The Pros and Cons of Sustainability Considerations
The theme of the Pros and Cons 2022 conference was the Pros and Cons of Sustainability Considerations. Researchers and experts shared their perspectives on the topic.
Contributors: Julian Nowag, Nicole Kar, Nadine Watson, Max Engels, Karl Lundvall, Maarten Pieter Schinkel, Edith Loozen, Martijn Snoep, Roman Inderst, Dirk Middelschulte och Margarida Matos Rosa.
Topics and summary of the conference
Welcome address by Rikard Jermsten, Director-General, Swedish Competition Authority
Ladies and gentlemen,
I am delighted to welcome you all to the twentieth edition of the Pros and Cons conference, organised by the Swedish Competition Authority!
It is very encouraging that we are able to hold this anniversary as an in-person event, here in Stockholm, with the pandemic well behind us. Just like last year, we are broadcasting this year’s conference as a live stream, which we intend to continue doing in the future.
Since its launch in 2002, the annual Pros and Cons conference has been providing a platform for academics and practitioners from all over the world to meet and exchange ideas on competition policy and enforcement.
Every year, we seek to find a timely topic and a good mix of researchers and practitioners with extensive experience in the chosen area.
This year, we have more speakers than ever before – eleven in total – including three Director-Generals of competition authorities (not counting myself!).
To encourage even more interaction and debate, we are moving away from the traditional presenter – discussant format towards a set-up more closely resembling a panel, which we think is especially appropriate to cover the theme of this year’s conference: the Pros and Cons of Sustainability Considerations.
The choice of this theme was not hard – with the possible exception of the digital field, the theme has been alone in the centre of debate for the last year. And important new developments are likely to emerge in the near future.
Among enforcers, many – but not all – share the view that competition law enforcement should deepen and improve considerations of sustainability, especially those that relate to the climate crisis. How this can be done in practice is an area where views differ more.
Most would agree that enforcement of competition rules cannot be allowed to obstruct much-needed action to battle the climate crisis, nor would they deny that the private sector has a key role to play.
However, regarding the need for close collaborations between competitors to achieve sustainability benefits – as well as how these should be assessed – opinions differ.
In this year’s conference, we cover four perspectives.
The first relates to competition policy: Is there a ‘sustainability gap’ between the objectives of competition policy and the enforcement of its rules? Is the current approach to assessing cooperation between competing firms still appropriate? My colleague, Olivier Guersant, Director-General at DG COMP, will present the latest from his desk, including the recent draft Horizontal Guidelines, which include an entirely new chapter on sustainability.
Next, we will listen to the industry. What is the business case for green investments and what is the appropriate role for competition policy? Collaborative initiatives are often motivated by concern for the environment, but how do firms reconcile such concerns with the profit motive? Here, we will meet Dirk Middelshulte, Global General Counsel for Competition at Unilever, Director-General Margarida Matos Rosa and Professor Maarten Pieter Schinkel.
Third, we will learn about the key challenges for competition agencies to better understand and incorporate sustainability considerations in their daily enforcement work. Director-General Martijn Snoep will give us some insights into his views. They will be followed by reflections from Research Associate Edith Loozen and Nicole Kar, Global Practice Head in the Antitrust and Foreign Investment Group at Linklaters.
Fourth and last, we will take a more detailed look into the methodological toolbox of antitrust and explore whether it is capable of correctly assessing sustainability harms and benefits. Professor Roman Inderst will outline the strengths and weaknesses of the approaches currently available. His remarks will be followed by input from Nadine Watson, Senior Vice President at Compass Lexecon. Deputy Chief Economist Max Engels at Bundeskartelamt will then provide some real-world examples drawn from his enforcement experience.
And ultimately: what is the value of all this advanced economic evidence, if … you cannot convince a judge?
Therefore, Simon Holmes, himself a judge, will share his views on economic evidence on sustainability harms and benefits and the standard of proof: Will it survive in court?
