespective of the form of cooperation.

In the Guidelines, the European Commission provides input on how to self-assess several categories of sustainability agreements, which are described in turn below.

Agreements falling outside the scope of Article 101 TFEU

Not all sustainability agreements between competitors are caught by Article 101 TFEU. If agreements do not affect parameters of competition, such as price, quantity, quality, choice, or innovation, they are not capable of raising competition law concerns.

The Draft Horizontal Guidelines contain a list of examples of “green agreements” that fall outside of the application of Article 101 TFEU. For example, agreements to create databases containing information about sustainable suppliers or distributors, without requiring any of the involved parties to necessarily purchase from or sell to them, is provided as an example of such an agreement that falls outside of the application of Article 101 TFEU, as it will normally not affect competition.

Similarly, agreements relating to the organisation of industry-wide awareness campaigns or campaigns raising consumers’ awareness, and agreements that do not concern the economic activity of competitors, but their internal corporate conduct, are generally acceptable pursuant to the Guidelines.

Assessment of sustainability agreements

While the Guidelines provide some guidance on how to assess several types of horizontal cooperation agreements, the sustainability chapter focuses on agreements setting sustainability standards, which have distinct features when compared with traditional technical standards.

It is, however, described in the Guidelines that, since sustainability agreements often relate to some other form of cooperation, such as agreements concerning R&D, specialisation, production, or joint purchasing, the agreements should be assessed under the industry-specific or agreement-specific guidance.

According to the Guidelines, the pursuit of sustainability objectives is, nonetheless, relevant for determining whether the agreement is of a by object or by effect nature. If the parties can document that an agreement, which appears to pursue a by object restriction such as price fixing, market or customer allocation, limitation of output or innovation, actually pursues a sustainability objective, then the effects on competition will have to be assessed.

A “safe harbour” for sustainability standardisation agreements

Sustainability standardisation agreements often have positive effects on competition as they contribute to a sustainable development and may therefore enable the development of new products or markets, increase product quality, or improve supply or distribution conditions. Moreover, sustainability standards often have positive effects on competition by allowing consumers to make well informed decisions.

Despite the generally positive effects, sustainability standardisation agreements still need to be assessed in case of appreciable negative effects on competition. In some circumstances, sustainability standards may also restrict competition. This can occur in three main ways: through price coordination, foreclosure of alternative standards, and the exclusion of or discrimination against certain competitors.

In the draft horizontal rules, the Commission introduces a category of sustainability standard agreements and provides a “soft safe harbour” for such agreements if seven cumulative conditions are fulfilled. If all seven conditions are satisfied, the agreement is unlikely to produce appreciable negative effects on competition and will therefore fall outside of the scope of the Article 101(1) TFEU.

The cumulative conditions are:

a) unlimited participation in and transparent process leading to the selection of the standard;

b) no obligation to participate in the standard or to comply with it;

c) participating companies can adopt a higher sustainability standard for themselves;

d) no exchange of commercially sensitive information beyond what is necessary for the standard;

e) effective and non-discriminatory access to the outcome of the standardisation process;

f) no appreciable increase in price nor an appreciable reduction in choice of products; and

g) mechanism or monitoring system in place ensuring compliance.

Where one of the conditions are not met, it does not automatically make the agreement prohibited. However, the appreciable negative effects of the agreement on competition will need to be assessed and therefore it will come under the Article 101(1) TFEU.

The Commission offers Guidance on assessment of sustainability agreements under Article 101(3) TFEU

Even if a sustainability agreement restricts competition, it can still be exempted pursuant to Article 101(3) TFEU. For this exemption to apply, the parties to the agreement must be able to document efficiency gains of the agreement. The European Commission has, however, specifically set out that it takes a broad view of benefits that are relevant to the competitive analysis, including (i) individual use value benefits, (i) individual non-use value benefits and (iii) collective benefits.

Individual use value benefits

Consumer benefits typically derive from the consumption or the use of the products, for instance by means of improved product quality or product variety resulting from qualitative efficiencies, or of price decrease as a result of cost efficiencies. These benefits can be referred to as “individual use value benefits” as they result from the use of the product and directly improve the consumers’ experience with the product in question.

Individual non-use value benefits

Consumer benefits from sustainability agreements may not only comprise direct benefits from the use of a sustainable product but also indirect benefits, resulting from the consumers’ appreciation of the impact of their sustainable consumption on others. In particular, some consumers may prefer their consumption of a sustainable product more than the consumption of a non-sustainable product because the sustainable product has less negative impact on others than the non-sustainable one.

Collective benefits

Collective action may be needed, as the sustainability impact from individual consumption accrues not necessarily to the consuming individual but to a larger group. Cooperation agreement may be used as a tool to internalise such negative externalities and bring about sustainability benefits to a larger group of the society.

For example, the Guidelines mention that consumers may be unwilling to pay a higher price for a product produced with a green but costly technology. To ensure that the benefits related to the use of that green technology materialise, an agreement to phase out the polluting technology may be necessary. These benefits are referred to as ‘collective benefits’ as they occur irrespective of the consumers’ individual appreciation of the product and objectively can accrue to the consumers in the relevant market if the latter are part of the larger group of beneficiaries.

In this regard, we note that the Commission states that, for a restriction to be justified by collective benefits, there needs to be (a significant) overlap between those individuals who suffer the harm of the restriction and the individuals who benefit.

For more information, please contact Petteri Metsä-Tokila, Maria Karpathakis or Alexander Brøchner.

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