On 17 November 2021, the European Commission announced a Proposal for a new Regulation to reduce global deforestation and forest degradation driven by EU consumption of certain commodities. If enacted, the law would have a profound effect on EU trade in the regulated wood and agricultural commodities. It would represent a very significant extension of state intervention in European commodities trade even compared to the existing controls imposed through the EUTR.
Introduction of the new regulation would also have profound implications for those countries engaged in the FLEGT VPA process towards development of licensing procedures to allow products to be placed on the EU market without operators having to undertake EUTR due diligence. Drawing on the results of the EU’s “Fitness Check” of the FLEGT Regulation and EUTR, the regulatory proposal includes a provision declaring wood covered by a FLEGT license to have fulfilled the legality requirement. It also notes that “some VPA components might be integrated where feasible and agreed by the partners into specific cooperation programmes, like Forest Partnerships or others to further support forest governance”.
However, the regulatory proposal includes no provision for FLEGT licenses to meet the “deforestation-free” or “degradation-free” requirement. The regulatory proposal and all supporting documentation are available here.
The proposed law would prohibit regulated commodities and derived products from being placed on the EU market unless they can be shown to be “deforestation-free” and “forest degradation-free”, produced in accordance with applicable laws, and covered by a “due diligence statement”. It would also prohibit their export from the EU under the same conditions.
The proposed regulation would impose mandatory due diligence rules on companies to ensure that only compliant commodities and products enter the EU market or are exported from it. The regulation would repeal the EU Timber Regulation (EUTR) which already imposes mandatory due diligence rules on EU timber traders.
Annex I to the regulatory proposal contains a Combined Nomenclature (CN) list of products that would be covered by the Regulation.
The list of wood products closely follows that for EUTR. It includes: nearly all CN44 wood products with a few notable exclusions (such as charcoal, tools, tableware/kitchenware, and packing material used exclusively to carry another product); all CN47 pulp and CN48 paper products with the exception of bamboo-based and recovered products; and categories of wooden furniture under 9403 together with wooden prefabricated buildings (940610). As in EUTR (and for reasons which remain obscure) wood seating under 9401 is not included.
Of agricultural commodities, the proposed regulation includes cattle, cocoa, coffee, palm oil, and soy together with derived products. In a press conference, Commissioner Sinkevičius did not exclude adding rubber to the list of commodities concerned.
A deforestation-free commodity or product would have to be produced on land that has not been subject to deforestation after 31 December 2020, and for which wood has been harvested without causing “forest degradation” since that date. Criteria for assessing whether commodities are deforestation-free or degradation-free would be applied regardless of the country of origin.
“Deforestation” is defined in the proposed regulation as “the conversion of forest to agricultural use, whether human-induced or not”. The extension of the requirement to cover products which are forest degradation-free would be particularly significant to the wood products sector. This requirement is only relevant to timber harvesting and in practice would introduce a mandatory sustainability requirement for wood products.
“Forest degradation” is defined in the regulation as “harvesting operations that are not sustainable and cause a reduction or loss of the biological or economic productivity and complexity of forest ecosystems, resulting in the long-term reduction of the overall supply of benefits from forest, which includes wood, biodiversity and other products or services.”
The definition of “sustainable harvesting operations” is broad and would effectively impose certain specific silvicultural requirements. According to the draft regulation the term “means harvesting that is carried out considering maintenance of soil quality and biodiversity with the aim of minimising negative impacts, in a way that avoids harvesting of stumps and roots, degradation of primary forests or their conversion into plantation forests, and harvesting on vulnerable soils; minimises large clear- cuts and ensures locally appropriate thresholds for deadwood extraction and requirements to use logging systems that minimise impacts on soil quality, including soil compaction, and on biodiversity features and habitats”.
As in EUTR, the proposed regulation would impose obligations on “operators”; i.e. persons or entities placing the commodities and products in question on the EU market, or exporting them from it, for commercial purposes. Where a relevant commodity or product is placed on the market by an entity from outside the EU, the operator would be the first entity established in the EU who buys or takes possession of it. EU importers would therefore qualify as operators. Some obligations would also be set on “traders”.
Operators would have to exercise due diligence before placing regulated commodities or products on the EU market or exporting them from it. Due diligence would include the collection, organization and preservation for five years of verifiable information that the commodities and products are deforestation-free and that they were produced in line with relevant legislation of the country of production.
