Green Antitrust: Why Would Restricting Competition Induce Sustainability Efforts?

While “green” antitrust is gaining momentum, its key premise—that restricting competition would incentivize companies to jointly take more sustainability initiatives—finds little or no ground in economics. “Cartel greenwashing” lurks.

Inspired by the urgency of the climate crisis and an apparent government failure to fight it effectively, a green antitrust movement that proposes to exempt corporate collaborative sustainability initiatives from the antitrust laws is growing in Europe. Legal scholars, corporate executives, and lawyers claim that the transition to a more sustainable economy requires market power. Their concern is that firms in competition would not be able to implement more sustainable ways of doing business because of a “first-mover disadvantage.” Allowing joint agreements in restriction of competition and the buildup of market power would break this deadlock, according to their view.

In a recent paper, we warn that the above claim has no basis in economics and green antitrust risks damaging both competition and the environment, however well-intended the movement is. The lobby for it is quite successful, though: Several competition authorities in Europe consider allowing restrictions of competition on the promise of sustainability benefits. The Dutch Authority for Consumers and Markets (ACM) is a forerunner with recently published guidelines on “sustainability agreements.” The Greeks are following suit. Last February, the European Commission organized a large event on “Competition Policy and the Green Deal” to inform the planned revision of its guidelines on horizontal agreements. The topic is hotly debated at the OECD and in the US, thanks to the Business Roundtable statement from 2019 and emerging management literature that calls for collective corporate social responsibility.

Green Cartel Exemptions

Among the ideas being debated, the most concrete are proposals to exempt sustainability agreements that restrict competition from EU cartel law. There is a single precedent, CECED (1999), in which the European Commission allowed washing machine producers to coordinate taking their least energy-efficient models off the market. By antitrust’s consumer welfare standard, an anticompetitive agreement can be exempted from the cartel prohibition if the buyers of the products concerned obtain a compensating share of the benefits of that agreement. In CECED, consumers were believed to be more than compensated for the increased purchasing price of a more energy-efficient washing machines by saving on their electricity bills. However, full compensation of consumers may be hard to deliver when consumers have a low willingness to pay for more sustainably-manufactured products.

The ACM now welcomes green cartels that harm consumers too. Its new guidelines stretch the compensation criterion by taking out-of-market externality benefits to all citizens and future generations into account. Hence, the Dutch antitrust agency single-handedly replaced the established consumer welfare standard with a “citizens’ welfare standard,” and calls on other agencies to do the same. Under the consumer welfare standard, regulators protect the interest and welfare of the buyers of the products concerned when evaluating potential mergers and, in this case, anticompetitive behavior with sustainability benefits. Consumers should at least be indifferent, and preferably better off, before a merger or anticompetitive agreement can be allowed. By shifting to the citizens’ welfare standard, regulators add in benefits of the anticompetitive behavior to other stakeholders as well–which easily are many, such as reduced global warming serving the entire world population.

The adoption of the broader welfare standard implies that a sustainability agreement may be allowed, even though consumers are worse off. According to the ACM, this is justified because “their demand for the products in question essentially creates the problem for which society needs to find a solution.” Essentially, this is a case of an antitrust agency deciding that the polluter-pays-principle applies. By doing so, the agency takes on a role of redistributor of wealth—broadly from the poor, who struggle to afford the more sustainable high-end products, to the rich, who already bought high-end and now enjoy for free the environmental benefits that result from forcing more expensive sustainable consumption onto others. That is a political role, however, that doesn’t seem to suit an independent market regulator. 

Competition on Green

While “green” antitrust is gaining momentum, its key premise, that restricting competition would incentivize companies to jointly take more sustainability initiatives, finds little to no ground in economics. Recent theoretical and empirical research about sustainable consumption, consumers’ environmental concerns, and the impact of competition on corporate social responsibility points to more competition, not less, as the right stimulus for inducing sustainability efforts. Green is a dimension of competition: by differentiating their products as more sustainably manufactured than those of rival sellers, companies can build a “green reputation” and attract consumers, who have an established and growing appreciation for sustainability.

Note that, rather than about innovation, which can be stimulated through cooperation, the current proposals seek to advance the implementation of existing cleaner technologies. These are quite certain business investments in strategic corporate social responsibility. It turns out that for any positive willingness to pay more by consumers for greener products, firms’ incentives to produce more sustainably are always stronger when they compete than when allowed to make sustainability agreements.

Further, when firms truly have no way of monetizing their sustainability efforts—for example, when they are unable to make buyers see the difference, or consumers do not care at all—colluding on green efforts is not a solution either. Joint sustainability agreements simply create no incentive for making the costly investments necessary for transition and every opportunity to avoid them. This is true when firms are fully for-profit, as well as with some intrinsic motivation to promote sustainability. Accordingly, proponents of the policy struggle to come up with convincing examples.

