Environmental sustainability in antitrust law – front row or back seat

May 27, 2024

Protection of the environment has now found a place in antitrust law. That is a welcome development. Yet is that a place in the front row, or one just in the back seat?

In this note, we review the still new 2023 EU Guidelines on Horizontal Co-operation Agreements (Horizontal Guidelines) by the European Commission (Commission) to consider what has been achieved, what could still be achieved, and which questions remain unanswered. Our intention is to provide "food for thought," rather than all the answers.

The Horizontal Guidelines now contain a long section on sustainability agreements. That section goes a long way towards…. However, it still lags behind, and considerably so, when compared to the courageous experiments of the Greek and Dutch antitrust authorities in this area. In this note, we set out our thoughts on what may still be missing from the new Horizon Guidelines.

I. Competing interests in a complex environment

The Horizontal Guidelines are a real attempt to reconcile the sometimes competing interests of economic efficiency, as generally enshrined in competition policy, and effective environmental protection. Both are worthy objectives. In our view, however, environmental protection is becoming increasingly important. Not for ideological reasons or reasons of party politics, but due to the urgency of the matter. A proper competitive process can only take place if the global means of production are not destroyed by climate change. If the ice in Antarctica melts, half of northern Europe will be flooded. Then nothing will function properly anymore, except perhaps shipbuilding.

1. Welcome novelties…

While firmly grounded in a tradition of established antitrust law doctrine, the Horizontal Guidelines nonetheless make serious and well-intended attempts to loosen the reins of antitrust law so as to avoid them standing in the way of effective environmental protection. This is to be welcomed without reservation.

2. … in a traditional two-tier system

There are less satisfactory aspects, however. The Horizontal Guidelines are based on a methodological approach that de facto relegates environmental protection to taking a back seat. The reasons for that may be understandable, since these Guidelines were developed by a competition authority, not an environmental agency.

Indeed, it is not surprising that DG Competition developed Horizontal Guidelines that focus first and foremost on the protection of competition, and only then look at environmental protection. Perhaps unwittingly, however, in today's environment, they may be putting the cart before the horse.

Under the Horizontal Guidelines, the Commission first examines whether cooperation between companies restricts competition. Only where such restrictions exist, for example where collaboration causes prices to rise, does the Commission consider a second question: Whether, for example, climate protection objectives can justify the restriction, based on environmental efficiencies. This is the well-known "101 para. 3" test, which was always something of a "sniff test." Within this framework, one could only hope that the test for demonstrating environmental efficiencies is applied no more stringently than that for other types of efficiencies. As long as the collaboration does not have a taint of greenwashing, should it not be: In dubio pro environment?

3. Growing pains within the body of traditional antitrust law…

The most difficult conceptual hurdle when considering environmental effects is the concept of consumer participation. The text of the Treaty on the Functioning of the EU ("while allowing consumers a fair share of the resulting benefit") as well as antitrust law's historical focus on the "relevant market" require that consumers of a product that has just become pricier due to an environmental agreement, should also benefit from the pricier product.

a) Green light: Securing individual benefits

This is easy where the objective quality of the product has measurably increased. For example, antibiotic-free "organic chicken" enhances the quality of the product ("individual use value benefit"). In other cases, at least the subjective buyer perception, measured by the willingness to pay more, is enhanced. For example, purchasing "fair-trade coffee" can come with the perception of having done something good to the coffee farmer, which allows the righteous consumer to sleep well even when drinking their coffee late at night ("individual non-use value benefit"). In both cases, the consumer paying also secures an individual benefit from paying more. That is, consumer and beneficiary are the same and in the same relevant market.

b) Yellow light: Substantial overlap between consumers and advantages enjoyed more broadly

The assessment becomes more difficult for agreements whose environmental advantages accrue to society more broadly ("collective benefits"). Here-under antitrust orthodoxy-a "substantial overlap" is required between consumers paying higher prices and beneficiaries to establish the "passing-on" of the benefit from a restriction of competition.

