With market import controls to combat deforestation looking set to shape global forest product trade increasingly, a new report examines and compares latest regulatory developments in the US, EU and UK. All three have new forest product import rules at some stage of development and all essentially share the same remit, according to the report, ‘Comparing recent deforestation measures of the US, EU and UK’ from US law firm Steptoe & Johnson LLP.
“The measures [of all three] recognize the harmful effects of deforestation with regard to climate change and seek to address them by prohibiting certain commodities produced on (illegally) deforested land from being placed on their respective market,” it states.
At the same time, it highlights that there are significant differences between the respective regulations with potential ‘market access implications for companies’. Among aspects setting the various jurisdictions apart are their rules for the timber trade.
The three new measures are the US Fostering Overseas Rule of Law and Environmentally Sound Trade Act of 2021 (Forest Act), the EU’s Proposal for regulation on deforestation-free products (Deforestation Regulation) and the UK Environment Act 2021.
Each of has a different set of ‘covered commodities’. The EU Deforestation Regulation encompasses oil palm, soya, cocoa, cattle, coffee and wood, plus ‘relevant products’ made with these commodities.
The US Forest Act covers oil palm, soy, cattle, cocoa, rubber and wood pulp and similarly products manufactured from these.
Forest risk commodities under the UK Environment Act will be decided by the Secretary of State for the Environment, but those proposed in ongoing consultation are cocoa, coffee maize, palm oil, rubber and soya, plus products derived from these.
Timber and wood products are omitted from US and UK measures says the Steptoe report because both are maintaining separate laws prohibiting market access of illegally sourced wood; namely the US Lacey Act and UK Timber Regulation (UKTR).
Commenting to the IMM for its 2021 UK Trade Survey on market impacts and perceptions of FLEGT, FLEGT licensing and the UKTR, the UK Department for Environment (Defra) confirmed that ‘there was no intention for the Environment Act to cover wood products as these are already covered by UKTR and FLEGT’. The UKTR is focused on legality, while FLEGT Licences are accepted in government procurement policy broadly as proof of legality and sustainability.
As it stands, the proposed EU Deforestation Regulation would supersede the EUTR, while assimilating elements of FLEGT VPAs into ‘forest partnerships’. FLEGT Licences would be considered proof of legality under the new regulation, but no longer exempt timber from further due diligence. The latter would have to be undertaken on licensed imports to ensure supply chains are deforestation- and forest-degradation free.
At the same time, says Steptoe, the EU, US and UK rules have inbuilt flexibility to change their lists of commodities. The US Forest Act list will be updated at least annually, while the EU Deforestation Regulation proposal is for reviews two years after enactment, and regularly thereafter.
In allowing the Secretary of State to define forest risk commodities, the UK Environment Act ‘offers the flexibility to extend the commodity range captured … to accommodate changing patterns of deforestation’.
Regulations differ in in their reference to illegality and deforestation
Another key point of difference between regulations, says Steptoe, is in their reference, or absence of it, to illegality and deforestation and how they propose to counter them.
The Deforestation Regulation states that no ‘relevant’ commodity can be placed on the EU market, or exported from the EU, unless proven deforestation-free, produced in accordance with supplier country law and covered with a due diligence statement.
The UK Environment Act prohibits use of forest risk commodities unless local laws in relation to their production were complied with, while the US Forest Act blocks imports of products from ‘illegally deforested land’ and covered products from countries with ‘action plans’ to improve forest and forest product trade governance unless accompanied by declarations that due care was undertaken to mitigate risk of association with illegal deforestation. It’s proposed that these action plans are developed by supplier countries in cooperation with the US.
Steptoe says that inclusion in the EU Deforestation Regulation of the specific requirement that commodities are deforestation-free – defined as produced on land that has not been subject to deforestation or harvested in a way that has induced forest degradation since December 31 2020 – makes it ‘more extensive’ than UK or US measures, with their stipulation that goods are not produced in violation of producer country laws.
“Put simply, the EU Deforestation Regulation can prohibit market access to commodities and products produced on land that was lawfully deforested,” says the Steptoe report. “Moreover ‘deforestation’ is broadly defined as ‘forest conversion to agricultural use whether human-induced or not’.”
