On 28 June 2022, the Council of the European Union adopted its negotiating position on the draft regulation which would ban the import and export of six basic agricultural products to and from the European Union when these products have been related to deforestation.
The motor of politics is conviction1 that ending deforestation is a necessary condition for achieving net zero (negative greenhouse gases, such as carbon and methane, produced by human activity), providing benefits for all. The raw materials in question are beef, soya, palm oil, coffee, cocoa and wood and derived products such as leather, chocolate and furniture.
In November 2021, we published a briefing in which we set out the background and details of the draft regulation (Regulation) proposed by the European Commission (Commission). We have also provided an analysis of the likely implications of the regulation and future developments in this area.
The regulation is now in first reading and the Council of the European Union (Council of the EU) adopted its negotiating position on June 28, 2022. In this article, we describe the proposed changes brought about by the Council’s negotiating position of the EU, the considerations businesses should take into account and the likely next steps.
Position of the Council of the EU
The press release of the Council of the EU2, published on June 28, 2022, confirms that it has now adopted its negotiating position (general guidance) on the settlement. This includes “compulsory vigilance rules for all operators and traders who place, make available or export” the six main agricultural products to and from the European Union (EU) – beef, soybeans, palm oil, coffee, cocoa and wood and derived products such as leather, chocolate and furniture.
The Council of the EU has simplified and clarified the due diligence system to avoid “doubling of obligations” and reduce the “administrative burden for operators and Member State authorities”. It also added the ability for smaller operators to rely on larger operators to prepare due diligence statements. Additionally, he offered a “benchmarking system”, which would assign EU member states and third countries a risk category (high, standard or low) based on that country’s deforestation risk profile. The Council of the EU confirmed that this would result in “enhanced surveillance for high-risk countries and simplified due diligence for low-risk countries”. The Council of the EU has also “clarified control obligations and set quantified targets for minimum levels of control for standard and high risk countries”.
The proposed text on sanctions and enhanced cooperation with partner countries was maintained. In terms of other changes, the Council of the EU responded to the concerns of heavily forested EU Member States that the definition of “forest degradation” in the Commission proposal, as defined in Article 2, was too broad by modifying the definition. The Council of the EU has therefore reduced the scope of the definition as follows: “‘forest degradation’ means structural changes in forest cover, taking the form of conversion of primary forest to forest plantations or other wooded land” instead of the previous version: “harvesting operations that are not sustainable”. The Council of the EU also included references to the “United Nations Declaration on the Rights of Indigenous Peoples”.
The changes adopted by the Council of the EU are perhaps more notable for what they did not include, than for what they did. The scope of “relevant goods”as defined in Article 2, has not been increased, except to modify the detailed list of specific products set out in the Annex3. This has been criticized by some campaigners, who believe the regulation should go further to cover more commodities, including rubber, and to close loopholes they say allow banks to finance deforestation.4.
Other activists argue that the settlement offers “Insufficient protection” at “indigenous communities” and that he has like “lots of holes like swiss cheese”5. An argument put forward by environment ministers in some countries is that the regulation is “too narrow” and that the definition of “forest degradation” which has been amended by the Council of the EU should be extended to cover “other ecosystems” and also “secondary forests”6. In the general approach adopted, the Council of the EU underlined “the importance of assessing the need and feasibility of extending this scope to other products and ecosystems during the first revision of the text within two years; the preparatory work for this revision must begin as soon as the text enters into force”. It also points out that broadening the definition of forest degradation “will have to be addressed in the first revision of the text”seven.
The simplified due diligence procedure has been criticized by some environmentalists who believe it will leave loopholes to be exploited8. For example, some environmentalists have argued that the same strict requirements should be applied universally, to prevent the laundering of goods through low-risk countries.9.
The Council of the EU maintained the Commission’s proposal to require traceability information for all volumes purchased by operators. Geolocation and traceability requirements are at the heart of the regulation. In practice, commentators say this would require mapping farms with precise GPS coordinates, checking this against evidence of deforestation using satellite images, inspecting fields, digitally tracing produce from farm to factory and put in place a deforestation risk assessment and mitigation measures. This can pose problems for products such as palm oil, where mills typically process fruit from a number of different farms which they blend. In addition, collecting geolocation data from smallholders and cooperatives could pose significant challenges.
Other concerns about EU traceability schemes have been raised by industry associations including COCERAL, FEDIOL and FEFACten. They argued that the traceability requirements, which were included as part of the operator’s risk assessment, impose on the operator the obligation to take into account the “risk of mixing with products of unknown origin or produced in areas where deforestation or forest degradation has occurred or is occurring”. They claim that separating verified and unverified products will have a disruptive effect on supply chains and will also require the construction of new infrastructure. This could have the potential to undermine existing deforestation efforts in high-risk countries as operators shift to lower-risk areas11. Although these plans can be costly, they have received support from some NGOs12.
Another proposed change that was made was to modify the applicable time limit contained in the definition of “without deforestation” from December 31, 2020 to December 31, 202113. Importers should therefore consider that the qualification of products without deforestation applies to land not deforested since December 31, 2021 and not to the initial date of December 31, 2020. Although this imposes less of a retroactive obligation on importers, and would probably welcomed by importers for this reason, it would still be necessary to undertake a retrospective analysis of the lands producing the relevant products.
Next steps
The regulation will now enter the next stage of the legislative process and pass its first reading in the European Parliament. The European Parliament is expected to adopt its position on the regulation during the plenary session on September 12, 2022, before entering into further discussions with the Council of the EU14 in the final stages of 2022 to agree on the final text.
As we said in our first briefing15, if approval is obtained, the Regulation will enter into force on the twentieth day following that of its publication in the Official Journal of the European Union. The main provisions of the regulation will apply 18 months after the entry into force of the regulation.
