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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.