Introduction to EU’s Regulation on Deforestation-Free Products
The European Union (“EU”) recognised its marketplace as the world’s most significant contributor to deforestation, only a little behind China. Deforestation and forest degradation continue alarmingly, contributing more than 12-20% of global greenhouse gas emissions.[1] Last year, the cumulative global forest loss was recorded at 4.1 million hectares, a 10% increase compared to 2021.[2]
As one of the world’s major economies and consumers of commodities linked to deforestation, the EU is partly responsible for this degradation and is taking up the charge to solve it by introducing the Regulation on Deforestation-Free Products (“EUDR”), which is implemented under a broader action plan outlined under the Commission Communication on Stepping up EU Action to Protect and Restore the World’s Forests, 2019.[3]
The Regulation on Deforestation-Free Products is a tool that will play a critical role in reducing the EU’s impact on global forest degradation. This Regulation entered into force on June 29, 2023, in the Official Journal of the European Union and is expected to reduce greenhouse gas emissions and biodiversity loss. After a haul of 18 months, the EUDR was made applicable for micro, small and large enterprises, with an additional six months extended to only micro and small enterprises. This means although the EUDR is in force, operators and traders have until 30 December 2024 to implement the new rules and due diligence process. Subsequently, micro and small enterprises have until 30 June 2025 to comply with EUDR.
With the aim of preventing global deforestation and carbon emissions associated with forest-risk commodities, the EUDR outlaws specific products that include: cattle, wood, cocoa, soy, oil palm, coffee, and rubber.[4] Moreover, the derivatives of these umbrella category commodities shall also be subjected to similar regulations.
Compliance and Due Diligence for Organisations
The regulation does not govern a group of companies' internal organisation and due diligence policy. Hence, the group's name shall be in the due diligence statement, and total responsibility shall be retained under the Regulation. The stakeholders indulging in business with the EU ought to be governed by the EUDR, shall have stringent Due Diligence requirements wherein stakeholders must prove the commodities are deforestation-free. In order to do this, the operators would have to streamline their due diligence with EUDR compliance.
The regulations direct operators to set up and maintain a due diligence system, which includes three steps comprehensively covered under articles[5] -
● Article 9 (Information Requirements) for the collection of information and documents
● Article 10 (Risk Assessment) for risk assessment measures
● Article 11 (Risk Mitigation) for risk mitigation measures
A Due Diligence Statement would inculcate a risk management system to identify and mitigate deforestation risks in their supply chains. Mapping supply chains will aid in tracing products to their point of origin to declare them deforestation-free. The complication occurs when there are high levels of traceability within complex supply chains that span multiple countries and market players.
Ensuring legal compliance within the regulatory framework is rather difficult. Companies can furnish certificates of internal audits, but not all certificates are acceptable, especially when they do not align with the EUDR regulations and can only be used to support their claims and data.
In cases of non-compliance, the regulation prescribes penalties of the following broad categories -
● fines against violations amounting to 4% of the defaulting firm's annual turnover in the EU
● confiscation of product
● confiscation of revenues gained from a transaction
● exclusion from public procurement
Extant trade relations between EU- India
This step towards preserving the world's forests, which is undoubtedly the need of the hour, comes with a bundle of trade barriers for the world, including the EU itself. According to the United Nations Comtrade database[6] on international trade, the total exports from India to the European Union were USD 70.9 billion[7] in the last financial year. Vice versa, the Imports from the EU to India were reported to be USD 59.3 billion.
India’s coffee export, which is one of the seven commodities rowed to be outlawed under EUDR, alone makes up almost 57%, of its total coffee exports, worth over USD 600 annually, while leather, oil cake and wood furniture exports to the EU account for 30%-40%.[8] Moreover, the EU receives approximately 25% of its total natural rubber and rubber products exports, worth around USD 800 million annually.[9] India is also a major exporter of finished leather products, with the EU accounting for 30-40% of its exports, worth roughly USD 1.5 billion annually. Tracing deforestation-free sources for these products within complex supply chains is a hurdle these industries must overcome to ensure compliance with the new regulation.
Lately, developed countries have been adopting internal trade and tariff-related measures to counter humanity’s carbon footprint by addressing sustainability, environment, and climate change. Only last year, Indian exports to the EU were struck with a proposed trade bloc, the Carbon Border Adjustment Mechanism (CBAM), which affected Indian exports worth USD 37 billion and translated to roughly 40% of India’s exports to the EU.[10]
The World Trade Organisation (“WTO”) is seeking clarifications from the Union regarding whether it would cover adaptation costs in traceability and due diligence requirements of the unilateral measure. India has also sought more details about the regulations specifically to seek a benchmark for compliance. The country is expecting a big hit on trade as India’s deforestation rate is high as it is. According to the report by Utility Bidder,[11] India has the second highest level of deforestation, resulting in the loss of 668,400 hectares of forest between 2015 and 2020. Meanwhile, the Agricultural and Processed Food Products Export Development Authority (“APEDA”) is working towards implementing blockchain-enabled traceability systems for different commodities, some of which are already live on the APEDA[12] website.
Specifications of New Trade Barriers
The EUDR expects relevant mechanisms to be in place when the regulations move from pilot testing to full-fledged implementation to satisfy the requirements.
One of the significant hurdles for any organisation is the requirement of traceability. Companies are obligated to collect geographical coordinates of the plot of land wherein the supply was produced. The challenge is to trace each commodity to its origin and furnish plantation-level geolocation information across all stages of the supply chains. It is also very rare for an enterprise to already have a traceability process in place to oversee its operations and third-party vendors. Per the regulation, a due diligence statement must be prepared before the product has reached the intended market. EUDR also mandates annual public reporting on the process of due diligence and statements to ensure compliance.
