Competition v Collusion : Fostering Sustainability

DG Competition is currently analysing nearly 200 contributions from a vast array of stakeholders. Contributors from industry, from environmental groups, consumer organisations, as well as competition experts advanced their opinions on the growing concern that competition and the Green Deal are at odds.

On the basis of these contributions, there seems to be two main views. The first is advanced by Maarten Pieter Schinkel, Professor of Economics at Amsterdam University, who while acknowledging that competition places these restrictions, argues that they are necessary to promote competition and drive competitors to develop more sustainable solutions.

The second view suggests competition law and policy as it stands represents a barrier to sustainable development and fails to recognise the importance of competitor collaboration.

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Competition as the primary driver

Beginning with the first view, it is also the view of the Commission that effective competition “encourages firms to produce at the lowest costs, to invest efficiently and to innovate and adopt more energy-efficient technologies”. It also holds the positions that in a competitive market, the pressure exerted by competitors is an important motivator to make efficient use of the planet’s scarce resources, consequentially supplementing environmental and climate policies and regulation aimed at internalising environmental costs.

As such, competition in itself is pivotal to the development of green markets and to the successful realisation of our sustainability goals. In this sense, the Commission shares the view of Mr Schinkel, and yet, the Commission has recognised the need for competition policy to do more to help us reach our (and their) sustainability targets. The Commission undoubtedly boasts some of the best economists in the world, and they recognise that competition policy as it stands is not doing enough.

Schinkel argues that the restrictions in place are in fact aiding the drive for sustainability, and that the competitive pressure that effective markets exert on its players are necessary to encourage the development of new technologies and more sustainable practices. Schinkel further suggests that there exists the incentive from consumers to pay for more sustainable products. As such ‘green’ is a parameter of competition - allowing firm’s to collaborate removes the incentive to minimise costs.

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Collaboration as A Necessary Driver

While Schinkel suggests cutting the Gordian Knot, Dolmans suggests several reasons why we cannot rely on the current framework alone. He contests that market forces alone will not rectify the pressing climate concerns, because of market failures. There is a widely held belief that market forces lead to efficient outcomes, a proper allocation of resources, and innovation.[1] However, markets are nonetheless defined by negative externalities.

Dolmans points to the social costs, which are not paid by competitors and is not included in the price of goods or services. These costs, or ‘negative externalities’ are those associated with pollution, greenhouse gasses, both now and in the years ahead.

These costs are most certainly real, but are paid by those affected by poor air quality in the form of medical expenses and those who are victims of natural disasters. Because the social cost is not included in the market price of a non-sustainable product, production is greater than the “social optimum.”

Negative externalities arise because of “collective action problems” (or “coordination problems”). When making important decisions that will effect subsequent pricing, firms tend to prioritise returns on their investment. These ‘collective action problems’ give rise to the subsequent negative externalities which define the markets.[2] Essentially, competitors are so concerned that in a competitive environment that they will fail to recoup the cost of R&D, or that they will suffer from “first mover disadvantage” that we now face the “tragedy of commons” in our modern society – the decay and destruction of our environment as a result of overuse, in lieu of individual incentives to have the true cost of production integrated into the purchase price.

Of course, in markets where willingness to pay (WTP) is greater than the true price of production, competition is best left to compete. As consumer appetite for sustainability grows, it is likely so too will their WTP. This creates new opportunities for companies to compete with a competitive advantage of being cleaner or greener or overall more sustainable than other market players.[3]

However this relies on the consumer’s WTP (ie. To cover the true price of production), which as Unilever demonstrates, it's currently lacking. This failure on the demand side suggests WTP in itself is not sufficient to support the drive for sustainability.

The current author shares the views of EVP Vestager, that there exists other, better equipped, mechanisms to fight the climate battle and promote sustainability. Amongst these, is governmental regulation and taxation, which many propose to be the optimum method of coordination. While regulation may be one solution, it is not enough on its own. Taxation or regulation alone is not sufficient as price increases result in a reduction of demand and substitution at the margin.

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Taking Perspective

The last point Dolmans makes in this regard addresses the adage that “competition drives innovation”. This may well be the case, but ultimately it is not sufficient to rest on our laurels and wait for scientists to happen upon the solution to all our problems.

“Techno-optimism” is not going to deliver us from the threat of climate change. To put things into perspective, when the covid-19 pandemic came knocking in March 2020 and the world went into a global lockdown, people were clamouring for an effective vaccine to allow us go back to our normal lives. At the time we knew not if or when a vaccine would be found. Abnormally, in response to this crisis vaccines were developed through competitor collaboration. These large companies boast the greatest intellectual property and know-how, and the financial means to develop a cure, ultimately fast tracking the process.

There is no doubt that there existed sufficient demand from the consumer side, and sufficient incentive from the production side, however the current author expresses some doubts that the public would have been willing to wait it out for another 5 years in a global lockdown for competition alone to drive innovation and render us with a vaccine. The fact of the matter is that while perhaps further removed from the immediate public consciousness, on our current trajectory the day will come for future generations where Covid-19 seems but a blip in comparison to the climate crisis. At that point, they will ask why competition did not breed the technology needed to halt the decay of our planet. While competition is possibly ‘the’ core ingredient in the drive for sustainability, in and of itself, it is not enough.

The Commission notes that it is responsible for the “enforcement of competition rules based on its competences under the Treaty and existing EU secondary legislation, under the close supervision of the EU Courts.” As such, competition policy must look to further the goals of the Green Deal within the boundary of the Treaties, Secondary Legislation and European Caselaw.

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Sources

Contributions are available here

Schinkel, Maarten Pieter and Treuren, Leonard, Green Antitrust: Friendly Fire in the Fight against Climate Change (December 15, 2020).

Speech 4 February 2021 Conference on Competition Policy Contributing to the European Green Deal

Submission to EVP Vestager 34 Renew Seminar, 22 September 2020 THE “POLLUTER PAYS” PRINCIPLE AS A BASIS FOR SUSTAINABLE COMPETITION POLICY1 Maurits Dolmans, Cleary Gottlieb Steen & Hamilton LLP, London/Brussels

Peeperkorn, “Competition and sustainability: What can competition policy do?”, Concurrences 4-2020

Stern, N. (2006), Review of the Economics of Climate Change, at: http://mudancasclimaticas.cptec.in

pe.br/~rmclima/pdfs/destaques/sternreview_report_complete.pdf. 38 Stern, N. and Oreskes, N. (2019), “What's the Price of Climate Change?”New York Times, at: https://www.nytimes.com/2019/11/05/opinion/climate-change-economics.html. 39 40

Buchanan and Yoon, “Symmetric Tragedies: Commons and Anticommons”, Journal of Law and Economics, Vol. 43, No. 1 (April2000), pp. 1-13, at http://www.jstor.org/stable/725744.

https://www.edf.org/sites/default/files/expertconsensusreport.pdf.

Nicholas Stern: Climate Change, Ethics and the Economics of the Global Deal, November 29, 2007, https://economistsview.typepad.com/economistsview/2007/11/nicholas-stern.html