I can’t wait to get started, can you? And, to guide us through these intriguing and complex issues, I now invite Professor Julian Nowag, who has kindly accepted our invitation to moderate this conference, to the podium.
Is there a sustainability gap in the competition policy toolbox?
Olivier Guersent, Director General, European Commission, Directorate-General for Competition
Olivier Guersent, Director-General of the Directorate General for Competition of the European Commission, held the first presentation and highlighted the addition of a chapter on sustainability to the draft Horizontal Guidelines of the European Commission.
Mr Guersent stated that sustainability challenges are much broader than competition and that other instruments, mainly regulatory ones, are more suited to boosting sustainability initiatives in the industry. Nevertheless, multiple aspects have led to the inclusion of the new sustainability chapter in the draft revised Horizontal Guidelines. The first aspect relates to innovation. Innovation will be central in meeting the new challenges related to the global climate crisis, and also ties in with issues in the field of killer acquisitions. The second aspect is consumer preferences, which are taken into account in regard to market constraints. Consumer preferences are likely to shape the analytical framework. The third aspect is related to efficiencies. Some stakeholders require that a longer timeline is considered when looking at whether conditions for efficiencies are met. Balancing efficiencies over a longer period of time with possible harm to consumers in a short-term perspective is difficult. The current Merger Regulations does not allow for such balancing when quantifying effects. Mr Guersent explained that a new tool might be needed, as it is complicated to foresee the effects in new fields of alterations or steering of an existing tool, in this case competition law.
On the other hand, it is important to recognise that some green efficiencies have already been taken into account in, e.g., merger cases related to waste reduction, increased water quality or out-of-market efficiencies. These have been dealt with in the same manner as other efficiencies, meaning that they have to be both merger-specific and passed on to consumers. However, the issue is slightly different when an efficiency benefits all of society, not just the consumers in the relevant market that could potentially be harmed by a merger. An example of such a benefit is reduced emissions. Furthermore, some caution should be exercised here. According to Mr Guersent, balancing qualitative benefits against quantitative harm will require some fine adjustments. The central question is if the compensation provided for the harm is appropriate. Whether or not compensation must be full is a matter of debate.
Mr Guersent further explained the additions made to the current draft revised Horizontal Guidelines and Horizontal Block Exemption Regulation. The main objective of the work has been to give more guidance to firms seeking to cooperate in the field of sustainability. While some individual guidance may be needed in new or complicated situations, self-assessment by undertakings of their own behaviour is the rule. Mr Guersent emphasised that most agreements that are positive for the environment are not restrictive for competition. Innovation is the defining criterion, but is increasingly costly – and the incentive for firms to delay roll-out may be large. Cartels might arise in the form of agreement to delay a roll-out.
The presentation ended with Mr Guersent once more emphasising that the issues of sustainability in conjunction with competition are new, which calls for caution. The draft guidelines have been created without decisional practice and may be imperfect. The guidelines and potential guidance given in this area should be seen as complementary. Though competition practitioners are not environmental experts, they are able to adapt.
What is the business case for green? What is the appropriate role for competition policy?
Margarida Matos Rosa, President of the Portuguese Competition Authority
Dirk Middelschulte, Global General Counsel Competition, Unilever
Maarten Pieter Schinkel, Professor of Economics at the University of Amsterdam
During the second panel, the business case for green and the role of competition policy were discussed from the perspectives of competition authorities, private business and academia.
Margarida Matos Rosa, President of the Portuguese Competition Authority, gave the first presentation. Ms Matos Rosa stated that sustainability has become an important focus for policymakers, and that this is the case also in the competition field. Currently, competition law can be seen as a barrier to sustainability from a business perspective and limited cooperation might boost more sustainable business practices. However, the appropriate balance is yet to be found.
To increase legal certainty, the new draft guidelines from the European Commission are a welcome addition, to ensure that neither firms nor national competition authorities become overburdened in dealing with these questions. In addition to guidelines, individual assessments may also be needed and decisions need to be streamlined at a European level, as sustainability agreements are far from straightforward.