Does this deliver the right results, however? Let's consider a hypothetical example: All taxi companies in Munich agree to use only more expensive and cleaner biofuel. Of course, all residents of Munich benefit, because the air is better not only for taxi users. Yet, only the taxi users pay the higher price. When is the "significant overlap" test met? If 90 percent of Munich's residents regularly use taxis, the answer will probably be "yes." But what if it is only 30 percent? There is an overlap, but is it significant? And should it even matter, or is the introduction of cleaner biofuel not positive in any event?

c) Red light: Without substantial overlap, the antitrust approach fails the environment

The situation becomes yet more difficult when there is no overlap between the advantage and the consumers payment a higher price. Again, let's consider a hypothetical example: If European textile retailers agree to require their producers to ban cheap toxins from their production process, fashionistas in Europe pay marginally more for their T-shirts. However, it is only workers and the environment in producing countries that benefit. Under the Horizontal Guidelines, there is likely a competition law problem, because working conditions and the environment elsewhere are not a primary concern. From the perspective of traditional antitrust law, that may be understandable. Yet, it is unsatisfactory from a teleological point of view, considering pressing sustainability objectives.

The Commission admits that it does not have enough experience considering such questions under competition law, and promises to keep the area under review. Experience tells us that this process will take time. The difficulty here clearly results from the doctrine of the "relevant market." Luckily, there are sound arguments that may help to address the issue:

(aa) The Treaty requires consumer participation in the benefits "resulting" from the restriction of competition ("while allowing consumers a fair share of the resulting benefit," i.e. supra-competitive profits). If the price increase merely covers the increased production costs and does not go beyond, there should not actually be any supra-competitive profits to be shared with consumers.

(bb) For environmental efficiencies that address worldwide problems, the geographic market should in principle also be worldwide, reflecting the "nature of the problem." Take the Sahara, which flourished 15,000 years ago. While mankind is not to blame for the devastation, it illustrates the geographic reach of environmental impacts, here changing wind currents triggered by high and low pressure zones in the Himalayas. Another example: Should the temperature of the world's oceans continue to rise due to man-made global warming, the warming Gulf Stream may collapse. Action to address the problem should therefore be considered on a worldwide basis. Human rights, which include the right to a clean environment, are global, and Europe often insists on the universality of these values. Should that then not also be reflected under its antitrust laws?

All in all, the Horizontal Guidelines are a good start. They go in the right direction, just not yet far enough.

4. Increased legal certainty?

Do the Horizontal Guidelines then contribute to enhanced legal certainty on these issues? The answer to that question seems to be a resounding "yes" and "no." As with all other guidelines, the devil is in the details. The Horizontal Guidelines necessarily remain abstract, and fail to offer guidance on the crucial issues we raised above. That said, the Horizontal Guidelines do contain a lot of helpful material for lawyers to work with. As long as a company's practice is rooted in these Guidelines, there are at least sound arguments that can be raised when receiving a call from the antitrust authority.

5. What about non-horizontal cooperation?

Strictly speaking, the Horizontal Guidelines apply to "horizontal" agreements, i.e. agreements between companies operating at the same level of trade (= competitors). There are no guidelines yet for vertical and conglomerate sustainability agreements. Historically, vertical cooperations have been considered less harmful to competition than horizontal ones. In the era of AI and digital ecosystems, however, this no longer applies without restriction-companies should, therefore, as a precaution, take the Horizontal Guidelines into account also for non-horizontal cooperations, certainly as long as there are no specific guidelines.

II. Not in the front row of Article 101 TFEU...

Another much more fundamental question has not yet been raised, however: The environment currently sits only in the back seat of antitrust law. In light of the urgency, should it be in the front row?

1. Cheap but dirty…

What if a European antitrust authority is called upon to assesses a project that is good for the wallets of European consumers but very bad for the environment? A deliberately generic, vague and fictitious example: The authority becomes aware of an industrial project, in a third country without comparable environmental standards, that can produce products more cheaply than domestic companies, which must comply with applicable environmental regulations. This creates tension between the principle of the unity of the legal system, which in the EU context is reinforced by integration obligation clauses in general and Article 11 TFEU in particular, and the principle of sovereignty of each state over its own territory and applicable regulations. In the EU context specifically, we know this, for example, from the interface between state aid and public procurement law (non-compliance with public procurement law automatically results in the presence of state aid)-and the principle of conferral. Under this principle, the EU has jurisdiction only where granted, and the Treaty then sets up different organizational mechanisms and competencies in different policy fields, speaking against an overly expansionist reading of Article 101 TFEU. Against this background, does the authority have to wave the project through, or can it intervene? There are various conceivable solutions:

a) The competition authority does not focus on the lack of environmental protection, but on the resulting distortion of fair competition in Europe through environmentally damaging underpricing. The competitive harm would be to the competitive process and long-term to consumer welfare in Europe. On this approach, the competition authority is not pursuing environmental protection per se, but an anti-competitive advantage resulting from a breach of existing rules (e.g., data protection) or the lack of rules (e.g., foreign subsidies).

