U.K. Competition Regulator Leads Environmental Agenda by Publishing Draft Environmental Suitability Agreements Guidance
On 28 February 2023, the U.K. competition regulator, the Competition and Markets Authority (CMA), sought to promote itself as a leading advocate of the ‘Green Agenda’ by publishing for consultation draft guidance on the application of the Chapter I prohibition of the Competition Act 1998 to environmental sustainability agreements (Draft Guidance). This move makes it one of the first competition regulators to publish specific competition guidance to assist business in interpreting what is and is not acceptable in pro-environmental agreements.
It is hoped this new guidance will give business greater confidence to enter into environmentally friendly agreements and act as a spur to the green agenda. The CMA’s consultation on the draft guidance is open until 11 April 2023. The CMA will then prepare the final version. This guidance will ultimately be included in the new CMA Horizontal Agreements Guidelines (Horizontal Guidelines) which the CMA began to consult on in January this year and will sit alongside the new U.K. horizontal block exemption orders which came into force on 1 January 2023 (The Competition Act 1998 (Specialisation Agreements Block Exemption) Order 2022 and Competition Act 1998 (Research and Development Agreements Block Exemption) Order 2022.
CMA Harnesses Competition Law to Encourage Pro-Environmental Agreements
Environmental Sustainability Agreements are agreements or concerted practices between competitors and potential competitors which are aimed at preventing, reducing or mitigating the adverse effects economic activities have on environmental sustainability such as pollution, reducing biodiversity or contributing to climate change from greenhouse gas emissions. Examples include agreements aimed at improving air or water quality, conserving biodiversity or promoting the sustainable use of raw materials.
The U.K. Government is one of the leaders in seeking to accommodate a flexible interpretation of competition law to encourage sustainability agreements, but not the first. The emphasis on the green agenda has seen other competition regulators provide guidance on the application of competition law to sustainability agreements. The EU Commission in its updated draft Horizontal Agreements Guidelines sought to give further guidance on when agreements with a pro-environmental purpose could fall outside the EU competition rules (Article 101TFEU) or merit an individual exemption under Article 101(3) TFEU but stopped short of producing standalone guidance. The Dutch competition regulator, however, was the first in Europe to specifically set out draft guidelines on sustainability agreements in 2021.
The U.K. Government saw the chance to make its mark on the environmental agenda when it consulted on its proposals for reforming competition and consumer policy in July 2021. At that time the Secretary of State published a letter asking the CMA to provide advice on how the U.K. can better use the tools available under competition and consumer law to achieve the government's Net Zero and environmental sustainability goals. In March 2022, the CMA responded to the Secretary of State. It stated that it intended to produce guidance on these issues to improve legal certainty for businesses. It has now published those draft guidelines for consultation.
The CMA’s Draft Guidance on Environmental Sustainability Agreements
The Draft Guidance applies to environmental sustainability agreements, including climate change agreements, and provides guidance as to their treatment under U.K. competition law. The Draft Guidance is intended to supplement but not replace the other parts of the Horizontal Guidance. Its purpose is to provide the business community with confidence and clarity when entering into environmental sustainability agreements. The CMA does not want business unnecessarily or mistakenly deterred from lawfully co-operating or collaborating to promote environmental sustainability, out of fear of breaching competition rules.
In some cases, collaboration between competitors may be needed to deliver environmental benefits. The Draft Guidance gives an example. If a firm acted unilaterally to protect environmental sustainability, such as by switching to a more sustainable but costlier input (which its competitors would not), it is likely it would sustain a competitive disadvantage compared with its rivals. The result is that no other firms would have the incentive to switch without some form of collaboration. The Draft Guidance, therefore, explains the circumstances in which collaboration to protect or enhance environmental sustainability may or may not be permitted under competition law.
Competition Law Treatment of Environmental Agreements
The Draft Guidance sets out the types of environmental sustainability agreements that are likely and unlikely to infringe competition law and how certain types of restrictive behaviour may be exemptible under Section 9 of Competition Act 1998. Each of the four conditions for an agreement to claim exemption under in Section 9 of the Competition Act1998 must be met. The Draft Guidance gives specific guidance on what types of environmentally friendly objectives are likely to meet those criteria. The four conditions include:
- Benefiting production, distribution or technical or economic progress. The parties need to have evidence of objective substantiated benefits arising from the agreement, such as reducing greenhouse gas emissions, creating new or improved products which have a reduced impact on the environment, combining resources to create economies of scale in relation to a new, more environmentally sustainable input, introduction of new cleaner technologies, or developing new, more energy-efficient processes.
- Ensuring the restriction must be indispensable. There must be no less restrictive, but equally effective, alternative of putting the arrangement into effect. An agreement or restriction is likely to be considered indispensable, or reasonably necessary, to the relevant benefits if the parties can demonstrate that, in the absence of the agreement, they would not otherwise be able to achieve the level of benefits which the agreement seeks to achieve
- Passing on benefits to U.K. consumers. The parties need to be able to show that the benefits that result from the agreement are passed on to U.K. consumers and that those benefits outweigh the harm that U.K. consumers would suffer as a result of the agreement. Benefits can include future as well as current benefits that accrue to direct as well as indirect users. In the context of climate change agreements, this condition can be satisfied taking into account the totality of the benefits to all U.K. consumers arising from the agreement, rather than apportioning those benefits between consumers within the market affected by the agreement and those in other markets.
- Not eliminating competition. The agreement must not eliminate all competition on the market(s). Where the agreement covers the entire market, this condition may still be satisfied if there is still scope for the parties to compete on key conditions (such as price or quality), even if they align other aspects of their competitive behaviour.
CMA Guidance and Enforcement
The CMA states that it will not take enforcement action against environmental sustainability agreements, including climate change agreements, that clearly correspond to examples used in the Draft Guidance and are consistent with the principles set out in the guidance. Where parties are unsure about the applicability of the Draft Guidance, they should consider contacting the CMA.
The Draft Guidance positively encourages businesses entering into an environmental sustainability agreement to approach the CMA for informal guidance on their proposed initiative. Subject to the requirements of confidentiality, the CMA proposes to publish a summary of its informal guidance in relation to certain types of agreements to assist others entering into similar types of agreement.
The Draft Guidance represents a very important step in harnessing flexibility within the competition law framework to support the green agenda both domestically and internationally. However, it is to be seen how enthusiastically businesses embrace this latest initiative as concerns over a possible recession continue to intensify.