Regulation (EU) 2023/1115 of May 31, 2023 (the "Deforestation Regulation" or "EUDR") aims to reduce the EU's role in cutting down woodlands and thereby to limit the impact of deforestation on greenhouse gas emissions.
The EUDR will come into effect on December 30, 2024 (or June 30, 2025, for micro or small businesses); and that is necessitating significant preparatory work for many stakeholders of the supply chain for the relevant commodities covered by the Deforestation Regulation (i.e., cattle, cocoa, coffee, oil palm, rubber, soya, and wood).
One of the challenges faced by these stakeholders is the lack of current classification of the level of risk for originating countries (see our prior Commentary on the application and challenges of the Deforestation Regulation). Article 29 of the EUDR establishes a three-tier system for the assessment of countries, which may be either "high risk," "low risk," or "standard risk" of producing relevant commodities on deforested land plots. It appears that the EU Commission intends to pause the classification of countries, given the concern expressed by certain countries regarding the "high risk" label. Such classification would have far-reaching implications for these countries' capacity to export relevant commodities and may also be at odds with their international commitments to tackle climate change.
Another challenge resulting from the delay in classification is that all countries would by default be classified under "standard risk." As the Deforestation Regulation still requires a substantial amount of due diligence for products from "standard risk" countries, companies will need to apply this due diligence to relevant products from all possible countries of origin. This means companies will not have the possibility of performing only simplified due diligence for the foreseeable future.
The replacement of existing suppliers with compliant suppliers is yet another challenge for companies. Article 3 of the EUDR provides that operators and traders shall not place or make available on the EU market, or shall not export, relevant commodities and relevant products that are not deforestation-free. This is the primary and most ambitious provision of the Deforestation Regulation, which aims in particular to reduce the impact of deforestation on greenhouse gas emissions. As a result, companies will have to review their supply contracts with small producers, and may decide to purchase from larger producers that can afford the means to supply deforestation-free commodities. Choosing such larger producers may have adverse effects on social issues, in particular if locally owned small producers are bypassed; thus, hindering another objective of the EUDR, which is protecting indigenous and local communities. In addition, even larger suppliers may have difficulties changing their production quickly enough to meet the new standards. Consequently, companies that need to comply with the Deforestation Regulation may face difficulties in finding suppliers of compliant products, which may result in shortage of relevant products in the EU.
From a practical standpoint, the implementation of the Deforestation Regulation may also run into difficulties for electronic registering of due diligence information. Article 33 of the EUDR provides that due diligence information should be registered into an IT system, which shall be established by the EU Commission before December 30, 2024. According to media reports, however, the pilot tests undertaken so far on the EU Commission's IT system have revealed a number of technical flaws, which cast doubt on the system's reliability and raises many questions as to how the IT system will be able to play its role in allowing the registering of due diligence information. Moreover, the absence at this date of an available IT interface (Application Programming Interface, or API) prevents companies from preparing for the requirements of the upcoming IT system, which poses a risk of non compliance.
Guidelines and a new FAQ are expected to be published shortly by the EU Commission, which should provide answers to some of the challenges faced by companies in implementing the Deforestation Regulation.
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