Speech Sustainability and Cooperation, Martijn Snoep GCR Connect, April 28, 2021

GCR Connect: Sustainability and Cooperation – 28 April 2021

Martijn Snoep (Chairman Netherlands Authority for Consumers and Markets)

Ladies and gentlemen,

Last week, a ground-breaking agreement was reached for a new European Climate Law. This new law sets ambitious climate goals: a reduction of 55% by 2030 and net zero green-house gas emissions by 2050. In addition, by June 30, the Commission should review and, where necessary, propose to revise all relevant EU policies to achieve these goals.

I assume that the Commission’s competition policy will also be one of those policies that will be subject to review. In our opinion, there is at least one aspect of the Commission’s competition policy that needs a revision. And that is its current interpretation of the fair share test.

As you all know, agreements with negative effects on competition are exempted, if consumers are allowed a fair share of the benefits that the agreements generate. The current policy is that in order to meet the fair share test, the benefits to consumers must at least compensate them for the negative effects.

The ACM’s proposal is to make an exception for a certain subset of agreements. Namely agreements that lead to environmental benefits for the whole of society by the reduction of negative externalities. For this subset of agreements we propose that the fair share test is met if the benefits to society as a whole, outweigh the negative effects to consumers.

I will further substantiate the ACM’s proposal in three parts:

• How did we get to the Commission’s current policy on the fair share test?
• Why is this policy bad for reaching Europe’s new climate goals?
• What can be done about it?

In order to answer the first question (‘how did we get to the current policy’?), we need to go back in time. But first I need to point out three things.

1. a textual interpretation of article 101 (3) makes clear that the purpose of the fair share test is to ensure that, while consumers may not get all the benefits the agreements generate, they at least get a fair share,
2. what a fair share is, is always context-specific; fairness can never be assessed outside context,
3. cases that assess what a fair share is for consumers, compared to the benefits for the whole of society, are rare. There are only a few past cases we can learn from.

The first case dates from 1994. Philips and Osram set up a joint production facility that would reduce the emission problems inherent to the manufacture of certain types of glass. In granting an exemption, the Commission argued that: “The use of cleaner facilities will result in less air pollution, and, consequently, in direct and indirect benefits for consumers from reduced negative externalities.” The benefits to consumers and the whole of society were not quantified, and we can only assume that consumers were considered to receive a fair share of these benefits.

In 1995, Exxon and Shell set up a joint production facility to produce polyethylene. The Commission justified its exemption by noting that: “the reduction in the use of raw materials and of plastic waste and the avoidance of environmental risks involved in the transport of ethylene, will be perceived as beneficial by many consumers.” Again, no quantification of the benefits for consumers and the rest of society, neither an assessment of what a fair share for consumers would be.

The only case that explicitly deals with the relationship between benefits to consumers and benefits to the whole of society is the CECED-case. In 2000, the European manufacturers and the importers of washing machines agreed on new environmental standards and on production and import restrictions for washing machines. The Commission exempted the agreement by arguing that “the benefits to society (…) appear to be more than seven times greater than the increased purchase costs of more energy-efficient washing machines. Such environmental results for society would adequately allow consumers a fair share of the benefits (…).” So here the Commission made it very clear that consumers would receive a fair share of the benefits because society as a whole benefited from the reduction of negative externalities.

But the Commission moved away from this interpretation of the fair share test only a few years later. This coincided with the Commission’s modernization package and the decentralization of the exemption regime.

In 2004, shortly after the adoption of Regulation 1/2003, the Commission adopted new guidelines. In these guidelines, for the first time, the Commission explicitly stated that the concept of a "fair share" implies that the benefits of the agreement must at least compensate consumers for any negative impact caused to them by the restriction of competition. No more room for a context-specific assessment. No different treatment for agreements that generate environmental benefits for the society as a whole. Exit CECED.

It is important to realize that this policy change of the Commission was not the result of a change of the law or a change in case law. It was simply a change of the Commission’s policy. On the one hand, the Commission gave up its exclusive competence to grant exemptions under article 101 (3), but, on the other hand, it limited the scope of the exemption by tightening the fair share test. So this is how we got to the Commission’s current policy.

