If we can't do what we must, we must do what we can...

Climate change, private sector cooperation and the race to net-zero...

CGLN Fellow Maurits Dolmans analyses antitrust policy as applied to private-sector climate cooperation, using the debate around Race to Zero and GFANZ as a case study.

When I started as a young antitrust lawyer, I was taught that markets were always right.

· Market forces drive the most efficient use of resources.

· Consumers get the best product for the lowest price.

I was taught that antitrust law should protect that process. The reality, however, is that markets sometimes fail, especially where it concerns climate change.

Firms pay for raw materials and labor, but don’t pay to spew out greenhouse gases. The resulting cost to society of extreme weather events and global warming is not included in the price of goods. Economists call them “externalities”. This has two consequences:

· Because there is no price for emissions, producers have no incentive to cut them, unless consumers insist and are willing to pay for that – which they mostly don’t.

Worse, unmitigated market forces drive companies to exploit nature as much as they can.

· Consumers don’t actually get the best deal – there are hidden costs in the form of climate change.

We are trapped by these market failures. Even if companies realize the danger of climate change, market forces discourage them from taking individual action.

· They fear that cutting emissions costs money. If they then raise their prices, and if they are the only ones to do it, rivals will undercut them.

· This “first mover disadvantage” leads to a “collective action problem”: everyone would be better off if everyone cut emissions, but nobody does it, because they think others will get a free ride, and keep emitting as before.

· Unmitigated competition traps everyone in a climate prisoners’ dilemma. It is what drives us down the road to climate hell.

· Eminent economist Sir Nicholas Stern concluded that “Climate change is a result of the greatest market failure the world has ever seen.”

The same happens on the demand side of markets. Why should I pay more for clean fuel, if my neighbour continues to drive a gas guzzler? Why should I stop flying when my friends keep going for weekend jaunts with budget airlines?

Now, the best way out of a collective action problem is regulation, or a “polluter pays” tax. We should push for binding worldwide net-zero rules. But let’s be realistic for a moment. While we wait, regulation and carbon taxation remains too little, too slow, and not worldwide. The bottom line is that apart from market failure, we also see regulatory failure. Political failure.

There is only one reasonable conclusion: if we can’t do what we must, we must do what we can. That includes pushing for regulation, education, carbon taxation, litigation, reforestation, innovation, but it also includes cooperation in the private sector. Climate change is an existential threat, and we have to pull out all the stops.

Private sector agreements to stop climate collective action problems are a Good Thing.

We tried private-sector cooperation at COP26. The Glasgow Financial Alliance for Net Zero led by Mark Carney wanted to agree not to finance or insure new unabated coal projects.

Since then, some vested interests threatened to sue under antitrust law. This created enough uncertainty to force GFANZ to abandon the “no new unabated coal” agreement.

Were those critics right? I think not.

· The agreement wasn’t a cartel – the parties didn’t try to fix prices or raise their short-term profits. To the contrary: they would forego profits.

· The agreement was beyond suspicion: It was based on impressive work done by the International Energy Agency, the “Roadmap for Global Energy”. And at COP26, the Governments agreed to phase coal down and out. It wasn’t the parties who set the goal.

· The agreement was necessary: The IEA explained in the Roadmap for Global Energy that if we keep building new unabated coal power plants, we cannot meet the goals of the Paris Agreement. The 1.5 degree goal is already under severe threat.

· Most important: the agreement served to resolve a collective action problem. So long as everyone agrees, the benefit from reducing the risk of tipping points leading to a climate disaster in the next years and decades, is bigger than the short-term profits banks and insurers would give up. Society wins as well.

But none of them would act alone. The “no new coal” agreement fixed that. “where positive spill-overs exist between firms, efforts by one firm also benefit other firms. In this case, the level of sustainability efforts by other firms would actually have a positive effect on a firm achieving its own objectives. Allowing firms to coordinate their sustainability efforts will then lead to higher overall effort levels.” See “When to give the green light to green agreements” (Jenkins et al, Oxera)

Prohibiting a “no new coal” agreement would preserve the “greatest market failure the world has ever seen,” and damn the consequences. This can’t be right.

The International Energy Agency Roadmap requires “no new oil and gas fields approved for development” as a milestone for 2021. Yet a report from NGO Urgewald released during COP27 explains that fossil fuels companies’ current expansion plans lead to a “frightening” further growth of fossil fuel production that would blast another 115bn MT of CO2 into the atmosphere, amounting to “more than 24 years of US emissions.”

If our economy collapses because of extreme weather events, tropical regions become too hot to survive, or we reach climate tipping points, there is little future for business and little scope for fair or effective competition – and antitrust law will have failed to achieve its goals.

In other words, if antitrust law prevents us from doing what we need for the economy and society to survive, then – to quote Dickens’ Mr. Bumble – then the law is an ass. We need climate adaptation for antitrust policy. The law already allows it; it’s a matter of political courage, and necessity.

How to distinguish between good agreements and collusive greenwashing?

