New UK Green Agreements Guidance published
17 October 2023
17 October 2023
On 12 October 2023, the Competition and Markets Authority (CMA) published its guidance on the application of the Chapter 1 prohibition to sustainability agreements between businesses operating at the same level of the supply chain (Green Agreements Guidance).
The CMA has shown an increasing interest in the potential impact of competition law on companies' willingness to collaborate on sustainability initiatives.
The Green Agreements Guidance is designed to provide clarity to companies on the application of the Chapter 1 prohibition to environmental sustainability agreements between competitors. Unlike the previous guidance published in January 2021, the Green Agreements Guidance proposes a more flexible approach to certain types of sustainability agreements.
The CMA considers that it can ensure markets for sustainable products or services develop in competitive ways, assist consumers in making informed choices about the environmental impact of goods and services they consume, and ensure that competition law does not operate as an unnecessary barrier to companies pursuing sustainability goals. The CMA has established a Sustainability Taskforce to lead and coordinate its work, across both competition and consumer law.
The Green Agreements Guidance applies to agreements or concerted practices between actual or potential competitors which aim to prevent, reduce or mitigate adverse impacts on the environment from their economic activities or to monitor the impact of their activities on environmental sustainability. Examples of these agreements include those aimed at improving air or water quality, conserving biodiversity and natural habitats, or promoting the sustainable use of raw materials.
The CMA has identified three categories of agreement in the context of the Chapter 1 prohibition:
The CMA has also identified a sub-set of sustainability agreements related to climate change, which will benefit from a more permissive approach. This sub-set relates to agreements which contribute towards combatting climate change. Notably, the definition no longer refers to the "UK's binding climate change targets under domestic or international law" as was proposed in the draft guidance. The Green Agreements Guidance offers additional examples of climate change agreements, including agreements:
In the Green Agreements Guidance, the CMA acknowledges that many sustainability agreements are unlikely to raise any competition concerns and will therefore not fall within the parameters of the Chapter 1 prohibition.
While the guidance makes clear each agreement will be assessed on its own facts, the CMA has provided the following examples of agreements which are unlikely to infringe the prohibition:
The final guidance makes clear that a trade association or NGO providing assistance, facilitation or support to businesses taking part in these types of agreement are also unlikely to raise competition concerns.
The Green Agreements Guidance distinguishes between sustainability agreements which infringe the Chapter 1 prohibition because they have the "object" of restricting competition and those which infringe the prohibition by having the "effect" of restricting competition. It notes, however, that collaboration between competitors may well involve parts that fall into either or both types of infringement.
The guidance emphasises that particular caution is required in relation to agreements which involve price fixing, market or customer allocation, limitations on output, quality or innovation, as these are typically considered to be agreements which restrict competition by object, irrespective of their sustainability goals.
Following a careful analysis of the facts of the case, it is possible that a sustainability agreement that restricts competition by object may nevertheless meet the conditions for exemption. In practice, however, it has proven very difficult to establish that the exemption criteria are met in relation to restrictions by object, and it is not clear that the Green Agreements Guidance will change this position in relation to sustainability agreements.
Where a restriction is categorised as an "ancillary restraint" (i.e. where it directly relates to and is necessary for the implementation of a sustainability agreement which is not itself prohibited by Chapter 1) it may be permitted. The guidance provides the example of a group of competitors cooperating to jointly purchase inputs with a low carbon footprint from large suppliers, so as to encourage production and purchaser of alternative products with a lower carbon footprint. To make this arrangement effective, the purchasing group may restrict its members from joining other purchasing groups. The guidance notes that such a restriction may be treated as ancillary.
On the question of whether a sustainability agreement would have an appreciable negative effect on competition, the Green Agreements Guidance emphasises that the effects of each agreement need to be reviewed on a case by case basis. The guidance notes that this assessment should consider the following factors:
The Green Agreements Guidance provides specific guidance on when sustainability agreements may be capable of exemption under section 9(1) of the Competition Act 1998. To benefit from the exemption, the benefits of the agreement must outweigh the competitive harm. This is assessed by reference to four cumulative conditions:
The agreement must produce benefits to production, distribution or technical or economic progress. These benefits must be objective, concrete and verifiable. For example, sustainability benefits may arise by: reducing greenhouse gas emissions; improving product variety or quality; reducing production or distribution costs; enabling sustainable products to be brought to market quicker; improving production or distribution processes (e.g. introducing new cleaner technologies) and increasing innovation (e.g. by developing new energy-efficient processes).
The CMA acknowledges that some benefits of environmental sustainability may not be immediately apparent, but it is "legitimate to have regard to such future benefits". The CMA notes that a number of methodologies may be available to quantify environmental benefits (including ways of quantifying non-monetary benefits in monetary terms), as well as techniques of discounting the value of such benefits. The CMA invites parties to discuss their proposed approach.
Parties should demonstrate that the agreement is no more restrictive of competition than is required to achieve the benefits. This means there must be no less restrictive, but as effective, alternative available. In practice, parties will be required to show that without the agreement they would not be able to achieve the level of benefits or that they would not be able to achieve the benefits this efficiently. Careful consideration should be given to the scope and duration of the restrictions.
For example, an agreement to adopt a more sustainable input may be considered indispensable if the agreement enables companies to achieve economies of scale by significantly increasing demand and this results in lower costs than otherwise.
