How businesses can co-operate on environmental goals - new CMA guidance

The Guidance was announced by Sarah Cardell, CEO of the CMA, in her speech to the Scottish Competition Forum in January 2023 and builds on the environmental sustainability advice that the CMA provided to the Government in March 2022. 

The CMA has stated that it is keen to ensure that businesses are not deterred from lawfully collaborating in this space in light of the scale of the challenge to address environmental sustainability, particularly climate change, and the degree of public concern about such issues. The purpose of the Guidelines, therefore, is to provide clarity in this area, whilst also forming part of the CMA’s programme of work to support its public commitment to promoting environmental sustainability and helping to accelerate the transition to a net zero economy.

Environmental sustainability agreements and climate change agreements

The Guidance applies to environmental sustainability agreements and climate change agreements.

Environmental sustainability agreements are broadly defined as agreements or practices between actual or potential competitors which are aimed at preventing, reducing, or mitigating the adverse impact that economic activities have on environmental sustainability (for example, through pollution or reducing biodiversity), or assessing the impact of their activities on environmental sustainability. Examples include agreements aimed at improving air or water quality, conserving biodiversity, or promoting the sustainable use of raw materials.

Climate change agreements are a sub-set of environmental sustainability agreements. These are agreements which contribute towards the UK’s binding climate change targets under domestic or international law, for example, an agreement between manufacturers to phase out a particular production process which involves the emission of carbon dioxide. The CMA have decided to take a particularly permissive approach to these types of agreements.

Three categories of environmental sustainability agreements

The Guidance discusses three categories of environmental sustainability agreements, namely:

1. are unlikely to infringe the prohibition against anti-competitive agreements
2. could infringe the prohibition against anti-competitive agreements, unless they benefit from an exemption
3. can benefit from an exemption

For each category, the Guidance sets out further guidance and specific, worked examples. These examples are aimed at making it easier for businesses to assess whether their environmental sustainability agreements are likely to infringe the competition rules.

Agreements that are unlikely to infringe the prohibition against anti-competitive agreements

Many environmental sustainability agreements are likely to fall outside the scope of the competition rules altogether. To assist parties with understanding which types of environmental sustainability initiatives are likely to fall into this category the Guidance provides a series of helpful examples. These include examples of:

1. agreements which do not affect the main parameters of competition between the parties (for example, price, quality, or service) and therefore do not affect how the parties compete. This may include, for example, an agreement relating to the organisation of a joint campaign to raise awareness about environmental sustainability issues
2. agreements to do something jointly which none of the parties could do individually (e.g., co-operation in early-stage scientific or technological research with an environmental sustainability objective)
3. co-operation required by law
4. pooling information about the environmental sustainability credentials of suppliers or customers;
5. creation of industry standards or codes of practice aimed at making products of processes more environmentally sustainable
6. phasing out / withdrawal of non-sustainable products or processes
7. industry-wide efforts to tackle climate change, such as setting non-binding targets to achieve environmental sustainability objectives

Agreements that could fall within the scope of the prohibition against anti-competitive agreements

The Guidance distinguishes between those types of agreements which have an “object” of restricting competition and those which have an “effect” of restricting competition.

The Guidance notes that agreements which have the “object” of restricting competition are assumed, by their very nature, to be harmful to the proper function of normal competition, regardless of their actual effects. As is the case with any other agreement between competitors, particular caution is required in relation to environmental sustainability agreements which involve price fixing, market or customer allocation, limitation of output or limitations of quality or innovation.

Nonetheless, the Guidance acknowledges that a restriction of this nature in an environmental sustainability agreement could be capable, in certain circumstances, of benefiting from an exemption (see below) and parties should therefore not automatically assume that it will be prohibited. In addition, the Guidance notes that there are circumstances where certain restrictions, which otherwise would be a restriction of competition “by object”, may be permitted because it is an “ancillary restraint”, that is, directly related and necessary to the implementation of a wider sustainability agreement that is not of itself anti-competitive, or benefits from an exemption.

The Guidance clarifies the types of factors that are likely to be relevant when assessing whether an environmental sustainability agreement is likely to have the “effect” of restricting competition, including the market coverage of the agreement; whether the businesses participating in the agreement (individually or collectively) have market power in the markets affected by the agreement; and whether non-parties can participate.

