EU Green Deal, sustainability and competition law: European Commission’s policy reforms take shape

Europe

In December 2019, the European Commission presented the “European Green Deal”, which commits to climate neutrality by 2050. EU Member States promised to reduce emissions by at least 55% by 2030, compared to 1990 levels, and turn the EU into the first climate neutral continent by 2050. In order to achieve these ambitious goals, the Commission announced deployment in all policy areas, but in the area of competition policy, it seemed reluctant in the beginning.  While the interplay of sustainability and competition law has been discussed intensively at member state level for several years, the issue seemed of no particular importance for EU competition watchdog Competition Directorate–General (DG Competition).

This changed in September 2020 when Executive Vice President Margrethe Vestager, responsible for the competition portfolio at the Commission, acknowledged that to reach the goals of the Green Deal everyone (private and public, including competition enforcers) must play their part, and launched a debate on how competition rules and sustainability policies can work together. In response to a call for contributions, the Commission received as many as 200 submissions from a broad range of stakeholders. On 4 February 2021, Vestager hosted a high-profile conference to debate how competition rules and sustainability policies can work together. Since then, stakeholders have been waiting impatiently to see how the Commission would react to the input it collected and what concrete policy measures – if any – it would take.

Now the Commission's statement is out. On 10 September, DG Competition published a Competition Policy Brief summarising the key points taken from the stakeholder debate and providing considerations and examples for concrete policy reform. Competition Policy Briefs are papers by staff of DG Competition about policy issues and key cases. They do not reflect official positions of the Commission. This Policy Brief, however, was authored by a team of 12 DG Competition officials involved in the reform process.

While the Competition Policy Brief stresses that well-functioning and fair markets “are part and parcel” of a comprehensive response to the transformative challenges and competition policy supports, and that they complement European solutions “at various levels” rather than driving it, the policy reform measures envisaged by the Commission are an important step towards a stronger focus on sustainability considerations in EU competition policy. It is safe to say that the Brief will have a significant impact on companies pursuing sustainability projects and green initiatives in the EU. 

The Brief concerns all three areas of competition policy: State aid, antitrust and merger control. 

1. State Aid

  • What are the key points the Commission took from its stakeholder consultation vis-à-vis State aid?

Many stakeholders took the view that State aid will need to play a key role in supporting Green Deal objectives. In summary, stakeholders highlighted the need to limit access to public funding for fossil fuels. They also proposed that the environmental impact should be assessed systematically in State aid procedures. Additionally, stakeholders called for simplified rules that provide legal certainty and transparency of State aid initiatives that are potentially harmful to the environment and stressed the importance of support for R&D&I projects.

  • Which concrete policy reforms will the Commission consider or adopt regarding State aid?

The State aid framework will play a key role in achieving Green Deal objectives. The European Commission reveals that changes will be made in particular to: (i) the Guidelines on State aid for environmental protection and energy; (ii) the General Block Exemption Regulation; (iii) State aid rules on Important Projects of Common European interest; and (iv) other rules will be revised and equipped with the necessary tools to achieve Green Deal objectives.

i. Climate, Energy and Environmental State Aid Guidelines (CEEAG)

The Commission has already started the process of overhauling the Energy and Environmental State Aid Guidelines, which will be replaced by the Climate, Energy and Environmental State Aid Guidelines (CEEAG). Key aspects of the revised guidelines include:

  • Broader scope: New areas such as industry, clean mobility, circularity, and biodiversity and all technologies that can deliver the Green Deal (including support for renewable energies) will be covered.
  • Higher aid intensities: Coverage of up to 100% of the funding gap.
  • New instruments: Such instruments include operating aid in new areas and “Carbon Contracts for Difference”.
  • Coherence: The EU aims at phasing out fossil fuels and will discourage aid to projects involving the most polluting fossil fuels.
  • Environmental protection costs: Mandatory calculation for most categories of aid.
  • Stricter conditions for non-green infrastructure projects: Support for non-green infrastructure projects will have to be notified and can only be allowed when they contribute to achieving the EU's 2030 climate target and 2050 climate neutrality target and do not lead to stranded assets and demand for polluting products.

You will find more detailed information on the CEEAG here: What to expect from the European Commission’s revised Climate, Energy and Environmental Aid Guidelines 2022? (cms-lawnow.com)

Next steps: The adoption for the CEEAG is anticipated at the end of 2021.

 

ii. General Block Exemption Regulation (GBER)

A partial revision of the GBER, which allows Member States to grant aid under certain conditions without prior notification, was adopted on 23 July 2021. The Commission extended the scope to new areas and revised the rules to support the transition to a green and digital economy. This includes:

  • Simplified rules for aid for energy efficiency measures in buildings.
  • New block exemption for aid for publicly accessible recharging or refueling infrastructure for the supply of electricity and hydrogen to zero and low emission road vehicles for transport purposes.
  • Revised rules and new block exemptions to facilitate the digital transition.

