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Archive for September 9th, 2021

Sustainability agreements and antitrust – three criteria to distinguish beneficial cooperation from greenwashing (by Maurits Dolmans)

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[Maurits Dolmans delivered one of the talks at our last Chillin’Competition conference, back in December 2019 (video available here). Maurits talked then about Sustainable Competition Policy. This subject has only continued to gain prominence, and today it is one of the hottest topics in contemporary competition policy. The guest post below could not be more timely]

This summer, the Commission adopted “Fit for 55” proposals to deliver the Green Deal, and the Council and Parliament adopted a Climate Law.  There have been calls for a reassessment of competition policy too.  Indeed, DG Comp is considering whether to adopt a more permissive approach to sustainability agreements, in the context of the review of the Guidelines on Horizontal Agreements.  Commissioner Vestager is about to decide.

When speaking early this year on this topic at the OECD Open Day on Sustainable Competition Policy, EC Chief Economist Pierre Regibeau put his finger on a sore spot.  He asked, I hope rhetorically: “Can we allow sustainability deals if that means taxing the people who buy, to benefit those who do not buy?”  

That question is of course exactly the wrong way around.  Producers and consumers impose costs on society – including climate change, large scale pollution, and loss of biodiversity – that are not included in the monetary price consumers pay.  This leads to overconsumption and a “tragedy of the commons”, the degrading of our environment, due to overuse.  These supply- and demand-side market failures are hard to resolve – why should a supplier produce cleanly if that means higher costs and rivals taking market share; why should a consumer buy green at a higher price if the neighbours keep buying polluting goods?  Eminent economist Sir Nicholas Stern said in 2007 that “climate change is a result of the greatest market failure the world has seen”. We all suffer from this collective action problem, including the consumers themselves. 

The Chief Economist should have asked “Why should we allow producers and consumers to impose costs on those who do not consume?”  Or “why should we prohibit agreements that could help reduce the social costs of climate change and pollution, if they may make the polluters pay for the damage they cause?” 

Article 191(2) TFEU leaves the Commission no choice in how to answer that question:  EU policy, including competition policy, “shall be based on the … principles … that environmental damage should as a priority be rectified at source and that the polluter should pay.”  See also here.  Article 11 TFEU demands that “environmental protection requirements must be integrated into the definition and implementation of the Union’s policies and activities, in particular with a view to promoting sustainable development.”  And for the avoidance of doubt, Article 7 TFEU requires the Commission to “ensure consistency between its policies and activities”. 

I could go on citing additional Treaty provisions saying the same (like Articles 3(3) and 3(5) TEU), but the message is clear enough: we should allow agreements that efficiently prevent or reduce greenhouse gas emissions or pollution at source, or that make producers pay for removing past emissions and repair of the environment. 

Some argue that carbon taxation and an adequate emissions trading price are a better answer (although interesting critiques appeared here and here), or prefer regulation.  But regulation is slow, and often ineffective, and carbon taxes especially are deeply unpopular. Carbon trading rights in the EU have gone up from € 25 to more than € 60 recently, but even that level is not enough to compensate for the real (and ever-increasing) social cost of climate change.  More important, carbon trading rights don’t cover all greenhouse gases, including several that are much more potent than CO2, and cover only a fraction of the world’s economy. The revenues are not dedicated to solving the climate crisis, either.  It is counterproductive to prohibit sustainability agreements on the ground that, in theory, taxation or regulation is a better tool, when that regulation is too little, too late.  We have to use all available tools to reduce emissions, remove excess greenhouse gases, and repair the environment.

Is the threat of private liability part of the solution?  The Dutch “climate tort” judgment recently required Shell to reduce emissions by 45% by 2030 compared to 2019.  But Shell is appealing, arguing it should not be held to a standard that does not apply to its competitors.  A perfect illustration of the collective action problem.  Do we let burglars off the hook because many of their colleagues are not caught and convicted?  If everyone reasoned that way, we would never get anywhere. Would it not be better to solve the problem by allowing oil and gas companies to agree that they will all comply with at least the same standard as Shell?  A “compliance with law” agreement – of course with the right do better than the minimum required by the Paris Agreement?  (Yes, I know that may be wishful thinking, but wouldn’t it be enlightened and set a great example if they did…)  But in the meantime, resolving the Shell litigation and pursuing others will take years.

The Commission is tempted to focus on competition as the solution:  more competition means more innovation, and innovation is the answer to everything.  But as Stiglitz explains, innovation has been suboptimal, and we can’t be sure that some innovator will emerge as deus ex machina to save the world.  And competition is exactly the force that drives firms to use up natural resources and emit greenhouse gases as if there is no tomorrow.  The costs will be borne by our children and our grandchildren.

Competition is the answer only in markets where firms know that enough consumers are willing to pay to eliminate all greenhouse gas emissions (and even then, we still have to repair the damage already done).  In those markets, firms have an incentive to compete not just to be the cheapest and best, but also the cleanest and greenest supplier.  Unfortunately, in many markets, consumers do not have the willingness or the ability to pay.  That’s when cooperation should be allowed, as a complementary tool, to spread the costs, reduce the risks, and speed up reduction of greenhouse gas emissions.

A few economists, such as Prof Maarten Pieter Schinkel, argue that if we give competitors a finger, they will take the whole arm, and try to avoid having to pay for emissions reduction.  They back this up with elegant economic models.  But if competition practitioners know anything about economic models, it is that you have to check the assumptions.   They may not apply universally in the real world.  For instance (and see also here):

  • Consumers are assumed to be willing to pay as much as is needed to avoid climate damage, and it is always profitable for firms to meet that demand – whereas in reality, the ICPP warns of tipping points with dramatic effect, as well as extreme weather events, meaning climate damage increases in a non-linear way. Cutting half the emissions does not cut half the climate risk, and many people do not realize the dramatic impact of climate change until it happens to them.  Because of this information asymmetry and other demand-side market failures, many consumers are not willing to pay (or pay enough) for greenhouse-gas-neutral products, and firms may lose more than they gain if they go green individually;
  • Regulation is assumed to offer a fully effective solution – which flies in the face of our experience of “regulatory failure” or “political failure” of the last decades;
  • Firms are assumed to benefit only from (and to seek only) short-term profit maximization, and always collude to minimise green investment or greenwash if they can get away with it, without regard to the long-term impact on them; and
  • It is assumed that consumers must be fully compensated for any price increase.  Out-of-market benefits or improved access to non-market goods (say, clean air or a safe environment) supposedly do not count as compensation. 

Let’s have a closer look at the last two assumptions:

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Written by Alfonso Lamadrid

9 September 2021 at 6:34 pm

Posted in Uncategorized