(Bloomberg) -- Economic superpowers often turn to trade as a way to achieve their foreign policy goals. So it’s no surprise that the European Union, in its determination to be a global leader in the fight against climate change, has made forest preservation a condition for doing business with the bloc. From the end of the year, the EU will enforce a ban on imports of raw materials produced on newly deforested land anywhere in the world. But the way it’s going about it has prompted a backlash from industries and other trading nations, raising the risk that the landmark initiative may be delayed.
1. What’s the plan?
The European Deforestation Regulation, or EUDR, is designed to stop the felling of forests to grow products sold in Europe. Those include palm oil (which is found in thousands of everyday items including ice cream, shampoo and fuel), soy, beef, wood, rubber, cocoa and coffee and some manufactured products such as chocolate, leather and furniture. To send them into the EU or export them from the bloc, companies must show they weren’t made on land that was deforested or degraded since Dec. 31, 2020. They will also need to prove they were produced in compliance with local human rights laws and laws protecting the rights of indigenous peoples. The measures entered into force at the end of June 2023, and companies have until the end of 2024 to comply, with a further six-month grace period for small businesses.
2. How will it work?
The new rules require sophisticated tracking systems and will be enforced using the threat of fines. Importers must have collected precise data identifying the plots of land where the goods were grown. The location coordinates will be checked off against historical land-use information gathered via satellite imaging and other sources. A traffic light system will assign a score for each country based on the perceived risk of deforestation there.
3. How significant are the new rules?
Up to this point, efforts to stop the destruction of the world’s forests focused largely on persuasion and positive incentives. Now one of the most important players in the global economy has resorted to coercion. Companies that fail to meet the rules could face fines of at least 4% of their annual turnover in the EU. It’s not the only area where the bloc is using trade in pursuit of climate goals beyond its borders. It’s also agreed to a carbon levy on imports of goods such as steel and aluminum from countries with less strict environmental rules, while packaging producers outside the bloc will also have to comply with its re-use and recycling rules.
4. What’s the EU’s motivation?
Burning or cutting down rainforests releases greenhouse gases and deprives ecosystems of carbon-absorbing trees. Much of the cleared land is used to grow export crops or to raise livestock, which generates even more climate-warming emissions. The EU was responsible for 16% of deforestation associated with international trade in 2017, surpassed only by China, at 24%, according to a 2021 report by the World Wide Fund for Nature. Efforts to re-grow Europe’s own forests have little impact on the region’s overall carbon footprint as so much of what its population and industries consume comes from elsewhere. Europe’s demand for rubber alone has been linked to the deforestation of 520 square kilometers (201 square miles) of West Africa since the end of the last century.
5. Who opposes the EUDR?
Commodity-producing countries have been among the first groups to protest. They say the rules will unfairly penalize smallholders who often lack the sophisticated mapping tools needed to get their harvests approved by the EU. The likes of Indonesia — a major producer of palm oil — even accused the bloc of “regulatory imperialism.”
Major trading partners, including the US, have also raised objections, along with several industries that use the commodities covered by the regulation in everything from furniture to diapers. Their main gripe is a lack of clarity on how to implement the regulations across their supply chains, which national authorities will oversee the rules (not all EU countries have appointed a regulator) and how to deal with the reams of extra paperwork. A group of 20 industry groups — from animal feed suppliers to grain traders — warned of impending supply disruptions and inflation due to a lack of detail on the rules, according to a statement seen by Bloomberg News.
Even some EU governments are having cold feet, with Austria leading a group of countries calling for a delay to the rules and a substantial re-write. The largest group in the European Parliament, the center-right European People’s Party, has made a similar plea.
6. What was the EU’s response?
It’s been making some concessions. The European Commission, the bloc’s rule-making body, had originally intended to categorize all countries as having a high, standard or low level of deforestation risk. High-risk countries were to face a stricter level of checks — 9% of traders and commodities — compared with 1% for those deemed to be low-risk. It later conceded this would take too long, so switched to having one standard level of risk to start with. This could benefit countries seen as having the highest risk of deforestation. But it could irk those seen as carrying a lower risk, such as Sweden or the US, that will now be obliged to have more checks than they’d expected.
Aside from that, the commission is largely sticking to its guns. It plans to have the information system that will make sure industry, traders and other stakeholders are playing by the rules up and running in early December, less than a month before deadline. The commission has downplayed the level of bureaucracy entained by the EUDR. A former environment commissioner has said farmers could simply use their smartphones to comply. Some advocates of the new system say the industry may be pushing back partly because the world will finally see how much deforestation their activities cause.
Environmentalists have lauded the EU measures, with the WWF calling them “groundbreaking.” They hope the rules will be expanded to other ecosystems, such as savannas, and say the rules are vital for making sure Europe lives up to its international commitments.
7. What if the EU does want to overhaul the EUDR?
The clock is ticking until Dec. 31, leaving the bloc with limited options, even if it does decide to delay compliance. It doesn’t help that Commission President Ursula von der Leyen has just been re-elected and the body is entering a new legislative cycle. Von der Leyen needs to choose a new team of commissioners, and whoever takes over the environment portfolio will have their own view on the way forward. So what are the options?
- The commission could propose re-opening the agreed text to write a delay into the text, but that would require sign-off from member states and the European Parliament, unless it decides to fast-track the rules via an emergency procedure
- It could choose to opt for a more informal “grace period,” whereby fines aren’t administered while companies get used to the rules
8. What does the EUDR mean for Europeans?
If the system holds up and importers comply, consumers will be able to enjoy their morning coffee in the knowledge that no trees were cut down to grow the beans. Economists will pay close attention to the potential impact on shopping bills. One study published in 2022 found the new measures would create compliance costs equivalent to as much as 3.5% of palm producers’ revenue. Advocates of the new rules say the companies will recoup those costs as consumers will be ready to pay more if they know the goods are environmentally sustainable.
--With assistance from Áine Quinn.
©2024 Bloomberg L.P.