Ms Matos Rosa stated that she believes that both cooperation and competition can be drivers of sustainability. She emphasis that more consumers are willing to pay for green nowadays, for example paying more for energy-efficient appliances. Facilitation of disruptive and innovative firms is important – and when innovation is important, competition is likely to be an important catalyst and thereby a driver of more sustainable business practices. However, it is equally important to recognise that not all consumers value sustainable products. Among those who do not, there is no willingness to pay and some profit-maximising firms will ignore greener paths. Cooperation may have a role in such markets.
Ms Matos Rosa highlighted that, in this new policy setting, both competition authorities and researchers need to document developments. Measurements of sustainability can be narrow, such as local ecosystems or animal welfare, or broad, such as emissions. It is as yet unclear how out-of-market efficiencies or the preferences of future generations should be factored in. All in all, this is a complex new field and Ms Matos Rosa emphasised that it is important to proceed on a case-by-case basis, with a robust economic analysis, to create legal certainty. Analysis will be important, as cartels cannot be allowed to hide behind green agreements or sustainability claims – and only competition authorities are responsible for antitrust.
The second presentation was given by Dirk Middelschulte, Global General Counsel for Competition at Unilever. Mr Middelschulte stated that there is a strong business case for sustainability through competition policy, as consumers appreciate green businesses. However, there are some important behavioural aspects to consider, such as stated versus revealed preferences. Consumers often have strong green preferences at home, but may act very differently when doing the actual shopping, where price is shown to matter more. Thus, sustainability is a complex business decision, as firms do not look only at profit and loss. A reputation of being sustainable is important, especially in the long run. However, there are instances where the costs of disruptive innovation are too high, and in instances with first mover disadvantages, cooperation is a welcome feature.
Mr Middelschulte was optimistic regarding the draft Horizontal Guidelines and described them as a welcome addition to the legal landscape. However, he identified a need for clarification of the treatment of mandatory standards and compensation requirements for collective benefits, and stated that market externalities and future consumer preferences are not yet being considered. Mr Middelschulte presented a few examples where cooperation could be beneficial, such as airlines agreeing to accelerate the migration to more eco-efficient fuels, construction undertakings agreeing to phase out conventional steel before a set deadline, or agricultural undertakings agreeing to use bovine feed additives to reduce methane emissions. In the midst of the current climate crisis, such agreements could have a deep and meaningful impact.
The final presentation in this panel was given by Maarten Pieter Schinkel, Professor of Economics at the University of Amsterdam. Prof. Schinkel stated that there is a strong business case for green – but as a parameter of competition, not in cooperation with others. The key premise behind green antitrust is that competition and sustainability may be in conflict. For example, when there are externalities, cost minimising production is often associated with more pollution. However, the idea behind the new Horizontal Guidelines is that restrictions of competition will stimulate sustainability initiatives, either through exemptions for horizontal agreements under Article 101(3) TFEU, through green merger efficiencies or through green abuse of dominance. And for that, Prof. Schinkel finds little support in the literature.
Prof. Schinkel has researched whether or not undertakings should be expected to take more corporate social responsibility in cooperation compared with in competition. In his model, there is a cost associated with making production more sustainable, consumers have some willingness to pay for sustainability, and undertakings are allowed to collude on the sustainability parameter, but not on price or quantity. The key conclusion is that if firms compete on sustainability, they invest in sustainability because this is profitable. If instead they are allowed to coordinate their sustainability efforts, this will eliminate that incentive and they will – as a group – invest less in sustainability than as individuals in competition.
Prof. Schinkel therefore warned that green antitrust has the risk of being counter-productive. Firms have incentives to choose a minimum investment in sustainability for the maximum possible price increase. If firms, for example, can agree to phasing out diesel by a certain year in a certain industry, it may well be that they would have done so earlier in competition with each other. Prof. Schinkel stated that government regulation, taxes or subsidies are therefore better tools to boost sustainability, yet may be crowded out by inferior collaborative self-regulation. Competition authorities should therefore stay tough and not compromise on the principle of full compensation, as it will be difficult to monitor green collaborations and avoid abuse for cartels greenwashing.
