How can businesses team up on climate action without breaking UK law?

How can businesses team up on climate action without breaking UK law?

There is widespread agreement that responding to the climate crisis and building a net zero emission economy will require unprecedented levels of cooperation — cooperation between businesses, between industries, between governments and between the public and private sector. Yes, intense and healthy competition will play a critical role in driving the clean tech innovations that can enable deep decarbonization. But the need to deliver net zero emissions within a few short decades means widespread sharing of best practices, standards, technologies and infrastructure will be essential if clean tech solutions are to be deployed at sufficient pace and scale.

But what then happens when the desire for businesses to co-operate runs into competition laws designed to stop them from doing precisely that? One person’s constructive co-operation agreement is another’s competition-destroying cartel.

For several years the United Kingdom Competition and Markets Authority has been attempting to manage this tension, and today it provided an important update on its position with the publication of new Green Agreements Guidance, which aims to clearly explain how competition law applies to environmental sustainability agreements between firms operating at the same level of a supply chain.

Officially titled “Guidance on the application of the Competition Act 1998 to environmental sustainability agreements,” the document sets out the key principles which apply to the policing of such agreements, along with practical examples that businesses can use to inform and shape their decisions when working with other companies on environmental sustainability initiatives.

Crucially, it confirms the CMA “does not expect to take enforcement action” against agreements that are in line with the guidance and includes a specific chapter setting out how agreements tackling climate change will be considered by the regulator.

It gives firms greater certainty about when agreements that genuinely contribute to addressing climate change will be exempt from competition law.

The CMA said the guidance had been developed following extensive consultation on a draft version of the guidance, which saw many businesses confirm they wanted more clarity about what is and what is not legal when working together towards environmental sustainability goals.

The guidance has also been accompanied by a new awareness campaign, which includes a video and a roadmap detailing how businesses can best ensure their partnerships are in line with the rules.

“We know that tackling climate change and promoting environmental sustainability matters, and supporting businesses to do this is a priority for the CMA,” said Sarah Cardell, chief executive at the CMA. “So, we have developed the Green Agreements Guidance for all companies who are considering collaborating so they can understand how to agree green goals without breaking the law. The guidance goes further than before — it gives firms greater certainty about when agreements that genuinely contribute to addressing climate change will be exempt from competition law.” 

She added that the watchdog would also operate an “open-door policy” whereby it would invite any queries from businesses as to whether activity is compliant with the rules and provide “tailored informal guidance on how they can work together to boost the green economy.”

So, what is in the new guide?

Firstly, it accepts there is a problem that needs to be addressed. “Given the scale and urgency of the challenge to ensure environmental sustainability and particularly to combat climate change, and the degree of public concern about such issues, the CMA is keen to help businesses take action on climate change and environmental sustainability, without undue fear of breaching competition law,” it states. “This is particularly important for climate change because industry collaboration is likely to make an important contribution to meeting the U.K.’s binding international commitments and domestic legislative obligations to achieve a net zero economy, and to play an essential part in delivering the U.K.’s net zero ambitions.”

If a business incurs a ‘first mover disadvantage’ when deploying initially costly clean technologies it can slow the transition to green technologies.

It also acknowledges there are specific circumstances where collaboration that may have previously been prohibited could be required. For example, if a business incurs a “first mover disadvantage” when deploying initially costly clean technologies it can slow the transition to green technologies at the economy-wide level. Collaboration with competitors could allow businesses to spread the costs and risks associated with those new technologies and remove the barriers to deployment that can stop economies of scale being realised and costs being driven down for everyone.

Similarly, the guidance noted that there are instances where allowing businesses to pool resources, R&D and expertise can “reduce duplication of activities in ways that are necessary to improve efficiency and otherwise benefit consumers.” “This may be the case for standard-setting, for example where development of a sustainability label, applied to certain qualifying products, by a number of businesses across a market may reduce confusion for end consumers,” it added.

As such, the guidance provides information on, and examples of, business cooperation that is unlikely to infringe rules designed to stop agreements that prevent, restrict or distort competition — known as Chapter 1 prohibition — as well as examples of business cooperation that could infringe the rules. Finally, it sets out instances where environmental agreements may be exempted from some competition rules, noting that exemptions are more likely where agreements are focused on tackling climate change given that it “represents a special category of threat: the sheer magnitude of the risk that climate change represents (including the need for urgent action), the degree of public concern about it and the binding national and international commitments that successive U.K. governments have entered into set it apart.”

The creation of industry standards, agreements to phase out non-sustainable products or practices, and the joint setting of environmental targets are all permitted under competition law.

The guidance is complicated — it runs to 45 pages, and lots of the examples where partnerships would not be in breach of the rules contain caveats — but it does establish some broad principles that should make it easier for businesses to avoid inadvertently breaching the rules.

For example, alliances that do not affect the main parameters of competition, such as product price, quantity, quality, choice or innovation, are unlikely to breach any rules. So an agreement to run a joint campaign to raise awareness about environmental sustainability issues within an industry or among customers is highly unlikely to breach any rules, the CMA said, “provided that the campaign does not amount to joint selling or advertising of specific products.”

Similarly, the creation of industry standards, agreements to phase out non-sustainable products or practices, and the joint setting of environmental targets are all permitted under competition law.

The clarifications are welcome, but are broadly in line with what most businesses would expect, given such partnerships and campaigns are already widespread. More interesting is the confirmation that agreements to “do something jointly which none of the parties could do individually” and agreements to “pool information about suppliers or customers” are unlikely to breach Chapter 1 rules. The CMA said that as long as companies are not sharing commercially sensitive information about prices and customers, such partnerships are unlikely to breach any rules.

Indeed, the guidance makes clear that the CMA is only likely to be concerned with environmental partnerships if they set out with an objective of curtailing competition or are shown to have “an appreciable negative effect on competition” — and even such an effect is detected a partnership may benefit from an exemption from the law.

The vast majority of corporate coalitions and cooperation agreements for promoting environmental best practices and clean tech adoption and innovation are perfectly legal.

Such exemptions can be secured if an agreement can “demonstrate certain benefits, namely improving production or distribution or contribute to promoting technical or economic progress”; show that any restrictions of competition are “indispensable to the achievement of those benefits”; ensure consumers receive a fair share of the benefits; and can prove it does not eliminate competition in the market affected by the agreement.

The bar for proving an agreement qualifies for an exemption is relatively high, but cooperation that offers clear benefits can secure approval from the CMA. Plus the regulator has made clear that there is more leeway for exemptions for partnerships that are focused on tackling the climate crisis.

As such, the guidance offers two clear takeaways for businesses working to advance the net zero transition. The first is that the vast majority of corporate coalitions and cooperation agreements for promoting environmental best practices and clean tech adoption and innovation are perfectly legal. Collective environmental targets, product standards, joint R&D programs and promotional campaigns are highly unlikely to breach any rules. Even agreements to phase out polluting products or cooperate on the development of new markets can comply with current rules or secure exemptions, so long as they do not tip over into restricting competition and manipulating prices.

The second main lesson is that this remains a complex field with plenty of grey areas and judgement calls. And as such if a business or trade group has any concerns about the green partnerships and collaborations it is pursuing it should take advantage of the CMA’s open door policy and seek advice as soon as possible. The authorities are more understanding than ever before on the case for greater collaboration in pursuit of environmental goals, but it is always best to check before signing off on a partnership that could inadvertently break the law.

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