Deforestation Regulation: Impacts Of A Possible Delay In Risk Classification Of Countries And Other Recent Developments - Commodities/Derivatives/Stock Exchanges

On 9 June 2023, the European Union published Regulation (EU) 2023/1115 on the making available on the Union market and the export from the Union of certain commodities and products associated with deforestation and forest degradation (the "Deforestation Regulation" or the "EUDR"). The EUDR entered into force on 29 June 2023, although the main prohibitions and obligations will not apply until 30 December 2024.¹

Pursuant to the EUDR, beginning 30 December 2024, relevant products (derivatives of palm oil, soya, wood, cocoa, coffee, cattle, and rubber, as listed in Annex I to the EUDR) may be placed or made available on the EU market, or exported from the European Union, only if they meet the following requirements:

(1) Deforestation-free: Relevant products must be traceable to the plot of land where the relevant commodities were produced/harvested, and such plot of land must not have been subject to deforestation (or to forest degradation with respect to wood) after 31 December 2020

(2) Legality: Production/harvesting of the relevant commodities on the respective plot of land must be compliant with relevant legislation of the country of production

(3) Due diligence statement (DDS): Each batch of relevant products must be covered by a DDS, which must be submitted into the Information System by an EU operator or trader upon conducting due diligence, or upon ascertaining that due diligence was carried out in accordance with EUDR in a prior step of the supply chain.

In order to meet these requirements, EU operators and traders are required to obtain adequately conclusive and verifiable information along the entire supply chain, starting from the producers of the relevant commodities.

1. FREQUENTLY ASKED QUESTIONS ON THE DEFORESTATION REGULATION

To clarify complex EUDR requirements, the European Commission ("Commission") published Frequently Asked Questions ("FAQ"). The FAQ is a non-binding working document drafted by the Commission to provide guidance to national authorities and EU operators and traders for the implementation of the EUDR. National authorities and economic operators may make use of this guidance based on the text, context and purpose of the EUDR, to achieve its uniform application across the European Union. Among other things, the FAQ clarifies the following:

Placement on the market during the transitional period (FAQ 80): Obligations of EU operators/traders with respect to: (1) products placed on the market before 30 December 2024 and (2) products produced from the commodities or products placed on the EU market before 30 December 2024, will be limited to gathering adequately conclusive and verifiable evidence to prove that such relevant commodity, or relevant product, was placed on the market before the entry into application of the Regulation. Such products will be exempted from the full due diligence requirements that are otherwise imposed on EU operators and traders placing relevant products on the EU market as of 30 December 2024.
Granularity of traceability requirements (FAQ 2 and 4): The traceability requirements apply to each batch of imported, exported, or traded relevant commodities, meaning that the deforestation-free and legality requirements must be fulfilled for each batch of commodities or products placed on the EU market. In that context, mass balance chains of custody which allow for the mixing—at any step of the supply chain—of deforestation-free commodities with commodities of unknown origin or non-deforestation-free commodities are not allowed, because they do not guarantee that the commodities placed on the market or exported are deforestation-free.
Traceability requirements for bulk products (FAQ 3 and 21): For products traded in bulk, such as soy or palm oil, the operator or a trader needs to ensure that all plots of land involved in a shipment are identified, and that the commodities are not mixed at any step of the process with commodities of unknown origin, or from areas deforested or degraded after the cut-off date of 31 December 2020. In that context, traceability information can be added up along supply chains. For instance, a large, bulk shipment of soy that has been sourced in several hundred plots of land from several countries would need to be associated with a due diligence statement, which includes all relevant countries of production and geolocation information, for every single plot of land in each country that contributed to the shipment.
Recycled products (FAQ 33): Only relevant products manufactured using 100% of the recycled inputs are exempted from the EUDR. However, if the product contains even 1% of non-recycled material, it is subject to the requirements of the EUDR, and the non-recycled material will need to be traced back to the plot of origin via geolocation.
Treatment of packaging (FAQ 32): Packaging material is outside of the scope of EUDR unless it is placed or made available on the EU market as a product in its own right. FAQ clarifies that any material used exclusively as packaging material to support, protect or carry another product placed on the market is not a relevant product within the meaning of Annex I of the Regulation, regardless of the HS code under which they fall. User manuals accompanying shipments are included under this exemption, unless they are purchased in their own right.

