Intense Negotiations Underway On EU “Deforestation-Free” Law. ITTO European Market Report 30th April 2022

Intense negotiations continue within the European Council and European Parliament towards agreement of a final text of the law “on the making available on the Union market as well as export from the Union of certain commodities and products associated with deforestation and forest degradation”.

If jointly approved by the Council and Parliament, the new law will replace the existing EU Timber Regulation (EUTR) and extend due diligence obligations to a wider range of “forest risk” commodities. As currently drafted, it would prohibit placing of products on the EU market that contribute either to “deforestation” or to “forest degradation”, alongside illegally harvested products.

On 17 March, the European Council of Environment Ministers exchanged views on the legislative proposal. The meeting included clarifications and justifications for the regulation from the European Commission (EC) followed by a short statement by each Member State in turn. The EC identified aspects of the regulatory proposal setting it apart from the existing EUTR and from equivalent legislative initiatives in the US and UK. If passed by the EU, the law will:

  • Build on FAO definitions of deforestation and degradation.
  • Include a prohibition on products derived from any deforestation or forest degradation, irrespective of whether legal or illegal according to national laws in the country of harvest.
  • Require operators to file each year a due diligence statement to be uploaded into an EU digital database to allow better targeting of enforcement actions.
  • Require that the source of all regulated products – excluding only those from countries deemed by the EC to be “low risk” – be traced to the “geolocation”, defined as the specific plot of land where harvesting took place.
  • Set out procedures for benchmarking of countries as “high risk”, “standard risk” and “low risk” by the EC for which different due diligence obligations would apply and which thereby “provide an incentive for countries to step up their protection of forest”.
  • Establish minimum requirements for enforcement actions by EU Member States to better ensure uniform implementation across the EU and a level playing field for operators.

In the same way as EU Agricultural Ministers speaking at their earlier Council meeting in February (see ITTO Tropical Timber Market Report, Volume 26 Number 4, 16-28 February 2022), Environment Ministers expressed a wide range of views on the legislation.

The most supportive statements came from the German and Dutch Environment Ministers. Germany said the proposed regulation would pay for itself in the long term and be an important improvement over the EUTR, and that it contained appropriate measures to reduce the burden on SMEs.

The Netherlands Environment Minister expressed his “full support the proposal” and said that it is “vital to the green deal” (the EU objective to cut greenhouse gas emissions by at least 55% by 2030). The Netherlands also called for “other ecosystems to be introduced as soon as possible” and that it is “key that forest degradation remains part of the proposal”. Netherlands said there should be deeper engagement with major producer countries to “avoid negative impacts such as discrimination against smallholders and rising costs”.

Ministers raising the most substantive concerns about the draft legislation came from the Nordic countries and Baltic States. Sweden said that the administrative burden and costs of the new legislation would be significantly higher than was the case for EUTR. Sweden believes the legislation does not sufficiently reflect varying national forestry conditions both within and beyond EU and that definitions relating to degradation and sustainable forest management are unclear and likely to conflict with national forest policies. Sweden recommended that these definitions either be removed or deleted and called for more steps to ensure full compliance with WTO obligations.

Finland emphasised that deforestation is a global problem and the EU should focus on promoting a multilateral response. Also that due diligence must be justified in relation to impact and proportionality and that the geolocation requirements be examined more closely from the perspective of practicality. According to Finland, the degradation definition created “many difficult questions”, particularly for countries with a large remaining forest area where legitimate changes of land use may be associated with some minor losses to forests at specific locations.

Estonia noted that the new law will have a significant impact on EU businesses, particularly SMEs, and regulatory authorities. According to Estonia, discussions in various EU working groups on the regulation had been too rapid leaving insufficient time for proper consideration to be given to the full implications of the new law. Estonia called for more wide ranging input from experts from the individual commodity sectors and in trade law. Estonia noted that sourcing of wood from illegal sources has remained a problem despite EUTR, and that bringing cases to court has been challenging. Estonia believed that definitions, particularly for “forest degradation”, must only contain concepts agreed at international level.

Some Southern European countries, while expressing broad support, also raised specific substantive objections. For example Italy said the scope of the draft law extends well beyond EUTR and will be challenging to implement and called for “reasonable time frames” before full implementation. According to Italy, more time is needed to develop “effective new platforms to link together operators” and “new innovative tools, including partnerships with private entities”. Italy also suggested that existing FLEGT partnerships should be developed before coming up with new partnerships. There was a need too for more consideration to be given to interim arrangements when switching from EUTR to the new regulation.

