More room for joint sustainability initiatives
The realisation of large sustainability projects often requires various market players to work together. Examples include cooperation between energy companies to stimulate the Dutch hydrogen economy by building hydrogen infrastructure or an electrolyser; cooperation between various stakeholders in the Regional Energy Strategies to implement agreements made under the Climate Agreement (such as heat transition in built-up areas) and cooperation within the large-scale Carbon Capture (Utilisation) and Storage projects (‘CC(U)S’) to achieve CO₂ savings (and CO₂ use) in the industry. However, cooperation between market players is not without competition law risks.
Even if the government is involved in the project or if the government encourages the cooperation, this does not exclude competition law risks resulting from the cooperation. When the association of enterprises in the energy sector intended to close down five old coal-fired power stations, its plan which had been included in the (2013) Social and Economic Council (SER) Energy Agreement ran up against competition law concerns. The central government had supported and signed the SER Energy Agreement. Despite this, the Dutch Authority for Consumers and Market (ACM) concluded in 2013 that the agreement to close the old power stations was incompatible with the competition rules.
It seems that the ACM is now looking to create more room for cooperation in the context of sustainability initiatives which are aimed at reducing environmental damage. This is apparent from the ACM’s draft Guidelines for sustainability initiatives, published on 9 July 2020 and, in amended form, on 26 January 2021 (Guidelines). The Guidelines describe the possibilities under competition law for businesses to conclude agreements and, in doing so, work together to build a more sustainable economy and society. In this blog, we shall briefly discuss these Guidelines and explain the options given by the Guidelines to cooperate in the energy market without infringing the competition rules.
Essence
In the national Climate Agreement (2019), the Netherlands set itself the goal of reducing greenhouse gas emissions by 49% in 2030, in comparison to 1990. The national Climate Agreement elaborates on the international Paris Climate Agreement (2015). The Netherlands is bound by the objective of the Climate Agreement to limit global warming to a maximum of 2 degrees, with the target of 1.5 degrees. An ‘energy transition’ is needed to achieve these goals. Such energy transition requires large investments for example in electricity networks, and research into sustainable ways to generate energy. Cooperation between various undertakings or agreements made between them, could be appropriate to finance these investments and facilitate common research.
However, the Dutch and the European prohibition of cartels does not allow anticompetitive agreements between undertakings. Examples include agreements between competitors on pricing or production volumes of a certain product or on the quality of the products they intend to purchase. Such agreements could significantly or completely restrict the competition between these undertakings and disadvantage other undertakings and consumers. These so-called ‘cartel agreements’ are therefore prohibited. Market players are in principle required to determine their market conduct independently of their competitors.
Which agreements are allowed?
In its Guidelines, the ACM clarifies that the competition rules do not necessarily prevent cooperation in the field of sustainability initiatives. It identifies three possibilities for making sustainability agreements. Cooperation is permissible where:
(i) agreements do not appreciably restrict competition;
(ii) the advantages of the restrictive agreements outweigh the negative consequences for competition; and
(iii) legislation provides for such agreements.
In its Guidelines, the ACM distinguishes between environmental damage agreements and other agreements. (Although the name is somewhat misleading) environmental damage agreements relate to reducing negative external effects of certain practices (such as greenhouse gas emission) and, consequently, the more efficient use of natural resources. Agreements between undertakings in the energy sector which contribute to the reduction of greenhouse gas emissions will, in principle, qualify as environmental damage agreements. Given the Guidelines, such sustainability agreements are less likely to be in violation of the competition rules.
(i) Agreements which do not appreciably restrict competition
Agreements between undertakings in the energy sector which do not appreciably restrict competition fall outside the scope of the cartel prohibition. Sustainability agreements which merely aim to improve product quality, product variety or product innovation or which aim to introduce new products are generally not anticompetitive. Such sustainability agreements often end up stimulating competition. Examples include general agreements between energy companies to reduce their CO2 emissions.
(ii) Agreements whereby the advantages of the restrictive agreements outweigh the negative consequences for competition.
The Dutch and the European competition rules include a general exemption form the cartel prohibition for agreements which do restrict competition but at the same time lead to advantages which counterbalance these restrictions. The agreement must meet four conditions to qualify for an exemption. Two of these conditions concern the balance between the sustainability advantages and the disadvantages of restriction on competition, such as a price increase. The Guidelines provide a new criterion in relation to these advantages.
Where in the past a fair share of the advantages had to benefit current and future users, the ACM finds in the Guidelines that there is sufficient reason to deviate from that general principle in the field of sustainability, and particularly in relation to environmental damage agreements. In the opinion of the ACM, advantages beyond the circle of current and future users should also be taken into account.
For environmental damage agreements that contribute to achieving targets of the national Climate Agreement and the Paris Climate Agreement it is sufficient if the users benefit in the same way as the rest of society. According to the ACM, it could be fair in such cases that users are not fully compensated for the disadvantages of the agreement, because their demand for the products has essentially caused the problem society must now try to solve. It is therefore justified, according to the ACM, to allow agreements where the (environmental) benefits to society outweigh the negative consequences for the direct users. In concrete terms this means that, despite the higher price for users, the ACM will allow an agreement on, for example, a production process that leads to higher costs, but also to a reduction of CO2 emission, provided that the benefits to society as a whole outweigh the higher costs.
The benefits of sustainability initiatives must be thoroughly investigated and well-substantiated. If the advantages of the agreements between parties evidently counterbalance the disadvantages, for example if the joint market share of the parties involved falls below 30 percent, it is sufficient for the parties to provide a qualitative description of the benefits. Otherwise, parties must support the benefits with figures. As regards environmental damage agreements, parties have to calculate the CO2 reduction their initiative could achieve and how much it would cost the government to achieve a similar CO2 reduction. If the costs the government saves on achieving the CO2 reduction (prevention costs) are higher than the price increase following from the agreements, the agreements will qualify for an exemption from the cartel prohibition, based on the so-called ‘sustainability gain‘.
(iii) Sustainability measures provided for by legislation
If the ACM takes the view that a certain agreement between undertakings with a sustainability objective is not permissible under the competition rules, parties can apply to the legislator. If the measures parties wanted to agree on are imposed by the legislator, the sustainability object will be achieved without anticompetitive agreements between undertakings. Furthermore, parties may have the possibility in the future to apply to the Minister of Economic Affairs and Climate Policy (the Minister) to declare a certain sustainability initiative binding. If the Room for sustainability initiatives Bill is adopted, the Minister can adopt a general administrative measure to this effect, enabling undertakings to cooperate in relation to the relevant sustainability initiative. Th Bill concerns requests in the field of greenhouse gas reduction and sustainable energy production or energy saving. It is however controversial and the legislative process for the adoption of the Bill is currently on hold.
The ACM has stated in its Guidelines that it is open to discussions with undertakings which intend to enter into sustainability agreements. Undertakings which in good faith take account of the Guidelines at the time of entering into sustainability agreements and announce their initiatives publicly, should not fear a fine, even if their agreements turn out to be illegal. In that event, the ACM will discuss with the undertakings involved to see how their agreements can be amended so as to comply with the competition rules.
Conclusion
It is hard to achieve the much needed sustainability initiatives without working together. However, cooperative projects must be set up in a manner permitted by competition law. If there is a risk that the cooperation will lead to a restriction of competition, it is advisable to list and quantify the pros and cons carefully. Under certain circumstances, it may be worth consulting the ACM, to be more certain about the permissibility of a sustainability initiative.
Van Doorne is happy to answer any question you may have on the possibilities for your company in accordance with the Guidelines.
