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 Not for citation, distribution, or duplication without permission of WRI.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.

• The EC Parliament, which consists of 518 elected members (MEPs) from each member state, Danish Bottles (B) 3

and has the authority to reject "common positions" proposed by the Council, as well as to propose amendments.

• The Europeans Court of Justice, which consists of 13 judges assisted by 6 Advocates-General, and hears cases, such as the Danish case, brought against member states. It also assists national courts in interpreting EC law.

The CEC was represented by its legal adviser, Mr. Wainwright. His main argument was that by effectively creating a quantitative restriction, Denmark was acting contrary to Article 30 of the EEC Treaty. Article 30 says that "Quantitative restrictions on imports and all measures having equivalent effect shall ...be prohibited between Member States." These measures of equivalent effect include "all trading rules enacted by Member States, which are capable of hindering directly or indirectly, actually or potentially, intra-Community trade."

The CEC said that Article 30 was contravened in 5 ways:

• Only certain types of drink were affected, to be sold in returnable containers

• Sale of these drinks in metal cans was prohibited

• Systems for collecting and refilling containers had to be established

• Prior authorization was required to market certain drinks, with the associated administrative burden

• Parallel imports into Denmark of these drinks was forbidden

Hence, it was argued, Denmark was restricting imports and protecting its own producers.

The CEC contended that the restrictive effect of the Danish rules was proved by the statistics shown in Exhibits 4 and 5. These show that imports of foreign beer into Denmark were very low and had fallen since the relevant legislation was introduced. Furthermore, Wainwright argued that this was due to the restrictions and not lack of demand for foreign beers by the Danish consumer. When the rules were suspended during a strike by the Danish brewers in 1985, the quantity of imported beer soared to a level that the CEC said could not be explained solely by the need to replace the national product.

The European producers who had initiated the case with the EC were particularly upset about the effective ban on drink sales in metal cans in Denmark. There were no restrictions on exports of Danish beers in metal cans.

The CEC argued that the Danish measures could only be justified "if any restrictive effects on trade are not disproportionate to the intended objective of protecting the environment," and that it was possible to encourage recycling by less restrictive means. A key concept here is that of proportionality. For example, in Denmark there is no statutory collection system for containers of milk, wine, spirits, table oil or vinegar: all are voluntarily returned and collected for re-use or for recycling, and the system seems to work satisfactorily, suggesting that any stronger measures would be unnecessary and therefore "disproportionate." The CEC doubted "the sincerity of the Kingdom of Denmark's ecological concerns," given that the milk and wine markets were not subject to competition between domestic and foreign producers for different reasons, and did not fall under the recycling restrictions. Mr. Wainwright pointed out that Denmark was one of Europe's largest exporters of beer (see Exhibits 6 to 8).

4 Danish Bottles (A)

It was then the turn of Mr. Molde of the Danish Ministry of Foreign Affairs to present the case for Denmark.

Denmark's Case

The Danish Government's main argument was that the contested legislation was justified by a legitimate concern to protect the environment, by conserving resources and reducing the volume of waste. The Danish legislation had been very effective: 99% of approved bottles were returned and some of them reused up to 30 times.

The Danes argued that the exclusion of milk and wine bottles was justified because:

• Milk containers were different in that they were usually paper cartons and could be burnt with the household waste.

• Wine containers are not much of a danger to the environment because of the very limited consumption of wine in Denmark.

• In any case milk and wine container recycling was now under investigation by the relevant authority.

The Danes also argued that even if the rules might have adverse effects on trade, these effects were small given the size of the market. In 1984 only 0.01% of total Danish beer consumption was accounted for by foreign beers.

There are admissible exceptions to Article 30 that come under Article 36. These allow restrictions or even bans on imports, provided they do not constitute a means of arbitrary discrimination, or disguised restriction on trade between Member States. The measures must "justified on the grounds of public morality, public policy or public security; the protection of health and life of humans, animals or plants; the protection of national treasures possessing artistic, historic or archaeological value or the protection of industrial or commercial property" (note the similarity in wording to the GATT's Article XX).

Returning to the environment, Mr. Molde said "... it seems the Commission has not followed the increasing ecological awareness which has arisen in recent years throughout Europe and which has led to the giving of priority to the protection of the environment over the free movement of goods, which, whilst remaining a fundamental objective, is no longer seen as an aim which must be achieved at any price." Then, he categorically rejected the CEC's suggestion that the environment could be "sufficiently" protected by a less effective system than the Danish system, given that the voluntary systems did not give satisfactory results. Non-approved containers cannot be returned to any retailer, but only to retailers who stock that brand. As a result fewer bottles were returned.