b) Recent representatives of the US "hipster antitrust" approach take the view that competition law protects not only consumer welfare, as defined by purely economic parameters (which was never the European approach anyway). Instead, it also protects workers, smaller companies as well as freedom and democracy, including in their political dimension. A similar turnaround can currently be seen in US trade policy: Instead of increasing consumer welfare, "fair trade" is the new primary goal. If this is true, then competition law should also protect the environment as a precondition of fair competition, freedom and the democratic process.

c) In his master's thesis, The Hidden Goal of EU Competition Law: Well-Being of People (2022), Tuncer Özgür Kiliç, formerly a Turkish student at Leiden University, explains the consumer welfare protected by Article 101(1) TFEU as a manifestation of Article 3(1) TEU, which provides that: "The Union's aim is to promote peace, its values and the wellbeing of its peoples." This brilliant intuition deserves attention. "Consumer welfare" (economically defined) and "well-being of the peoples" (holistically defined) are linguistically close to each other. Doesn't the "level playing field" of the competitive process require green grass, clean water and fresh air? Recent case law on human rights in the international courts also tends to support such a broader view.

This raises the question of whether and to what extent traditional antitrust analysis can or should be modified to integrate environmental protection. The obvious objection to this novel and unorthodox approach is: Do the ends justify the means? This delicate question is touched on in a new book by Pablo Ibanez Colomo, The New EU Competition Law. The book reveals that, albeit to a lesser extent than its American sister authorities, the Commission already adopts a more results-oriented approach to the application of antitrust law. It is doing so also in areas beyond the digital sectors, where it interferes with product design and business models to achieve results that amount to industrial policy through antitrust law. Examples of this are the "Article 22" notice and far-reaching commitments it extracted from certain Big Tech players, thereby deeply interfering with suppliers' product design. Here, its focus is no longer on the open-ended competitive process, as in the days of the "New Economic Approach," but on achieving, through antitrust law, policy objectives identified as desirable.

2. Can and should antitrust law thus be applied to close regulatory gaps?

In adopting a more expansive approach to antitrust laws, we should ask, however, whether stretching these antitrust concepts is really necessary? After all, there are a number of instruments in other areas of law that address issues of environmental protection, including with extraterritorial effects. The latter includes the EU regulation on a carbon border adjustment mechanism or its regulation on deforestation-free products. The practical relevance of, or need for, an extension of antitrust law in the above sense may therefore be less significant than initially suggested. On the other hand, it is obvious that existing regulations, including those mentioned above, do not cover all potentially relevant scenarios. Should not every regulatory opportunity be used to close the regulatory gap when it comes to climate change? Along the lines of: Better safe than sorry.

III. Conclusion

Sustainable development is a broad topic fraught with tension, in which environmental, social and economic dimensions, as well as the interests of developing countries and applicable international law, must be considered. It would therefore be interesting to brainstorm together the factual circumstances, in which antitrust law could make an even more efficient contribution to environmental protection and do so in a legally justifiable manner.

Please feel free to reach out to your Dentons relationship partner if you have any questions.

¹ Cf. EU General Court in Case T 616/18, Polskie Górnictwo Naftowe i Gazownictwo S.A./European Commission of 2 February 2022.
² https://insidetrade.com/daily-news/tai-ties-trade-policy-antitrust-enforcement-cites-common-cause.
³ https://www.echr.coe.int/w/grand-chamber-rulings-in-the-climate-change-cases.
⁴ https://www.bloomsbury.com/uk/new-eu-competition-law-9781782259145/.
⁵ https://eur-lex.europa.eu/legal-content/en/TXT/?uri=CELEX%3A52021PC0564.
⁶ https://eur-lex.europa.eu/legal-content/DE/TXT/HTML/?uri=CELEX:32023R1115.