Blog Jan Tichem: Government policies to improve sustainability remain necessary

The current Dutch cabinet (the Schoof cabinet) gives markets center stage for making the Dutch economy more sustainable. In its government program, the cabinet says “we give Dutch entrepreneurship and creativity maximum latitude, and create green markets”. The budgeting follows this logic. Funds for the sustainability transition must also be raised by an innovative, green financial sector. This hints at greater confidence in market-based initiatives and less at government control. Markets indeed help make our economy and society more sustainable, but they are no alternative to government policies. When it comes to sustainability achievements, government policies actually enhance market-based initiatives. That is why government policies such as legal standards, pollution taxes, and subsidies for green initiatives remain essential.

A market-based sustainability transition

Entrepreneurship is a powerful driver behind innovation and productivity growth, especially in situations of effective competition. In their pursuit of more customers, businesses develop new products. If customers care about sustainability (and are thus willing to pay for it), businesses will focus on it. A good example of this dynamic comes from the car industry. Empirical research shows that the more their customers care about sustainability, the more green technology car manufacturers develop. This effect is more pronounced in situations with increased competition. This combination of green preferences and competition appears to act as a strong incentive: as strong as a fuel excise rate of 17 percent.

Competition enforcement can thus contribute to the sustainability transition that markets produce. One infamous historical example of an anti-sustainability cartel is the Phoebus cartel. The businesses in that cartel agreed to limit the life expectancy of light bulbs to below what was technically feasible. Misleading sustainability claims, too, need to face the music, as greenwashing companies compete unfairly with businesses that actually do invest in sustainability. They make it harder for consumers to make a sustainable choice, and also undermine the confidence of consumers in markets for sustainable products.

Unfortunately, consumers on average do not wish to pay for sustainable products to a sufficient degree. Reasons for this range from a lack of interest, behavioral pitfalls such as emphasis on the short term, to not being able to afford it. The modest share of organic products in total sales illustrates this point. In these types of situations, businesses experience too few financial incentives to make sustainability efforts. Nevertheless, some businesses are willing to invest in sustainability. Not only do they value profits but they also value making a broader contribution to society, whether or not as a result of their CEO’s intrinsic motivations, pressure from shareholders, or fear of reputational damage and liability. If the importance of a broader contribution to society is not recognized in the same way by all competitors, competition can make it harder to recoup the costs of the sustainability efforts, and it can also put pressure on those efforts.

Arrangements between businesses can stimulate sustainability, but not to a sufficient degree

So, less competition can sometimes benefit sustainability. That is why ACM looks at sustainability arrangements between competitors with an open mind. European competition law also offers that scope. Competitors can restrict mutual competition if they meet several conditions. One of which is that the benefits that consumers directly or indirectly accrue as a result of an increased level of sustainability outweigh the costs of reduced competition. In that way, we stimulate slightly more sustainability initiatives of market participants (while taking away the excuse that ‘sustainability is not possible because of the competition law’).

Despite the scope for sustainability arrangements, markets alone do not produce sufficient results in terms of sustainability. First of all, businesses do not always have an incentive to make sustainability arrangements with their competitors, even if such agreements are allowed. Consumers differ in their willingness to pay for sustainability. That gives businesses incentives to serve different target audiences that differ in their willingness to pay for sustainability. By serving different groups, businesses partially escape mutual competition. That makes a sustainability agreement less rewarding.

Second, sustainability arrangements are particularly desirable if consumers do not fully appreciate sustainability. After all, in those situations, competition offers businesses insufficient incentives to go the extra mile, and an agreement may give that final push. However, if consumers hardly appreciate sustainability, businesses will risk alienating consumers, and it becomes harder to demonstrate that consumers are compensated for the restriction of competition. With major externalities in particular, limits to the exemption to the cartel prohibition come into sight. It should be noted that many sustainability agreements submitted to ACM do not even restrict competition, which means they do not even need the exemption to the cartel prohibition. So, much is still possible in reality.

Third, it is sometimes difficult to properly measure consumers’ appreciation of sustainability. Willingness to pay depends on social norms. Moreover, social norms depend on context, including the choices that other consumers make as well as information about those choices. It is therefore quite possible that consumers say they do not wish to pay for a sustainable product that still needs to be developed, but would be willing to pay for it once it becomes available and is also purchased by others. This is not solely a measuring issue. Willingness to pay is not a static given but is shaped by the socio-economic environment. Businesses determine that socio-economic environment by developing and marketing sustainable products, but the government plays a role here as well.

Government policies promote market initiatives

Government policies on the sustainability transition remain necessary. By setting standards, subsidies and taxes, the government directly advances sustainable market outcomes. The signal that such policies send is more indirect, yet is just as important. A government that advances sustainability efforts shows that sustainability is important. A government that does not do so, also sends a signal, but the opposite one. As such, the government influences social norms surrounding sustainable behavior. Social norms, in turn, influence consumer choices to which businesses respond. All the while, attention to a just transition is essential. A government that asks its citizens to act sustainably must also offer support where necessary. Moreover, sustainable behavior sometimes simply makes economic sense, such as solar panels. That is another reason why it is important that everyone is able to participate. The government is the stakeholder par excellence to influence these distributional aspects of the sustainability transition.

See also

• Arrangements between businesses regarding sustainability (in Dutch)
• Collaboration test (in Dutch)