The EUDR FAQ is expected to be updated by the end of March 2024 to address a multitude of questions from stakeholders. It is also expected that the Commission will issue a general EUDR Guidance by the end of May. This Guidance will cover 11 areas, including:

clarifications on placing and making available on the EU market;
legality;
risk assessment;
product scope; and
the role of third-party verification schemes.

In the meantime, the Commission has provided a list of some (but not yet all) Designated Competent Authorities.

2. EUDR INFORMATION SYSTEM

In December 2023 and January 2024, the Commission revealed the EUDR Information System Operator DDS Input Screen ² and conducted pilot testing of the Information System. This testing identified a number of major technical and other issues, including the lack of mechanism to allow automation of geolocation uploads. ³ In February 2024, the Commission published aWorking Document with High Level Specification of EUDR Application Programming Interface (API) for Operators, which describes functional aspects of the API. Information System trainings are expected to begin in Q2-Q3 2024, and the system is expected to open for registration in November 2024.

3. POSSIBLE DELAY IN THE CLASSIFICATION OF COUNTRIES INTO LOW AND HIGH RISK

In March 2024, reports ⁴ emerged that the Commission intends to pause the classification of countries (or parts thereof) into low, standard or high risk of producing relevant commodities on land plots deforested after 31 December 2020. The delay is said to be related to criticism by many developing countries which "have expressed concerns about the bad reputation associated with a 'high risk' label, fearing that it could lead companies to cease operations in these regions or favour large producers over small farmers, who may struggle to comply with the new regulations." ⁵ Apparently, companies importing the relevant products into the European Union started to "scale back" ⁶ purchases from smallholders in developing countries, and "could pull out of 'high-risk' areas because the burden of proving their products did not come from deforested land was too high, while several have started to favour supply deals with bigger producers that can afford to deploy sophisticated geolocation technology." ⁷ In this context, some view this delay as a relief measure for producers in developing countries, giving them more time to adapt to the EUDR. ⁸ The fact of the matter is that a possible delay should not affect the steps that EU operators and traders need to undertake, leading to the full-fledged application of the EUDR on 30 December 2024.

a. Risk classification and why it matters

Under the EUDR, the scope of due diligence by EU operators/traders—and the intensity of EU Member States' enforcement activities—depends on the risk level of the country of origin of the relevant commodities (or a part of the country). All countries are to be classified as "high risk," "low risk," or "standard risk" of producing relevant commodities on land plots deforested after 31 December 2020 (i.e., the risk that relevant products produced from such commodities do not meet the requirement of being deforestation-free). Keeping with paragraph 2 of Article 29 of the EUDR, the Commission shall classify countries, or parts thereof, that present a low or high risk by implementing acts to be adopted, in accordance with the examination procedure. This classification is to be carried out by 30 December 2024. Meanwhile, as of 29 June 2023, all countries have been assigned a default "standard risk."

b. Impact of a potential delay on the scope of due diligence

The EUDR envisages that the scope of due diligence to be conducted by EU operators and traders depends on the classification of the countries (or parts thereof) of origin of the relevant commodities. In particular, simplified due diligence option is available to EU operators and traders with respect to the relevant products made of relevant commodities produced/harvested in countries (or parts thereof) classified as "low risk." To conduct simplified due diligence with respect to such products, EU operators and traders would need to:

(1) collect (a) geolocation of the respective land plots, as well as (b) adequately conclusive and verifiable information, that (i) the relevant products are deforestation-free, and that (ii) the relevant products/commodities have been produced in accordance with the relevant legislation of the country of production, as well as other information listed in Article 9;

(2) ascertain that all relevant products/commodities have been produced in countries (or parts thereof) that were classified as "low risk" (i.e., verify geolocation, check traceability and uninterrupted chain of custody) (Article 13(1));

(3) collect and assess evidence demonstrating no or negligible risk of circumvention and of mixing with products of unknown origin, or originating in "high risk" or "standard risk" countries (or parts thereof) (Article 13(1)).

