EU’s Deforestation-Free Regulatory Proposal Sparks Intense Debate. ITTO Tropical Timber Market Report, Volume 26 Number 4, 16-28 February 2022, Europe Section

Intense negotiations are ongoing as the draft EU law on “deforestation-free” and “forest degradation-free” products, published by the European Commission (EC) on 17th November last year, navigates the various stages of the EU law-making process.

The draft law is planned to replace the EU Timber Regulation (EUTR) while at the same time extending regulations to a range of “forest risk” agricultural commodities, including beef, cocoa, coffee, palm oil and soy together with derived products.

To become law the final text must be adopted jointly by the European Parliament and the European Council of Ministers. At this stage, drawing on views expressed by Agriculture Ministers of Member States at their Council meeting on 21 February there seems to be broad endorsement across all EU member states of the law’s objectives and agreement that due diligence by producers and importers placing regulated products on the EU market should be the basis of the regulation.

On the other hand, there is a variation in views across Member States on the details of the regulation, particularly the definitions of “deforestation” and “forest degradation” and the controversial proposal that the law should ban commodities derived from land that is legally deforested (i.e., as part of a nationally approved land use plan) as well as illegally deforested.

There is also widespread concern across Member States over the complexity of enforcement, the costs and potential discriminatory consequences for smallholders and SMEs and the impact on consumer food prices and global competitiveness of European producers in the global forest products and agricultural commodities trade.

The Agriculture Council meeting indicated that there is a way to go before Member States reach consensus on this legislation with some calling for more product specific impact assessments to extend the assessment already undertaken by the EC. This process may take some time, despite the clear stated priority attached to passage of the law by the current French Presidency of the EU Council, which runs for the first six months of this year.

France has expressed ambitions to adopt conclusions in March while the European Parliament plans to adopt its position before July. Time is of the essence for France’s Council presidency as it could be severely curtailed by April’s election when President Macron is expected to seek re-election.

Further insights into the extent of EU-wide consensus on the deforestation regulation will come when EU Environment Ministers discuss the proposal at their next Council meeting on 17 March. But as things stand, the original timetable set out by France seems optimistic. The actual timing may well hinge on the priority attached to the legislation by the countries holding the subsequent six-month rotating presidencies, the Czech Republic followed by Sweden

Major implications for FLEGT VPAs

The implications of any potential delay in the EU reaching some form of consensus on the new law, irrespective of whether the EU eventually decides to adopt something similar to the existing text, or to reject it altogether, are significant for those tropical countries that are signatories to existing FLEGT VPAs. There is now considerable uncertainty over the future policy direction in the EU raising concerns about a hiatus in implementation of existing agreements.

The uncertainty is particularly problematic for Indonesia, the only country to have achieved FLEGT licensing, and which is looking to the EU to fulfil its obligations under Article 13 of the VPA. This requires that the EU “shall promote a favourable position” in the EU market for licensed timber, including through “public and private procurement policies that recognise a supply of and ensure a market for legally harvested timber products; and a more favourable perception of FLEGT-licensed products on the Union market”.

If the draft deforestation legislation is passed into law in its current form, the scope for the EU to promote “a favourable position” for FLEGT licensed timber in the EU market would be constrained. While the regulatory proposal includes a provision declaring wood covered by a FLEGT license to have fulfilled the legality requirement there is no provision for FLEGT licenses to meet the “deforestation-free” or “degradation-free” requirement.

This creates a situation whereby EU operators could reject FLEGT-licensed timber on grounds that, while it is entirely legal, it does not fulfil the EU’s definitions of “deforestation-free” or “degradation-free timber”. Any suggestion that FLEGT licensed timber may not meet these definitions would contradict the EU’s obligation to promote “a more favourable perception of FLEGT-licensed products on the Union market”.

The draft legislation provides one potential route out of this dilemma, through the proposed country benchmarking. The draft legislation enables the European Commission to assess the risk of commodity-driven deforestation and forest degradation by country and to categorise each country (or sub-national region) as “low”, “standard” and “high risk”.