You will find more information about the GBER revision here: New state aid rules for aid combined with EU support and for the green and digital transition (cms-lawnow.com)

Next steps: The partially revised GBER was adopted on 23 July 2021.

 

iii. Important Projects of Common European interest (IPCEI)

The rules on aid on Important Projects of Common European interests govern cross-border projects that require joint investments by public authorities and industries from several EU Member States. Member States, for example, recently made use of this framework to get the Commission's approval on two IPCEIs: in which Member States planned to provide cross member state support for longer lasting, shorter charging lithium-ion batteries and one to support hydrogen value chains.

The revised IPCEI rules will support the development of new technologies and production processes that contribute to the Green Deal objectives. This will likely include a wider scope of application for participants (such as SMEs) and a link to the "Do No Significant Harm" principle to the nature of investments. Innovation will be a significant element in the revised framework.

Next steps: The adoption of the new IPCEI Communication is planned for the second half of 2021.

 

iv. Other state aid policy measures

The Commission expects that the revised Regional Aid Guidelines, which were adopted on 19 April 2021 and will enter into force January 2022, will also play a role in pursuing the Green Deal objectives and will ensure a just transition taking into account different needs and economic realities in EU Member States by enabling additional support for less developed areas and the possibility of combining regional aid and aid under the CCEG. For further information see The European Commission adopts its revised Regional State Aid Guidelines (cms-lawnow.com)

A revision is also planned for the rules on agriculture, forestry and fisheries and aquaculture. The entry into force is envisaged for 2023.

Finally, the Commission pointed out that other EU State aid rules will also ensure that all relevant rules are in line with the "Do No Harm" principle.

2. Antitrust

  • What are the key points the Commission took from its stakeholder consultation regarding antitrust?

The most pressing issue stakeholders raised is the need for more clarity on how and whether sustainability objectives can be considered in antitrust assessments of co-operations, such as agreements to phase out unsustainable products or modes of production, joint purchasing of sustainable input, joint R&D&I or joint standard setting for green products and technologies. Stakeholders suggested the introduction of special block exemption regulations, specific guidelines, adoption of an open-door policy at the Commission and the introduction of “regulatory sandboxes” allowing market players to test new forms of cooperation under regulatory supervision. In terms of substance, a key element of the discussion was the question of how to accommodate “out-of-markets” benefits, such as a positive impact on carbon reduction.

  • Which concrete policy reforms will the Commission consider or take regarding antitrust?

(i) The Commission announces in the Policy Brief that it will provide detailed guidance on sustainability co-operations and green initiatives in the guidelines on horizontal cooperation and vertical agreements, which are both currently under revision. This guidance will address key questions on the compatibility of such co-operations and initiatives with competition law.

(ii) In parallel, the Commission is ready to consider requests for individual guidance letters in relation to sustainability initiatives that raise novel issues (i.e. "comfort letters”).

(iii) Finally, the Commission will provide guidance under which circumstances for sustainability initiatives in the agricultural sector can benefit from competition law exemption as part of the Common Agricultural Policy (CAP).

(i) Guidance on key questions of competition law assessment of sustainability co-operations and green initiatives

The Commission is currently reviewing two Horizontal Block Exemption Regulations as well as the Block Exemption Regulation on vertical agreements, along with the Horizontal and Vertical Guidelines. It will take the opportunity to add guidance on sustainability co-operations and green initiatives to the guidelines (in particular, the Horizontal Guidelines). The Policy Brief sets out important elements of the competition law assessment of such co-operations and initiatives on which the revised Guidelines will provide guidance:

