By Pedro Aránguez Díaz

When the United Nations announced the net zero financial alliance, it was seen as a major breakthrough for the environment. However, since October 2022, the major banks that joined the initiative are facing a US antitrust investigation. The investigation alleges that these agreements lead to market sharing, restriction of production, and eventually price increases for consumers.

This research reflects a broader debate: the adequacy of competition law to integrate the positive effects of sustainability into its analysis. In the European Union, new guidelines on horizontal cooperation agreements were published on 1 June 2023, with a chapter dedicated to sustainability allowing for more flexible treatment. Other jurisdictions such as the Netherlands, the United Kingdom, Austria and Greece have also made reforms in favour of change.

Despite this trend, the issue is not unanimous. In the past, sustainability agreements have also been banned in Europe. In the US, the Chairman of the Federal Trade Commission, Lina Khan, has rejected the measure outright, stating that “our job is to prevent illegal mergers, not to make the world a better place”.

Professors Antonio Robles and Lazar Radic recently organised a panel on this topic at the Universidad Carlos III de Madrid, demonstrating the division of opinion. Critics of the inclusion of sustainability in this area argue that competition advocacy is inadequate to address climate change. According to this view, environmental damage should be corrected by tax and regulation, or by market competition, without private cooperation to disrupt it. Are these alternatives sufficient, or should competition law consider the sustainability arguments in favour of private cooperation?

Regulation and taxes

The first line of action in the face of the climate crisis should be environmental regulation and taxation. The problem is that these tools alone are not being properly applied to curb climate change. Despite the existence and development of extensive environmental regulation since the 1970s, the climate crisis has worsened, with regulation unable to keep up with the scale of the crisis.

A non-exhaustive array of theories can explain this failure. The temporary nature of elected governments severely limits their ability to make long-term commitments, with voters more concerned with issues such as the cost of living. There is also a certain personal and institutional inertia to maintain the status quo and a complex interplay between democratic actors that leads to environmental inaction. Finally, regulatory inefficiency can also be attributed to information frictions, in global and opaque structures where pollution and other externality outcomes often occur outside the jurisdiction of the regulator.

Even in the presence of environmental regulations, if they impose obligations of result, the European Commission has recognised that cooperative private initiatives may be indispensable to achieve the outcome of the regulation in a more effective, efficient and expeditious manner. For example, the proposed EU Directive on corporate sustainability due diligence imposes obligations with an open and abstract design on how to exercise due diligence. However, when it comes to detecting sustainability risks, even cooperating to share information and resources may be anti-competitive conduct prohibited by Article 101 TFEU. The proposed Directive clarifies in Article 4(2) that all actions of undertakings must comply “with applicable competition law”. This demonstrates the importance of competition law in providing answers to sustainability challenges, rather than shifting all responsibility to other branches of law.

Regulation and taxation, while useful, do not provide alone all the solutions. A more comprehensive approach, with a variety of tools, is a stronger route to sustainability. Private initiatives are effective in governing the commons. The aim is not to substitute regulation for private initiatives, but to complement both.

Unilateral private initiatives

Unilateral private initiatives would largely escape the scrutiny of competition authorities. Unilateral conduct prohibited by Article 102 TFEU only concerns a limited number of undertakings and a certain type of abusive conduct. However, not all private initiatives can be unilateral.

In fact, the negative externalities at the root of the climate crisis are due to so-called “collective action problems”. Two of these problems are particularly applicable to private sustainability initiatives.

The first-mover disadvantage can affect the first company to introduce a sustainable product to the market, when its introduction requires short-term investments and potentially higher operational costs that consumers do not take on board in their purchasing behaviour. Another obstacle is free riding: if only a small group of consumers buy sustainable products, other consumers take advantage of the collective sustainability benefits but continue to buy the cheaper, unsustainable product. The effect is that few consumers want to belong to the small initial sustainable group, because that group bears the cost but shares the benefits.

Cooperative private initiatives

Cooperation could overcome these collective action problems and result in more sustainable markets. Two recent studies suggest that currently prohibited cooperation would be beneficial in overcoming these barriers: in the context of first-mover disadvantage and free-riding. Several examples show the benefits of collaboration, such as the private sector agreements for sustainable soybean cultivation in the Amazon.

However, competition law is hindering and sometimes blocking cooperation. A survey of 200 sustainability officers in companies in the US, UK, France, Germany and the Netherlands reveals that 57% of the companies surveyed have not participated in sustainability agreements because the legal risk was too high, and 92% say that reform and clarification of competition law is needed to improve cooperation on sustainability. In practice, a number of companies are withdrawing from UN sustainability partnerships, citing legal risks of competition law infringement.

A new horizon of sustainable Competition Law

Competition law cannot avoid the climate crisis as irrelevant to its analysis, due to deterrence these rules generate for sustainable private cooperation. Social norms on sustainability are permeating our legal analysis even in areas traditionally outside the debate, most recently in corporate law, and the trend suggests that they will do so in competition law as well.

The next step is to design a framework of analysis to distinguish environmentally beneficial cooperation from greenwashing cartels. The analysis should not merely incorporate political issues, but be guided by economic and legal analytical rigour. In this regard, there is a need to clarify the level of collaboration that is considered restrictive of competition; the accepted economic methodologies for testing sustainability benefits; and the acceptable level of trade-off, if any, between potential short-term consumer harm and long-term sustainability benefits.