World Resources Institute Sustainable Enterprise Program A program of the World Resources Institute DANISH BOTTLES (A) Commission of European Communities v. Kingdom of Denmark For more than a decade, WRI's In September 1988 the Court of the European Communities had Sustainable Enterprise Program to decide whether, by declaring that all containers of beer and (SEP) has harnessed the power of soft drinks must be returnable, Denmark had failed to fulfill its business to create profitable solutions free trade duties under the Single European Act (SEA), or to environment and development whether Denmark's decision was justified on the grounds of challenges. BELL, a project of SEP, is environmental protection. focused on working with managers and academics to make companies Background more competitive by approaching social and environmental challenges It had long been the practice in Denmark to charge a deposit on as unmet market needs that provide the sale of beer and soft drink bottles. This stimulated many business growth opportunities through consumers to return their bottles voluntarily, helping to keep the entrepreneurship, innovation, and environment free of discarded bottles. This system worked well organizational change. when there were a few different bottle types, and when foreign imports were often made under license or at least bottled in Permission to reprint this case is Denmark. However, in the mid 1970s, Danish beer available at the BELL case store. Additional information on the Case manufacturers began to use cans and different shaped bottles. To Series, BELL, and WRI is available at: ensure that the deposit system continued to be effective www.BELLinnovation.org. legislation was introduced "limiting or prohibiting the use of certain materials and types of container ...or requiring the use of certain materials and types of container” (Law No 297, 8th June 1978). This case was prepared by John Clark, PhD candidate, under the supervision of Assistant Professor Scott Barrett at London Business School (LBS), to stimulate class discussion rather than to illustrate effective of ineffective management strategies. The case was developed with support from the Management Institute for Environment and Business (MEB). Copyright © 1992 by World Resources Institute (WRI) and LBS. Not for citation, distribution, or duplication without permission of WRI. In 1981, as part of the Danish legislation on the reutilization of paper and beverage containers, the Danish Government set new orders for containers of beer and soft drinks (Order 397, 2nd July 1981). The Order said that beers and soft drinks could be marketed only in "returnable containers." According to the definition given in the Order, this meant that there had to be a system of collection and refilling under which a large proportion of used containers were subsequently refilled. With existing technology, this effectively banned plastic and metal containers. Also, the Order required formal approval for returned containers by the Danish National Agency for the Protection of the Environment (MiljOstrelsen). The Agency could refuse approval if the planned collection system did not ensure that enough containers were reused, or if a container of equal capacity, already approved and suitable for the same use, was available. Danish brewers had initially been against the recycling regulations introduced in the 1970s. However, they were forced to make significant investments in recycling processes and infrastructure. By the mid 1980s, the Danish industry was in a good position to cope with the strict recycling standards imposed by government. These moves were supported by the Danish firm United Breweries. A significant exporter, United Breweries also dominated the Danish beer market with its leading brands Carlsberg and Tuborg (together accounting for 70% of the Danish market). It was also a major player in the Danish soft drinks market. In both markets it held minority share holdings in most of its local competitors. Finally, United Breweries also owned the only glass bottling facility in Denmark. Exhibit 1 contains extracts from a relevant United Breweries annual report. Outside Denmark the regulations were viewed less kindly. Producers of drinks and containers, and European associations representing the retail trade from other EC Member States, would have been more concerned, but for the small size of the Danish market. However, some industries did complain to the European Commission about the Danish regulations. The metal packaging industry was especially vociferous. Its concern had less to do with the tiny Danish market per se, than with a precedent being set for Germany's much larger market. They argued that the legislation had the effect of preventing imports of foreign beer and soft drinks into Denmark, both because of administrative difficulties, and the costs involved for importers in establishing the required collection system. The Commission supported this claim and objected to the Danish Order. The Order was amended by the Danes in 1984 (Order 95) to allow the use of non-approved containers (except metal) if volume was less than 300,000 liters per producer per annum, or if the market was being tested, provided that a deposit and return system was established. Despite this amendment the Commission considered the measures to be equivalent to a quantitative restriction contrary to Article 30 of the EEC Treaty. The Commission tried to persuade the Danish authorities to modify their position. However, negotiations failed and in December 1986 the Commission brought an action against Denmark before the European Court of Justice. Environment and the Single European Act A central issue of the case was whether an EC Member State should be allowed to erect potential barriers to trade on the grounds of environmental protection. The opening of the Single European Market in 1992 and the promised benefits of free trade were a large part of the European business psyche during the 1980s. It was only towards the end of this period that the environment and its implications impinged on the thinking of voters, politicians and industry. In 1992, the completion of the internal market would mean further coordination of environmental policies at an EC level. EC environment policies are based on the principle of "subsidiarity." Subsidiarity means that environmental policy decisions should be taken at the lowest possible level. The SEA explicitly recognizes the importance of the environment in Article 130r (see Exhibit 2), which states that the EC 2 Danish Bottles (A) will take action on the environment only if EC environmental objectives can be better attained at the EC level than at the individual state level. If each country is allowed to decide its own environmental standards and strategies, significant differences in environmental quality will result. Some countries might set very low standards which would be counter to the SEA (Article 3c). This provides for the free movement of EC citizens, with the implication of minimum environmental standards, irrespective of location. On the other hand, countries setting high environmental standards might come against Article 100a of the SEA, which provides for the free movement of goods. Thus "subsidiarity" might result in conflict between environmental and market integration objectives. European legislation left it to the European Court to decide how this conflict should be balanced, and the Danish bottles case provided the Court with the opportunity to do just that. The GATT Dimension Another complication for the Commission and the Danes to consider was the possible intervention of GATT (General Agreement on Tariffs and Trade). GATT was created in 1944, along with the World Bank and the International Monetary Fund at the Bretton Woods Conference. As an institution, GATT monitors the trade policies of its members, serves the various committees that they set up, and helps to settle trade disputes. There are 3 guiding principles that govern GATT's existence and are embodied in its articles: • Reciprocity: If one country lowers its tariffs against another's exports, it can expect the other country to lower its tariffs in return. The principle is based on downward tariffs and does not allow governments to threaten to raise their tariffs. • Non-discrimination: Countries should not grant one member or group of members preferential trade treatment over the others. It is known as the most favored nation rule which, despite the name, means that every country is treated as favorably as the most favored. • Transparency: The GATT urges countries to replace non tariff barriers (e.g. import quotas) with tariffs, and then "bind" (i.e., fix) those tariffs. The logic here is that non tariff barriers do more economic harm than tariffs. Bound tariffs create greater certainty and are more amenable to negotiated reduction. The European Court could only judge on the basis of European law. However, the case could also be taken to the GATT, where the applicability of Article XX (see Exhibit 3) would have to be judged. The Commission's Case To understand the context of the European Commission's case, the role and structure of the Commission need to be understood. The Commission of the European Communities (CEC) fulfills a role broadly equivalent to that of the Civil Service in Britain. But, it has considerably greater independence and is responsible for the initiation of all EC legislation. It is headed by 17 commissioners each of whom run one of 17 divisions called Directorate Generals (DGs). For the Danish bottles case the relevant DGs were: DGIII, the guardian of the internal market; DGIV, the competition Directorate; and DGXI, covering the environment. It was DGIII who led the case against Denmark. DGXI, on the other hand, seems to have been generally in favor of the Danish stance. Along with the CEC, the three other relevant EC institutions are: • The EC Council, which consists of representatives from the governments of each member state, and is the principal law maker and focus of political control within the Community.