Environmental sustainability agreements and competition law

Anti-competitive agreements reached between businesses are generally prohibited by competition law. The UK’s sanctions for businesses found to breach competition law are extensive and include:

• fines for the businesses involved of up to 10% of their annual worldwide turnover;
• up to five years imprisonment and/or unlimited fines for individuals involved in setting up or implementing anti-competitive agreements with competitors; and
• disqualification from acting as a company director for up to 15 years.

These sanctions are in addition to any damages claims which may be brought by third parties affected by the anti-competitive behaviour and the reputational damage which is likely to be suffered by firms investigated or fined by the Competition and Markets Authority.

Competitors may want to work together to improve the environmental standards of their products or services. They may wish to cooperate in order to achieve more environmentally sustainable outcomes. This could be for example by establishing industry-wide standards for the use of sustainable products or processes, such as phasing out the use of plastic packaging. However, they may be concerned about the consequences of doing so in relation to competition law.

The CMA is aware of these concerns and wishes to ensure that competition law is not an unnecessary barrier to businesses seeking to pursue environmental sustainability initiatives. It has therefore issued draft guidance to businesses as to how competition law affects such co-operation and how businesses can ensure that any such co-operation is carried out in compliance with competition law. The CMA is currently consulting on the draft guidance but it is expected that it will be formally adopted shortly.

Co-ordination by competitors in defining quality or technical standards to foster regulatory compliance and promote sustainability and environmental objectives does not normally breach competition law except where it restricts competition, such as in pricing, product choice or innovation. Even in cases where pricing, product choice or innovation are affected, it may be possible that the co-ordination may benefit from an exemption from competition law where the restriction is necessary to achieve the relevant object of the co-operation and consumers will benefit.

There are many situations where agreements that restrict competition can, on balance, be beneficial to consumers. The CMA draft guidance explains how this test will be applied by the CMA in relation to environmental sustainability agreements. The draft guidance also explains that climate change agreements, being agreements which contribute towards the UK’s binding climate change targets under domestic or international law, will benefit from a more permissive approach. Examples of climate change agreements include:

• agreements that reduce the negative externalities from greenhouse gas emissions;
• an agreement between delivery companies to switch to electric vehicles; this would benefit all UK consumers through reduced carbon dioxide emissions.

Further, the CMA proposes to operate an “open door policy” for businesses which are proposing to enter into an environmental sustainability agreement to seek informal guidance from it on the proposed initiative and the impact of competition law on it. The CMA will not issue fines against parties who implement an agreement which has been discussed in advance with the CMA and the CMA did not raise any competition concerns (or where any concerns that were raised by the CMA have been addressed).