The European Union (EU) has sounded the alarm: “climate change and environmental degradation are an existential threat to Europe and the world”. To mitigate this threat, the EU recently presented the ‘European Green Deal’ (EGD), which aims to achieve climate neutrality by 2050. While competition policy may not be the most obvious instrument to achieve this aim, it does in the authors’ view have a role to play. This article seeks to offer some perspective on how the rules pertaining to Article 101(3) TFEU and the EU Merger Regulation (EUMR) could be applied differently and/or amended to effectively accommodate environmental benefits.
ARTICLE 101(3) TFEU: A PROVISION THAT RADIATES VERDANCY
Article 101(1), which catches restrictive practices, is set aside by Article 101(3) where such restrictive practices contribute to “improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit’, and neither “impose[s] on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives’ nor ‘afford[s] such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question”.
A strict interpretation of Article 101(3) suggests that the test enshrined therein is exclusively economic in nature. However, the European Commission (EC) has previously stated that the terms of Article 101(3) are sufficiently broad to include other policy objectives, and more specifically environmental protection objectives. The approach taken by the EC in this regard has, however, been relatively patchy, with much greater deference being given thereto under the now defunct Regulation 17 compared to under the current rules in force.
ARTICLE 101(3) UNDER REGULATION 17: AN ERA OF PERMISSIVENESS?
Regulation 17 endowed the EC with sole power to declare (now) Article 101(1) inapplicable to restrictive practices pursuant to Article 101(3). Under this system, the EC was amenable to accepting environmental benefits as a justification for the application of Article 101(3). A good example is Conseil Européen de la Construction d’Appareils Domestiques (CECED) (1999). CECED involved an agreement amongst domestic appliance manufacturers to refrain from manufacturing and/or importing washing machines that did not meet certain energy efficiency criteria. The agreement was found to infringe Article 101(1). When undertaking its cost/benefit analysis under Article 101(3), however, the EC found that “the future operation of the total of installed machines providing the same service with less indirect pollution is more economically efficient than without the agreement”. Crucially, the EC appears to have put the reduction of pollution on a par with economic efficiency. Furthermore, the EC took into account the “collective economic benefits” that CECED would engender to conclude that it would likely contribute significantly to technical and economic progress, whilst allowing consumers a fair share of the benefits.
ARTICLE 101(3) UNDER REGULATION 1/2003: AN ERA OF UNPERMISSIVENESS
Regulation 1/2003 introduced the direct application of Article 101(3), whereby competition authorities and Member State courts were given the power to also apply Article 101(3). Restrictive practices that satisfy the conditions of Article 101(3) are legally valid and enforceable ab initio without the need for an administrative decision to that effect. As a corollary, the onus now rests with companies to undertake a risk-based analysis of whether a restrictive practice is compliant with EU competition law. The EC issued a wealth of instruments to enable companies to perform such ‘(self-)assessments’. Such assessments are, however, to be undertaken within ‘a legal framework for the economic assessment of restrictive practices’ to the exclusion of factors extraneous to competition. This move to a purely economics-based approach under Article 101(3) was in the authors’ view controversial in light of EC and EU Court precedent in particular.
While guidance was published to assist companies with the task of performing an economic assessment of whether Article 101(3) is applicable, there is currently very little scope for the successful invocation of Article 101(3) on the basis of environmental protection. The Guidelines on Article 101(3) allude to the fact that ‘goals pursued by other Treaty provisions can be taken into account to the extent that they can be subsumed under the four conditions of Article [101](3)’. This has left little room for climate change abatement considerations to be taken into account:
First, EC guidance on the application of Article 101(3) is exclusively focused on the countervailing economic benefits that a restrictive practice leads to for consumers. As such, the Guidelines on Article 101(3) accentuate economic efficiencies over any other type of countervailing benefit, including environmental benefits.
