Antitrust and Climate Change: How Competition Enforcement Prevents Sustainability Collaboration
The authors are Prateek Yadav and Madhav Tripathi, third year students at Dr. Ram Manohar Lohia National Law University, Lucknow.
Collaboration forms the cornerstone of global action against climate change and the race to net zero carbon emissions. The climate crisis is a result of complex webs of interacting forces. Thus, concerted cross-sectoral action between businesses and governments is imperative to the solution. However, Private-sector collaboration on climate action through sustainability-focused financial coalitions have been accused of cartel-like behaviour.
The functions of these collaborations range from establishing shared net zero targets to developing frameworks for carbon accounting. To decarbonize, firms must often not only agree to standards, but also make substantial investments and take other costly actions.
However, it must be noted that any collaboration between businesses, especially competitors, requires articulate risk management given the institutionalized prohibitions on cooperation amongst rivals through antitrust laws. Therefore, regardless of how well intentioned and efficient a collaboration may be, it will be deemed illegal if found to have had anticompetitive effects.
Against this backdrop, the authors seek to delineate the nexus between climate collaboration and competition law. This article traces the likelihood of antitrust challenges to environment, social and governance (“ESG”) initiatives in the Indian competition regime while juxtaposing it with developments in the European Union (“EU”). We also discuss how the fabric of our competition framework can be stretched to make room for pro-competitive/sustainability collaborations.
Room In the Existing Regime?
At present, there is no explicit provision relating to sustainability focussed competitor collaborations under the Competition Act, 2002 (“The Act”) or even the recent Competition (Amendment) Bill, 2022. This compels us to stretch the fabric of our competition framework to make room for pro-competitive/sustainability collaborations.
Proviso to Section 3(3) of The Act reads as follows –
“Provided that nothing contained in this sub-section shall apply to any agreement entered into by way of joint ventures if such agreement increases efficiency in production, supply, distribution, storage, acquisition or control of goods or provision of services.”
The Jurisprudence around the proviso has been limited till recently owing to which it has become a breeding ground for new interpretations. On the other hand , the counterpart of this proviso in the European Competition Regime is Article 101(3) of The Treaty on the Functioning of the European Union (hereinafter TFEU) is comparatively more developed. It states the conditions wherein “horizontal agreements” could be exempted, that is when the agreement is helping increase the efficiencies of production, distribution or technical advancement.
In India, upon reading the judicial pronouncements – A notice jointly issued by Andhra Pradesh Gas Distribution Corporation Limited, Shell Gas B.V and others, the Competition Commission of India (“CCI”) agreed with the argument of the parties that their joint venture (“JV”) increased efficiency. In this instance, a JV was proposed to be set up by the government of Andhra Pradesh and GAIL Gas Limited, for creating the necessary infrastructure for the supply of natural gas in India. The CCI was of the opinion that there was a deficiency in natural gas supply in India and the proposed JV had inherent efficiencies in terms of creating a new source of natural gas for the consumers, thus allowing the JV.
Sustainability Agreements are collaborative arrangements between businesses to achieve sustainability goals and tackle climate change. For example, businesses may agree to work together to reduce environmentally harmful substances or determine how to handle the costs of environmental protection measures.
Sustainability issues are not specifically addressed by the provisions on abuse of a dominating position, restrictive agreements/conceded practises, and merger control requirements in competition law. Competition law has traditionally placed an emphasis on economic objectives, presuming that other legal disciplines are better equipped to address “supplementary” non-economic public interest objectives.
Therefore the “relaxation” under the proviso only talks about the commercial efficiencies by which the end consumer gets satisfied. Therefore, we argue that the current law around JVs is inadequate in its scope to incorporate multifaceted Sustainability Agreements.
Such collaborations would be notably different from the JVs talked about in the proviso. A JV is when two companies are pooling their resources in furtherance of a mutually lucrative commercial result. It doesn’t affect the operation of their individual businesses and therefore the competition. But collaboration under Sustainability Agreements involves –
● Pilot technology by way of which companies agree to use technologies through which the product’s emission gets reduced significantly and prices shoot up.
● Selective Suppliers, by which companies collectively stop giving supplier contracts to a particular supplier owing to ESG concerns.
● Exclusive Dealing is an arrangement in which the two companies enter into an exclusive obligation agreement in which for specific ESG friendly projects, (say renewable energy plant) they cannot acquire goods, services from another competitor. When such an agreement takes place, the chances of the completion of mega projects on time with high efficiency increases.