Finally, he said that the Danish Government was ready to accept alternative solutions which were equally effective, but that until such systems were found, the Danes could not accept a weakening of legitimate and effective rules for protecting the environment.

The Advocate General's Opinion

The European Court is assisted in each case by an Advocate General. They summarize the arguments of the parties and make their own submissions to the court as impartial spokespersons. Their opinions are authoritative, and they rank equally in precedence with the judges of the court. The Advocate General for the Danish bottle case was Sir Gordon Slynn.

Having summarized the history of the case Sir Gordon's main point of reference was the "Cassis de Dijon Danish Bottles (B) 5

Principle." In the leading case of Cassis de Dijon (Case 120/78) German legislation prevented the sale in Germany of alcoholic liquor below a specified minimum alcohol content. That legislation had the effect of preventing the import into Germany of French Cassis which had a low alcohol content. The Court of Justice effectively struck down the German legislation under Article 30 and established the important principle that Article 30 may apply to any national measure that has the effect of preventing the sale in one Member State of any product lawfully produced and marketed in another Member State, though the measure applies to domestic and imported goods alike.

Exceptions are allowed to the Cassis de Dijon Principle. Sir Gordon said the Danes actions to protect the environment was a justifiable exception. Yet, he added that, "Cassis de Dijon does not give Member States carte blanch - the level of protection required for one of the acceptable categories must not, as I see it, be excessive or unreasonable and the measures taken to achieve the requirement must be necessary and proportional." The Commission's case was that the measures go too far and, as Sir Gordon pointed out, "it is for the Danish authorities to show that the measures are necessary and that they are not disproportionate."

On the argument that the legislation imposed higher cost burdens on foreign than on domestic producers, Sir Gordon's opinion was: "...even though on the surface indiscriminately applicable to Danish and non- Danish manufacturers, the rules bear in practice more heavily on the latter. On that basis Denmark cannot, as I see it, rely on the principle stated in Cassis de Dijon, since the Danish provisions in practice if not in form are indistinctly applicable even if, as I accept, environmental protection is within the category of possible exceptions to the basic rules."

In conclusion, Sir Gordon said: "There has to be a balancing of interests between the free movement of goods and environmental protection, even if in achieving the balance the high standard of the protection sought has to be reduced. The level of protection sought must be a reasonable level: I am not satisfied that the various methods outlined in the Council Directive and referred to at the hearing - selective collection by governmental authorities or private industry, a voluntary deposit system, penalties for litter, education of the public as to waste disposal - are incapable of achieving a reasonable standard which impinges less on the provisions of Article 30."

The Decision

With the evidence before them and Sir Gordon's opinion, the European Court of Justice considered its judgment.

On the 20th of September, 1988 The European Court of Justice delivered its verdict.

6 Danish Bottles (A)

Exhibit 1: United Breweries: Sales and Activities

The Years Ahead It is intended to continue the expansion of brewery activities outside Denmark with a view to consolidating the favorable trend in sales of Group brands in recent years. Substantial investments are to be expected in marketing, modernization and capacity increases at a number of the Group’s foreign breweries. Similarly, it may be necessary to strengthen the position of the Group on a number of markets by the acquisition of shareholdings in new or established breweries and sales companies.

Growth in total beer consumption in Denmark is not expected, but the Group has hopes of regaining its market share before the prolonged industrial disputes in 1985. The modernization of the Copenhagen breweries by investment in new technology continues. At the same time measures to adjust sales and distribution to structural changes at present taking place among our customers are under consideration.

After the disposal of unprofitable activities, the Cold Stores Group would be intensifying its activities in the other commercial areas and expects improved results.

The Royal Copenhagen Group has initiated a series of reorganizational measures in the industrial art sector, and an integration with Bing & Grøndahl A/S is expected in the slightly longer term to lead to a substantial strengthening, particularly in export markets.

The Group’s research-based companies which market new technology for application within the brewing industry, the meat and fish-processing industries, the milling industry and biotechnology expect progress in sales, but intend in the immediate future to utilize considerable resources on improvement of production maturity and on the introduction of new high-technology products.

