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Report from
Europe
EU publishes far-reaching "deforestation-free"
regulatory proposal
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.
The regulatory proposal and all supporting documentation
are available at:
https://ec.europa.eu/environment/publications/proposalregulation-deforestation-free-products_en
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 clearcuts
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 deforestationfree,
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 noncompliance
is negligible, they should not place the
relevant commodities or products on the EU market or
export them.
Operators would also have to carry out risk mitigation,
adopting measures to reach nil or negligible noncompliance
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 geolocation,
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 subnational
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.
Introduction of the new regulation would 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 (see below), 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.
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
at:
See:
https://www.atibt.org/en/news/13090/the-europeancommission-has-published-its-draft-regulation-to-fight-againstimported-deforestation
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 news paper 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.
EU Fitness Check: success in Indonesia but otherwise
VPAs have "not delivered"
The long awaited "Fitness Check" of the EUTR and the
FLEGT Regulation was published on 17 November
alongside the EU's Deforestation regulatory proposal. The
stated objective of the Fitness Check is to assess whether
"these two instruments are fit for their purpose to halt
illegal logging and related trade as set out in both
Regulations" and the main conclusion is that "the general
objectives of the two Regulations have not yet been fully
met".
According to the Fitness Check, "while there are tangible
signals that both Regulations together have been
moderately successful in their aim to prohibit the
placement of illegally logged timber on the EU market, it
is difficult to conclude (based on the data available) that
they have had a significant effect on illegal logging
globally".
On the specifics of the VPA with Indonesia, the Fitness
Check is more positive noting that "the implementation of
the FLEGT licensing scheme with Indonesia has worked
well", a fact which is attributed to "the Indonesian SVLK
[being] fully integrated in a wider reform of the national
forest governance system and not seen as an 'add-on' only
inspired by trade concerns".
The Fitness Check notes that many elements of FLEGT
licencing "have been implemented successfully both by
Indonesia and EU member States, and processes and
systems are continuously updated and improved".
It is also noted that "the level of exports from Indonesia to
the EU has risen since licencing commenced (although
less so than overall imports to the EU).
Remaining challenges are addressed as they arise¡.The
SILK database for Indonesia shows that from 2013 there
was improvement in operator compliance as expected in
advance of FLEGT licensing".
More widely with regard to the FLEGT VPAs, the Fitness
Check notes that a "great amount of learning can be drawn
from the Indonesian experience" and that "there is
evidence of VPA partner countries taking steps in the right
direction and putting in place the foundations for
improvements in the future, i.e. concerning governance,
civil society participation, clarifications around existing
definitions and legislation".
Despite these positives, the Fitness Check concludes that,
overall, the FLEGT VPAs have "not delivered" and their
"effect has been limited, with only one country issuing
FLEGT licences and no evidence that the VPAs have
contributed to reduced illegal logging".
A number of factors are identified as having constrained
the FLEGT VPA process. It is noted that "negotiating,
concluding and implementing VPAs proved to be a long
and complex process" and that "such processes are fraught
with challenges in many partner countries such as the
required high standards of a TLAS (weak overall
governance, lack of institutional capacity, absence of
political willingness, often widespread corruption),
difficulties in gaining agreement from multiple regions in
partner countries, insufficiently effective measures and
weak law enforcement".
The Fitness Check also claims that the VPAs have
suffered from a "high focus on process (strengthening
governance elements such as stakeholders¡¯ participation,
etc.) to the detriment of the main objective: stopping
illegal logging and associated trade". This, it is alleged,
"may have led to disincentives for VPA countries to bring
the preparatory processes to an end, since they continue to
receive the EU economic support for activities while at the
same time selling the majority of their timber to less
discerning markets, such as China".
The Fitness Check goes on to suggest that "the VPA
processes as designed by the EU provide funding to
establish participatory forest governance processes, but do
not address the economic drivers of illegal logging in the
forest sector, nor the underlying corruption in the
administrations and at the political levels that are
benefitting from illegal logging".
"These factors prevented VPA processes from creating the
expected improved transparency in all financial
transactions related to the forest industry, the processing
industries directly linked to it and the export volumes of
goods sourced from forests".
Another weakness of the VPAs, according to the Fitness
Check, is that "many important exporters to the EU, which
are considered to be high-risk countries regarding illegal
logging, have never shown interest in engaging in the
VPA process, e.g. Russia, Ukraine and Brazil".
It is suggested this is due to several factors: "a perception
that VPAs are designed solely for developing tropical
countries, a ¡®demand-driven¡¯ approach for the selection of
partner countries, doubts about the economic benefits of
VPAs in terms of greater EU market access, and the
potential reputational damage of withdrawing from
negotiations once started".
The Fitness Check includes a critical cost-benefit analysis
of the FLEGT VPA process, suggesting that "Considering
that timber and derived products followed by FLEGTlicenses
cover only 3% of timber imports into the EU, the
costs and administrative burdens seem immense¡.. its
benefits may not seem to justify its costs".
The total investments by the EU and Member States in the
preparation, negotiation and implementation of FLEGT
VPAs since 2004 is estimated in the Fitness Check at €1.5
billion shared between the EU and the Member States
(much of it apparently spent on preparation and
negotiation rather than actual implementation).
This excludes the amount invested by VPA partner
countries the level of which "has been proven difficult to
quantify as this was partly in the kind i.e. time and effort
invested by authorities and stakeholders".
The annual costs of running a FLEGT licensing system are
estimated in the Fitness Check using data from Indonesia
as the only country that has reached that stage.
