The past two years have seen a number of competition authorities publishing guidance on how sustainability agreements are to be assessed under competition rules.

The key challenge that authorities have grappled with is how to reconcile the urgent need to address negative environmental externalities with their core mandate of ensuring markets deliver for consumers. In this article, we argue that supporting action to tackle climate change and biodiversity loss through competition policy does not require a departure from this core mandate. Rather, it is fully in line with making markets efficient – even if some of the measures result in higher prices and reduced output. Competition policy should not shy away from letting consumers pay the true costs of their consumption if this means that markets can then operate within sustainable boundaries.

Competition authorities have a mandate to protect effective competition in markets. This mandate is motivated on the basis that well-functioning markets enhance consumer welfare and lead to an efficient allocation of resources. When competition does not work well, society suffers because resources are wasted: inefficient markets lead to a situation where consumers are collectively worse off. In this article we argue that a market in which consumers are depleting the earth’s vital resources is not efficient, it is failing.

At the core of our argument is the understanding that competition works by bringing market prices into line with the true costs of production and consumption. Seen through the conventional lens of competition policy, we tend to think about the role of competition as one of lowering prices, limiting market power so that firms can’t raise their prices above costs and extract excessive profits. And that is indeed one way in which prices can get out of line with the true costs of production and result in inefficiency.

But another cause of inefficiency in markets is when prices are too low, below the true costs of production and consumption. Effective economic regulation – including competition policy – should therefore seek to ensure that neither happens.

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