Cartel Greenwashing and Government Shirking

Relaxing general competition laws to accommodate the rare genuine sustainability agreement is not good policy. A first risk is that it will invite abusive cartel greenwashing. Competitors who are allowed to coordinate have an incentive to provide minimal sustainability benefits for the maximum price increase they can get away with. The more accommodating the agency, the less green will be delivered, in fact. By placing more weight on the benefits side, the Dutch proposal for a citizens’ welfare standard actually decreases the compensatory green that the agency can require for a given price increase. Antitrust agencies will have to strictly demand, and constantly monitor, that sufficient compensatory sustainability benefits are delivered. This task requires a staggering amount of information that no agency can be expected to have. It would simply overburden our antitrust agencies, so that greenwashers can slip past them unnoticed.

A second risk is that green antitrust will give those government agencies that should promote sustainability further excuse to shun their responsibility for designing proper regulation. After all, they could now point to coordinated corporate self-regulation to take care of the problem—and even blame the antitrust agencies for being in the way of this supposed solution.

Both scenarios have taken place in the Netherlands, in the two cases that the ACM was so far presented with: National Energy Agreement (2013) and Chicken of Tomorrow (2015). In the first, the collected electricity producers would not deliver on the CO2 emissions reductions claimed, because they refused to take their unused emission rights out of the ETS. In the second case, a  joint agreement among poultry farmers would give factory chicken only slightly more cage space—and only the 30 percent bred for Dutch consumption, not the for-export chicken. Prices would nevertheless go up substantially in each case. The ACM rightly disallowed both meagre initiatives, but was subsequently framed as an obstacle to environmental protection and animal well-being.

Now, by relaxing the compensation requirement, the ACM has given itself more legal leeway to allow the occasional sustainability agreement. So low is the new threshold, however, and therefore easy to meet, that it will be hard for the agency to say “no” to the next scanty proposal that it will be made. The bottom line is that where there is a need for coordinated implementation of more sustainable production, governments should regulate it. Firms with such green initiatives better lobby the designated public authority for effective regulation, rather than the competition authorities for protection from competition.

Where Are the Cases?

Green antitrust is a sympathetic but ineffective and even counterproductive attempt to solve the global climate crisis. It is telling that the advocating agencies can hardly report cases of joint sustainability initiatives that were presented to them. No applications for a cartel exemption are in the public domain either, despite ambitious plans posted by organizations like Fair Wear and Fair Trade.

There certainly is huge potential for welfare improvement by preventing negative externalities, including from exploitative unfair trade practices, and pursuing positive externalities. However, allowing firms market power does not create incentives to tap into that potential. Whenever consumers have at least some willingness to pay for more sustainably-manufactured products, sustainability efforts are larger in competition than in cooperation. That does not mean, of course, that sustainability levels are socially optimal in competition: when there are externalities, they typically are not. This is exactly why there is a clear role for government to assign property rights, levy taxes, grant subsidies, and regulate. That’s Public Economics 101. It is a mistake to think that market power would incentivize firms to internalize externalities.

Growing awareness of the importance of sustainability, the rise of civil society, and an increasing willingness to buy from and invest in companies that take a more socially and environmentally responsible stance are ever stronger motivators for firms to offer more sustainable produced goods and services. These hopeful gathering forces should be given free rein, rather than be suppressed by corporate collaborations that risk collusion. It seems proper, therefore, to regard the corporate cheers for green antitrust policy with some suspicion—also in light of several big cartel cases, like Trucks (2017) and German Car Manufacturers (under investigation), in which part of the firms’ objective seems to have been the elimination of competition in the sustainability dimension. The idea that competition, and therefore competition authorities, would somehow stand in the way of companies contributing to a more sustainable future is simply false.

Unilever is a case in point: the company is one of the most vocal proponents of the need for green cartels. At the European Commission and OECD events, the lead example of the company’s spokesman for why industry-wide anticompetitive agreements are needed is “compressed deodorants.” These are smaller bottles, still containing the same deo dose, that would reduce pollution from packaging and transportation. Unilever shared its IPRs on this invention, but compressed deodorants failed to catch on. According to the company, the unregulatable first-mover disadvantage would be that consumers believe they are getting less spray from the smaller can. Deodorant users would have a negative willingness to pay for compressed delivery, that is, and apparently could not be explained its contribution to the fight against climate change. Well, if this is the kind of corporate joint green initiatives that is supposed to save the planet, if only we suspended cartel laws, maybe we should aim a little higher.