The changes needed to reach net zero will require sector-wide transformation. Collaboration is vital in creating the scale to drive pioneering climate-related practices.
Of course, competition between businesses is also important, helping to accelerate green innovation and ensure consumers can access affordable low-carbon products and services.
Harnessing the power of both collaboration and competition is crucial, but many boards are concerned about how competition or antitrust regulation impacts their ability to join climate groups and alliances.
Why has climate change become an issue in competition law?
Institutions in the Glasgow Financial Alliance for Net Zero (GFANZ) faced calls to drop the requirement to phase out coal investment. Similarly, insurers have pulled out of the Net Zero Insurance Alliance, fearing that participation may breach competition rules.
This issue has become linked to broader political arguments, particularly in the US. Therefore it is important to understand competition law’s actual limits, and how it can enable—rather than constrain—global climate action, while also benefiting consumers.
Competition law’s fundamental aim is to preserve healthy markets and protect consumers. Climate policy aims to address a market failure and protect the public, so there is clear alignment between these ambitions. Indeed, businesses taking climate action may provide consumers with more efficient goods and services that could also receive government subsidies and incentives.
Evaluating sustainability agreements
Directors should consider several key factors when starting to negotiate a sustainability agreement, or weighing the advantages of joining an existing agreement.
Although there are some legal risks associated with climate change initiatives and competition law, it is important to remember that most sustainability agreements do not impact competition, and those that do may still be legal.
For guidance applicable to your business’s specific context, it is essential to consult legal professionals in the relevant jurisdiction, as legal regimes for competition law will vary.
Nonetheless, some competition and antitrust principles are common to many jurisdictions; businesses across the world are grappling with issues addressed in the following key questions:
What is the intention of the sustainability agreement?
Businesses should not use climate-related collaborations to disguise anti-competitive behaviour. Therefore, directors should first check that any proposed sustainability agreement is clearly aimed at addressing the climate crisis or other environmental issues, and that it does so effectively.
To ensure that your business is engaging with the best intentions, consider whether all relevant industry competitors have been given the opportunity to join the agreement, and whether relevant aspects of the agreement have been made transparent.
Does the agreement impact competition?
The majority of sustainability agreements do not meaningfully impact competition and therefore will not cause competition law concerns.
Some agreements may restrict competition on their surface, referred to as ‘by object’ restrictions in the EU, or ‘per se’ illegal practices in the USA. Agreements to fix prices or limit output necessarily impact competition, and are likely to violate competition law.
If the agreement is not anti-competitive on its face, it may still raise antitrust concerns if it has the effect of restricting competition. Directors should therefore also consider what impact an agreement might have when put into practice—for example, how an agreement to set sustainability standards might impact prices and consumer choice.
If the agreement does impact competition, could it still be valid?
Even if an agreement is deemed to have a material impact on competition, it may still be permissible. Depending on the jurisdiction, certain agreements may fall under general exemptions based on the nature of the agreement or the businesses involved.
In the absence of such exemptions, sustainability agreements that impact competition may still be valid when their benefits outweigh any negative effects on competition.
As discussed, climate change action can improve markets by addressing a market failure, while also creating new products and services or lowering prices for consumers.
Many jurisdictions therefore allow authorities to conduct balancing exercises to consider whether benefits to consumers or the public make an agreement valid under competition law, in spite of any impacts on competition.
Obviously, mitigating climate change brings much broader gains and certain regulators have started to consider these. For example, the Netherlands’ Authority for Consumers and Markets (ACM) quantified the health benefits of avoiding climate change in monetary terms when evaluating an agreement to close coal-fired power plants.
Understanding how it is possible to use competition law to enable companies to act together during the transition to net zero is a critical area of focus for our work and we look forward to continuing conversations that support this critical area of law.
Emily Farnworth is director of the Centre for Climate Engagement at Hughes Hall, University of Cambridge. For further information on this topic, or future areas of focus as part of our Law for Climate Action programme, please contact the centre at [email protected] or sign up to its mailing list. www.climatehughes.org.