Photo courtesy of Cleary Gottlieb Steen & Hamilton LLP.
On June 11, 2024, the US House Judiciary Committee released an interim staff report titled “Climate Control: Exposing the Decarbonization Collusion in Environmental, Social and Governance (ESG) Investing” (the “Majority Report”). This was followed by a hearing by the House Judiciary Committee on June 12.
The Majority Report contains strongly worded conclusions. It argues that a “‘climate cartel’ of left-wing environmental activists and major financial institutions has colluded to force American companies to ‘decarbonize’ and reach ‘net zero.’” Organizations like Climate Action 100+, Ceres, CalPERS, and Arjuna, for instance, allegedly “declared war on the American way of life,” to limit how Americans “drive, fly, and eat.” They did this “by forcing corporations to disclose their carbon emissions, to reduce their carbon emissions, and … handcuffing company leadership and muzzling corporate free speech and petitioning.” Employing nice alliteration, it is said they “collude to kill carbon.” It is suggested that corporate compliance with the goals of the Paris Agreement raises prices to American consumers—ignoring the OPEC+ output reductions, the wars in Ukraine and the Middle East, and the Houthi attacks on shipping, but also the long-term costs of climate change, the findings of the International Energy Agency that no new fossil fuel development is needed to meet current and expected demand, and that renewables and nuclear energy are increasingly cheaper than fossil fuels. The Majority Report boasts of the effect of antitrust threats in causing firms to shy away from cooperation to mitigate the climate risk.
The Majority Report contains no legal analysis. It mentions towards the end that the Committee will “examine the sufficiency of federal law” and “whether legislative reforms are necessary “– which suggests that the authors themselves realize that the law as it stands does not support the legal conclusions.
On the same day, the Democratic members of the House Judiciary Committee published a rebuttal report (“Unsustainable And Unoriginal: How The Republicans Borrowed A Bogus Antitrust Theory To Protect Big Oil”, the “Rebuttal”). As the title already indicates, they conclude that the investigation is misguided and an abuse of oversight authority. Mirroring some of the strong wording in the Majority Report, the Rebuttal concludes that “the legal theory underpinning the Republican investigation is a total sham.” But it differs from the Majority Report in that it contains an in-depth antitrust analysis, based on a detailed review of case-law and the factual record. This leads them to the conclusion that:
There is no theory of antitrust law that prevents private investors from working together to capture the risks associated with climate change. There is certainly no antitrust law that prevents investors from asking corporations how they plan to transition to a climate-resilient economy.
Instead, “[i]nvestor-led ESG initiatives respond to a genuine demand from investors for greater transparency into public companies’ exposure to climate change,” and “[t]he evidence produced in this investigation undermines, rather than supports, theories of potential antitrust liability for these ESG initiatives.”
Pointing out that basic facts of the climate crisis are not subject to dispute, not even in the Majority Report, the Rebuttal maintains that the initiatives attacked in the Majority Report rely on “voluntary compliance of their participants, who act independently,” and show no “conscious commitment to a common scheme designed to achieve an unlawful objective.” Indeed, it may make good commercial sense for companies to take unilateral action to mitigate climate damage, and there is good support that there is a fiduciary duty to stakeholders to do this. Even if agreements are needed, these cause no competitive harm because the parties lack market power. More importantly, they would be subject to a rule of reason analysis, because they are not intended to raise prices and benefit the parties financially by restricting output, or excluding rivals from the market to increase their market power, but to achieve pro-competitive or market efficiency effects. It is a pro-competitive benefit to “maximize the value of … [investment] portfolios against climate-related risk” by, for instance, encouraging investee firms to transition to renewables. The Rebuttal further reasons that petitioning for climate-related policy change or exercising rights to vote on shareholder proxy resolutions is allowed under “longstanding precedent immunizing expressive activity from antitrust condemnation” and that “an actual group boycott of fossil fuel companies motivated by a desire to end climate change could likely make a colorable argument for First Amendment protection.” The Rebuttal finally implies that the goal of the Majority Report itself is anticompetitive, by tracing the strategy back to those who would shield the fossil fuel industry from competition from renewable (and, one could add, nuclear) energy sources.
