Frontier Economics has submitted its response to the Competition and Markets Authority’s (“CMA”) public consultation inviting feedback on its draft guidance* on sustainability agreements.
The CMA has proposed guidance for businesses on how agreements between undertakings which seek to attain sustainability objectives are to be assessed under UK competition rules. In particular, the guidance clarifies how to interpret the requirements for exemption from the Chapter I prohibition under Section 9 of the Competition Act 1998.
Framework for assessing sustainability agreements
Frontier welcomes the CMA’s efforts to provide clarity to businesses through this guidance and in particular the CMA’s proposed framework for assessing climate change agreements, which appropriately takes out-of-market benefits into consideration. This is imperative if the CMA is to support businesses seeking to take climate action where collaboration is needed. Externalities such as climate change by definition take place out of the market. They therefore cause a wider societal harm which must be incorporated into decision-making if it is to be addressed.
In our response, we urge the CMA to apply this same framework to all sustainability agreements, including those which do not have climate change mitigation as their goal. In the current draft guidance, the CMA proposes to apply a more restrictive framework in assessing other types of sustainability agreement, whereby only benefits accruing to consumers in the relevant market may count. This risks preventing genuine sustainability agreements seeking to improve social welfare, but which cannot clear this high hurdle, from taking place. We do not see any reason to treat sustainability agreements differently according to their goals: the fundamental economic problem is the same regardless of the environmental problem at stake. Environmental problems such as biodiversity loss and pollution present huge risks to society and the UK government has committed itself to binding targets to address these under the 2021 Environment Act. Competition policy enforcement should seek to support the government in achieving these targets.
Valuing the benefits of sustainability agreements
Furthermore, we encourage the CMA to provide clearer guidance to businesses on how to value the benefits of sustainability agreements. While the costs and benefits of a proposed agreement will need to be assessed on a case-by-case basis, there are a number of established methodologies and resources that are widely used in government and elsewhere to quantify the benefits of environmental sustainability measures. Parties to sustainability agreements seeking to demonstrate they satisfy the criteria for exemption from competition rules do not need to reinvent the wheel, but can cost-effectively utilise these existing resources. We have put forward some constructive examples of how this may be done.
We urge the CMA to implement these two recommendations in the final version of its guidance in order to unlock progress in addressing the most important sustainability challenges facing the UK economy.
The CMA’s public consultation ended on 11th April 2023. We look forward to reading the final version of the guidance.
Read our full response here.
*CMA, Draft guidance on the application of the Chapter I prohibition in the Competition Act 1998 to environmental sustainability agreements, dated 28 February 2023