UK consumers must receive a fair share of the benefits and that the benefits must outweigh the harm. As noted above, the Green Agreements Guidance recognises that relevant benefits can include future benefits. It also recognises that there may be benefits to both the direct users of the products / services covered by the agreement and consumers more widely who value the broader sustainability benefits of the agreement.
In assessing this condition, the relevant consumers will typically only be the consumers in the relevant market for the agreement's products or services. However, the Green Agreements Guidance recognises that it may be appropriate to take into account a proportion of the wider societal benefits where they are also enjoyed by the consumers of the relevant products. It is for the parties to decide which type of benefits, whether direct, indirect, collective benefits or a combination of the types, they wish to bring forward. Notably, a different approach is taken to climate change agreements (see below).
Further, the parties need to demonstrate that the benefits are substantial enough to offset the restriction of competition. Depending on the case, it may be necessary to quantify the benefits if it is not clear that the benefits are of a sufficient scale to offset the harm. In the context of sustainability agreements, the Green Agreements Guidance explains that parties are expected to assess both environmental benefits / harms and the effect on competition of the agreement, noting again that the benefits may accrue over a longer time period.
The Green Agreements Guidance notes that the benefits may also be felt outside the UK but, to satisfy this condition, the benefits to UK consumers must outweigh the harm they suffer as a result of the agreement.
The fourth condition requires that there must be some remaining competition on the market affected by the agreement or that there is still competition on key parameters (such as price or quality) where the whole market is covered by the agreement.
Elimination of competition for a limited period of time will not prevent an agreement satisfying this condition, provided that the agreement has no impact on the development of competition after the limited time period is over. For example, an agreement to temporarily limit the production of one variant of a product which contains a non-sustainable ingredient in order to introduce a sustainable alternative to the market and raise consumer awareness is likely to satisfy this condition.
In broad terms, "climate change agreements" will be assessed by reference to the exemption criteria set out above. However, in relation to condition 3 (the need for consumers to receive a fair share of the benefits), the Green Agreements Guidance proposes to adopt a more permissive approach in assessing the relevant consumer.
This is in recognition of the "exceptional nature" of the threat posed by climate change and the "exceptional nature" of the benefits to consumers from mitigating climate change or its impact. In light of this, the CMA proposes to take into account the totality of the benefits to all UK consumers (termed collective benefits) when assessing whether the "fair share to consumers" condition is satisfied.
To benefit from this approach, the agreement's benefits will need to be in line with (or exceed) existing legally-binding requirements or well-established national / international targets (including the overarching climate change goals set out in the Paris Agreement).
The Green Agreements Guidance indicates that evidence for these collective benefits in reports by public authorities or recognised academic organisations may be of particular value for this assessment.
The Green Agreements Guidance invites businesses to approach the CMA at an early stage in the development of sustainability initiatives and agreements, and provides a dedicated email address (email@example.com) for seeking informal guidance from the CMA.
Notably, the CMA will not issue fines against parties that implement an agreement which was discussed with the CMA and where the CMA did not raise any competition concerns (or where any concerns were addressed). In addition, the CMA will not pursue director disqualification in relation to such agreements.
Where informal guidance has been sought, the CMA will typically publish summaries of the initiative, risk assessment and any solutions proposed. This will likely provide helpful guidance to companies considering similar initiatives. In exceptional circumstances, it may not be appropriate to publish a summary of the proposed initiative.
The Green Agreements Guidance supplements the CMA's Guidance on Horizontal Agreements (Horizontal Guidance) and companies should consider both sets of guidance in parallel where an environmental sustainability agreement concerns a type of cooperation covered by the Horizontal Guidance. If both apply to the same agreement then the parties may rely on the relevant part of either guidance "whichever is more favourable to the parties".
For example, an agreement to undertake joint research and development to produce a more environmentally friendly product should be assessed under the Green Agreements Guidance but also the Horizontal Guidance on research and development agreements.
The Green Agreements Guidance provides helpful clarity to businesses seeking to enter into environmental sustainability initiatives on the types of agreements that will not usually infringe competition law and how the CMA will apply the exemption criteria. The ability to seek informal guidance from the CMA will also provide further certainty to businesses.
In the UK, the Financial Conduct Authority has stated that it will also have regard to the CMA's Green Agreements Guidance when carrying out its own (concurrent) competition powers.
National competition authorities and the European Commission have also been considering how competition law should apply to sustainability initiatives and agreements in recent years. In particular, there has been debate amongst academics and regulators about what sustainability benefits can and should be taken into account when considering whether a sustainability agreement may benefit from an exemption.
The Dutch and Austrian competition authorities have advocated taking into account a broader scope of efficiencies covering the environmental benefits for society as a whole (i.e. not limited to consumers on the relevant market). See our October 2021 newsletter. The CMA's Green Agreements Guidance incorporates elements of the Dutch approach, including the more permissive approach to climate change agreements and providing an informal advice mechanism to encourage companies to come forward with proposed initiatives and obtain comfort that their plans comply with competition law.
The European Commission included guidance in its revised Horizontal Guidelines (published in July 2023). In March 2022, it released its draft guidance for consultation (see our April 2022 briefing). Unlike the CMA and the Dutch competition authority, the EU Horizontal Guidelines do not treat agreements relating to climate change differently to other sustainability agreements. However, the Horizontal Guidelines indicate that in some circumstances collective benefits (i.e. those outside the relevant market) may be taken into account.
With thanks to Florence Chan and Eleanor Popplewell of Ashurst for their contribution.