Operators would be permitted to implement “simplified due diligence” procedures excluding the requirement for risk assessment and mitigation for all commodities from countries assessed to be “low risk”.

The far-reaching forest reform process undertaken as part of the VPA should better position Indonesia to achieve a “low-risk” status. However, according to the current draft regulation, achieving such a status would require that Indonesia demonstrates that no forest-risk commodities with potential to enter EU supply chains derive from any forest land cleared after 31 December 2020, irrespective of whether the clearance is legal or illegal.

All timber products would also be required to meet a definition of “degradation-free” which is regarded, even by some governments of EU member states, to be highly problematic and likely to conflict with national forest policies.

While the EU and Indonesia may yet negotiate a way around the looming roadblock for FLEGT licensed timber created by the new regulation it is hard to escape the conclusion that this ratcheting up of requirements only five years after FLEGT licensing became operational is not what Indonesia signed up for through the VPA, nor is it likely to be viewed in Indonesia as an adequate return in terms of a favourable position in the EU market after a decade of forest reform.

The on-going negotiations around the new deforestation regulation in the EU have implications for the recent rebranding campaign for the SVLK standard, which forms the basis for the FLEGT licensing system, as a sustainable forestry standard.

The campaign developed by the Indonesian Ministry of Environment and Forestry (MoEF) through a multi-stakeholder process supported by the UK government has the expressed aim to ensure that SVLK certification meets the sustainability requirements of even the world’s most environmentally sensitive markets.

The SVLK rebranding is explicitly designed to address increasing demand for sustainably produced timber products and deforestation-free supply chains. It also addresses the reluctance among the timber trade to promote the concept of “legal timber”, which is now considered a basic requirement in regulated consumer markets and not an add-on that should be specifically promoted or highlighted.

Besides sustainability aspects, the Indonesian promotion campaign intends to highlight the strengths of Indonesian timber products identified through stakeholder consultations in Indonesia and other research and surveys, including trade surveys by the FLEGT Independent Market Monitor, an ITTO project funded by the EU, in EU countries and (until 2021) the UK.

To ensure that the market benefits of Indonesia’s delivery of FLEGT licensing after a decade of forest reform are not lost during this period of uncertainty, there is a clear need now for dialogue between Indonesia and the EU to resolve potential differences of interpretation in relation to definitions of deforestation, forest degradation and sustainability.

FLEGT in relation to changes in wider EU policy environment

All tropical timber supplying countries need now to consider that the overall thrust of both the draft deforestation law and FLEGT Fitness Check published by the EC at the same time in November last year suggests that the concept of FLEGT licenses and of VPAs focussed on timber products may be dropped or substantially amended.

In their place, the EU has indicated an intent to promote broader Forest Partnerships to deliver on European Green Deal priorities, particularly in relation to zero carbon, as well as the EU’s development cooperation objectives including poverty alleviation and human rights.

With respect to VPAs the draft deforestation regulation only states 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”.

The political background to negotiation of the new Forest Partnerships is also very different compared to when the FLEGT VPAs were being negotiated in the decade between 2007 and 2017. During that period, there was strong emphasis on development and trade recognition of forestry standards decided in the partner country through a stakeholder consultation process.

As noted in a recent paper for the European Centre for Development Policy Management (ECDPM), “By focusing on legality as defined by the law in producer countries rather than by imposing European standards, FLEGT ensures respect for territorial rights and World Trade Organization (WTO) rules, while avoiding politically sensitive sovereignty concerns in partner countries and thereby increasing the likelihood of their participation in the FLEGT scheme.”

This consensus-based approach was combined with a positive trade incentive through provision of “green lane” access in the EUTR and other commitments by the EU to promote a favourable market position for FLEGT licensed timber.

In contrast, discussions over the new deforestation law, and negotiations towards the new Forest Partnerships, are set within the context of an EU that is becoming “more assertively defensive in its trade policy”, according to POLITICO, the independent EU-based policy news organisation.