Relevant products made of relevant commodities produced in countries (or parts thereof) classified as "high risk" or "standard risk" require a full-fledged due diligence, encompassing, in addition to the above, risk assessment, and, where applicable, risk mitigation.

Thus, delay in classification of the countries (or parts thereof) into "high risk", "low risk" and "standard risk" categories will put all countries on equal footing: all relevant products, irrespective of country of origin, will need to undergo a full-fledged due diligence (as products originating from a "standard risk" country) prior to being placed on the EU market. Hence, a possible delay in classification of countries will bring little relief to producers in developing countries and their EU customers: even though the delay appears to be aimed at ensuring inclusive transition to sustainable, deforestation-free, and legal supply chains, it remains the case that—starting 30 December 2024—it will not be possible to place on the EU market (including via import) relevant products made of relevant commodities produced/harvested by producers that can't provide geolocations of their land plots, along with other necessary information down the supply chain. Thus, companies importing relevant products to the European Union will continue requesting the required data and information from producers in developing countries, in order to conduct a full-fledged due diligence with respect to all relevant products supplied by each particular supplier, regardless of whether the country of origin is of high risk or not.

c. Impact of the potential delay on the enforcement of the EUDR

Intensity of EUDR enforcement activities depends on the risk-based classification of the countries (or parts thereof). The higher the level of risk, the higher a percentage of operators and traders that the national competent authorities should check on an annual basis.

Delay in the classification of the countries (or parts thereof) into "high risk," "low risk," and "standard risk" will result in one threshold ("standard risk" country threshold) being applied to all relevant products, regardless of the country of origin of the relevant commodities. In such case, annual checks by the national competent authorities will need to cover at least 3% of the operators placing or making available on the market or exporting relevant products. This percentage will need to be met separately for each of the relevant commodities.

Against this background, a possible delay in the classification of the countries (or parts thereof) into "high risk," "standard risk," and "low risk" puts all EU operators and traders on equal footing, in terms of the intensity of checks to be performed by the national competent authorities. Namely, the same 3% threshold will apply regardless of the country of origin of the commodities/products that they place or make available on the EU market. This translates into a certain relief for producers from countries that are likely to be classified as "high risk," since only 3% of traders and operators placing or making available on the market or exporting their relevant products will be checked instead of 9% of operators and quantities that the EUDR envisages for high-risk countries. At the same time, however, the lack of classification of some countries as "low risk" will subject relevant products originating in those countries to a higher threshold of checks than they would have otherwise enjoyed (1%).

On that basis—even assuming the European Union will indeed confirm that it postpones the mandatory 30 December 2024 deadline to classify countries into "high" and "low" risk categories—operators and traders placing relevant product in the EU market, as well as their suppliers, should continue preparing full steam for EUDR implementation. Any delay in classification of the countries into risk categories will not negate essential EUDR requirements that will still have to be fulfilled.

Footnotes

1. See our previous Legal Update on the EUDR, as well as our webinar explaining key aspects of the EUDR.

2. A screenshot of the EUDR Information System Operator DDS Input Screen is available in the presentation on the Information System.

3. Pilot testing feedback is available here.

4. See "EU delays stricter rules on imports from deforested areas" published by Financial Times; "Anti-deforestation delays: EU backtracks on stricter import rules amid international backlash" published by Food Ingredients First; and "EU attempts to smooth South American complaints over deforestation policy" published by Reuters.

5. See "EU environment chief to address anti-deforestation law concerns on South America tour" published by EURACTIV.

6. See "Coffee firms turning away from Africa as EU deforestation law looms" published by Reuters.

7. See "EU delays stricter rules on imports from deforested areas" published by Financial Times.

8. See "Anti-deforestation delays: EU backtracks on stricter import rules amid international backlash" published by Food Ingredients First.

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