  And now, why is this policy bad for reaching Europe’s new climate goals?

In order to answer this question, we need to go back in time again. And more in particular, to the commons: the meadows around medieval villages where farmers let their cattle graze freely on grounds that were commonly owned by the villagers. If farmers added cattle to their stock, they would receive additional benefits, while the rest of the farmers and the other villagers shared the burden of damage to the common. And if all farmers made the rational economic decision to add cattle, the common would be depleted to the detriment of all. Hence, the famous term “tragedy of the commons”.

This term was coined by an American biologist in the late 1960s with a grim view on human overpopulation. Fortunately, Lin Ostrom, the world’s first female Nobel Memorial Prize winner in Economic Sciences, brought the term into mainstream economics. Ostrom argued that the tragedy is not inevitable. If farmers decided to cooperate with one another, monitoring each other’s use of the common and enforcing rules for managing it, they would be able to avoid the tragedy.

The root cause for the tragedy of the commons is the existence of what economists call negative externalities. A cost associated with a certain economic activity – grazing of the common  - inflicted on others – the other villagers, including other farmers - that did not choose to incur that cost.

It doesn’t take a rocket scientist to see that the tragedy of the commons is not only applicable to medieval meadows but also to our planet’s living environment. Just as the farmers who added cows to their stock were depleting the common, we, too, are depleting our planet’s natural resources, such  air, water, soil, and biodiversity, by our own production and consumption. The cost of each individual’s damage to our planet’s living environment is inflicted on the rest of society.

The tragedy of the commons is a typical market failure. The market will not automatically lead to a long-term efficient outcome. And so, the classic reaction to this market failure is government regulation. Setting up permit systems for activities that deplete the commons. Or imposing restoration obligations on those who deplete them. Or setting up systems that lead to the internalization of the negative externalities, like taxes, and monetized and transferable depletion rights.

However, just like market failures exist, so do regulatory failures. And like market failures, there can be a host of reasons why regulators, including legislators, fail to address market failures properly, timely, and without unintended consequences. There is regulatory blindness, regulatory near-sightedness, regulatory capture, regulatory incoordination and regulatory overconfidence, to name just a few. The bottom line is: regulation may be the preferred solution to solve the tragedy of the commons, but we cannot expect it to prevent all tragedies.

Fortunately, like Lin Ostrom argued, the tragedy of the commons can also be prevented by cooperation among producers, and this is where the fair share test comes into play.

Let’s take an example:

Two competing companies (A and B) together produce 100 units, serving 100 consumers. Society consists of a total of 400 people, including the 100 consumers.

Each unit produced, causes a negative externality to society due to environmental pollution. The monetary value of this pollution is €1 per unit produced. So the total negative value of the environmental pollution to society is €100.

The pollution can be reduced to zero at an extra cost of  €0.40 cents per unit. So the total cost of a reduction to zero for all customers is €40. (100 units times €0.40 cents). Total cost to consumers to reduce pollution to zero: €40. Total benefit to society from reduction of pollution to zero: €100.

A and B want to agree on reducing to zero pollution. But without an agreement, A believes that, if it switched, it would lose its customers to B due to its cost advantage.

Again, the agreement causes extra costs to consumers of €40. Benefits to society as a result of the reduction of the pollution are €100. But the benefits to consumers are only €25, being the consumers’ share in the total value of the total benefits to society of €100. Remember, consumers only make up 25% of society.

So, on the basis of the Commission’s current interpretation of the fair share test, this agreement between A and B would not qualify for exemption. Consumers would not be fully compensated for the price increase, although society as a whole would clearly benefit.

The fact that such agreements would not qualify for exemption is indeed bad for reaching Europe’s new climate goals. It is bad because regulation will simply not be enough to avoid the tragedy of our commons. Regulation cannot overcome this in light of the drastic changes that are needed in our production methods and consumption patterns. We need companies to share in this responsibility by, when necessary, agree on new production and distribution standards. We’re losing an opportunity to meet Europe’s ambitious new climate goals, if we don’t change the current interpretation of the fair share test.

So first, I showed how we got to the Commission’s current interpretation of the fair share test. It is a self-imposed policy interpretation. It is not part of the law. It is a policy probably developed to avoid an overly broad use of article 101 (3) by companies and national courts in a decentralized enforcement structure based on self-assessment.