To summarize, the Group expects over the next few years to stabilize its earnings at about the present level with reasonable prospects for increased profits in the slightly longer term. Danish Bottles (B) 7

United Breweries Ltd. Company capital DKK 813,621,700

8 Danish Bottles (A)

Sales of Beer and Soft Drinks in the Domestic Market

In the past 5 years aggregate beer sales in Denmark have leveled off and per capita consumption has fallen. Sales did increase by almost 5 percent during the year under review, but this rise should be seen against the background of a decline in 1985 as a result of prolonged industrial disputes. The breweries have not raised their prices since October 1984, but April 1, 1986 saw the government increase excise duty by DKK 0.1447 per bottle.

The import by private individuals of beer from Germany, where excise duty is only DKK 0.18 per bottle compared with DKK 1.59 in Denmark, has achieved very considerable proportions, which naturally has a negative influence on domestic sales. In June 1986 the Danish government introduced an import quota of 10 litres per adult, but the effect on aggregate private imports has so far only been very slight.

Carlsberg and Tuborg domestic beer sales increased in 1985/6 by 459,000 hectolitres to 4.8 million hectoliters, a rise of 10.6 percent. This should also be viewed in the light of the dispute in early summer 1985; in 1984/5 Carlsberg and Tuborg beer shared fell by 641,000 hectolitres, and market shares forfeited due to the dispute have thus not yet been fully recovered.

After several years’ decline, aggregate domestic sales of soft drinks showed in increase of around 6 per cent in 1985/6. Carlsberg and Tuborg soft drinks recorded in increase of 46,000 hectolitres or 9.1 per cent over the previous year, when sales dropped by 70,000 hectolitres due to the industrial dispute. For soft drinks too the position held by our brands prior to the dispute has not fully been recaptured.

Source: UB Annual Report 1987)

Danish Bottles (B) 9

International Activities Carlsberg and Tuborg brands strengthened their international market position in the accounting year. Exports from Denmark, which the year before showed a decline of just over 7 per cent due to a prolonged industrial dispute in Copenhagen, increased in 1985/1986 by 17.6 per cent or 0.2 million hectolitres to 1.3 million hectolitres. At the same time sales of Carlsberg and Tuborg beer, including beer brewed under license and brands produced at foreign breweries within the United Breweries Group, increased by 8.8 per cent or 0.8 million hectolitres to 9.3 million hectolitres.

As shown in the outline on page 22 the aggregate sales outside Denmark increased by 9.8 per cent to 10.6 million hectolitres. In addition to exports to more than 130 markets, Carlsberg and Tuborg beer is brewed at 44 breweries in 2 countries.

Europe Competition in the European recorded in sales of both beer market has become more Carlsberg and Tuborg. In Switzerland, Carlsberg and fierce, and viewed against this Tuborg have figured strongly background it is gratifying to Despite increased competition, among imported prestige brands note that the United Breweries Carlsberg remains the leading for a number of years. Exports Group as a whole recorded imported premium brand on the to this market demonstrated an progress and a consolidated Belgian market, while Tuborg upward trend. position in a market which has not yet recovered from the accounts for 80 per cent of our effects of the prolonged strike at Sales of Carlsberg beer brewed international sales. the Danish breweries in the under license in Greece are summer of 1985. improving, but the market In the UK - still the most remains uncertain. important market - the positive Sales of Carlsberg and Tuborg trend for the Carlsberg brand beer in France continue to show In Cyprus, Carlsberg beer is continued in close cooperation an upward trend. Cooperation brewed by Photos Photiades with the Watney Mann Group. was begun with the Breweries and maintained a Tuborg maintained its position Kronenbourg brewery for leading position in this slightly in the UK market. distribution of Carlsberg beer improving market. Tuborg is outside Paris. Sales within the imported in small quantities In Eire, where Carlsberg has capital are managed by from Copenhagen. joined forces with Beamish & Carlsberg France. Crawford, sales of Carlsberg Exports of both our brands to again progressed very favorably In Italy, sales of Tuborg from Eastern Europe are increasing, during the past year, particularly the Poretti breweries and of and sales of Tuborg beer brewed in the important Dublin area. imported Carlsberg continue to in Hungary at Köbanyai Sörgyar advance. and in Yugoslavia at the Hopes of increased Carlsberg Prodravka brewery remain and Tuborg sales and a larger In the Spanish market, sales of satisfactory. share of the market were Carlsberg were satisfactory, realized in a Swedish market particularly since June when As a result of government now showing slight expansion. local brewing began at Unión restrictions on beer sales, In Sweden, Tuborg has an Cervecera. Tuborg beer is performance in Turkey, where arrangement with Pripps imported, but as yet only in Tuborg is produced at the Türk Breweries while Carlsberg modest quantities. Tuborg brewery in Izmir, operates in conjunction with the improved only slightly. Falken Brewery. Following Portugal’s entry into Substantial growth was recorded the EEC, competition between in sales of soft drinks. Germany (F.R.) continues to be foreign beers intensified. In one of United Breweries’ most spite of this, both Carlsberg and important export markets, and Tuborg maintained a prominent satisfactory advances were position. 10 Danish Bottles (A)