The current supply chain for many capitalist industries starts in low or middle-income countries such as Brazil or Indonesia for cheaper labour and relatively better returns on investments. This practice of reliance on outsourcing from high-risk zones would become obsolete when EUDR is implemented. Such countries, including India, are very industrialised, so there is always a possibility of violating the regulations.
Commodity coverage is often insufficient, especially for food produce, as companies lack comprehensive reporting on all commodities and focus traceability predominantly on one commodity. This creates additional complexity for companies that source from various locations for relevant products. While the increase in regulation poses challenges, it also creates opportunities for effective collaboration between companies, governments, investors, and smallholders to increase traceability capabilities and prevent global forest loss. For instance, Unilever announced in March 2022 that it is piloting a blockchain technology to track better and trace its palm oil supply chain.[13]
EU’s unilateral move to resolve environmental concerns would also divulge specific regulations within the framework. Countries will be classified as low, standard or high-risk. Based upon the classification, the countries would have to comply with consecutively rigid obligations and would be subjected to more stringent checks. Share of customs and other applicable taxes would vary for firms and consignments from high-risk, standard and low-risk countries.[14]
Concluding Remarks
EUDR represents a significant step towards mitigating the global impact of deforestation and associated carbon emissions. By targeting key commodities, the EUDR aims to enforce due diligence requirements on operators to ensure deforestation-free practices throughout the supply chain.
However, implementing such regulations presents challenges, particularly in traceability and compliance, which may disproportionately affect industries and countries reliant on outsourcing from high-risk zones. While these hurdles exist, the EUDR also creates opportunities for collaboration and innovation, such as adopting blockchain technology for supply chain transparency. Cooperation between companies, governments, investors, and smallholders will enhance traceability capabilities and prevent further global forest loss.
With less than a year until all companies must comply with the regulations, statistics from ESG Risk Ratings show that most companies are unprepared to meet the new requirements. This will create a void for low—or middle-income countries, which will soon become ineligible for supply procurement.
The Government should support businesses, particularly small and medium-sized enterprises, by providing financial aid, infrastructure for traceability, and research into sustainable practices to help them comply with new regulations. Industries must collaborate to develop shared data platforms and traceability solutions to promote accountability and transparency and collectively advocate for fair implementation of the EU’s EUDR. This cooperation between government and industry will enable businesses to navigate regulations confidently and foster mutually beneficial partnerships with the EU.
Of particular interest in this pilot phase implementation of EUDR is the extensive trade dynamic between India and the EU. With such significant numbers of trade exchange, neither of them can be unaffected by the potential loss of GDP, exports/imports, job loss, and other repercussions of trade deficit at Micro and Macro levels. India clearly cannot afford to do away with the trade with 27 countries. A closer examination of the regulations at a microeconomic level will reveal how closely India and other countries are aligned with the EUDR's parameters.
The key to EUDR success lies in effective implementation, international cooperation, and a commitment to innovation in supply chain management. Through these efforts, the EUDR has the potential to significantly reduce global deforestation, benefiting not just the environment but also fostering sustainable economic growth worldwide.
[1] Preparing for the EU Deforestation Regulation (EUDR): everything you need to know, Foods Connected March 2024 - https://blog.foodsconnected.com/preparing-for-the-eu-deforestation-regulation
[2] Weisse, M., Goldman, E., and Carter, S. “Forest Pulse: The Latest on the World’s Forests.” - World Resources Institute - https://research.wri.org/gfr/latest-analysis-deforestation-trends
[3] Stepping up EU Action to Protect and Restore the World’s Forests - https://eur-lex.europa.eu/legal-content/EN/TXT/?qid=1565272554103&uri=CELEX:52019DC0352
[4] European Commission. “Regulation on Deforestation-Free Products.” https://environment.ec.europa.eu/topics/forests/deforestation/regulation-deforestation-free-products_en
[5] Regulations (EU) 2023/1115 of the European Parliament and of the Council - on the making available on the Union market and the export from the Union of certain commodities and products associated with deforestation and forest degradation and repealing Regulation (EU) No 995/2010 - May 2023 - https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32023R1115
[6] United Nations’ Department Of Economic and Social Affairs (Statistics Division, Trade Statistics) - https://comtradeplus.un.org/
[7] European Union Imports from India, Trading Economics May 2024 - https://tradingeconomics.com/european-union/imports/india
[8] EUDR Compliance in Indian Trade, the Impact of TRST01Chain, Jan 2024 - https://trst01.com/eudr-compliance-in-indian-trade/#:~:text=The%20EUDR%20is%20a%20complex,ways%20to%20comply%20with%20them
[9] supra
[10] 43% of India's exports to EU to be hit by green regulations: Report, Business Standard Sept 2023 - https://www.business-standard.com/economy/news/43-of-india-s-exports-to-eu-to-be-hit-by-eu-green-regulations-report-123092200486_1.html
[11] Deforestation Report, March 2023, Utility Bidder - https://www.utilitybidder.co.uk/compare-business-energy/deforestation-report/
[12] APEDA, Ministry of Commerce and Industry, GOI - https://apeda.gov.in/apedawebsite/
[13] Unilever, "SAP, Unilever Pilot Blockchain Technology Supporting Deforestation-Free Palm Oil." March 21, 2022 - https://www.unilever.com/news/press-and-media/press-releases/2022/sap-unilever-pilot-blockchain-technology-supporting-deforestationfree-palm-oil/
[14] EU deforestation rule could cost India up to $1.3 bn in exports every year: GTRI, Mint, May 2023 - https://www.livemint.com/economy/eu-deforestation-rule-could-cost-india-up-to-1-3-bn-in-exports-every-year-gtri-11684411960902.html