From an ESG perspective, the agreement presents an innovative means of solution. However, from a competition perspective, the agreement may be considered a horizontal agreement. This is because competitors or potential competitors exchange certain sets of sensitive information amongst themselves, which draws the attention of the competition regulators as a probable violation of section 3(3).
Climate Cartels: Masking Opportunism
Cartels, and “buy-side cartels” in particular, come into existence when competitors or potential competitors are engaging in the exchange of information regarding suppliers, customers and pricing data. If a collaboration involves multiple businesses, it requires only two of those entities to be competitors or potential competitors for the entire arrangement to be deemed a cartel. On the other end, as a result of collective procurement practices exists the supplier side cartel or supplier monopoly.
Businesses have a proclivity to cloud the distinction between genuine green credentials and opportunism towards maximising profits. This phenomenon is universally known as “greenwashing”. It refers to the promotion of a company’s products, practices and services as being more environmentally sound than they actually are in actuality.
For instance, in July 2021, the European Commission (“EC”) found that certain car manufacturers (Daimler, BMW, and Volkswagen group) breached EU antitrust law by colluding on limiting technical development in the area of nitrogen oxide cleaning for new diesel vehicles. The aforementioned manufacturers held regular meetings to develop emissions control systems which were required to meet the regulatory requirements on emission cleaning. Furthermore, they also decided not to compete on exploiting the full potential of one of the systems. They agreed on the tank sizes and estimated consumption of the diesel exhaust fluid (“AdBlue”) which was injected into the exhaust gas stream as part of the emission control system, and exchanged commercially sensitive information on these elements. According to the EC, this amounted to restricting competition on product characteristics relevant for consumers and constituted an infringement in the form of a limitation of technical development. They were consequently fined € 875 million.
Similarly, in a cartel case involving detergent manufacturers (Unilever, Proctor & Gamble, Henkel), the parties had extended the defence of implementation of an environmentally conscious initiative concerning laundry detergents (which, inter alia, led to coordinated price increases). Their defence was, however, not accepted and the EC imposed a fine of € 315.2 million on the manufacturers.
Genuinely Green or Covertly Black: A Test
To discern Sustainability Agreements from cartels, a novel test is required to be incorporated within the law itself. First, while scrutinising such agreements, those which aren’t JVs should not be considered “per se” illegal. After not disallowing prima facie, CCI must apply both, the “per se rule” and the “Rule of Reason” to gauge the true motives behind the agreement. Second, it should scout the agreement for possible “Ring-fencing clauses”. The presence of careful planning of ring-fencing measures and information-exchange protocols is visceral in the agreement to ensure the information exchanged is limited to only what is required to fulfil the purpose of the collaboration. Any additional information enabling a more precise forecast of competitor conduct, or reducing market uncertainty makes the agreement “per se” illegal.
After passing the “per se test” the CCI can use the “Rule of Reason”, by taking a leaf out of the 4 pointer UK Competition Authorities test- “(i) the agreement should generate efficiencies (i.e., increase the quality of products); (ii) these efficiencies cannot be achieved with less restrictive means; (iii) they should benefit consumers; and (iv) the agreement should not lead to the elimination of competition in the market.” Although efficiencies should be ‘objective’, both quantitative data (i.e., the reduction rate of carbon footprints) as well as qualitative data (i.e., related to animal welfare) could be contemplated. The Austrian Antitrust Law, Section 2(1) explicitly allows out-of-market efficiencies, where the environmental benefits do not need to be granted to consumers on the relevant market and it is sufficient if they benefit the broader society.
Basically, such efficiency evaluation metrics are required to analyse the quantum of environmental benefit vis-a-vis the economic impact on the market. If the balance of convenience lies in favour of the latter, that would not be a mere impact but a distortion of competition proving an appreciable adverse effect on the market. If the agreement passes both the tests, the CCI can consider it as a “Legal Sustainability Agreement”.
As highlighted earlier, if an agreement passes both tests, and is deemed to be a “Legal Sustainability Agreement”, then it would be able to work for both the worlds of commercial gains (eliminating “first mover disadvantage”) and for the larger public interest. This time, the authorities would incentivise sustainability focused collaborations by allowing businesses to make their case by not terming them as anti- competitive prima facie whilst also calibrating the same by undertaking a thorough comparative analysis of the ecological benefits vs econometric complications it may create in the relevant market. Adopting this new approach is paramount against the backdrop of contemporary realities and the urgent requirement of enabling Sustainability Agreements. Given the nature of the climate crisis, the status quo seems unlikely to hold up in this rapidly transmogrifying landscape. Till now the regulators have used an amorphous case-to-case basis formula but now the time is ripe to incorporate such novel mechanisms in the form of cohesive guidelines and tests within The Act itself.