Economists and competition lawyers are a suspicious lot. They worry that when consumers are not willing to pay fully to cut emissions, and firms pursue short-term profits, firms have an incentive to cheat. This could lead to joint greenwashing.

Fortunately, the antitrust authorities already know how to deal with that – as the European Commission showed in the Adblue case. Moreover, we can distinguish between good and bad cooperation.

· First, check the nature and provisions of the agreement. If it leads to higher short-term profits, it looks like a cartel, which is very hard to justify. The “no new unabated coal” agreement discussed above did not lead to higher short-term profits – to the contrary, the parties would forego those profits.

· Second, check the goal of the agreement. Does it seek what economists call “positive externalities” – where each party cuts emissions to reduce others’ (and consumers’) climate risk, in exchange for others doing the same for them? That fixes a market failure, resolves a collective action problem, benefits everyone, and is in the public interest. That was definitely the case for the “no new unabated coal agreement.”

· Third, trust but verify. It is useful to check whether internal documents confirm that realizing positive externalities is the goal, and the agreement is not some cloaked price fixing or dodging of regulation. Another useful check is whether the parties kept the agreement secret or discussed it with stakeholders.

· Finally, you check whether the agreement is necessary, in the sense that there is no realistic, currently available, less restrictive alternative. In the case of the “no new unabated coal” agreement, necessity was proven by the IEA setting it as a necessary but not sufficient milestone.

So, a reasonable interpretation of competition law, based on first principles and economics, allows us to conclude that where effectively binding worldwide rules are lacking, a “no new unabated coal” agreement should not – and I would say, does not – violate competition law.

Does this mean consumers may have to pay more to get climate benefits for other people?

Climate agreements don’t necessarily raise prices – they can in fact lower prices, for instance where competitors agree to use less packaging, or local products.

· Fabio Panetta, member of the ECB’s Executive Board, gave a speech on 16 November 2022 explaining that “the green transition need not lead to higher inflation”; indeed, it may help reduce inflationary pressures and “increase the … economy’s resilience to fossil fuel price spikes and supply disruptions”.

· In the case of the “no new unabated coal” agreement, energy producers could switch to renewables and new technologies like molten salt power generation, which are expected to be cheaper than fossil fuels – especially when scaled up. (And scaling up would be faster if we cut fossil fuel subsidies. Astonishingly, in spite of the threat of a climate disaster, the G20-IEA estimate that the world keeps subsidizing fossil fuels to the tune of $ 700 billion a year.)

· Or they can temporarily apply carbon capture and sequestration – so long as it’s truly effective, and only as a provisional measure while transitioning to clean energy.

· And climate change abatement reduces overall net costs to society and individuals. We all face higher insurance costs, damage to our health and our assets, and damage to the economy if the climate crisis worsens.

But we cannot exclude that some climate agreements may raise prices. This is a sensitive topic in times of inflation and economic hardship caused by Covid and Russian aggression. It should be addressed by social measures and taxation.

The solution is not to keep exploiting the commons and public goods like the environment and the climate to the maximum. I heard a chief economist of an antitrust authority argue that it would be “unfair” that European consumers should pay more to create climate benefits for the world, and that climate mitigation agreements like the Race to Zero agreement should therefore not be allowed under antitrust law competition law.

I think this is legally, ethically, and economically wrong.

· First of all, it is the world upside down. Producers who emit greenhouse gases impose costs on others – the costs of climate change. This is like a tax on others, who in addition have no say in the production decision. If there is anything unfair, that’s it.

· Many laws include a “polluter pays” principle. You will find it for instance in the European Treaty. Antitrust authorities are legally required to follow this, also for climate agreements.

· A “polluter pays” rule makes economic sense, because it gives producers an incentive to lower costs, and gives consumers an incentive to buy clean and green products.

· And finally, ethics. There is one rule of fairness that all religions and philosophies in the world share: Do not do to others, what you don’t want them to do to you. You can call it the “Golden Rule”, a Kantian “categorical imperative”, or the outcome of a Rawlsian “veil of ignorance” thought experiment, but this is a firm rule that is innate to humanity (as Oxford professor Ken Binmore explains brilliantly in “Natural Justice”), and intuitively clear to everyone.

To summarize, antitrust law and policy should – and I would conclude “does” – allow a “no new unabated coal” agreement between members of the various “net zero” alliances. We should not impose a climate disaster on others for our financial gain, just like we don’t want others to ruin our environment to line their pockets. Surely, that’s one principle everyone can agree on.

Maurits Dolmans is a CGLN Fellow, and an antitrust lawyer in London and Brussels, in the firm of Cleary Gottlieb Steen & Hamilton. This comment is based on a presentation and debate at COP27. Disclaimer: Use of information in this blog does not create or continue an attorney-client relationship, nor should the information herein be construed as legal advice. This communication may constitute “Attorney Advertising” under the rules or law of certain jurisdictions. It reflects my personal views and does not bind the firm or any clients. His impressions of COP27 are found here.