Competition and sustainability: Quantifying the environmental benefits of cooperation
As we explained in the second post of our series, fighting against the crippling effects of climate change is a collective effort: it will often require competitors to collaborate in designing and implementing sustainability measures.
While competition laws generally apply to collaborations which harm competition, in many jurisdictions these laws do, at least in principle, provide for a possible defence on the basis that the environmental benefits outweigh that harm. The key is to ensure that the environmental benefit is a cognisable efficiency that can be clearly quantified and weighed against the competitive harm.
How have authorities tackled this so far? And are they doing it right? Building on the discussion in our Competition and Sustainability webinar from economic expert Matthew Bennett of Charles River Associates, let’s walk through some thoughts on these questions.
The US and China: nothing to see here
In the US, companies can in principle raise environmental and other social non-economic benefits as pro-competitive arguments under the rule of reason assessment, which weighs up pro-competitive benefits against anti-competitive effects.
But courts and agencies have been ambivalent about crediting these effects. Some competition authorities have referred to environmental benefits in passing, e.g. the DOJ’s Business Review Letter to the Pollock Conservation Cooperative and its members. Others have rejected social non-economic benefits outright, e.g. Professional Engineers v. United States.
What about actual US cases? We’re not aware of any in which the authorities or courts have sought to quantify pro-environmental effects. Nor has any party succeeded solely based on environmental / non-economic benefits.
Meanwhile, China’s Anti-Monopoly Law expressly acknowledges social benefits including environmental benefits as a ground on which companies could seek to exempt agreements that may otherwise be considered anti-competitive. In addition to these benefits, the parties need to show that the relevant agreement (1) does not seriously restrict competition, and (2) pass on of the associated benefits to consumers. But to the best of our knowledge based on public record – as with the US – no party has invoked this defence (successfully or not) since the law’s inception in 2008.
More progress in Europe…
European competition authorities have assessed a few agreements with underlying environmental objectives under the relevant exemption. This exemption applies only where:
- the restrictive conduct leads to improvement in production/distribution or technical/economic progress;
- consumers have a fair share in these benefits; and
- the restrictive conduct is indispensable to achieve such improvements while not in effect eliminating competition.
With varying degrees of success for the parties, the main methodologies used to quantify and weigh up the benefits have included:
- Qualitative assessment of exclusivity in agreements for packaging waste collection services resulting in cost savings and lower prices for consumers (EC’s DSD case, 2001).
- Comparing the increased consumer price for more energy efficient washing machines against the benefits of lower electricity consumption, which was translated into a monetary equivalent of reduced emission levels (EC’s CECED case, 1999).
- Comparing the higher electricity prices associated with closure of coal plants against the benefits of lower emissions, which were calculated based on a combination of shadow prices (which track emission costs) and prevention cost method (which tracks the savings in not needing to take emission reducing measures) (Dutch coal plant closure case, 2013).
- Comparing higher prices of sustainably produced chickens against consumers’ willingness to pay for animal welfare and environmental improvements (Dutch Chicken of Tomorrow case, 2014).
So the EU does appear to be in the lead here. But, as we mentioned in the second post of our series the cases are scarce and old, and crucially the methodologies used have been limited. The authorities have tended to focus on the more easily calculated direct cost savings or survey-based ‘willingness to pay’ amounts associated with the positive effects on the environment. However, the potentially greater, wider benefits outside of those consumers who are directly affected - i.e. in the relevant market – have tended to go unquantified.
… But lamentably narrow approach prevails
While EU authorities are not shying away from evaluating some elements of environmental benefits based on various economic models, the methodologies focus on relatively narrow albeit objective criteria:
- Monetary values attributed to immediate reductions in emissions. Reducing fundamentally non-economic environmental effects to economic values is a clear-cut way of enabling their balance against economic factors such as changes to price. Whilst in general a short-term analysis of the costs and benefits will be a good proxy for longer costs and benefits, if there are dynamics that change the relative weighting of costs and benefits over time, then these changes may not be incorporated.
- Consumers’ willingness to pay. Assessments have tended to focus only on consumers within the relevant affected markets and not benefits to society (i.e. all consumers). The reason given is that wider benefits may be difficult to monetise and may take longer to materialise. They may also be incompatible with the interpretation of the requirement that a fair share is passed to consumers who are affected by the costs – i.e. only those in the relevant market. But in reality, the environmental benefits of an agreement can be expected to benefit a much wider set of consumers.
Time for a broader, longer-term view
This relatively narrow approach taken to measuring pro-environmental benefits may be one of the reasons companies have felt discouraged from collaborating on sustainability initiatives. There is an expectation that the analysis of costs and benefits under competition law is unlikely to fully internalise the benefits and therefore will result in an unfavourable outcome.
To allow competition law to play a positive role in tackling the climate change emergency, the quantification exercise needs to move away from the more easily quantified but relatively narrow direct short-term price effects, and start to quantify the wider benefits. ‘Willingness to pay’ surveys such as the Dutch competition authority did in the Chicken of Tomorrow case is one way to try to address this, but these surveys have their own issues. Increased consideration of non-price benefits is an area that the authorities already emphasise in relation to, for example, the effects on innovation of mergers.
In practice, this means a wider test which goes beyond direct costs and benefits for just those consumers within the relevant affected markets and looks at the costs and (potentially significant) longer-term benefits for society as a whole. This methodology will not necessary be straight forward, as it will require experience not just in competition, but also in wider fields such as the environment and cost-benefit analysis.
But such methodologies are not outside of the realm for courts and competition authorities to consider. A similar one is already well-established in the context of private damages claims, where courts must assess the “remoteness” of an event to decide where to draw the line. That said, there are questions as to whether competition authorities are best placed to assess the wider environmental benefits to society of an agreement or merger.
Given the lack of robust or recent guidance from cases or otherwise, authorities should develop explicit guidelines clarifying their methodology. And – in a move away from their customary scepticism of efficiency arguments in pursuit of headline grabbing fines - authorities should publish “non-infringement” decisions clearly exempting those agreements where the environmental benefits outweigh any costs that may arise. These two steps are vital to provide enough legal certainty and encouragement to foster meaningful and beneficial progress on sustainability.