EU Deforestation Regulation (EUDR)
The European Parliament recently passed the EU Deforestation Regulation (EUDR) which aims to ensure that products exported to the EU are deforestation-free after a cut-off date of December 31, 2020. To be specific, this regulation seeks to “minimize the EU’s contribution to deforestation and forest degradation worldwide and promote the consumption of products from deforestation-free supply chains in the EU.”
The commodities included in this regulation are palm oil, rubber, coffee, soy, cocoa, cattle and timber, as well as derived products (such as beef, furniture, or chocolate). The list of commodities covered will be regularly reviewed and updated, taking into account new data such as changing deforestation patterns.
The new regulation requires all relevant companies that want to place to verify or conduct strict due diligence if they want to export to, and from, the EU market to prove that their products are both deforestation-free (produced on land that was not subject to deforestation after December 31, 2020) and legal (complaint with all relevant applicable laws in force in the country of production).
Companies will also be required to collect precise geographical information on the farmland where the commodities that they source have been grown. And countries will be categorized into high risk, standard and low risk based on their level of their deforestation risks.
The criteria used for the classification are rate of deforestation and forest degradation, agricultural land expansion, production trends, Forestry and Other Land Use (FOLU) sector in Nationally Determined Contributions (NDC), existing forest partnerships with the EU, national laws and law enforcement. While there is exception for smallholder farmers, the provisions aren’t clear and detailed.
The next step after the legislative process is completed is the implementation of Implementing Acts or Delegated Acts by each EU member states where some changes to the regulation can be made.
It is worth noting that this regulation is only one of many that have been and will be issued by the EU in its quest to achieve net zero or carbon negative by 2030. EU’s main agenda in reducing the greenhouse gas emissions is the New Green Deal. After the deforestation regulation, it is set to issue a regulation on Corporate Sustainability Due Diligence (CSDD). The proposal aims to foster sustainable and responsible corporate behaviour throughout global value chains.
However, the majority of EU and Indonesian companies will likely not be covered due to its narrow scope. The proposal includes requirement for all importers to conduct “the identification, prevention and mitigation of labour and human rights issues in a dynamic way and at regular intervals…and periodically (at least every 12 months).” Furthermore, the EU has proposed Forces Labour Regulation to prohibit products made with forced labour on the EU market. This will give the European Commission power to stop/seize imports at the EU border if forced labour is suspected, similar to that of the U.S. There will be mandatory requirements for companies – importers and traders – to exercise transparency, traceability, mapping and assurance instruments and to foresee a procedure whereby victims can file a complaint against their activities or that of their suppliers or distributors.
Meanwhile, Indonesia is currently facing a Dispute Settlement (DS393) case related to RED (Renewable Energy Directive II) at the World Trade Organization (WTO). RED II is an EU regulation pertaining to the use of new and renewable energy where the EU is bound by the directive to gradually reduce and stop using palm oil-based biofuel because it is considered to pose a high risk of indirect land use change (ILUC). It is estimated that the dispute settlement will be decided by the WTO in the coming months. However, unlike this case, deforestation regulation isn’t limited to the use of palm oil for energy but also food and manufacturing. Therefore, the implication will be broader for other Indonesian exports covered by the regulation.
Another case that is being faced by the palm oil industry is the accusation of subsidies by on various derived products such as biofuels and oleochemicals. The EU accuses that by imposing different export levies, it is as if the export of biofuel and palm oil derivatives are being subsidized by the government making similar products produced by the EU become uncompetitive.
Indeed, Indonesia’s palm oil industry is facing and will face many challenges and obstacles in the EU market and this will adversely impact the palm oil trade.