"The total costs for Indonesia, MS [EU Member States]
customs and importing operators in handling the
approximately 35000 licenses per year are in total €11.5
million", according to the Fitness Check. This includes the
support and costs for certification of forest areas in
Indonesia but excludes costs related to support to SMEs
and family holdings. On this basis, cost per license issued
is estimated at approximately €330 and the cost per tonne
of import into the EU about €336-338.
The Fitness Check argues that "there is limited potential to
reduce the costs of the VPA system". This is because the
"FLEGT/VPA system makes it necessary for the VPA
countries to develop and implement a licencing scheme,
undertake inland and border inspections, certify forests
and plantations, as well as control and verify transports
and traders, warehouses and processing industry, which
leads to complex enforcement systems with high
administrative costs that exceed the capacities of some
partner countries".
On the positive side, the Fitness Check notes that "there is
evidence that FLEGT licences are reducing the costs of
timber import for those EU operators mainly or fully
sourcing their products from Indonesia, as they do not
need to exercise DD [due diligence] under the EUTR",
although the value of this saving is not quantified in the
Fitness Check.
It is also noted that "there is some evidence that once the
FLEGT licencing starts, exporters experience a benefit.
But overall the benefit to Indonesian exporters has been
limited to date. The trade data shows that Indonesian
exports to the EU increased by only 3.6% from 2015-18
(relative to a 10% growth in all [EU] imports) and by only
0.4% between 2016-18 (relative to a 12% growth in all
imports)".
Mixed verdict on EUTR effectiveness
The Fitness Check verdict on the effectiveness of the
EUTR is equally mixed, suggesting it has had only a
limited impact on illegal flows globally, although this
partly reflects the inherent difficulties of measuring such
flows, but that it has focused efforts by European traders
on removing illegal wood from trade and has equipped the
EU to work closely together with other consumer
countries implementing similar legal frameworks.
The Fitness Check notes that "The requirements of
improved transparency and information gathering to fulfil
the DD obligations on evidence of the place of harvest and
no breaches of applicable legislation have put pressure on
all actors along the supply chains".
Furthermore, "most stakeholders consider that the EUTR
has led to a positive change in transparency and the
availability of information and documentation around
timber supply chains (in particular regarding species and
origin) and as such has put pressure on the supply chains
to ensure legality of the wood based products being
exported to the EU".
On the other hand, "a number of implementation and
enforcement challenges have been identified regarding the
functioning and effectiveness of the due diligence system,
in particular the way the EUTR has been enforced in MS
[EU Member States]".
The Fitness Check highlights that while EUTR due
diligence systems have been widely applied by large
operators to cover the majority of wood based products
placed on the EU market, "smaller operators are less
inclined to implement them, not least because they face a
number of challenges in developing and implementing
DDSs, including limited awareness and understanding of
their obligations".
The use of the concept of ¡®negligible risk¡¯ in the DD
provisions of the EUTR has also complicated
implementation and enforcement. "The term is subjective,
which makes it more difficult to select which information
to gather and complicates the determination of wherever a
risk is ¡®negligible¡¯ for operators, Competent Authorities
and the courts¡.Difficulty proving ¡®non-negligible risk¡¯
in court has also led to some hesitations in bringing cases
to court".
It is noted that while all EU Member States have
established legislative frameworks to implement the
EUTR, the level of enforcement differs.
"Evidence exists that operators clearly see a variation in
the stringency with which the EUTR is enforced across
MS (e.g. number of checks, level of penalties), which
leads to attempts observed to import riskier timber via
specific MS".
The Fitness Check is also critical of the fact that Member
States lack the power to redraw or halt marketing of
products already placed on the market even when there is
clear evidence of inadequate due diligence and verifiable
determined negligible risk.
According to the Fitness Check, this means that "market
powers keep traders and retailers sourcing from
questionable operators if the price is low enough. This
may drive operators to continue sourcing wood based
products from high-risk countries like Myanmar, Belarus
and Ukraine".
It is noted that "the trade data also presents mixed signals.
Intra-EU trade (lower risk generally than extra-EU
imports) grew less over the period of implementation
relative to imports as a whole, as did imports from ¡®lower
risk¡¯ countries. Furthermore, there was an absence of
significant changes in trade patterns towards more
transparent countries¡..looking specifically at imports
from countries where issues were specifically identified
over the implementation period (Ukraine and Myanmar),
[these] continued and actually grew in the case of the
latter".
The total costs of EUTR implementation per year are very
uncertain and estimated to be between €71 million (low
estimate) and €1071 million (high estimate) with a central
estimate of €714 million. This draws on a range of studies
undertaken between 2015 and 2021 ¨C all reliant on only a
small sample of operators ¨C indicating average annual
costs per operator between €1000 and €15000.
The Fitness Check notes these costs "need to be seen in
the light of the total import value of products under the
scope of EUTR, which was €24.5 billion on average
between 2015-2019 giving a range of estimated costs
between 0.29% and 4.3% of the import value before
customs and taxes".
The closing statement in the Fitness Check essentially sets
out the EU's rationale for the new deforestation legal
proposal: "If the EUTR were to be repealed without a
system to replace it, the risk of illegal timber entering the
EU market would considerably increase. However, by
covering a wider commodity range in a new legislation,
this issue could be addressed while also covering
important elements of sustainability.
"In contrast, if the FLEGT Regulation were to be repealed,
it would free considerable resources - not only financial
but also human - currently dedicated to negotiating VPAs
or monitoring their implementation. Those could be used
in the context of a different, new approach that addresses
the issue more effectively and more efficiently ".
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