This is illustrated by a comment made by the French Agriculture Minister Julien Denormandie in January, that “Europe must impose its standards on others and not have others’ standards imposed on it.”

In this respect the draft deforestation regulation proposal aligns closely with another ambition of the French Presidency of the EU Council to ensure the introduction of so-called “mirror clauses” in all EU trade agreements.

As a condition of agreement these would demand that trade partners mirror the EU’s own production standards and not be allowed to undercut European workers through laxer environmental rules.

The new deforestation proposal also aligns with the proposal for a Carbon Border Adjustment Mechanism (CBAM), published by the EC on 21st July last year and another priority of the French Presidency. This mechanism is seen as necessary to reduce the risk of European climate policies leading to “carbon leakage”. That is a rise in offshoring of production of carbon-intensive goods outside the EU, and re-importation of these goods to the European single market.

The aim of the CBAM is that goods imported into the EU should be covered by equivalent carbon pricing to that applicable to production of the same goods within the EU, under the Emissions Trading System (ETS). While the ultimate objective is that there should be broad product coverage in CBAM, for practical reasons, only the five emissions-intensive, trade-exposed industries under EU ETS are targeted in the current proposal: cement, fertilisers, iron and steel, aluminium, and electricity (CBAM goods).

Under the proposal EU importers must purchase CBAM certificates, where one CBAM certificate will correspond to one tonne of GHG emissions measured in the concerned CBAM goods. In essence, the number of CBAM certificates must be equal to the total embedded emissions in the CBAM goods imported.

The proposal states that the Commission will consider a broadening of the CBAM scope in terms of targeted sectors, indirect emissions, transportation services and downstream industries before 2026. Relevant to the forest sector is that pulp, paper, and paperboard, are identified as likely to be included in the next tranche of products.

In this wider context, the draft deforestation law can be seen as a measure by the EU to prevent “carbon leakage” in the agricultural and forest products sector. It’s about raising barriers to products considered to have inferior environmental standards to those produced in the EU.

This is a different proposition to the FLEGT VPAs where the objective was to support partner countries in ensuring compliance with their own forest laws. For the advocates of the new law, deforestation of any kind in third countries is unacceptable, irrespective of whether or not legally sanctioned. Nor is there scope for the EU to actively promote products from third countries inside the EU unless they explicitly contribute to achievement of the EU’s zero carbon goal.

This last point raises an intriguing opportunity for tropical timber given their potential to substitute for more carbon intensive products such as steel, aluminium, and plastics in certain applications. Recent successes of ATIBT to encourage SOLIDEO, the Paris Olympic commissioning organisation, to communicate on the advantages and open certain orders to the use of certified tropical hardwood, and to persuade the SNCF, the French national rail company to use these timbers for sleepers and supports, sets a precedent for this. So too does rising EU imports of biomass, which doubled in value to USD800 million between 2016 and 2020, mainly from the USA and Russia, a trade which benefited from renewable energy subsidies in the EU.

In each case, it is notable that public sector support for forest products from non-EU countries was contingent on sustainable forest certification and clear information on carbon impacts.

Specific issues for tropical timber raised by draft EU deforestation law

Some specific implications of the draft deforestation regulation for supply of tropical timber and other forest-risk commodities are explored in an article by Alain Karsenty, senior scientist at the French Agricultural Research Centre for International Development (CIRAD), published on the Mongabay environmental news site.

Karsenty highlights the implications of the 31 December 2020 cut-off date on deforestation which means that any product derived from an area cleared before this date is regarded as “deforestation-free”. This date, much more recent than the 2015 originally proposed by the European parliament, effectively “amnesties” a lot of recent deforestation in large producing countries, such as Brazil.

However, it also potentially penalises those low deforestation countries like Gabon that may want to develop a larger agricultural area in the future.

Karsenty also notes the impact of the choice of FAO’s definition of a forest as a minimum area of 0.5 hectares with 10% tree cover. This is a very broad definition which is out of step with many countries that have adopted a minimum threshold of 30% tree cover. The difference in definition has potential to create significant trade tensions.

