Policy makers must consider how environmental regulation affects markets.
There is no radical incompatibility between environmental and competition policy. Both share the ultimate objective of promoting the efficient use of natural resources. On the one hand, “green growth” generates new economic opportunities, such as the renewable energy industry and other green technologies. On the other hand, maintaining effective competition is also important for environmental protection because markets provide pricing information and stimulate industry innovation.
However, both policies address different goals. It turns out that, in some cases, the policies may be contradictory. To be clear, distortion of competition is often at the core of environmental regulation, which lays down measures that favor some undertakings or industries over others. Distortion of competition may be a necessary price to pay, but strong environmental protection should not let us forget the need to preserve competition in a market economy.
Environmental regulation can promote certain activities at the expense of competing ones. For example, a policy that encourages wind energy can discourage the development of other renewable energy sources, just as creating exclusive rights in order to develop environmental activities can eliminate competition in the market. Likewise, a public contract awarded on environmental grounds, like securing electricity from renewable energy sources, may harm other energy producers, which could be better able to take on the contract.Standardization agreements intended to achieve environmental benefits could lead to higher prices or new entry barriers to the market. Pro-environmental subsidies distort the market, since they grant economic advantages favoring certain productions or undertakings, which can increase the costs of competitors.
Competition concerns also arise with regard to market-based instruments, which have gained a growing importance in environmental regulation. For instance, the effects of a tax on fuel may vary depending on its intended use. The same variability occurs when environmental goals are achieved through group-related charges. Applying pricing measures on plastic products favors biodegradable alternatives. An inadequate design and execution of a right of use scheme may distort competition by favoring some companies to the detriment of others.Similarly, allocation of greenhouse gas emission allowances could unduly distort competition among states, if there is no correspondence between the rights received and the potential of their industry or by introducing differences between industries or undertakings not based on objective reasons.
It is necessary to find a proper trade-off between environmental protection and industry competitiveness. It may be tempting for state authorities to approve “green regulation” without taking into account the wider impact of their decisions on the economy. However, while there is no free ride in environmental protection – particularly in an increasingly globalized world – regulation often raises the market access barriers, which could lead to more concentrated markets.
In short, environmental regulation has to avoid, or at least reduce, the distortion of competition as much as possible. For the same reason, competition policy can take environmental goals into account at least to a very limited extent, since it seeks to protect the market. When placed on an equal footing, environmental protection and competition policy can benefit each other.
This post draws from the author’s recent article in the Oxford Journal of Competition Law & Practice, “Protecting the Environment without Distorting Competition” (2012) doi: 10.1093/jeclap/lpr092, First published online: January 11, 2012.