Competition policy and the EU Green Deal: Freshfields responds to the Commission’s call for contributions

The European Green Deal aims to transform the EU into a fair and prosperous society, with a modern, resource-efficient and competitive economy. Both the European Commission ('the Commission') and national competition authorities now recognise that competition laws can play an important role in promoting and achieving the substantial investments required to implement the Green Deal.

While competition policy cannot replace environmental laws or green investment, the Commission consulted stakeholders to evaluate if and how state aid, antitrust and merger control rules can better support the EU’s 'green' ambitions. With sustainability at the top of our own agenda, we have submitted our views on how competition law and policy can help realise the Green Deal and other sustainability objectives while maintaining competitive markets.

Part 1: state aid

In order to achieve the Green Deal’s objectives, both the EU and its member states will have to provide large funds for sustainable investment. This public funding is required to crowd-in private investment into projects that might otherwise fail to attract sufficient investors. The state aid law related risks companies and member states face when jointly investing in green projects are discussed in our recent blog post. The EU also has to overcome market failures that are currently hampering an increased level of environmental protection. A 'green' reform of the state aid rulebook is therefore required if state aid is to be an enabler of EU climate objectives that simultaneously maintains competitive markets.

While we generally consider the existing state aid rulebook to be fit for Green Deal purposes, our submission suggests the revision of several frameworks, including the guidelines on state aid for environmental protection and energy 2014-2020. For example, the Commission should consider broadening the concept of 'eligible costs' to ensure sufficient state aid can be provided to projects that support the Green Deal. Similarly, a more permissive stance within the framework on state aid for research and development and innovation is desirable to enable additional aid aimed at making renewable energy more accessible and competitive in the future. In addition, increased use of the 'Important projects of common European interest' instrument will contribute to mobilising greater public and private funds.

Where the Commission aims to mitigate a negative environmental impact, it may consider granting aid under conditions for the beneficiary and the member state to offset the negative impact. Alternatively, our submission considers introducing a cap on aid leading to negative environmental consequences.

We also suggest the introduction of 'safe harbour' rules for impact investors and related intermediaries. The Commission has previously considered these players to be potential recipients of 'indirect state aid' when investing in green companies. This means that private investors might have to repay (a part of) their profit, leaving them with unforeseen risks.

A separate Freshfields blog post on the interplay between state aid rules and sustainability will be published soon.

Part 2: antitrust rules

Competitor collaborations will often be the most effective way to deliver on ambitious sustainability targets. However, EU antitrust rules may deter firms from entering into such collaborations, given the relatively low bar set for establishing anti-competitive effects and the absence of clear guidance on how environmental benefits are taken into account in the authorities’ assessments. 

For example, where retailers agree to buy only from manufacturers whose production processes meet a minimum standard, such an arrangement could be characterised as a purchasers’ cartel, particularly if it foreclosed upstream suppliers. Similarly, the exchange of competitively sensitive information between competitors has consistently been found to amount to an object restriction rarely justified under Article 101(3) TFEU. Our earlier blog post puts a spotlight on these and other sustainability collaborations.

Our submission suggests, as regards the application of Article 101(3), that EU antitrust rules currently interpret 'consumer welfare' too narrowly, with inadequate regard being given to wider and longer-term environmental or societal effects. To encourage large-scale sustainability initiatives at EU level, we consider that it would be helpful to receive further guidance on how the Commission proposes to assess environmental benefits in the future and whether – based on its experience to date – the Commission considers that any specific safe harbours for sustainability agreements should apply.

Greater investment by regulators, economists and other stakeholders is needed in the development of environmental economics to assess the true effects of sustainability agreements more effectively and accurately. In parallel, specific guidance on circumstances in which qualitative evidence is sufficient would be helpful for self-assessing businesses seeking to achieve sustainability objectives. Pending the introduction of adequate economic tools and specific guidance, we also consider that there is scope to make use of comfort letters as a means of providing more immediate certainty for firms considering potential collaborations for the benefit of the Green Deal. 

Part 3: merger control

As explained in our recent blog post, in some cases, businesses will need the scale and scope which only a merger or an acquisition can bring about to make necessary transformations commercially feasible, and to realise their 'green' transformational goals. To the extent possible, and within the bounds of promoting effective competition, merger control should encourage, rather than restrict, firms to pursue transactions which lead to enhanced sustainability outcomes post-merger.

The current framework of the EU Merger Regulation enables the Commission to take sustainability considerations into account in merger control. A new test for transactions with sustainability elements is not required in order to make progress in this area. Instead, sustainability considerations should play a more prominent role within the existing efficiencies framework.

Our response therefore sets out steps which we recommend are taken in order to more readily enable the Commission to take sustainability-related efficiencies into account, and to give businesses more certainty as to the Commission’s approach. As a starting point, the Commission may wish to provide guidance on the types of sustainability benefits it will take into consideration. In this context, we encourage the Commission to clarify whether it would consider sustainability efficiencies that benefit not only customers of the merging parties and/or end consumers, but society in a broader sense. The Commission should also continue its efforts to design an appropriate economic framework to capture and quantify merger-specific sustainability outcomes. This includes consideration of the timeframe within which sustainability outcomes must materialise in order to be capable of supporting efficiencies arguments. Sustainability reporting initiatives could provide an initial reference point in this context.

Taking such an approach would allow the Commission to consider the positive impact of a merger on sustainability, whilst retaining the existing merger control framework. However, there is significant work needed to establish an appropriate economic framework to capture merger-specific sustainability outcomes. Further consideration and consultation should take place in order to develop a suitable framework and tools for these purposes.

Our full submission in response to the Commission’s call for contributions on competition policy supporting the Green Deal is available below.

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