Second, I showed why this policy is bad for reaching Europe’s new climate goals. Because we have market failures and regulatory failures, cooperation among companies is also necessary to reach Europe’s climate goals. The Commission’s current interpretation of the fair share test hinders such cooperation.

So now it is time for the last segment: what can be done about it?

Also in the hope we would inspire the Commission and other competition authorities, the ACM drafted new sustainability guidelines. Our aim was threefold. First, we wanted to show how companies could cooperate to achieve sustainability goals without infringing competition rules. Second, we told the business community that we are open to discussing with them their sustainability initiatives. That we are willing to give guidance. And that we will not impose any fines to companies that follow our guidelines in good faith. And third, our aim was to show how the fair share test could be modified without opening the floodgates to all sorts of agreements aiming to achieve various public goals.

For a specific subset of agreements, we propose that consumers are considered to get a fair share of the benefits, if the benefits to society as a whole are bigger than the negative effects to consumers. Agreements that fall within this specific subset must fulfil three criteria:

1. The agreements must reduce environmental damage (reduce negative externalities),
2. The government has set a goal for this reduction or the agreement helps in  complying with a legal requirement, like for example the Paris Treaty,
3. The proposed measure to achieve the reduction is cost-efficient.

We believe that in this specific context it is fair not to require that consumers are fully compensated for the negative effects. The reason for this is 1) consumers will benefit from the reduction of environmental damage in the same way as the rest of society, and 2) their very demand for the affected products generates the environmental damage for which society as a whole needs to pay the price. In fact, one could argue that it would be unfair to deny society the benefits of these agreements by blocking an exemption.

Fortunately, we received many positive reactions on our proposal for a change of the fair share test from companies, trade organisations, law firms, academics, and NGOs. A few argued we should have opened the gates a bit more to allow for more agreements to benefit from this change. For a few others though, we already went too far. The main arguments of our opponents are:

1. this is a slippery slope and before you know it, anti-competitive agreements protecting all sorts of social goals are exempted,
2. this will stimulate regulatory inaction, because regulators have an escape route now,
3. this will lead to false positives and green cartels, as making assessments of benefits to society is too difficult for competition authorities to get right, and
4. this would be a drastic overhaul of the consumer welfare focus of EU competition law.

Let me briefly address these arguments.

First, because we propose to limit the scope of the policy change to agreements that aim to reduce damage to the environment as a result of negative externalities, it is already restricted. Also, because the government, the European legislature in this case, must have set a goal for this reduction or be bound by a legal requirement, its scope is even further restricted. And a final point is that off course the other three limbs of article 101 (3) remain unchanged. In particular, the indispensability test will restrict the scope of this policy change to those agreements that are really necessary to achieve Europe’s climate goals.

The second argument of our opponents is that our proposal will stimulate regulatory inaction. In theory, it may indeed be possible that our proposal could lead to a regulatory slow down. But regulatory failures are broad and multifaceted, with or without a change of the fair share test. We must achieve the climate goals by 2030 and 2050. So there is no time to wait for first-best solutions only. Sometimes second-best is good enough. It is all hands on deck now.

Third, contrary to what our opponents claim, the assessment of benefits is not that difficult. For example, there are official shadow prices for all greenhouse gases. And reductions of greenhouse gases and other environmental benefits can be quantified on the basis of a number of well-established methods. Together with the Greek authority, ACM commissioned a study that provides a comprehensive overview of these methods. Again, it is not rocket science.

And finally, fourth, this is not a drastic overhaul of EU competition law. The proposal falls squarely into the text and logic of article 101 (3) as interpreted by the Commission itself in the past. It leaves the consumer welfare focus untouched and requires only a revision of the horizontal guidelines who are up for review anyway.

I will come to a conclusion now. In the coming weeks, the Commission will review and, where necessary, propose to revise all relevant EU policies to achieve its new climate goals. One of these policies should be its policy on the fair share test. A new policy in line with ACM’s guidelines would help Europe to achieve its climate goals, and to avoid a tragedy of our very own commons.

Thank you very much.