New emphasis on green in the daily enforcement work – what are the main challenges?
Martijn Snoep, Chairman of the Netherlands Authority for Consumers & Markets
Edith Loozen, Research Associate at the University of Amsterdam
Nicole Kar, Lawyer, Global Practice Head, Antitrust & Foreign Investment Group, Linklaters LLP
Three speakers were asked to talk about the subject of sustainability in daily competition enforcement work. Their views are summarised below. The conversation touched upon the topics of first mover disadvantages, full compensation and Article 101(3), among other things.
Martijn Snoep started his presentation with the proclamation that the negative externalities that create climate change are the biggest market failure of our time. To correct this market failure, prices must increase and consumer surpluses fall. The issue at hand is that the average consumer is unwilling to pay the full cost of their consumption – the negative externality is not included in today’s prices. There is a huge difference between the stated preference for consumption of environmentally friendly products and revealed preferences: consumers continue to buy the cheapest option.
Mr Snoep stated that a regulatory failure is adding to the market failure. When markets fail, it is up to governments to intervene and correct this. Such interventions will increase consumer prices substantially. The issue with this is that the consumers with low willingness to pay are also the citizens who vote. The people who will suffer the effects of climate change are underrepresented in these processes and the short-sighted political process results in a situation where governments are unlikely to regulate and the true costs of our consumption are not paid.
Up to now, Mr Snoep explained, we have been sceptical of undertakings’ incentives to engage in more sustainable production. However, the pressures from their future employees and their shareholders’ interests create a good case for accepting their interest in a green transformation. There is also a first mover disadvantage which needs to be mitigated through cooperation in greener production.
Mr Snoep described the current situation as one of market failure, government failure and undertakings being unable to act. What is then the role of competition authorities? We need to enable for undertakings to cooperate for more sustainability. According to Mr Snoep, the Commission’s draft is a huge step in the right direction. However, it is unclear in its guidance on necessary impactful cooperation. The Commission’s assessment of if costumers are getting their fair share of the benefits from such cooperation will be key to whether or not it will work. Further, Mr Snoep stated that the Commission’s use of full compensation needs to be clarified. Why a consumer should be fully compensated for the harm he or she would have been caused is unclear. Mr Snoep’s conclusion was that agreements aimed at reducing greenhouse gas emissions should be exempted from competition laws.
Edith Loozen was the second speaker and came to a different conclusion than Mr Snoep. Antitrust should not allow so-called green cartels. There are two market failures at hand: the negative externalities and market power in terms of coercion. The main issue is democratic legitimacy and the solution, according to Ms Loozen, is to restart the political debate and push for better regulation. Antitrust based on collective consumer welfare analysis implies political decision-making and limits the legitimate choices of consumers within the market place. Instead, it takes account of the opinions of consumers that have not chosen to take part in the market. A lot of consumers do value green, meaning that undertakings compete in this dimension. Phasing this out would undermine such competition. It would be necessary to filter out any fake first mover disadvantage. However, Ms Loozen revealed that this is impossible, since both real and fake first mover disadvantages require coercion to be corrected. Phasing-out agreements are textbook examples of fake first mover advantages. However, these are accepted by the Commission.
Ms Loozen next described competition as a means – not an end – stating that it is necessary to protect the process which allows for effective outcomes, rather than forcing consumers into choices they themselves would not make. Competition law ultimately protects the competitive process rather than potential efficiency gains. The residual competition condition in Article 101(3b) does not differentiate between different dimensions of competition, so excluding environmental benefits is a mistake. The article protects all dimensions of competition, except those that are regulated by public norms. As such, the Commission’s draft should not include exemptions for sustainable horizontal agreements. Ms Loozen’s conclusion was that green antitrust is a no-go, since it would be anti-democratic and limit competition. Instead, the residual competition condition should be reset.