Karsenty explains, “by setting a threshold of 10% to define zero deforestation products, commodities considered legal in the country of origin (whose conversion may have involved an ecosystem with, for example, 20% cover) will be unacceptable to the EU, and, in principle, will not be allowed to be imported”.

Overall, Karsenty suggests that “the idea of having only one definition of forest for all countries… and all biomes, poses a problem of realism. It would be more appropriate to examine things on a case-by-case basis, and even biome by biome, since some countries have several forest biomes”.

Karsenty goes on to discuss the far-reaching implications for tropical timber products of forest “degradation” being included alongside deforestation. He comments that the “definition of degradation is rather unclear” and that “avoiding degradation implies, by some definitions, maintaining the original species composition, age structure or distribution rate of a forest stand. All of which are changed by selective logging, even if controlled and certified”.

Furthermore, the draft regulation specifies that forestry operations must not result in “loss of biological or economic productivity” or damage “the complexity of ecosystems”, criteria that will be difficult to interpret. Karsenty suggests that “few operations will be able to claim to meet them fully”.

Finally, Karsenty comments on the implications of the benchmarking proposals which, when combined with the lack of recognition for certification systems, another feature of the draft regulation, will create significant barriers for producers in some tropical countries.

According to Karsenty, “The criteria for comparison should be deforestation rates, production trends for commodities at risk of deforestation, national policies, quality of governance, etc. While this approach makes sense, it may discourage importers against sourcing from countries such as Cameroon, Cambodia or the Democratic Republic of Congo, given the effort they will have to make in terms of guarantees.

“By not wanting to trust ‘zero deforestation’ certifications to declare the product ‘negligible risk’, the Commission will penalize ‘clean’ producers in contexts of ‘difficult governance’. This is tantamount to collective punishment”, says Karsenty.

EU Member States raise reservations about new deforestation law

At the EU Agriculture Council meeting on 21 February, twenty-six Member State Agriculture Ministers (excluding France who Chaired the meeting) each made a statement setting out their position on the draft law on “deforestation-free” and “forest degradation-free” products.

While all were broadly supportive of the objectives and generally in favour of the due diligence approach set out in the draft, many Member States raised so-called “scrutiny reservations” on the entire text. In other words, there is some way to go before the Council reaches any sort of consensus on a final text.

The statements revealed that leading supporters of the existing text, or for an even more wide-ranging regulation, were Germany and the Netherlands. The strong support of France can also be assumed given the priority attached to passage of the law during the French presidency. Spain and Italy were also generally supportive, but more cautious in urging a general need for flexible and gradual implementation.

The most explicit critiques came from Sweden – who specifically rejected the notion that the law should boycott products from legal deforestation – and Finland who argued more on practical lines that there was a need for flexibility allowing some scope for legal deforestation for legitimate land use zoning/management purposes. Finland said the proposed 2020 retroactive deadline for forest conversion was “extremely problematic”.

Alongside these two countries, several other Eastern and Southern European countries (Czech Republic, Italy, Latvia, Portugal, Romania, Slovakia, Slovenia) raised objections to the definitions of deforestation and forest degradation in the law, pointing out there was no international agreement on what these terms implied. Italy noted, succinctly, “degradation in respect to what?” Portugal and Cyprus said the degradation definitions were not appropriate to fire affected forests.

Paralleling objections to the EC’s recent efforts to develop a new Forest Strategy, Finland suggested that the existing draft did not go far enough in endorsing the value of active, multifunctional and sustainable management of forests to supply a range of renewable products that can substitute for non-renewable and more energy intensive products.

Eastern European countries (e.g. Czech Republic, Bulgaria) were prominent in raising objections to the costs involved, emphasising both the special challenges for smallholders and SMEs, and the complexity of enforcement processes. Estonia observed that lessons needed to be learnt from EUTR which in practice had failed to effectively remove illegally harvested wood from EU trade.