Second, according to the EC, the economic benefits engendered by a restrictive practice in one market must, generally speaking, outweigh its restrictive effects in that same market (“in-market efficiencies”). This approach sits uneasily with the dicta of the EU Courts. For example, in GSK v. Commission (2006), the General Court held that “[i]t is […] for the Commission, in the first place, to examine whether [ … ] the agreement in question [ … ] enable[s] appreciable objective advantages to be obtained, it being understood that these advantages may arise not only on the relevant market but also on other markets”.
Third, the Guidelines on Article 101(3) recognize that there may be cases where a certain period of time needs to elapse before any efficiencies emerge. However, the EC also states that “[ … ] the greater the time lag, the greater must be the efficiencies to compensate also for the loss to consumers during the period preceding the pass-on”. Therefore, even if climate change abatement were recognized as a countervailing factor under Article 101(3), the relative immediacy with which efficiencies must arise automatically rules out its successful invocation.
THE EUMR: EFFICIENCIES DO NOT, BUT COULD, RADIATE VERDANCY
The substantive test embedded in the EUMR is whether a concentration would significantly impede effective competition, in particular as a result of the creation or strengthening of a dominant position (SIEC).
In making its appraisal of whether there is an SIEC, the EC must take account of “[ … ] the development of technical and economic progress provided that it is to consumers’ advantage and does not form an obstacle to competition” (Article 2(1) EUMR). This provision forms the legal basis for the “efficiency defence”.
Invocation of the efficiency defence, even on economic grounds, has been largely unsuccessful, however. A closer look at some of the elements of the defence demonstrates that the ability to invoke countervailing environmental benefits, such as a lessening of carbon emissions, is inconceivable based on current practice. This is inter alia because efficiencies must in principle benefit consumers in those relevant markets where it is otherwise likely that competition concerns would occur. The approach towards the efficiencies defence, and the manner in which it is applied, is therefore arguably too rigid to achieve climate neutrality by 2050.
SECURING CLIMATE CHANGE ABATEMENT VIA THE EU COMPETITION RULES: A FEW SUGGESTIONS
Article 101(3)
The EC’s current approach to Article 101(3) does not as things stand permit the invocation of genuine out-of-market environmental benefits. Granted, the EC’s current draft Horizontal Cooperation Guidelines recognise so-called “collective [sustainability] benefits”: “where consumers in the relevant market substantially overlap with, or are part of the beneficiaries outside the relevant market, the collective benefits to the consumers in the relevant market occurring outside that market can be taken into account if they are significant enough to compensate consumers in the relevant market for the harm suffered”. Moreover, according to the draft guidance, for collective sustainability benefits to be taken into account, parties should be able to: (a) describe clearly the claimed benefits and provide evidence that they have already occurred or are likely to occur, (b) define clearly the beneficiaries, (c) demonstrate that the consumers in the relevant market substantially overlap with the beneficiaries that are part of them and (d) demonstrate that part of the collective benefits occurring or likely to occur outside the relevant market accrue to the consumers of the product in the relevant market.
It is hoped, however, that the EC does not interpret this draft guidance too strictly when it enters into force on 1 January 2023 if it wishes to contribute to achieving the climate neutrality objective by 2050.
The EUMR
Many mergers bringing about environmental benefits do not pose competition problems. However, the parties to a merger would struggle to run a successful efficiencies defence based on environmental benefits because efficiencies must “in principle, benefit consumers in those relevant markets where it is otherwise likely that competition concerns would occur”. The reference to “in principle” means that the EC could, if it so desired, take out-of-market efficiencies into account in its assessment of an efficiency defence. Further, the EC could draw inspiration from the approach proposed by the Dutch competition authority in relation to Article 101(3), i.e., there should be no need to quantify the efficiencies where the harm to competition is, based on a rough estimate, obviously smaller than the benefits of the merger.
In summary, the EC is urged to ensure that EU competition law adequately takes into account the protection of the environment. Not doing so risks failing to avert the existential threat posed by climate change and environmental degradation.
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