Combating deforestation in the production chain of certain commodities and related products – European Parliament and Commission agree on new provisional political agreement

In December 2022, the European Parliament and the European Commission entered into a provisional political agreement to ensure that products exported to the European Union (“EU”) do not contribute to deforestation and forest degradation in the European Union and worldwide.

Ultimately, how could such an agreement come to affect Brazil’s exports?

Purpose

The EU has already been adopting major regulatory efforts across the continent to achieve its greenhouse gas emission neutrality project by 2050. The European Green Deal provides sustainability rules comprising a series of ecological actions that impact the European economy, now including forest protection within the global scope.

Although still provisional, the new political agreement aims to minimize deforestation and forest degradation, whether legal or illegal, associated with certain commodities and related products exported to the EU. To this end, the EU seeks to regulate the value chain of such products, preventing the circulation of commodities and related products that have been produced in areas associated with deforestation, even if indirectly, after December 31, 2020.

The concept of forest degradation was also expanded to encompass the conversion of primary or naturally regenerating forests into forest plantations, planted forests, or other wooded lands.

Scope

The agreement applies to the trade of seven specific commodities: cattle, cocoa, coffee, palm oil, soy, wood, and rubber as well as their derivative products. The regulation provides for a revision of its own scope and may be extended to other products that present deforestation risks in their production chain.

Any company that handles high-risk commodities and its derivative products is subject to the agreement, whether it is a European or a non-European company (for instance, a Brazilian company) that offers such products (including through exports), to the European market, as well as companies that export from the EU to other countries.

What obligations will companies have?

• Assessment and issuance of a due diligence statement by importers and exporters that goods placed on the EU market by the company have not caused deforestation or forest degradation anywhere in the world since the date of December 31, 2020. 

• The information, documents and data related to the due diligence statement (such as the description and quantity of the commodities, geo-localization coordinates of plots of land where the commodities were produced, and information contact of any supplier of the relevant commodities) must be kept for 5 years. 

• The due diligence statement will be a necessary instrument for the sale of specific products whose production chain involves high-risk commodities or derivative products (such as coal, printed paper, leather, furniture, or chocolate). 

• Companies are required to confirm their compliance with the applicable laws of the country of production, including laws related to human rights and to ensuring respect for affected indigenous population, including through free, prior, and informed consent.

How can the EU Member States act?

• The EU will have access to a series of relevant data capable of helping to confirm the products’ origin through information provided by the companies in the statement, such as geographical coordinates of the cultivation area. From the presented data, within 18 months, countries or locations will be classified by a benchmarking system according to their deforestation and environmental degradation risks. The countries will receive different proportions of compliance checks, and countries with the highest risk will have 9% of their volumes checked. Different levels of risk will lead to further obligations, simplifying due diligence for low-risk countries and increasing compliance needs for high-risk countries. 

• The Parliament and Commission will enforce the regulation at both the domestic and EU levels. At a domestic level, countries will appoint one or more supervisory authorities to monitor compliance with obligations when the agreement becomes a domestic law. The Commission will set up a European Network of Supervisory Authorities, uniting each national authority and encouraging cooperation and coordination in their practices.

What will enforcement and potential penalties entail?

• Member States will establish the penalties and adopt all measures necessary to implement the provisions. 

• The sale of such products without due diligence may result in a fine proportional to the environmental damage and the amount of operations, for a maximum of 4% of the offender’s total annual turnover within the EU. 

• Other penalties may include:
  • seizure of the relevant products from the infringing company;
  • seizure of revenues from the suitable product at issue; and
  • temporary exclusion from public procurement proceedings.

The agreement is still at the provisional stage, pending formal adoption by the Council and Parliament. If approved, the obligations will enter into force 20 days after the regulation’s publication in the EU’s Official Journal.

Despite the fact that progress made towards the adoption of this regulation and other regulations involving ESG issues by the EU is challenged by countries that export to the EU, including the potential violation of international trade rules within the scope of the World Trade Organization, the EU seems to be firmly pursuing the expansion of its regulatory framework on the subject

Sources: https://ec.europa.eu/commission/presscorner/detail/en/ip_22_7444 ; https://environment.ec.europa.eu/publications/proposal-regulation-deforestation-free-products_en

Demarest’s Environmental and International Trade teams are available to provide further information and clarify any doubts that may be necessary.