As governments around the world grapple with the urgent threat of climate change, it’s clear the private sector has a critical role to play in addressing its impact and pursuing environmental sustainability.
However, Canada’s competition laws may stifle such efforts unless changes are made to limit the risks associated with legitimate competitor collaboration on environmental initiatives. Under Canada’s current competition laws, there is a chilling effect on such collaboration.
What could happen here is what happened when the Net Zero Insurance Alliance scrapped its proposal to include a commitment to exit coal insurance as part of the terms of group membership because of advice it received from lawyers about potential violations of competition rules.
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Examples of investigations into environmental collaborations include the U.S. Department of Justice’s 2019 probe into an agreement between Ford, Honda, BMW and Volkswagen to follow California’s tailpipe-emissions standards, which were stricter than those proposed by the administration of former president Donald Trump. The investigation was eventually dropped, but the chilling effect is clear – collaborate and you risk being punished.
In the Netherlands, competition authorities investigated Shell and TotalEnergies for collaborating in the storage of CO2 in empty natural-gas fields in the North Sea, although the project was eventually approved. As early as 2000, an agreement between European producers and importers of washing machines to no longer market the least energy-efficient machines in the EU was investigated.
The federal government should use the imminent consultations on amending the Competition Act to follow the example of the European Commission and several European countries and ensure that competition laws do not interfere with the contributions that competitor collaboration can make to tackling the climate crisis.
As it stands, the Competition Act may impede co-operation between competitors or across industries to phase out environmentally damaging products, product attributes or production processes. For example, the rules could prevent an industry from working together to reduce the use of an environmentally damaging chemical. The current limitations could also discourage efforts to establish environmental standards, co-ordinate to reduce environmentally harmful substances, and/or share the costs of environmental protection measures, among other things. To put it simply, the law as written makes environmental collaboration that may affect product prices or supply a non-starter for competitors or entire industries.
Why? Because Canadian laws restrict co-ordination between competitors – particularly in relation to pricing, sales, marketing and production activities.
For example, the conspiracy offence in the Competition Act prohibits agreements between competitors that fix prices, allocate customers or markets, or lessen supply of a product or service. The sanctions include fines up to $25 million (which will become unlimited in June 2023, when the cap is removed) as well as potential maximum prison terms of 14 years for individuals. In addition, private legal actions to recover damages are available to any person who suffers loss as a result of a conspiracy. While competition laws play an important role in protecting consumers and businesses, these exposures can also chill socially useful collaboration in the fight against climate change.
To make matters worse, Canada removed its environmental defence in 2010. The defence currently available for “ancillary restraints” is not broad enough to cover many legitimate environmental collaborations.
Canadian officials are not unaware of the challenge. The Competition Bureau convened a Green Growth Summit in September to discuss these issues, although it has not yet taken action on them. A 2020 draft update to the bureau’s competitor collaboration guidelines indicated that environmental collaborations that affected prices would be dealt with as reviewable practices rather than as criminal offences. Unfortunately, this guidance was removed and uncertainty was increased when the competitor collaboration guidelines were finalized in 2021.
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Other countries are removing impediments to legitimate competitor collaboration on environmental issues. For example, the Netherlands has published guidelines, and the United Kingdom is in the process of developing guidelines, about how sustainability benefits can be weighed against competition concerns and the circumstances in which prohibitions against competitor collaboration should not apply. Most recently, the European Commission published drafts of revised block exemption regulations and horizontal merger guidelines, which outline when sustainability agreements would not be challenged under their competition laws.
We urge the Canadian government to introduce a robust defence to the conspiracy offence for agreements that protect the environment or promote sustainability. Such agreements are not hard-core cartel conduct. There is no policy basis for criminal investigations and prosecution of such conduct, nor is there any practical utility in attempting to do so. Eliminating the exposure to criminal sanctions as well as potential class actions for damages would remove the current chilling effects already inhibiting collaboration that can contribute to environmental sustainability.
A broad “reviewable practice” in the act already allows the Competition Bureau to review all types of competitor agreements and challenge those that are “likely to prevent or lessen competition substantially.” Agreements that reduce the supply or raise the prices of environmentally damaging products, or are likely to do so in the future, can be challenged before the Competition Tribunal.
The review of competitor agreements is subject to an efficiencies defence, but the benefits arising from environmental collaborations may not qualify. Reduction of greenhouse gas emissions or other forms of pollution have important social and economic welfare benefits. A tailored defence would allow the environmental benefits of competitor or industry collaboration to be weighed against anti-competitive effects that may arise from a sustainability agreement.
The federal government could model such a defence on principles developed by the European Commission. Sustainability agreements in the EU can benefit from an exemption when they meet four conditions:
1. they generate sufficient and substantiated environmental benefits;
2. consumers get a fair share of the resulting benefits;
3. the restrictions on competition are needed to attain the benefits; and
4. competition is not eliminated.
Alternatively, Parliament could assign the responsibility for trade-off decisions between the competitive effects and the broader environmental benefits of sustainability agreements to the minister of environment and climate change, or to the cabinet. Public interest frameworks are already used for certain mergers in the financial services and transportation sectors. A similar form of override power could be used for environmentally beneficial collaborations.
With the constitutionality of Canada’s greenhouse-gas regulatory regime recently confirmed by the Supreme Court, and amendments to a variety of Competition Act provisions likely to be considered this fall, the federal government has an opportunity to promote important sustainability and environmental goals. The most urgent priority is to insert an environmental defence into the broadly worded conspiracy offence. In addition, a defence that allows environmental benefits to be weighed against anti-competitive effects under the competitor agreements reviewable practice, or a public interest override mechanism, would ensure that environmental benefits can be pursued by competitors or on an industry-wide basis.
To be clear, we are not suggesting that the Competition Act should be used as a primary form of climate policy or environmental regulation. Instead, we are proposing that Canada join the increasing international momentum to ensure that competition laws do not trump and undermine climate policy in the specific context of competitor agreements.