The Rebuttal appears legally somewhat conservative—perhaps understandably so, in the current political context. It mentions the need to avoid free-rider problems and “first mover disadvantages” in the context of pro-competitive benefits of Net Zero initiatives, but does not delve deeply into the importance of externalities and market failures. It is worthwhile to consider these, as the sustainability chapter in the EU Guidelines on Horizontal Agreements and the UK CMA Green Agreements Guidance do. See also our Sustainability and Net Zero climate agreements – a transatlantic antitrust perspective, 8 Comp. L. & Pol’y Debate 63-80 (2023). It explains that climate change is the result of a market failure, since the current and discounted future costs of extreme weather events, global warming, and biodiversity loss are “externalities“—costs not included in the price of goods and services. Consumers and producers alike ignore or are insufficiently aware of these externalities. This means that market forces do not give the right signals for an efficient level of production, consumption, and allocation of resources. Antitrust policy should take account of this.
Net Zero Agreements can alleviate market failures, by resolving the related collective action problem or prisoners’ dilemma (i.e., firms may reduce their greenhouse gas emissions only if others do, too, for fear that they will otherwise just lose market share to free riders without improving the overall situation). These agreements would thus preserve consumer welfare, by lowering the potentially huge costs to consumers of an unmitigated climate crisis. Case law affirms that agreements seeking such benefits are subject to a rule of reason, because they do not seek a price increase or to exclude rivals from the market where the parties themselves operate so they can financially benefit from the loss of competition. The goal is instead to achieve a more efficient market. Under the rule of reason, antitrust authorities and courts in the US, EU, and UK can and should recognize the benefits of private-sector cooperation that avoid a market failure or “flaw in the market.” The UK Competition and Markets Authority, for instance, recently allowed an initiative to incentivize grocery suppliers to set net-zero targets, and accepted that climate change mitigation benefits could offset any negative impacts such as the exit or reduced presence of some suppliers. Cases like Appalachian Coals are consistent with this rule of reason approach. Excellent articles by Prof. John Newman (“The Output Welfare Fallacy: A Modern Antitrust Paradox”) and Prof. Amelia Miazad (“Prosocial Antitrust”) are instructive, as is a Report from the Columbia University Sabin Center (“Antitrust and Sustainability: A Landscape Analysis”).
The climate benefits can be enormous. A report for the IMF (“The Great Coal Arbitrage”) explained that the net advantage of an agreement to abandon coal projects, for instance, is as much as USD 78 trillion after deducting the present value of costs of phasing out coal (investments in replacement clean energy, and opportunity costs of giving up coal, financed by public/private funding, as this blog and this report explain). The benefit equals around 1.2 percent of current world GDP every year until 2100. And that is just for coal, and based on a conservative estimate of the social cost of carbon ($75 per ton of CO2).
This debate is important because the climate crisis is a greater threat than we thought until recently. Not so long ago, it was expected that the hidden discounted future cost of climate change late 21st century was in the high single digits of GDP. This was based on Nordhaus‘ quadratic formula—a nice slope showing climate damage gradually increasing with time. This is now debunked, as explained in an article in October 2023, forcefully titled “When Idiot Savants Do Climate Economics.” Stiglitz, Stern, and Taylor further found that Nordhaus’ models are “inadequate to capture deep uncertainty and extreme risk” because they ignore “potential loss of lives and livelihoods on immense scale and fundamental transformation and destruction of our natural environment.” See The Economics of Immense Risk, Urgent Action and Radical Change, 29 J. Econ. Methodol 181-216 (2022). Economists and scientists now think these costs are six times higher than originally estimated—because of greater atmospheric sensitivity to greenhouse gases, tipping points, and cascading risks (as explained by Prof. Tim Lenton of Exeter University in “Global Tipping Points”).
- Because of risk cascades and systemic vulnerability of the climate system, “[t]here is ample evidence that climate change could become catastrophic, [and w]e could enter such ‘endgames’ at even modest levels of warming.” See the diagram below, from “Climate Endgame: Exploring Catastrophic Climate Change Scenarios.”
