European Council Adopts Sweeping Regulation on Deforestation-free Products

On 16 May 2023, a historic piece of EU legislation on deforestation was adopted by the European Council, thus concluding over 18-months of informal trialogue discussions between the Council, the European Parliament and the European Commission. The “Regulation on the making available on the Union market as well as export from the Union of certain commodities and products associated with deforestation and degradation” will enter into force 20 days after it is published in the Official Journal of the European Union.  Although there remains some criticism of the scope of the new Regulation, it nevertheless takes a significant step towards addressing the enormous impact both legal and illegal deforestation has on climate change and human rights.

The Food and Agricultural Organisation of the United Nations estimates that 420 million hectares of forest, an area larger than the European Union, were lost to deforestation between 1990 and 2020. The net area loss in the same period was 178 million hectares, an area three times the size of France.

Deforestation also has a severe impact on the lives of many global communities. Following backlash from Indigenous leaders and NGOs alike regarding the exclusion of Indigenous rights from the original text, they were included in the December 2022 reading and incorporated into the text agreed by the European Parliament on 19 April 2023 and adopted by the Council on 16 May.

The Regulation requires affected companies to prove that commodities and/or derived products sold on the EU market:

• Are deforestation-free;
• Have been produced in accordance with the laws of the country of production; and
• Are covered by a due diligence statement.

Deforestation-free means that the commodities have not been produced on, and the derived products do not contain materials that have been produced on, land deforested or degraded after 31 December 2020.

Affected companies are those that, whether incorporated in the EU or elsewhere, place relevant commodities or derived products on the EU market.

Relevant commodities are cattle, cocoa, coffee, palm-oil, soya and wood. Relevant derived products are specified in an annex to the legislation and include leather, chocolate, furniture, rubber, charcoal, printed paper products and a number of derived palm-oil products. This has enormous reach and will impact companies headquartered all over the world.

Should commodities or products be found to fall foul of the Regulation, they will be removed from the EU market. Penalties will be “disproportionate and dissuasive”, and the maximum fine will be at least 4% of the total turnover in the EU.

The EU Regulation is unique in its focus on all deforestation, and not only illegal deforestation. The UK’s Environment Act 2021 and the proposed FOREST Act in the US focus on the legality of deforestation in the country of production, which some fear may have the unintended consequence of incentivising countries to weaken their deforestation laws for the benefit of their trade capabilities.

Once the text has been published in the EU Official Journal and entered into force 20 days later, an 18-month implementation period comes into force (24-months for SMEs).

It will be a busy 18-months as many practicalities of the Regulation need to be put in place, including the benchmarking of countries for the risk-assessment section of the due diligence requirement and the creation of the electronic interface to be used by authorities needs to be created.