With respect to geolocation data, Finland raised questions about the potential discriminatory effect on small operators of requiring such data, while Greece questioned whether this approach was at all practicable.

There was not universal acceptance of assertions in the EC’s impact assessment that costs would be manageable. There was a call (Austria, Denmark, Estonia) for more detailed sector specific impact assessments to better test these assumptions, and for phased introduction of the law to avoid overburdening operators and regulators in the early stages.

Romania and Portugal were concerned the regulation might raise costs of essential raw materials for EU agricultural producers and undermine their global competitiveness, notably by restricting supply to soy for animal feed.

Several countries (Sweden, Estonia, Greece) questioned the compatibility of the draft text with EU WTO obligations. Estonia pointed out that in order to avoid problems with WTO, the benchmarking of countries and regions would have to be carried out through an “internationally recognised risk assessment methodology”.

A number of countries explicitly called for more time and wider consideration by sectoral and legal experts to consider the full implications. Hungary concluded with the comment that “quality [of the regulation] is more important than the prompt conclusion of the negotiations”.

Industry and NGOs post conflicting statements on the new deforestation law

Various interest groups in the EU are now making known their views on the draft legislation. Particularly far-reaching objections are raised in a joint statement by COCERAL, FEDIOL, and FEFAC, representing the EU grain and oilseed trade and animal feed industry.

The three organisations suggest that “the design of the approach and several provisions of the proposed Regulation will have serious negative consequences without any real added value to meeting the objective of deforestation-free supply chains”. These range from supply shortages in the EU, leading to high prices and challenging the EU food and feed chain competitiveness, to a minimal impact on deforestation due to lack of leverage and incentives to transform practices on the ground, particularly as it will lead to “exclusion of the majority of smallholders and certain mills supplied by smallholders from supply chains”.

COCERAL, FEDIOL, and FEFAC jointly propose that traceability requirements be adapted to the specificities of the different commodities instead of a one-size-fits-all approach and that they “be inclusive of smallholder farmers and compatible with local laws, instead of requiring filing geolocation coordinates”.

The three organisations also suggest that operators should “not be guided by an inaccurate country benchmarking” but should instead be responsible for their own risk assessment and mitigation “verified by audits and controlled by competent authorities”. They suggest that “Not only would the country benchmarking approach lead to shifting sourcing from high-risk areas to low-risk areas, a trade distortion which penalises sustainable actors in high-risk areas, but it would also imply disengagement from high-risk areas, which need most engagement and sustainable transformation”.

For the timber importing industry, the European Timber Trade Association (ETTF) and the German Timber Trade Association (GD Holz) issued a statement suggesting that “the concrete definition of the impact site (geo-localisation) cannot be implemented in many cases”.

The two timber trade associations felt that the approach adopted in the EUTR which requires an annually updated risk assessment for each supplier was more appropriate. They also noted “a particularly important point is that the duty of care should not be extended to larger dealers, but should remain with the first distributor, i.e. the importer, as usual”.

GD Holz and ETTF also raised concerns about the definition of “deforestation” and “degradation”, suggesting that the regulation “must ensure that orderly forest management according to state laws is the basis for legal logging” and that “sustainable forest management in the supplier countries must not be viewed as deforestation or degradation”.

GD Holz and ETTF expressed concern that, according to current information, the “FLEGT process will no longer be continued in its current form” and that “It is still unclear how partnership agreements with FLEGT partners and negotiations with FLEGT candidates are to be handled”. They noted that, irrespective, the associations are “committed to continuing the [FLEGT licensing] process in any case, as it ensures more document security and more awareness of legality and sustainability in the supplier countries”.

While industry associations raised concerns about the challenges of implementing the existing provisions of the draft legislation, a statement issued by more than 100 ENGOs on 3rd February calls for a ratcheting up of the law’s extent in terms of eco-system, sectoral and product coverage and obligations.

They also propose removing the “simplified due diligence” procedures which exempt smaller operators and operators from compliance in countries and regions deemed to be lower risk, while also calling for there to be no ‘green lane’ for certification or third-party verification schemes.

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