Exhibit 2: The Single European Act: Title VII, Articles 130r, 130s, and 130t

ARTICLE 130 R

1. Action by the Community relating to the environment shall have the following objectives: • to preserve, protect and improve the quality of the environment; • to contribute towards protecting human health; • to ensure a prudent and rational utilisation of natural resources.

2. Action by the Community relating to the environment shall be based on the principle that preventive action should be taken, that environmental damage should as a priority be rectified at source, and that the polluter should pay. Environmental protection requirements shall be a component of the Community’s other policies.

3. In preparing its action relating to the environment, the Community shall take account of: • available scientific and technical data; • environmental conditions in the various regions of the Community; • the potential benefits and costs of action or of lack of action; • the economic and social development of the Community as a whole and the balanced development of its regions.

4. The Community shall take action relating to the environment to the extent to which the objectives referred to in paragraph 1 can be attained better at Community level than at the level of the individual Member States. Without prejudice to certain measures of a Community nature, the Member States shall finance and implement the other measures.

5. Within their respective spheres of competence, the Community and the Member States shall cooperate with third countries and with the relevant international organisations. The arrangements for Community cooperation may be the subject of agreements between the Community and the third parties concerned, which shall be negotiated and concluded in accordance with Article 228.

The previous paragraph shall be without prejudice to Member States’ competence to negotiate in international bodies and to conclude international agreements.

ARTICLE 130 S

The Council, acting unanimously on a proposal from the Commission and after consulting the European Parliament and the Economic and Social Committee, shall decide what action is to be taken by the Community.

The Council shall, under the conditions laid down in the preceding subparagraph, define those matters on which decisions are taken by a qualified majority.

ARTICLE 130 T

The protective measures adopted in common pursuant to Article 130 S shall not prevent any member State from maintaining or introducing more stringent protective measures compatible with this Treaty.

Danish Bottles (B) 11

Exhibit 3: GATT General Exceptions: Article XX

Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures:

(a) necessary to protect public morals;

(b) necessary to protect human, animal or plant life or health;

(c) relating to the importation or exportation of gold or silver;

(d) necessary to secure compliance with laws or regulations which are not inconsistent with the provisions of this Agreement, including those relating to customs enforcement, the enforcement of monopolies operated under paragraph 4 of Article II and Article XVII, the protection of patents, trademarks and copyrights, and the prevention of deceptive practices;

(e) relating to the products of prison labor;

(I) imposed for the protection of national treasures of artistic, historic or archaeological value;

(g) relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption;

(h) undertaken in pursuance of obligations under any intergovernmental commodity agreement which conforms to criteria submitted to the CONTRACTING PARTIES and are not disapproved by them or which is itself so submitted and not so disapproved;

(i) involving restrictions on exports of domestic materials necessary to ensure essential quantities of such materials to a domestic processing industry during periods when the domestic price of such materials is held below the world price as part of a governmental stabilization plan; PROVIDED that such restrictions shall not operate to increase the export of or the protection afforded to such domestic industry, and shall not depart from the provisions of this Agreement relating to nondiscrimination;

(j) essential to the acquisition or distribution of products in general or local short supply; PROVIDED that any such measures shall be consistent with the principle that all contracting parties are entitled to an equitable share of the international supply of such products, and that any such measures, which are inconsistent with the other provisions of this Agreement shall be discontinued as soon as the conditions giving rise to them have ceased to exist. The CONTRACTING PARTIES shall review the need for this sub-paragraph not later than 30 June 1960.

12 Danish Bottles (A)

Exhibit 4: Total Imports of Beer for EC, EFTA regions (‘000hl)

Exhibit 5: Percentage of Beer Consumption Imported for EC, EFTA regions

Danish Bottles (B) 13

Exhibit 6: Net Exports of Beer, Selected Countries

Exhibit 7: Comparative Retail Prices

14 Danish Bottles (A)

Exhibit 8: Europe’s Largest Brewers

Danish Bottles (B) 15