The last speaker of the panel was Nicole Kar. Ms Kar stated that there are often no commercial incentives for undertakings to improve the sustainability of their products. Since there is no profit driver, the undertakings have no appetite for risk. The issue is that consumption of green is seen as a luxury – especially now, when there is a return of inflation. This might be the breaking point, where we either go back to cheaper and dirtier or green innovation is spurred. The first point Ms Kar made was the value of signalling. Undertakings respond well to signals and this should not be underestimated. In none of the 45 most recent cases where undertakings have argued based on Article 101(3) has this been accepted. The competition agencies need to start taking efficiency defences seriously, Ms Kar said.
Ms Kar further suggested that this would send a signal and that it is beneficial that the Commission gives informal advice to undertakings. However, this must be open and transparent. An undertaking should also be exempted from fines if it brings an issue to the Commission and the latter does not object to the matter at hand. The question that is often asked by undertakings in discussions with the Commission is: Why would we knock on the door of an enforcer?
Ms Kar also described how undertakings have started to lobby governments, asking things like why consumers who use single-use plastics should be compensated. Undertakings should be allowed to phase out single-use plastics. However, this is not allowed in the guidelines. Some undertakings that would like to invest in chemical recycling are not allowed to cooperate with other undertakings to start such an enterprise. Another issue described is that full compensation for consumers that engage in consumption that has negative impacts on the environment should not be necessary.
Lastly, Ms Kar underlined that it would be necessary for undertakings to be honest regarding why they are engaging in horizontal cooperation and what parameters affect their behaviour.
Quantification and balancing of sustainability harms and benefits in competition law – can it meet the economic and legal standard of proof?
Roman Inderst, Professor of Economics and Finance at the Goethe University Frankfurt
Nadine Watson, Senior Vice President, Compass Lexecon
Max Engels, Deputy Chief Economist, Bundeskartellamt
Simon Holmes, Judge, UK Competition Appeal Tribunal, Visiting Professor, Oxford University
Roman Inderst introduced his presentation, which had the theme The possible incorporation of sustainability benefits raises many questions: Why? Which? How? with the focus in this case being How. The framework for the speech was the new Horizontal Guidelines from the European Commission and a 2021 paper written by Prof. Inderst and Prof. Stefan Thomas.
Prof. Inderst used a hypothetical case as an example, where a new type of car fuel would be introduced by multiple undertakings jointly, in order to phase out an older type. This would have no direct use value, but would mean less harmful emissions.
The first test to be used in an analysis of this would be a standard type of willingness-to-pay (WTP). For this test to be conducted properly, surveys or joint analysis could be used. Prof. Inderst stressed the importance of studying changes in the relevant context, in order to capture sustainability preferences, and drew attention to the Dutch case of Chicken for Tomorrow. In doing this, sustainability preferences can be introduced. However, Prof. Inderst noted that the focus must remain on a ‘consumer perspective’, not a ‘citizen perspective’.
The second test is a collective consumer welfare analysis used to capture within-market externalities and to use scenario changes rather than ceteris paribus questions. Unlike in the first test, more indirect methods can be used, such as hedonic pricing or measuring consumers’ averting or defensive expenditures. Prof. Inderst stressed that any such analysis must be performed with care, and raised potential issues – one being that change in the consumption of others is not paid for by a consumer. Other issues related to defining the legitimacy of such preferences.
Prof. Inderst concluded that a good starting point would be relying on a relatively narrow, well-defined and measurable consumer welfare criterion for efficiency analysis (Article 101(3)). For a collective consumer welfare analysis, an indispensability criterion could be a way forward. An alternative would be to rely on the ancillary restraints doctrine.
Nadine Watson focused her presentation on passive use value and how utility could be increased, including for sustainable products. Ms Watson mentioned three potential paths to utility. The first is when some individuals consume X and leave behind a behavioural trail, from which the value of a sustainability improvement can be estimated. The second is those who do not consume X, but value it through its impact on another market good Y. Third, some people may benefit from the value of X because of its impact on the planet.