  • Sustainability benefits as qualitative efficiencies: A co-operation is compatible with competition law if its anti-competitive effects are outweighed by the efficiency gains it creates. In the case of sustainability co-operations and green initiatives, however, the question arises as to whether and how sustainability benefits can be considered as efficiency gains. The Commission now clarifies that sustainability benefits can be assessed as qualitative efficiencies. Details on such assessments will be very useful.
  • Broader scope of sustainability benefits: When weighing the possible negative effects and sustainability efficiency gains, the quantification of sustainability benefits is particularly challenging. The Commission now explains that sustainability benefits do “not necessarily need to take form of a direct or immediately noticeable product quality improvement or cost saving” as long as the consumers appreciate the sustainability benefits. This would allow taking into account a higher willingness to pay by consumers for sustainable / green products and move away from the current objectified approach.
  • “out-of-market” benefits: A key question in the discussion about the competition law assessment of sustainability co-operations and green initiatives is how “out-of-market” efficiencies – such as the benefits gained from a carbon reduction for society – can be taken into account. The Commission points out that the objective of competition law rules is to protect competition “on the market” and that the assessment of the anti-competitive effects and benefits of a practice therefore must be made within this market. However, the Commission also explains that benefits on separate markets can possibly be considered if the consumers on both are “substantially the same”. If, for example, an agreement leads to a reduction in pollution to the benefit of society, and assuming the benefits are significant, a fair share of these benefits can be apportioned to the harmed consumers (the latter being part of society) and they can be fully compensated for harm. This pragmatic approach is a small revolution and would in fact take into account important “out-of-market” benefits, significantly facilitating co-operations in the area of green initiatives and carbon reduction.
  • First mover disadvantage: A major hurdle in the assessment of sustainability co-operations and green initiatives is that the recognition of efficiency gains requires that the cooperation is “indispensable” (i.e. that the participating companies are not in a position to generate the benefits independently). The Commission now recognises that in certain cases companies need to override a first mover disadvantage and to “nudge” consumers towards using more expensive sustainable products instead of cheaper polluting ones. The Commission will provide guidance under which a circumstances co-operation is indispensable to overcome such a market failure.
  • Interplay with (environmental) regulation: Cooperation between companies in the field of sustainability is often necessary due to a lack of regulation and the fact that private actors can move faster and more efficiently than lawmakers, particularly across borders. The Commission will provide guidance on the circumstances under which it considers existing (environmental) regulation already incentivises companies to produce in a sustainable manner and when co-operations can be indispensable.
  • Guidance by means of concrete examples: While the current guidelines already provide (abstract) explanations on the competition law assessment of co-operations such as joint productions, joint purchasing, standard setting, etc., applying these explanations on sustainability co-operations in practice often is difficult as they focus on “classic” efficiency gains. The Commission promises to add concrete examples in the revised guidelines on how sustainability objectives can be pursued by such co-operations.

Next steps: The Commission is until 5 October 2021 consulting stakeholders’ views regarding several policy options for the Horizontal Block Exemption Regulations and revisions of the Horizontal Guidelines as part of the impact assessment process. Draft of the revised Regulations and Guidelines will follow. Stakeholders may provide the Commission with their input in these consultations. Moreover, to inform policy revisions and ensure that guidance is as concrete as possible, companies are expressly encouraged to approach the Commission with issues they would like to receive guidance on or projects they feel have been hampered by potential competition law risks.

 

ii. Individual guidance (“comfort letters”)

Under the EU Antitrust Regulation, the Commission can take formal decisions finding that an agreement, co-operation, etc. is compatible with competition law if there is sufficient Community interest for such decision. This, of course, also applies to sustainability / green initiatives. However, in the system of self-assessment such decisions are rare, and the process is slow and leads to considerable effort, both on the companies’ and the Commission side.

During the COVID-19 crisis, the Commission has offered companies the opportunity to ask DG Competition for guidance if they are uncertain whether their initiatives to overcome problems associated with the crisis are compatible with EU competition law. In response to such requests, DG Competition provided informal guidance (i.e. “comfort letters”). In the same spirit, the Commission now promised that it will also consider requests for individual guidance letters in relation to sustainability initiatives that raise new and important issues. This individual guidance will help companies to achieve much needed legal certainty.

Next steps: DG Competition is ready to consider requests for individual guidance regarding sustainability co-operations and green initiatives.

 

iii. Exemption under Common Agricultural Policy (CAP)

The new Common Agricultural Policy (CAP) for the period 2023-2027 agreed on in June 2021 (pending final agreement between the European Parliament and the Council of the EU) contains certain exemptions from competition law rules. Under the envisaged new “fairer and greener CAP”, the prohibition of anti-competitive agreements, etc. under certain conditions does not apply to sustainability agreements concluded between players in the food value chain aimed at achieving higher standards than required by law regarding environmental protection, climate change prevention, animal health and animal welfare.

The CAP stipulates that the Commission will issue guidelines on the conditions for the exemption.

Next steps: The new CAP – if adopted – will apply as of 1 January 2023. The Commission guidelines should be ready by the beginning of 2024.

3. Merger Control

  • What are the key points the Commission took from its stakeholder consultation regarding merger control?

Regarding merger control, stakeholders mentioned that sustainability aspects/features prevailing in the market and consumer preferences for these should be taken into account when defining markets and as a differentiating factor in the analysis. Also, stakeholders asked the Commission to keep a close eye on possible harm to innovation, including “green killer acquisitions” when reviewing mergers. It was further pointed out that overall social benefits as well as long-term effects should be taken into account in the assessment of efficiencies.

  • Which concrete policy reforms will the Commission consider and take regarding merger control?

The Commission explains in the Policy Brief that a number of Commission policy initiatives deal with issues raised by the stakeholders. This concerns (i) the on-going revision of the Commission’s notice on the relevant market, and (ii) the new referral policy under the merger regulation. Furthermore, the Commission points out that (iii) questions related to sustainability already play a role in the enforcement practice.