- The British Institute and Faculty of Actuaries wrote two reports (“The Emperor’s New Climate Scenarios” and “Climate Scorpion—The Sting Is in the Tail”), with the University of Exeter’s Global System’s Institute. They find that “Conservatively, there is an argument for at least a 20% chance that we may be on a trajectory to 5˚C or more of warming at current levels of GHGs,” and “we expect 50% GDP destruction – somewhere between 2070 and 2090… It is worth a moment of reflection to consider what sort of catastrophic chain of events would lead to this level of economic destruction.”
Source: Kemp et al, ‘Climate Endgame: Exploring catastrophic climate change scenarios’ (2022). Licensed under CC BY 4.0.
- A working paper for the National Bureau of Economic Research (“The Macroeconomic Impact of Climate Change“) finds that every 1°C rise in global temperature causes global GDP to persistently decline, with a peak loss at 12%, and that “macroeconomic damages from climate change are six times larger than previously thought.” They conclude that “a 31% welfare loss result[s] from a moderate warming scenario…. These effects are comparable to having a major war fought domestically, forever.”
- The Swiss Federal Institute of Technology Zurich conducted a study finding a lower percentage of welfare loss, still at a dramatic 10-17% loss of GDP (“Climate damage projections beyond annual temperature“). The Potsdam Institute for Climate Impact Research estimates that the world is already committed to an income reduction of 19% by 2050, and possibly up to 29%: under a “middle-of-the-road scenario of future income development .… this corresponds to global annual damages in 2049 of 38 trillion in 2005 international dollar …. and possibly up to 59 trillion 2005 international dollars.” (“The Economic Commitment of Climate Change”). An article in Forbes concluded, “this means total economic collapse.”
- A study by the Atlantic Council finds that the economic costs of extreme heat alone already reach $100 billion per year and that “[w]ithout meaningful action to reduce emissions and/or adapt to extreme heat, labor productivity losses could double to nearly $200 billion by 2030 and reach $500 billion by 2050.” (“Extreme Heat: The Economic and Social Consequences for the United States”). That is just labor productivity loss caused by heat, not including loss from food insecurity, extreme weather events, increased flooding and wildfires, and health costs. The same study finds that loss of life is expected to be 59,000 lives a year, especially in southwestern Arizona, Southern California, and southwest Texas.
Given these risks and costs, it is worrying to see polarization of this debate along political lines. While there is at least a Conservative Climate Caucus, why are climate change mitigation and adaptation not more of a bipartisan effort? As the Rebuttal points out, “the same extreme weather events that pose an existential risk to human populations around the globe also threaten corporations’ assets and commercial dealings,” and firms that take climate action can reap substantial economic benefits. It is in the interests of Republicans and Democrats alike to reduce the risk of “the next hurricane, or heatwave, or flood, or wildfire,” the threat to prosperity and food and water security, or the plight of climate refugees as temperatures in certain regions become unbearable. Gallup found recently that two-thirds of Americans worry about climate change. Pew found that two-thirds feel large businesses and corporations are doing too little to reduce the effects of climate change. We should come together to face and defeat this common threat. It is cost-efficient, since climate change mitigation costs are estimated at 1/6 of discounted costs of climate damage (Potsdam study)—indicating that climate action is cheap compared to inaction. The “Great Coal Arbitrage” study above is a case in point. The benefits exceed costs even if we look only at the US. The study for the National Bureau of Economic Research concludes that the domestic costs of carbon in the US “largely exceeds policy costs … [and] unilateral decarbonization policy is cost-effective for the United States.”
The private sector has a fiduciary duty to its stakeholders to prevent damage and economic collapse, especially where Government regulation to correct market failures is inadequate. Antitrust law should not stand in the way.
Maurits Dolmans is a Senior Counsel at Cleary Gottlieb Steen & Hamilton LLP. He is a member of the Rotterdam and New York bars. This note reflects the writer’s personal views, rather than those of the firm, its members, or its clients.
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