Carbon emissions transcend firms and borders—they are a massive, unpriced externality. Companies across industries are increasingly waking up to the need to cooperate in the fight against climate change but the law might get in the way. Across Europe and the U.S., regulators are discussing whether corporate climate collaborations violate antitrust law. Companies need to keep an eye on this debate, and regulators should strive to incorporate the effect of a partnership on emissions into antitrust considerations.
What do Covid-19, the Russian invasion of Ukraine, and the climate crisis have in common? All three challenge our sense of safety and illuminate the interconnected nature of the modern world. Each also calls for a reconsideration of boundaries between government and business, and the appropriate balance between competition and cooperation in business — and in antitrust law. In some jurisdictions, antitrust authorities see climate cooperation as a means to support greener economies; elsewhere, their counterparts see them as a violation of antitrust law that must be stopped.
Pandemics, invasions, and carbon emissions have effects that spill over national borders. These “wicked” problems are caused by, and in-turn produce, complex webs of interacting forces. Their solutions, therefore, require collaboration across national borders and sectors. Society has considerable experience in cross-national coordination through multi-lateral organizations, treaty negotiations, and more. We encourage cross-sectoral cooperation between business and government, as well as between academia and government. We generally believe that these collaborations make a material difference in addressing broad systemic issues.
While our societies are comfortable with these collaborations, we generally have institutionalized prohibitions on cooperation amongst rivals through antitrust laws. Introductory economics teaches that a monopolist will set prices to maximize their profits, raising prices and lowering quantities relative to a competitive outcome, and thereby transferring wealth from consumers to producers. And even when there is no single monopoly, if companies are allowed to collude together they can collectively act as if they were one. That’s why, throughout history, laws have banned companies from acting collectively to restrain trade. This principle is enshrined in the antitrust laws of all major jurisdictions, prohibiting agreements between firms that lead to higher prices, lower output, lower quality, or less innovation.
There are legitimate reasons to ban collusion, yet collaboration is needed to battle climate change. A recent BCG study argued that to achieve sustainability, “companies must act aggressively — and collectively — to transform their ecosystems.” The same study noted that collaborations in sectors ranging from sustainable apparel to sustainable agriculture have produced some concrete outcomes. Our own research has identified more than 150 business climate collaborations ranging from common carbon accounting frameworks and principles for responsible investments to shared net zero objectives.
To decarbonize, firms must often not only agree to standards, but also make substantial investments and take other costly actions. While these actions may lower costs in the long run, in the short term they may lead to higher prices or lower margins. First movers may find themselves at a competitive disadvantage. Collective action can address this; hence, climate collaborations are increasingly the norm. Yet moving together has a risk. More ambitious climate collaborators have sometimes found a surprise — the long arm of the law. In some jurisdictions, interpretations of current antitrust laws and interpretation generally don’t consider socially desirable outcomes, meaning increased prices typically cannot be offset against broader environmental benefits to society. This means collaborating around shared climate goals might be simply illegal. In other jurisdictions, there is real uncertainty and concern around the legality of certain cooperative activities. The fear of prosecution can have a chilling effect: by one estimate, it discourages up to 60% of companies from engaging with climate coalitions. This may explain why some collaborations seem relatively toothless.
Does this sound far-fetched? In the U.S., the Department of Justice recently closed an antitrust investigation into voluntary agreements among carmakers and the state of California to reduce emissions. In March 2022, the Arizona attorney general, in a Wall Street Journal op-ed entitled “ESG May Be an Antitrust Violation,” announced that he was using antitrust statutes to go after “a coordinated effort to allocate markets.” He singled out a climate collaboration (Climate Action 100+) and proudly announced that he was launching “an investigation into this potentially unlawful market manipulation.” In July 2022, we saw an alliance of insurers pull back from collectively moving away from insuring thermal coal projects on the basis of antitrust considerations. The Financial Times has reported that the UN’s Race to Zero amended its interpretation guide — written by a peer expert review group — that had called for financial firms to not fund new coal projects. The language “no new coal projects” was removed in part due to anti-trust concerns. A recent piece by an insider in this process details the legal pressure they faced. Not so far-fetched.
How do antitrust laws balance their traditional concern for consumer welfare (consumers of a certain product might pay more) against externalities (everyone is hurt by greenhouse gas emissions)? Competition agencies — especially in Europe — are now considering how to ensure that antitrust law can contribute to greening our economies. Some European regulators, such as the Dutch Authority for Competition and Markets, have led the way, for example permitting competitors Shell and Total to cooperate on re-adapting empty North Sea gas fields for CO2 storage. The European Commission is consulting on changes to its guidelines to clarify when climate collaborations are legal. In the UK, the Competition and Markets Authority has recently established a “sustainability taskforce” to prepare new guidance and consider the case for changes in the law. The Ukraine invasion and Covid-19 pandemic provide pertinent models of the proactive role antitrust agencies can play — prompted by the rapid onset of these crises, safe harbors were quickly introduced to enable rivals to collaborate to address supply chain issues.
Yet, antitrust agencies are rightly wary that sustainability exceptions might permit anti-competitive behavior or “greenwashing,” as the recent EU fines on car manufacturers for colluding to avoid using certain technologies to reduce emissions shows. In the U.S., the greenwashing conversation is being led by the SEC, but federal discussions about green antitrust policy seem to be lagging behind Europe. Yet with the passage of the Inflation Reduction Act, which has elements of sustainable industrial policy, it is likely that American firms will need to collaborate more, not less, in the future. Policymakers across the globe need to join up these strands of activity. One incomplete action might be to explicitly consider the benefit of greenhouse gas reduction, as measured by the social cost of carbon, against any increases in price. A broader step would be to explicitly require the tradeoff of the public benefits of sustainability against the private costs to consumers.
What can firms do? If you operate in the UK or EU, weigh into the ongoing consultations on green antitrust policy. Some competition agencies are also actively encouraging alliances to bring forward concrete cases that they can review. Formal and informal input from industry and third parties can help agencies evaluate which collaborations will advance climate goals and to clarify their interpretations of the law. Wherever you are, as you enter into climate collaborations, discuss with your lawyers. In some instances, simple changes in language are important. Knowing red lines and potential safe harbors is essential. Most importantly, we must continue to decarbonize our economies and protect our planet for future generations. Given the recent projection that we will breach the 1.5° C barrier within the next five years, we must find a way to mitigate global warming—while meeting the current needs of our economies and societies. We can’t have legal chilling of collaborations that address the physical warming of our planet.