(i) Market definition

The Commission published its “Notice on the relevant market for the purposes of Community competition law” in 1997 and the Notice has remained unchanged since then. Currently, the Commission is reviewing the notice with a view to updating it to reflect market developments and evolutions in best practices in market definition.

The Commission explains in the Policy Brief that it expects issues related to consumer preferences will gain further importance given the stronger demand by individuals, companies and society as a whole for more sustainable products, services and technology. It announces that it will consider taking these preferences into account when defining markets in the revised market definition notice. This could lead to a different focus in merger investigations involving “green products” and could have a significant impact on the outcome of these proceedings, such as if markets are confined to “green products”. (It should also be noted that the scope of the market definition notice is not limited to merger control, but includes all competition instruments. The consideration of consumer preferences also strongly concerns antitrust assessments).

Next steps: The Commission has carried out a public consultation on an update of the market definition notice last year. The publication of a draft revised notice is expected for later this year. The adoption of the revised notice is envisaged for 2022.

(ii) Referral of “green killer acquisitions”

In March 2021, the Commission adopted a new policy regarding Article 22 of the EU Merger Regulation, which allows member states to refer mergers to Brussels for review. Under this new policy, the Commission has begun accepting referrals of mergers with relevance for the internal market from national competition authorities even if the referring authorities have no power to review the cases under their national merger control rules (see here for an article on the new policy).

The aim is to allow the Commission to examine mergers, which in its view merit EU merger review, but do not meet the thresholds of the EU Merger Regulation or national merger control rules, particularly "killer acquisitions", which are situations where dominant players acquire nascent, innovative companies eliminating future competition. So far, the Commission’s focus in this respect has been on biotech and the digital sector. Now, however, the Commission announces that it might apply the controversial referral policy to “green killer acquisitions” (i.e. acquisitions of nascent competitors that may lead to a loss of innovation in the sustainability context).

Next steps: The Commission adopted the new referral policy in March 2021 and has started applying it.

(iii) Sustainability and green aspects in merger control practice

Possible harm to innovation has been a focus of the Commission’s merger control practice in recent years across different sectors. It is likely that such theories of harm could also concern sustainability aspects. The Commission explains that it will protect innovation efforts on environmentally friendly technologies or capabilities when there is a risk of discontinuation of overlapping lines or research, or there is a risk of a reduction of incentives and the ability to achieve the same level or type of innovation. However, the Commission also confirms that it does not have a mandate to intervene in mergers solely because the mergers are likely to harm the environment if no competition parameter (e.g. innovation) is concerned.

Regarding efficiencies brought forward by companies to defend a transaction, the Commission points out that according to its Horizontal Merger Guidelines efficiencies should, “in principle”, occur within the markets where competition concerns are found. However, the Commission seems open to a more pragmatic approach reflecting the solution for the parallel problem (i.e. “out-of-market benefits”) in the assessment of co-operations under antitrust rules. This means that benefits on separate markets might be considered if consumers on both are “substantially the same”. This would give parties and the Commission in particular the flexibility to take environmental benefits into account in the assessment.

Next steps: Sustainability and green aspects are already considered in merger control proceedings by the Commission, but will likely play a stronger role in the future.

4. Summary

The Commission’s competition policy reforms to support the EU Green Deal and sustainability initiatives are taking shape:

The Commission has already started to overhaul and revise the State aid rules and has put forward concrete ideas for further reform. The new CCEAG, the partially revised GBER and IPCEI communication will include tools to support Green Deal objectives.

While the Commission initially seemed reluctant “to green” rules in the areas of antitrust and merger control, the Policy Brief shows that the Commission has acknowledged that the green transition also requires the adoption of these competition law instruments.

This does not mean that the Commission will throw its principles overboard. Instead, the Commission remains committed to the consumer welfare standard and the protection of competition. As the Policy Brief rightly points out, ambitious environmental policies can only be effective if markets can respond to the new regulatory signals and incentives and companies are pushed to innovate by competing intensely and fairly with each other. The Commission will not accept greenwashing – agreements or initiatives with no genuine environmental impact and a negative effect on competition. 

However, the Policy Brief clearly shows that the Commission is prepared to support green initiatives and sustainability co-operations and is willing to use its margin of manoeuvrability to include sustainability considerations in its enforcement practice. For example, the Commission now expresses an openness to accept (under certain circumstances) qualitative benefits and "out of market" benefits in its antitrust assessment and acknowledges that co-operation may be indispensable for overcoming market failures such as the first mover disadvantage. 

The Commission’s policy revision is ongoing, and the Policy Brief sets out the Commission’s considerations at this stage. To further policy work, the Commission depends on more input from stakeholders. Companies are expressly asked to come forward with their cases and questions. This will help the Commission shape its integration of sustainability objectives into competition law rules and guidance, and give companies necessary comfort for their joint initiatives.

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