Antitrust fines in the EU signal progress on emissions standards
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On the 8th of July 2021 the European Commission announced that it had imposed a €875 million fine on a group of German car manufacturers for conspiring to limit the development of clean emissions technology. This is the 7th largest fine ever imposed by the body and demonstrates the EU’s hard-line response to the car industry’s flagrant disregard of international environmental law. Daimler’s decision to alert the Commission to the cartel in order to avoid fines under the 2006 Leniency Notice suggests that new regulatory frameworks are effectively discouraging cartels.
The Establishment of a Cartel
In 2006 new regulations to restrict nitrogen oxide emissions prompted several large German car makers, BMW, Volkswagen, Daimler, Audi and Porsche, also known as the ‘Circle of Five’, to collaborate to develop technology to meet these new standards.
However, the collaboration developed into a cartel when the companies agreed to limit technological innovation to preserve the minimum market standards. This agreement violated EU antitrust laws and led to the commission’s investigation after Daimler brought the cartel to the attention of the commission.
This is the first time that the EU has used antitrust laws to prosecute the limiting of technological innovation and its actions, including fines and public admonishment, signal the body’s commitment to enforcing environmental standards.
A History of Illegal Emissions
The EU is no stranger to prosecuting car manufacturers for violating emissions standards.
In 2016, the EU issued Daimler a €1 billion antitrust fine as a result of its long-standing involvement in a 14 year cartel selling high emitting trucks in Europe.
In recent years, Volkswagen and Daimler have both been fined in the US for violating emissions standards. In 2020 the US Justice Department fined Daimler $1.5 billion for knowingly selling tens of thousands of vehicles in the US that did not meet American emissions standards. Daimler also incurred a further $700 million penalty to settle with customers.
All of these fines contributed to Daimler’s substantial loss in profitability in the later half of the 2010s. Daimler informed the EU of the Circle of Five during this period, strongly indicating that avoidance of further penalties motivated Daimler’s exposure of the cartel.
The Role of Globalisation in International Law
As markets and production pipelines become increasingly globalised, international law will hold greater power over historically localized firms. In order to access foreign markets, firms must consider the regulatory framework of those markets. For example, a car that meets EU emissions standards may be acceptable in the highly regulated California market.
However, for companies with substantial cash reserves for whom the commercial payoff of expanding into foreign markets is worth risking a fine, international law is less of a consideration. This was the case for Volkswagen who were fined $4.3 billion in 2017 by the US for conspiring to cheat US emissions tests. Since the company had roughly $22 billion cash-in-hand the fine was not a major financial blow to Volkswagen. Larger companies will also have the capital to invest into emissions research than their smaller counterparts, should they choose to reduce emissions rather than shoulder fines.
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European Green Deal and Corporate Compliance
Following the US withdrawal from the Paris Climate Agreement, the EU played the leading role within the body. In April of 2017, the European Commission sent its statement of objections to the Circle of Five. Separately, the EU established the Green Deal – an ambitious set of environmental policy objectives. Presented in December of 2019, the deal is described as ‘a roadmap for making the EU’s economy sustainable’ by intersecting green strategies across all areas of policy.
In a press release, the European Commission says that the cartel investigations show that ‘competition law enforcement can contribute to the Green Deal’. To make the policy framework around emissions even more robust, the EU is set to upgrade the Green Deal from its current form.
To effectively implement these policies, economist Dimitris Valastas has argued that the EU must harness its ‘economic size and influence’ through trade.
Influencing Global Policy through Trade
Since motor vehicles have been in the EU’s top 3 most valuable exports since 2016, the industry is a powerful tool for promoting Europe’s climate agenda. Roughly 60% of Volkswagen’s sales in 2020 were to European, North American and Chinese consumers, who are increasingly concerned about the emissions rates of their vehicles.
With the benefit of hindsight, politicians can avoid the mistakes of the Kyoto Protocol, the last significant international agreement to combat climate change. The agreement was predominantly signed by European countries while industrialising powerhouses like China and India were absent. Despite signing, the US did not ratify the agreement which prevented the deal from becoming legally binding.
As of 2021, 194 countries, including China, India and the US, have signed the Paris Agreement, which indicates progress towards a global commitment to tackling climate change. Although most countries still are yet to implement the goals set out in the agreement, international trade could help to facilitate progress.
Forecast
International law such as this could prove effective at upholding international environmental standards. There is evidence that companies are already changing their internal policy to achieve this. At a 2019 shareholders meeting, Daimler stated that ‘by 2025 all-electric models will account for between 15 and 25 percent of total unit sales by Mercedes-Benz’. This suggests companies are starting to recognise that the long-term reputational damage to their company outweighs the possibility of being fined. Furthermore, growing consumer preferences for low-emissions vehicles will incentivise manufacturers to meet the emissions standards in as many markets as possible.
President Biden’s 2021 Trade Policy Agenda states that the administration intends to use trade as a way to encourage environmental policy. With the US once again playing a role in this international policy, combined with the continued efforts of the EU, it is likely that smaller nations will be influenced through trade to adhere to and adopt a global standard of emissions.