Ms Watson stressed that passive use values are at risk of not being properly assessed when indirect measurement techniques which rely on observed market behaviour are used. Two key errors should be considered in particular. The first is the failure to fully capture the value of sustainability and the second is the failure to identify the relevant population of valuers. Ms Watson underlined that it is necessary to use the total value concept for all relevant valuers.
Lastly, Ms Watson discussed the Dutch case Chicken of Tomorrow, in which the Netherlands Authority for Consumers & Markets analysed sustainability arrangements. Ms Watson commented that this only partially captured passive use: only among consumers and only in relation to animal welfare. However, the effects of emissions, for instance, were not part of the survey, but could possibly have determined the outcome. In commenting on the European Commission’s horizontal guidelines, Ms Watson delivered criticism, stating that the definition of passive use value was limited and could not capture the full picture.
Max Engels described the Bundeskartellamt’s recent experience with sustainability considerations and mentioned several cases related to animal welfare in the retail sector. The agreements typically concerned raising compensation within the supply chain for certain products in order to establish new sustainable standards in the industry. Sustainability arguments that were accepted by the Bundeskartellamt did not involve a detailed quantification of the countervailing effects. Arguments that were rejected failed to qualify as giving rise to sustainability effects in the first place.
Mr Engels highlighted one successful initiative, the so-called Initiative Tierwohl (ITW), which was started in 2014 and is based on an agreement or cooperation between the agricultural, meat production and food retail sectors. The ITW is financed by a number of retailers and larger undertakings. Participating livestock owners pay a premium for improving the conditions in which animals are kept.
Mr Engels presented some thoughts on challenges when assessing sustainability considerations. One is the lack of case practice – there is, however, a rich literature in the field. Further, Mr Engels stressed the importance of starting with a clear and measurable indicator. The German waste compliance scheme market served as an example, showing how recycling quotas can be used to measure sustainability effects.
Simon Holmes held the final presentation of the day, focusing on two points: the burden of proof and the standard of proof.
Mr Holmes outlined the legal burden of proof and stressed that it falls on the private party only under the circumstance when an agreement has been found to be anticompetitive.
Mr Holmes further elaborated on the standard of proof, particularly on what the party that has the burden of proof must actually prove. While reserving himself from speaking for every national jurisdiction, his conclusion was that presenting evidence before a court is perhaps best summarised as balancing probabilities. The standard of proof in competition cases is not ‘beyond all reasonable doubt’, which under English law is reserved for criminal procedures. Mr Holmes specifically mentioned the subject of economic evidence in competition cases and described some challenges that could arise. While economic evidence is indeed important to present before a court in competition cases, it is only one relevant factor to consider, as a part of a wider picture that must be tangible and context-related. Concerning statistics and probable scenarios, the crucial elements must be connected to the facts in the case at hand.
Mr Holmes further stressed the importance of justice actually being delivered to a party, and stated that it is not necessary to quantify everything in competition policy and thus make achieving justice burdensome.
In conclusion, a court must undertake a value judgement in which both quantitative evidence and qualitative evidence are viewed and tested.
Mr Holmes answered a question about quantification, stating that all evidence must eventually be taken into account, rather than a party being denied justice. This has been supported in many cases and has a basis in the Damages Directive.
Prof. Inderst answered a question about the ancillary restraints doctrine and mentioned that the idea is to resolve the issue with democratic legitimacy. Prof. Inderst then elaborated on the concept of sustainability corridors. In Germany, legislation has been passed to impose an obligation on undertakings to review the sustainability of their suppliers.
Ms Watson answered a question about the WTP methodology and concluded that there are many ways to establish the reliability of this methodology, depending on the setting. As an example, this could be done through the design of the survey (which can in fact even be agreed upon together with enforcement authorities).
Mr Holmes answered a question about efficiency arguments and concluded that parties are hesitant to come up with them. Mr Holmes stated that he would like to see an obligation for the European Commission to explicitly perform substantive assessments of sustainability considerations, for instance in mergers.