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Speech Martijn Snoep: Climate change requires a fresh look on fair and efficient in competition law

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Climate change could be the biggest market failure in the history of mankind. To prevent the dramatic effects of climate change, this negative externality needs to be incorporated in the prices of products by imposing drastic greenhouse gas emission restrictions or taxes on such emissions, or by both. The ‘inconvenient truth’ is that either way the cost of living for consumers will increase significantly and low-income consumers will be hit disproportionally. That’s why it is so hard to incorporate these negative externalities via the political process only. The consumers (and voters) of today are simply not willing or able to pay for more expensive climate-neutral products to avoid the dramatic effects of climate change in the future, particularly if the cheaper alternative is still available. But there is way out of this deadlock. Governments, companies and competition authorities all have a role to play here. Governments need to set strict emission goals per sector of the economy and compensate low-income consumers for the disproportionate effects. Companies need to meet these goals, preferably individually, but if needed through cooperation with their competitors, even if that would restrict some parameters of competition. Competition authorities need to exempt these kinds of cooperation if these are indispensable to reach the sectoral goals set by governments. In line with EU competition law, such cooperation should be exempted if the total benefits of the cooperation outweigh the negative effects on prices and choice for the affected consumers. But in its draft Horizontal Guidelines, the European Commission seems to require that only a proportional share of the totalbenefits can be used to fully outweigh these negative effects. In essence, this means that the affected consumers need to be compensated in full for their extra costs of not contributing to climate change. That is simply not fair and not efficient, and will block impactful cooperation among competitors to reach the Paris Agreement’s goals.

Climate change requires a fresh look on fair and efficient in competition law

Speech by Martijn Snoep, Chairman of ACM, the competition authority in the Netherlands, at the XVth Treviso Antitrust Conference on 16 June 2022

Ladies and Gentlemen,

We are facing what could be the biggest market failure in the history of mankind. This market failure is caused by the negative externalities related to the production and consumption of many of the products we consume. These products come with significant hidden costs that are not included in the price, the costs of climate change. We will not only face some of these costs ourselves, but more importantly we are passing on the bulk of these costs to the world’s children and their children’s children.

Unfortunately, in addition to this market failure, there is also a regulatory failure. Because, preferably, governments step in to redress market failures through regulation, either by imposing output restrictions, like emission limits, or by imposing taxes on consumption to incorporate the negative externalities in the price, or by doing a bit of both. But if governments would do so, products will inevitably become much more expensive. And therein lies the problem. The short-term political cycle and the fact that future generations are underrepresented in our political process, make it very hard to find a political majority to effectively redress this market failure in a timely manner.

At the same time, we see that the willingness of consumers to pay for climate-neutral products is insufficient to cover the costs of climate-neutral products, in particular if the cheaper, climate-endangering alternative is still available. That is, by the way, regardless the amount of information that is given on the product’s impact on climate change. And this even assumes that consumers are able to pay the higher prices. While in reality we know that in many countries large groups of consumers live from hand to mouth and simply cannot afford to pay significantly more for their basic necessities such as food, heating and transportation.

So in the midst of a market failure, a regulatory failure and a lack of ability or willingness to pay for climate-neutral products, is there a way out? Yes there is. That is if everyone is ready to play its part.

First, to add to the necessary democratic legitimacy of this way our, governments should set clear and measurable climate-change reducing goals for each relevant sector of the economy, combined with a trade adjustment mechanism to protect against imports from countries without such goals. We are seeing the beginning of this but more steps are necessary.

Second, governments should put in place tax measures to gradually compensate low-income consumers for the increased costs of living, in particular when it comes to heating, fuel and food. The harsh reality is that we can no longer bank on future generations, so the cost of living for today’s citizens will increase. But this should and can only be done in a way that provides a realistic perspective for people with low incomes.

And third, in order to avoid governments having to micro-manage the economy, each economic sector should sit down to assess how the sectoral goals that governments set can be met, preferably individually by companies themselves, or through vertical cooperation in the supply chain, or, if that is indispensable for reaching these goals, through horizontal cooperation among competitors. Such horizontal cooperation could, for example, consist of agreements to jointly phase out polluting production processes, to jointly develop new production processes and produce climate-neutral inputs or to jointly stop selling products that negatively impact the climate.

So, in this third part, we, the competition authorities around the world, have to play our role, because traditionally any horizontal cooperation among competitors is frowned upon by us, as it may restrict competition. We are the ones holding the key to this part.

In the chapter on sustainability in its draft Horizontal Guidelines, the European Commission reveals how it intends to use this key. The draft is definitely a big step into the right direction but it does not bring all the clarity needed.

Any meaningful cooperation to incorporate these negative externalities will increase the cost price and will have a significant effect on consumer prices. Therefore, these types of cooperation critically depend on the Commission’s assessment whether consumers are getting a “fair share” of the benefits within the meaning of EU competition law.

But, contrary to the ACM’s draft sustainability guidelines, this is precisely where the Commission’s draft guidelines stop short of providing sufficiently clear guidance. In particular, two policy-driven interpretations by the Commission could make it virtually impossible to meet the fair share test in practice.

First, the Commission seems to insist that a fair share means that the consumers negatively affected by the potential harms of the cooperation (the price increase or reduction of choice) should be fully compensated by the benefits (the contribution to no climate change). But why do these consumers need to be compensated in full for the extra costs of not contributing to climate change? Wouldn’t it be fairer (and economically more efficient) to leave consumers – who are also responsible for the pollution – uncompensated for the harms, as long as the cooperation has a total net positive effect for everyone, including these consumers?

Second, in situations where the benefits are global, as in the case of climate change, the Commission seems to suggest that only a proportionate amount of those benefits can be used in the fair share test. So, for example, in the case of a European-wide agreement to reduce green house gas emissions from fossil fuel cars, the higher price or reduction of consumer choice will affect the entire European population of car owners. The benefits from the agreement will affect the entire world. But as Europe only has 5% of the global population, in the Commission’s logic, not more than 5% of these collective benefits can be used for the fair share test. So even if fairness would imply full compensation, this benefit-allocation restriction would make the fair share test insurmountable in practice.

The root cause of the problem is that the Commission lumps together all types of sustainability benefits ranging from animal welfare to greenhouse gas reduction, subjecting them to the same fair share test. From an economic perspective such a hard and fast rule does not promote efficiency and from a legal perspective it is not fair. One always has to look at the context to identify what fair is. Full compensation can indeed be fair n some situations but not fair in other ones.

In the case of agreements that aim to redress negative externalities like climate change, there is no sensible justification for requiring that the consumers need to be compensated in full for, in essence, not contributing to this disaster. Why, for example, would business class travellers need to be fully compensated for the harms inflicted by a hypothetical agreement between airlines that requires to take into account the negative externalities of flying? That is simply not fair and, by the way, also not economically efficient.

What is fair and efficient in the face of climate change, is that an agreement that is indispensable for the reduction of the emission of greenhouse gases is exempted from the competition laws. That is under the condition that the total benefits for everyone outweigh the negative effects on prices and choice for the consumers negatively affected.That is the type of fairness and efficiency we need in the face of climate change. And since the Commission is holding the key, I hope that the Commission will clarify in its draft guidelines that this is indeed the case.

Thank you