The EU’s use of the term ‘forest degradation’ is also described as ‘expansive’.
The definition covers land where ‘harvesting operations are not sustainable and cause a reduction or loss of biological or economic productivity and complexity of forest ecosystems, resulting in long-term reduction in supply of forest benefits’.
The EU and UK also differ from the US in the prohibited acts included in regulations. The EU proposal is to bar import, sale and export of relevant commodities and products which contravene its regulation and to include domestic as well as foreign goods. The UK Environment Act prohibits ‘use’ of covered commodities in commercial activity, including manufacture, production, processing, distribution, sales and supply, where they were not produced in compliance with supplier country local laws.
“In contrast, the US Forest Act’s restrictions are limited to import of commodities and products,” says the report.
Due diligence required
On due diligence, the Forest Act stipulates that importers of covered products file declarations on entry into the US that reasonable care was taken to assess and mitigate risk of production on illegally deforested land. Importers of products from countries with ‘action plans’ must identify steps taken in the supply chain to mitigate risk of implication in illegal deforestation.
The EU Deforestation Regulation due diligence rules require both operators and traders to conduct risk assessment of potential non-compliance, and perform mitigation measures if there is more than a negligible risk.
The UK Environment Act makes it obligatory for businesses which use covered products in commercial activity to assess risk of non-compliance with local law and take mitigation measures to eliminate such risk or ‘reduce it to as low as reasonably possible’. There will be a size threshold for businesses to be in scope of the act, with smaller companies able to apply for exemption.
Both EU and US measures, says Steptoe, envisage a risk ranking of supplier countries.
The EU will benchmark countries low, standard or high risk, with the level of due diligence undertaken rising accordingly.
“However, concerns have been raised as to whether such a system conflicts with member states’ World Trade Organisation obligations,” says Steptoe.
Similarly the US Forest Act classifies supplier countries as high risk or not high risk, with various bodies charged with identifying those with inadequate protections against illegal deforestation.
The UK Environment Act, however, places the onus on business to decide what level of risk of illegality a country constitutes and to tailor due diligence to suit.
Both the EU Deforestation Regulation and Forest Act make provision for collaboration with supplier countries to tackle deforestation, the US measure as stated via joint ‘action plans’, the EU through forest partnerships.
“Implementation [of the latter] will also be considered by the European Commission when classifying risk levels,” says Steptoe.
The UK Environment Act does not provide for specific supplier cooperation, but includes an undertaking ‘to support and strengthen standards on sustainable production to deliver robust environmental outcomes, while supporting local economies’.
Enforcement of the EU Deforestation Regulation will be down to each member state. They must undertake annual compliance checks of at least 5% of relevant operators, and 5% of commodity volumes placed on the market, rising to 15% for commodities from high risk countries.
The US Animal and Plant Health Inspection Service will audit importer declarations under the Forest Act, while Customs and Border Protection will establish enforcement mechanisms.
Enforcement provisions for the UK Environment Act will be set out in regulations by the Secretary of State, covering exercise of powers of inspection, search and seizure by enforcement agencies and record keeping requirements.
The UK Act was enacted in November 2021, with secondary legislation due to implement due diligence obligations, while the European Commission is targeting 2023 for adoption of the Deforestation Regulation.
But the Steptoe report says the ‘timing and passage’ of the US Forest Act are more uncertain. “It’s unlikely to be voted on in 2022 and the US political environment for climate measures could change dramatically in 2023 [following the Presidential election]”, it says.
While acknowledging that proposed US, UK and EU market controls could develop through implementation, Steptoe maintains that all are likely to increase costs for producers and purchasers of relevant forest commodities ‘to a significant degree – even precluding market access in some cases’.
“Firms conducting business in these jurisdictions need to follow development of these measures, examine supply chains and evaluate options to mitigate potential risks and take advantage of opportunities,” it says.
It’s also a near certainty, it adds, that these will not be the only jurisdictions to adopt anti-deforestation measures.
Click here for the full report.