CMA launches consultation on its draft environmental sustainability guidance
12 April 2023
The CMA is consulting on its draft guidance on the application of the Chapter 1 prohibition in the Competition Act 1998 (which prohibits agreements between businesses that restrict competition in the UK) to environmental sustainability agreements.
The CMA has made a commitment to promoting environmental sustainability and is doing this through three main pillars of work:
- Ensuring that markets for sustainable products and services develop in competitive ways.
- Helping consumers make informed choices about the climate impact of the goods and services they use.
- Ensuring that competition law is not an unnecessary barrier to companies seeking to pursue environmental sustainability initiatives.
This draft guidance has been published with the third of those pillars in mind. The guidance aims to explain the circumstances in which collaboration between businesses to protect sustainability initiatives may be permitted under competition law. The aim is that competition law does not deter businesses from collaborating on projects that are important for accelerating environmental objectives.
Which agreements are caught by the guidance?
- Environmental sustainability agreements: Agreements between competitors or 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 (e.g. an agreement aimed at improving air or water quality).
- Climate change agreements: Agreements which contribute towards the UK’s binding climate change targets under domestic and international law (i.e. achieving net zero greenhouse gas emissions by 2050). For example, an agreement between manufactures to phase out a particular production process which involves the emission of carbon dioxide. Climate change agreements are dealt with separately in the guidance.
What does the guidance cover?
The guidance covers three broad situations in relation to environmental sustainability agreements within the Chapter 1 prohibition:
- Environmental sustainability agreements which are unlikely to infringe the prohibition.
- Environmental sustainability agreements which could infringe the prohibition (unless they benefit from exemption as described below).
- Environmental sustainability agreements which would otherwise infringe the prohibition but may be permitted because of an exemption.
Environmental sustainability agreements which are unlikely to infringe the prohibition
The CMA points out that the boundary between agreements which do not restrict competition at all and those which do but are unlikely to have an appreciable effect on competition is not always clear cut and will depend on the facts. However, either way the agreement itself will not be deemed to breach competition law. Several agreements will fall into this category:
- Those which do not affect the main parameters of competition (e.g. an agreement which concerns the internal corporate conduct of a business and aims to eliminate the use of single-use plastics in their business premises).
- Agreements to do something jointly which none of the parties could do individually (e.g. where several housing corporations participate in a pilot project to develop zero-energy housing using a new, more efficient technology in a particular area).
- Cooperation required by law.
- Pooling information about suppliers or customers.
- Creation of industry standards.
- Phasing out / withdrawal of non-sustainable products or processes (e.g. if businesses agree to stop using a particular type of packaging and this does not lead to prices increasing to an appreciable extent).
- Industry-wide efforts to tackle climate change (e.g. the setting of non-binding targets or ambitions for the whole industry or environmental sustainability objectives).
Environmental sustainability agreements which could infringe the prohibition unless they benefit from exemption
Agreements that fall into this category will be prohibited unless they benefit from one of the exemptions set out below.
The guidance distinguishes between those agreements which infringe the prohibition because they have the ‘object’ of restricting competition and those which infringe by virtue of having the ‘effect’ of restricting competition.
Environmental sustainability agreements with the ‘object’ of restricting competition: These agreements are assumed by their very nature to be harmful to the proper functioning of normal competition without the need to examine their effects. Examples include agreements which involve price fixing, market or customer allocation, limitations of output or limitations of quality or innovation. Therefore, an agreement between competitors on the price at which they will sell products meeting an agreed environmental sustainability standard is likely to restrict competition by object.
Environmental sustainability agreements with the ‘effect’ of restricting competition: Environmental sustainability agreements may lead to various types of restrictive effects, such as increased prices and reduced output. They will only infringe the prohibition if they do not benefit from the exemption below. The CMA guidance sets out a list of factors that are likely to be relevant in assessing the effects of an environmental sustainability agreement, including:
- 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) affected by the agreement.
- The extent to which the agreement constrains the freedom of action of the parties. For example, in the case of an agreement to develop new standards for a particular product, whether the parties remain free to sell products not subject to the standard and whether they are free to take steps which go beyond the minimum set by a standard.
The guidance discusses two categories of exemptions:
Exemption for environmental sustainability agreements generally
Section 9(1) of the Competition Act 1998 includes an exemption where the benefits of the agreement outweigh the competitive harm. A party seeking to benefit from this exemption must be able to demonstrate that their agreement meets each of the following four conditions:
- The agreement must contribute to certain benefits, namely improving production or distribution or contribute to promoting technical or economic progress – the parties need to have evidence of objective benefits arising from the agreement (e.g. reducing greenhouse gas emissions). In this context it is not unusual for the benefits to materialise in the future and so the guidance reflects that the quantification of such future benefits and the extent that they need to be counted or discounted will need to be considered in accordance with the nature of the agreement.
- The agreement and any restrictions of competition within the agreement must be indispensable to the achievement of those benefits – the parties need to be able to demonstrate that there is no less restrictive, but equally effective, alternative.
- Consumers must receive a fair share of the benefits, which must be substantial and demonstrable. In general, the relevant consumers are consumers of the products or services to which the agreement relates.
- The agreement must not eliminate competition in respect of a substantial part of the products concerned.
Exemption for climate change agreements
The criteria for exemption applicable to climate change agreements is the same as the four conditions outlined above, except that the CMA considered that a more permissive approach is appropriate in assessing who the relevant consumers are in relation to the third criterion. For climate change agreements, the ‘fair share to consumers’ condition can be satisfied by taking into account the totality of the benefits to all UK consumers arising from the agreement, rather than apportioning those benefits between consumers within the market affected by the agreement and those in other markets.
The consultation ends on 11 April 2023. It is worth noting that the European Commission also has draft guidelines about horizontal cooperation from March 2022. The guidance contains a chapter about sustainability agreements. The Commission adopted a wide concept of “sustainability”, which includes broader objectives than environmental protection. The EU’s approach is less flexible than the CMA’s proposed approach but may change before the final iteration, which is due in June. Businesses should be aware of both approaches when considering partner arrangements for environmental or sustainable reasons.