Greece was particularly emphatic that the new regulation must be in line with WTO rules, must take account of national conditions and natural processes such as forest fires, must be transparent and simple, and implemented in harmonised way. Greece said that due diligence requirements should be precise and consistent with international standards such as OECD guidelines to minimise costs. Greece felt the “forest degradation definition should be kept out of the regulation allowing countries to adopt national provisions”.

European Parliament calls for even more far-reaching regulation

While this debate is on-going in the European Council, on 31 March the ENVI Committee of the European Parliament, the other branch of EU legislature, published a draft report setting out their proposed amendments to the new law. In some respects the amendments proposed in the ENVI Committee’s draft report respond to the same problematic issues as those raised in European Council discussions. But overall, the ENVI Committee draft amendments, if accepted, would significantly expand the scope of the law in relation to land area captured, the products covered and the obligations to be placed on operators.

The key amendments proposed in the ENVI Committee’s draft report include:

1. Change to product scope

The ENVI Committee draft report proposes that rubber is added to the list of commodities covered by the regulation, alongside cattle, cocoa, coffee, oil palm, soya, and wood. The draft report also proposes a specific exclusion for recycled materials and recycling products.

2. Conversion to tree plantations treated as “deforestation”

The ENVI Committee draft report proposes that the definition of “deforestation” be extended to prevent any conversion to tree plantations. The current draft includes a prohibition against conversion to plantations as a form of “degradation”. The ENVI Committee draft would strengthen this prohibition by defining conversion to plantations as a form of “deforestation” and tree crops as a form of “agricultural use”.

3. Conversion of “other wooded land” treated as “deforestation”

The ENVI Committee draft report proposes that the definition of deforestation be extended to include conversion of “other wooded land” as well as forest land so as to address threats to “forest-mosaic ecosystems and tropical woodlands and savannahs” alongside natural forests.

Drawing on the FAO definition, the draft report proposes that “other wood land” should include “land not classified as forest, spanning more than 0.5 hectares, with trees higher than 5 meters and a canopy cover of 5 to 10 percent, or trees able to reach these thresholds in situ, or with a combined cover of shrubs, bushes and trees above 10 percent, excluding land that is predominantly under agricultural or urban use.”

4. Slightly more flexible “degradation” definition

While the ENVI Committee draft report proposes that the definition of deforestation be extended in relation to tree plantations, it proposes that the definition of “forest degradation” be slightly more flexible. This is justified according to the draft report because “FAO states that a globally agreed definition of sustainable forest management (SFM) is impractical because of the huge diversity of forest types, conditions and socioeconomic contexts worldwide.”

The existing draft law indicates that any harvesting of forest products on “vulnerable soils” or involving “large clear-cuts” or any reduction or loss of soil quality or biodiversity, irrespective of timescale, is “unsustainable” and will lead to “forest degradation”.

The ENVI Committee draft report proposes that there be no general prohibition on practices such as “large clear-cuts” and no specific requirement for low impact harvesting. Instead it proposes a more flexible requirement that the forest site must be regenerated through planting or natural regeneration so that there be no overall decrease of forest land.

5. Greater focus on ensuring equity for smallholders

The ENVI Committee’s draft amendments to the law highlight that “the share of smallholders in the production of the commodities concerned can be as high as 80%” and acknowledge that “special attention needs to be paid to the challenges that smallholders will face with the implementation of this Regulation” and that “the new rules should aim to minimise the burden on smallholders in third countries and prevent barriers to their access to the market and international trade”.

The one major change proposed by the Committee’s draft report to facilitate greater access for smallholders would be to make the “geolocation” obligation slightly more flexible. Rather than require, as in the current draft, that all products must be traceable to an individual “plot of land”, the requirement would be that products be traceable to “production areas”. This is still quite narrowly defined as “a plot of land, farm, plantation, cooperative or village”.

This change is justified in the ENVI Committee’s draft report on grounds that “it might not be possible to trace back every single cocoa bean e.g. to a particular farm of a smallholder, but rather to the production area from which a cooperative is sourcing. Allowing to monitor a certain production area instead of every single plot of land will make it easier to implement the regulation and minimise the risk of excluding smallholders from the supply chain”.