As part of their due diligence, operators would have to engage in risk assessment and be able to demonstrate that the relevant commodities and products are deforestation- free, and that they have been produced according to the relevant legislation of the country of production. Where operators are not able to demonstrate that the risk of non- compliance is negligible, they should not place the relevant commodities or products on the EU market or export them.
perators would also have to carry out risk mitigation, adopting measures to reach nil or negligible non- compliance risk levels. Such measures would have to be adequate and proportional to effectively mitigate and manage non-compliance risk. They would include internal control and compliance management, the appointment of a management-level compliance officer, and independent risk mitigation auditing.
Regulatory proposal would significantly alter and extend EUTR obligations
Many of the due diligence requirements will be familiar to timber traders that have been working within the framework of EUTR since March 2013. However, according to the draft regulation, the EUTR due diligence requirements would be “adapted and improved” through the introduction of several new and far-reaching features including:
- a due diligence statement (Article 4). Operators would produce a due diligence statement when satisfied that the commodities or products were compliant, thus assuming responsibility. In the statement, operators would confirm having carried out due diligence, and having found no or only negligible risk. Submitting a due diligence statement would be necessary to place these commodities or products on the EU market or exporting them from it;
- the geographic information requirement or geo- location, linking the commodities and products to the specific plot of land where they were produced (article 9);
- country benchmarking (Articles 25-26). The European Commission would use a benchmarking system to assess the risk of commodity-driven deforestation and forest degradation by country. The benchmarking system would categorise each country (or sub- national region) as “low”, “standard” and “high risk”.
- a distinct procedure for “simplified due diligence” (Article 12) to apply when sourcing from a country or region assessed as “low risk”. Under this procedure operators would be still obliged to undertake the first step of the due diligence procedure (i.e. collect information, documents and data demonstrating products are legally produced and deforestation-free). However they would not be obliged to undertake risk assessment and risk mitigation.
- increased cooperation with customs (Articles 14 and 24) who would be empowered, for example, to verify the status of the due diligence statement covering individual import or export consignments and to block and destroy any consignment where risk analysis by EU competent authorities has established that there is a high risk of non-compliance;
- minimum inspection levels (article 14): each Member State would have to carry out checks of at least five per cent of the relevant operators, every year. Five per cent of the volume of each of the commodities and products placed, made available or exported from each territory would also have to be subject to checks each year.
Some implications and pitfalls of the EU regulatory proposal
ATIBT has published a Q&A drawing on an analysis by Alain Karsenty highlighting some of the other implications, and pitfalls, of the legislative proposal for tropical timber products. It highlights, for example, that definitions of deforestation and degradation contained in the draft EU regulation will likely contradict definitions used in tropical producing countries.
Products deemed legal (even sustainable) in the country of origin may well be deemed as unacceptable by the EU and will not be allowed to be imported with potential to create lot of trade tensions. The ATIBT commentary is available here.
Judging from a recent article in the Guardian, a national newspaper in the UK, some of these concerns are shared by the EC’s own trade officials. The article draws on what the Guardian describes as a “leaked memo” prepared by EU DG Trade officials. According to the Guardian newspaper EC trade officials have argued internally against the provision to regulate products linked to all deforestation, legal or illegal, and instead recommend that the law should clamp down only on illegal deforestation.
The “leaked memo” allegedly states that the law in its present form would be “a direct challenge to notions of sovereignty over land use decisions, whether in the EU or in third countries” and suggests that refocusing the law on illegal deforestation would bring the EU into line with the US and UK, who are considering narrower laws. According to the Guardian the trade officials also say the costs of complying with the EU law would hurt subsistence-level farmers and warn of retaliation by foreign governments through the World Trade Organization.
The officials also argue that the law should be limited to deforestation rather than forest degradation, citing the absence of international definitions on the latter which they say would make the law hard to enforce.
“Combined with the absence of international standards, [including forest degradation] poses serious policy and legal concerns and we consider it a risky avenue to try to justify this on the basis of public morals,” the memo states according to the Guardian.
Next steps for the EU regulatory proposal
As the deforestation law proposal is only a legislative proposal for now, the specifics are subject to change. Introduction of the law will require that consensus is reached on a final text between the Parliament and Council. The timeline between a proposal being tabled and adopted (or a decision taken to not adopt) varies widely depending on the degree of consensus and the priority attached to passage of the legislation by the country holding the EU Council Presidency. At the Press Conference launching the legislative proposal, Commissioner Sinkevičius said that France, who hold the Presidency between January and June next year, have indicated that they will prioritise efforts to pass this legislation during their Presidency.
For now the timing is still uncertain but may become clearer after the first reading to Parliament and there is an initial indication of the level of political support and consensus. The proposed regulation is intended to complement a separate legislative initiative introducing mandatory due diligence on human rights and environmental impacts to companies’ own operations and value chains in general but goes further than that initiative.