Incentives to 'Go Green': CMA publishes guidance on environmental agreements

On 12 October 2023, the CMA published the final version of its guidance on the application of the Chapter I prohibition in the Competition Act 1998 to environmental sustainability agreements (the "ESA Guidance"). 

Following on from our previous post, in which we discussed the draft version of the guidance, this blog will give a brief overview of the scope of the ESA Guidance, take a closer look at the CMA's open-door policy and approach to enforcement and discuss the challenges of quantifying the benefits of green agreements in determining if exemptions to the competition law rules might apply.

Scope and Assessment of Environmental Sustainability Agreements

The ESA Guidance applies to:

• Environmental sustainability agreements - defined as "agreements between competitors which are aimed at preventing, reducing or mitigating the adverse impact that economic activities have on the environment or assist with the transition towards environmental sustainability".^[1] Various examples are set out in the ESA Guidance, such as agreements between waste management companies to commit to recycling a waste product rather than incinerating it.
• Climate change agreements - a sub-set of environmental sustainability agreements which are designed to contribute towards combating climate change. For example, an agreement between delivery companies to switch to using electric vehicles.
• Mixed agreements - agreements that generate both general environmental benefits and climate change benefits. The ESA Guidance refers to an agreement to eliminate deforestation from supply chains as an example, as it may result in climate change benefits as well as broader environmental benefits, such as improvements to biodiversity. 

The ESA Guidance is intended to supplement, rather than replace, the CMA's Guidance on Horizontal Agreements. If an environmental sustainability agreement concerns a type of co-operation that is described in the Guidance on Horizontal Agreements, a business should have regard both to the Guidance on Horizontal Agreements and the ESA Guidance. Helpfully, in such cases a business may choose to rely on the relevant part of either the ESA Guidance or the Guidance on Horizontal Agreements, whichever is more favourable. It is not necessary to undertake the more taxing approach of establishing where the centre of gravity of the agreement lies to apply whichever set of guidance is deemed most relevant on that basis.  

CMA's Open-door Policy and Enforcement

Another commercial plus-point is the extent to which the ESA Guidance states that the CMA's door is open for discussion. Historically, the CMA has generally been reluctant to engage with businesses prior to an agreement being entered into, encouraging a reliance on self-assessment. The ESA Guidance maintains the position that it is for the parties to satisfy themselves that an agreement is compatible with competition law. However, in contrast to the Guidance on Horizontal Agreements, the ESA Guidance marks something of a departure by stating that the CMA is willing to engage in discussions with businesses from an early stage if they "wish to explore whether an agreement is something the CMA would, in principle, be willing to consider providing informal guidance on".^[2]

By making it clear that the CMA has an 'open-door' and is willing to provide clarity and informal guidance in particular circumstances from the point when an environmental sustainability agreement is merely in contemplation, the ESA Guidance goes some way to encouraging businesses to approach the CMA if they have concerns.

The ESA Guidance also states that the CMA does not expect to take enforcement action against environmental sustainability agreements that correspond clearly to the principles set out in the guidance and/or where the CMA has provided informal guidance and either raised no concerns, or where the parties have addressed any concerns raised^.[3]

Further comfort is provided for businesses which have engaged in open-door discussions, as the ESA Guidance states that the CMA would not issue fines in relation to environmental sustainability agreements that it had previously discussed with parties but which it later concluded had breached competition law. Likewise, a commitment is given that the CMA will similarly not seek to disqualify any directors of businesses who are party to such an agreement.^[4] The CMA's expression of such commitments are, of course, only set out in the context of guidance. They are also made on the understanding that the parties are transparent with the CMA throughout and do not withhold material information during discussions.^[5] Yet, they nonetheless underscore that the CMA is keen to afford quite considerable latitude in relation to agreements which have a green objective.   

Availing of an exemption - Quantifying the Benefits

The ESA Guidance is also to be commended for the extent to which it at least indicates that the exemption under Section 9(1) Competition Act 1998 will be applied more broadly in the context of climate change agreements. The test under the Section 9(1) exemption requires that:

• The agreement improves production or distribution or contributes to promoting technical or economic progress;
• Any restrictions of competition within the agreement are indispensable;
• Consumers receive a fair share of the benefits of the agreement, which outweigh potential consumer harm (the "Fair Share" test); and
• The agreement does not eliminate competition.

In addressing the Fair Share test, the ESA Guidance applies the same consumer benefits framework as that set out under the Guidance on Horizontal Agreements, foreseeing three key types of benefits:

• Direct benefits – benefits that consumers derive directly because of their consumption or use of the products covered by the agreement.
• Indirect benefits – benefits that a consumer may derive from the wider impact of the agreement.
• Collective benefits – benefits that accrue to wider society irrespective of the consumer's individual use of the product.

When assessing collective benefits for environmental sustainability agreements, only the proportion of the collective benefits that are enjoyed by the consumers of the relevant product can be taken into account. However, for climate change agreements, a more permissive approach is adopted, and the CMA will consider the "totality of the climate change benefits to all UK consumers arising from the agreement".^[6]

With that said, in its desire not to be overly rigid, the ESA Guidance is at risk of being somewhat vague in how it addresses quantification of consumer benefits for the purpose of the Fair Share test.

• On the one hand, businesses do need to be able to demonstrate that the benefits are capable of offsetting any harm caused by the restriction of competition. Yet, on the other, the CMA foresees some situations where a precise quantification of the benefits may not be needed, particularly where the total benefits clearly outweigh the harm.^[7] Cross-reference is made to the position taken by the Dutch competition authority in April 2022 when, in the context of a joint marketing initiative for carbon capture and storage services, it decided that precise quantification of the benefits was not required.^[8]
• Where it is unclear whether the total benefits outweigh the total harm, quantification will need to take place. And yet the ESA Guidance openly accepts that "the quantification exercise may not always be straightforward and … it may not always be possible to come up with a precise answer".^[9] To assist businesses undertaking quantification exercises, the CMA has highlighted some established methodologies (e.g., HM Treasury's Green Book supplementary guidance on the valuation of energy use and greenhouse gas emissions for appraisal).^[10] However, the CMA anticipates difficulties and has indicated that parties may want to approach the CMA to discuss their approach to quantification under the CMA's open-door policy.

It is widely acknowledged that there is relatively little experience with measuring and quantifying the benefits of environmental agreements, particularly collective benefits - a point which the European Commission makes in its own guidance on sustainability agreements.^[11] However, the Commission at least makes the helpful indication that it "aims to provide more guidance on this issue when it has gained sufficient experience of dealing with concrete cases, which may enable it to develop methodologies of assessment".^[12] It will be interesting to see if the CMA follows suit. This would clearly be useful for businesses, especially where there are no established market techniques to assist with quantification.

Conclusion

The publication of the ESA Guidance marks a welcome step towards having a clear, defined set of guidelines to apply to environmental sustainability agreements, which are relatively user friendly. The CMA's decision to keep the ESA Guidance distinct from its general Guidance on Horizontal Agreements has allowed the former to be more deliberate, specific and relatively more extensive in the examples which it provides. Likewise, the CMA's expressed willingness to have open-door discussions with businesses, and its transparency around enforcement when businesses do engage in open-door discussions, is also welcome.

Nonetheless, there is clearly a need for more detailed guidance on the methodologies businesses should adopt when seeking to quantify collective benefits in particular. It is to be hoped that, with more engagement and dialogue between businesses and the CMA, this will come without undue delay.

If you would like to discuss any of the issues covered in this blog, please get in touch.