Agreements that benefit from an exemption

Some environmental sustainability agreements which fall within the scope of the prohibition against anti-competitive agreements may nonetheless be capable of exemption. To qualify for exemption, the parties must be able to demonstrate that the following (cumulative) conditions are satisfied:  

1. the agreement must contribute certain benefits (improving production, distribution, or contribute to promoting technical or economic progress)
2. any restrictions on competition within agreement must be indispensable to achievement of the agreements’ benefits (in other words, there is no less restrictive way of achieving the overall objective)
3. consumers must receive a fair share of the benefits
4. the agreement must not eliminate competition in respect of a substantial part of the products concerned

In relation to the benefits that arise from an environmental sustainability agreement, the Guidance helpfully recognises that benefits may materialise over a prolonged period of time, and it is therefore permissible to have regard to future benefits. Benefits must, however, by substantiated, as well as being objective, concrete and verifiable.

As for the requirement that consumers must receive a fair share of the benefits, the Guidance notes that:

1. the parties must be able to demonstrate that the benefits that result from the agreement are passed on to UK consumers and that those benefits outweigh the harm the UK consumers will suffer because of the agreement. The Guidance highlights the established techniques that can be employed for these purposes, and
2. the relevant consumers for these purposes are consumers of the products or services to which the agreements relate, and
3. consumers may benefit from environmental sustainability agreements directly (eg, where the agreement results in improved product quality, or variety, or lower prices) or indirectly (eg, where they value the broader environmental sustainability benefits of an agreement and the impact of those benefits outside the relevant market in questions).

Exemption for climate change agreements

Significantly, the Guidance indicates that the CMA will take a more permissive approach to climate change agreements.

When assessing whether a climate change agreement qualifies for exemption, the Guidance clarifies, importantly, that businesses can take into account the totality of the benefits to all UK consumers arising from the agreement when considering whether consumers receive a fair share of the benefits. This broader interpretation is justified because of the exceptional nature of the risk posed by climate change, the level of public concern about the issue, and the fact successive UK governments have entered into binding national, and international, treaties concerning climate change.

Open-door and enforcement policy

The CMA have clarified that they will operate an open-door policy so that businesses that are considering entering into environmental sustainability agreements can approach the CMA early for informal advice on their proposed initiatives. Businesses can ask for clarification on issues not covered by the Guidance and seek comfort from the CMA on how a particular part of the Guidance will apply to their agreement.

In addition, the Guidance notes that the CMA will not take enforcement action against environmental sustainability agreements that clearly correspond to the examples and are consistent with the principles in the Guidance. This should provide comfort to businesses whose initiatives clearly fall within the examples outlined in the Guidance. Moreover, the CMA will not issue fines against businesses that implement an environmental sustainability agreement which was discussed in advance with the CMA and where the CMA did not raise any competition concerns, or any concerns raised by the CMA were addressed.

Key takeaways

The Guidance provides clarity and certainty to businesses about the legal framework applying to environmental sustainability objectives and the circumstances in which the CMA is unlikely to take enforcement action. The "open door" policy is also a welcome initiative to encourage businesses to seek informal advice about proposed initiatives, whilst the more permissive approach to climate change agreements may give real impetus to businesses to pursue collaborations which are aimed at contributing towards the UK’s binding climate change targets.

The Guidance is therefore a positive step forward for businesses that wish to work together to pursue environmental sustainability initiatives in the UK but may have felt unable to do so due to concerns that collaboration might lead to an infringement of competition laws.

For businesses with a footprint in the EU and UK who would like to implement cross-border initiatives, the European Commission is expected to publish a final version of its revised Horizontal Block Exemption Regulations and accompanying Guidelines in Spring 2023, which contain a new chapter on the assessment of sustainability agreements under EU competition law. This should bring further consistency at an EU level. That said, the draft guidance (published for consultation in March 2022) is not aligned in all respects with the CMA’s Guidance and businesses who may wish to roll-out initiatives that take effect in the UK and EU will need to be mindful of where differences may arise.

Next steps

The CMA is seeking comments on the Guidance, with the public consultation closing on 11 April 2023. Going forward, the CMA envisages publishing non-confidential summaries of initiatives of risks and solutions, and may update its guidance, or publish supplementary guidance, to capture experience gained so that businesses may have the benefit of even greater clarity.