Beyond this, the ENVI Committee seems to take the view that responsibility for ensuring equitable market access for smallholders should lie with the operators, noting that “it is therefore crucial that the operators buying from smallholders provide timely financial and technical support to help smallholders meet the new Union market access requirements”.

The ENVI Committee draft report also expresses an optimistic view of the benefits that might accrue to smallholders from the setting up of traceability systems to deliver against the geolocation criteria, noting that such systems “can empower smallholder farmers as it can avoid the non-payment of promised sustainability premiums, allow for electronic payments to producers by using the national traceability system thus combatting fraud and enable local authorities to collect knowledge on the number of producer plots and control the number of farmers.”

6. Requiring third party audits of operators’ due diligence systems and statements

In the current draft of the law operators would be required to implement a due diligence system and to prepare a due diligence statement covering all the regulated products placed on the EU market. The statements would be lodged with the Competent Authorities who would be responsible for checking on their veracity.

However, presumably due to concerns over the ability of EU Competent Authorities to carry out effective checks, the ENVI Committee draft report proposes that “operators’ due diligence systems should be controlled by a third-party external auditor on an annual basis”. The operators’ obligation to submit the due diligence statements would be extended to include “an annual audit report by a third-party auditor”.

7. Allow for differential approach between commodities

The current draft law would apply the same due diligence rules to all “forest-risk” commodities. However the ENVI Committee draft report argues that “applying the same rules and definitions for significantly different supply chains does not match the realities on the ground and will make it difficult for both operators and national control authorities to implement the regulation”.

The draft report therefore proposes that “where necessary, the Commission should develop guidelines laying down specific rules on due diligence requirements, traceability tools and liability rules in the supply chain for the different commodities. Those rules should also be harmonised as much as possible with the due diligence rules set out in [the forthcoming Sustainable Corporate Governance Directive]”.

8. Simplify benchmarking framework

The ENVI Committee draft report proposes that the existing proposal categorising countries/regions as “low”, “standard” and “high risk”, for which different due diligence obligations would apply, should be simplified. Instead the Committee draft report proposes only that “low risk” countries/regions be identified, for which products would be subject to “simplified” due diligence. Competent authorities would not be obliged to “apply enhanced scrutiny on relevant commodities and products from high risk countries or parts of countries identified as high-risk”.

9. Due diligence obligations focused on “first placers”

The ENVI Committee draft report proposes that “operators” to which detailed due diligence obligations apply should be restricted to the “first placer” rather than all suppliers throughout the EU supply chain. This would align with the current EUTR in which due diligence obligations only apply to the first placer. The draft report proposes that first placers be required to “share their due diligence statements with subsequent operators and traders in the supply chain”, thereby helping to avoid duplication at every stage of the supply chain.

10. Require compliance with standards for indigenous and community rights

The ENVI Committee draft report proposes that the current draft requirement for harvesting to be “deforestation-free”, “degradation-free” and compliant with national laws should be extended to include compliance with “international laws and standards on the rights of indigenous people and tenure rights of local communities, including customary tenure rights and the right to free, prior and informed consent.”

Of course, there is a long way to go before any of these proposals – which are just a first draft of comments on a law which itself is still only in draft form – actually make it on to the European statute book. However, coming as they do from an influential committee within the European Parliament, they do indicate that there is strong strand of opinion within the EU that even the existing legislative proposal for deforestation-free products does not go far enough.

At this stage, there is every expectation that the new law will eventually be passed in one form or another. However the complexity of the issues involved, and the pleas from some member states for more time to consider the full implications and for wider international consultation, suggest it may be several years before the new law is effectively implemented. In the meantime, EUTR remains in place and continues to provide the framework for regulation of timber products placed on the EU market.

For additional insights, non-profit organisation Preferred by Nature (PbN, formerly NEPCon) has run a seminar on the operation and implications of the proposed new regulation. A recording of the event is available at the link below. It features presentations by PbN’s responsible sourcing specialists Christian Sloth and David Hadley Garcia. They give their insights into key elements and requirements of the regulation and advise businesses trading in and using the forest risk commodities it covers, including timber, on what to prepare for ‘if and when it comes into force’.

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