Climate change agreements exempt from competition law, says CMA

The UK’s Competition and Markets Authority’s Green Agreements Guidance treats climate change agreements with particular leniency, but all types of environmental collaboration included in the guidance are safe from enforcement action.

The document released last week explains how competition law – specifically the ‘Chapter I prohibition’ in the Competition Act 1998 – applies to “environmental sustainability agreements” between companies that operate at the same level of the supply chain.

In it, the CMA details the types of agreements that are unlikely to infringe the Chapter I prohibition, those that could infringe it (where businesses need to apply certain restrictions), and those that can benefit from exemption from the competition law. 

Exempted agreements include all climate change agreements, defined as “reducing the negative externalities arising from greenhouse gases” from production, distribution and consumption of goods and services – under certain conditions.

The document provides various examples of this type of collaboration, such as manufacturers agreeing to phase out a particularly emissions-intensive production process, delivery companies switching to electric vehicles, or any agreement to “pool funds, technology or expertise to support the development of more effective technology to capture and store carbon dioxide”.

Climate change agreements: conditions for exemption

However, all climate change and environmental agreements must show evidence of “objective benefits” to production, distribution or technical or economic progress to avoid being in breach of competition law. Additionally, the companies involved must prove that there is no “less restrictive, but equally effective, alternative” to such agreements – in other words, that collaboration is more effective than competition in achieving these benefits.

Agreements must also demonstrably benefit consumers – normally the same consumer subsets that could potentially be harmed by the agreements, though the CMA will be more permissive around climate change cooperation. 

Finally, deals between companies must not represent a substantial elimination of competition.

“Given the scale and urgency of the challenge to ensure environmental sustainability and particularly to combat climate change, and the degree of public concern about such issues, the CMA is keen to help businesses take action on climate change and environmental sustainability, without undue fear of breaching competition law,” the guidance explains. 

Environmental sustainability agreements defined

Beyond climate change agreements, the guidance defines environmental sustainability agreements as “aimed at preventing, reducing or mitigating the adverse impact that economic activities have on the environment or assist with the transition towards environmental sustainability”. Essentially, collaboration around environmental goals beyond the reduction of greenhouse gas emissions – think water, biodiversity and natural resources.

Among these, the CMA lists agreements that are unlikely to breach competition law as those between firms with “a very small combined market share”, those that do no affect competition and those that are mandated by law, as well as cooperation around the creation of industry-wide standards or environmental targets.

Companies will need to apply more caution around sustainability collaboration “with the object of restricting competition”, for example if it involves price fixing, market or customer allocation. Here, the guidance explains that such restrictions of competition may be permitted “where it is objectively necessary to implement, and proportionate to the objectives of that wider environmental sustainability”. 

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‘Open-door policy’

In publishing the guidance, the CMA also made it clear that it remains available to clarify any doubts that may arise for companies trying to set up environmental sustainability agreements.

“We know that tackling climate change and promoting environmental sustainability matters, and supporting businesses to do this is a priority for the CMA(...) Our open-door policy means we can work with companies to give them tailored informal guidance on how they can work together to boost the green economy,” said CMA Chief Executive Sarah Cardell.

The CMS’s guidance will provide welcome clarity to companies and law firms that have been asking for such clarifications for years, and follows the publication of similar guidelines from the EU in June 2023.