When higher prices are worth it: assessing the environmental value of mergers

But in the fights against climate change and biodiversity loss, should competition authorities be considering the environmental value mergers can create?

As the European Commission (EC reviews its guidelines, we argue that a narrow focus on prices could be blocking deals that benefit the environment – and that a wider definition of value could bring merger control up to speed with sustainability policy and support the growth agenda.

Why this matters now: the EU’s merger review

Competition authorities increasingly recognise that agreements between firms can deliver sustainability benefits. But merger control still lags behind.

Some mergers could lead to environmental benefits through ‘green efficiencies’ – like reducing emissions, cutting waste or enabling investment in cleaner technologies.

But mergers are rarely cleared on these grounds. Instead, assessment tends to focus on direct price and output effects in the affected market, like whether the deal will lead to higher prices for consumers.

The EC has recognised this. As part of its Merger Guidelines Review, it’s considering whether more weight should be given to green efficiencies.

What are green efficiencies?

Mergers often lead to efficiency gains. They can generate cost savings, enhance technical capacity or improve production processes.

But as well as benefitting the company, these efficiencies can help the environment too. They might result in reduced carbon emissions or more efficient water use, or they might free up land.

In fact, the theoretical list of green efficiencies is so long it’s hard to capture definitively. So, building on existing research, we’ve identified four main types:

1. Rationalisation of production: Consolidating operations to use less energy, land or transport.
2. Economies of scale: When larger output enables investment in cleaner equipment or low-carbon technology.
3. Technological progress: Combining firms’ know-how to improve processes or products so they perform better environmentally.
4. Purchasing economies: When greater buyer power enables a switch to more sustainable inputs or suppliers.

Efficiencies submitted by parties in a number of mergers in recent years fall into these categories. Some of these directly argued positive environmental effects. For example, Aurubis/Metallo (2020) highlighted how shared recycling technologies could improve metal recovery. And in PKN Orlen/Grupa Lotos (2020), the parties argued that their combined scale could enable investment in green hydrogen and carbon capture.

Others cited the efficiency as a cost-saving measure, though on closer examination these may also have delivered environmental benefits as a side-effect. For instance, in Tesco/Booker (2017), the parties argued that integrating distribution fleets would cut costs – but doing so would also have reduced transport emissions.

Most of these arguments did not hold sway with the competition authorities.

Why current frameworks fall short

Merger control is often narrowly focused on consumer welfare within the market in question. In many cases, the assessment ultimately centres on a single question: how will the deal affect prices?

Some green efficiencies fall within this focus, because they lead to lower prices. When merging companies save on their energy bills, that not only benefits the environment, but the cost saving may be passed on to consumers.

But many green efficiencies don’t fit that pattern. Some may only generate fixed cost savings for the companies involved, which are less likely to result in lower prices. And many do not generate cost savings at all.

How economic tools can help – if given the chance

Is it possible to incorporate environmental value into merger control

Measurement isn’t the problem. Economists already have tools to value sustainability gains in monetary terms, from economy-wide marginal abatement costs to survey-based consumer willingness-to-pay estimates. These are widely used in other policy areas. 

The problem is one of scope: competition authorities have traditionally only focused on the effects on consumers within the market.

Let’s consider an example. Imagine a merger would lead to the creation of a new product – an insecticide that was less harmful to pollinators. Imagine that benefit is verifiable and merger specific, and a monetary value to society can be calculated. Competition authorities are still likely to ask: how will it benefit buyers of the insecticide or of the agricultural products that use it in the production process?

Such an approach is misguided. Environmental harms are a cost that is created by markets but realised outside them, in wider society. When it comes to mergers, if we only consider the benefits that green efficiencies could have within the market – on consumer prices – we will fail to take into account what might be the lion’s share of the benefits of the merger – and potentially prohibit mergers that would be beneficial for society as a whole.

So, where green benefits from a merger are verifiable and specific to the merger, there may be a strong argument that society would be better off if such a merger were cleared – even if it results in higher prices. In some cases, competition authorities may need to weigh the harm from higher prices – reflecting a loss of competition – against wider environmental efficiencies that benefit society as a whole. In others, higher prices and lower consumption may themselves form part of the adjustment needed to reach a socially efficient level of output.

Moreover, mergers that deliver green efficiencies could, in some cases, complement the economic growth objectives now shaping antitrust policy debates. The preservation of natural systems remains fundamental to long-term economic resilience. Given that over half the global economic output depends moderately or heavily on nature and its services, mergers that help sustain these underlying assets can also serve the broader foundations of growth.

Towards a broader view of value

Our view is that competition authorities should consider widening their assessment of mergers, to include the non-market value to society that arises from green efficiencies.

And promisingly, there’s precedent. In 2023, the Australian Competition and Consumer Commission cleared a merger between two energy companies, Brookfield and Origin, because it would benefit the public by accelerating the roll-out of renewable energy. This was despite concerns it would lessen competition in energy markets.

As the chair of the ACCC put it, “the proposed acquisition is likely to result in public benefits that would outweigh the likely public detriments.”

As the EC’s review continues, we wait to see if European regulators will follow suit.