The European Commission publishes a draft Regulation to tackle key commodities associated with deforestation

• United Kingdom

• Environment
• ESG
• Litigation and dispute management

07-12-2021

Following COP26 where we saw world leaders (including Brazil, China, Indonesia and the US) pledge to halt and reverse forest loss and land degradation by 2030 through the Glasgow Leaders’ Declaration on Forests and Land Use, the European Commission is now proposing to ban certain commodities that are associated with deforestation and forest degradation from entering/exiting the EU market.

The proposal, which forms part of a broader plan of actions to protect our existing forests, is intended to promote the consumption of certain commodities and derived products from “deforestation-free” supply chains in the EU, thereby reducing the EU’s contribution to global deforestation, greenhouse gas emissions and biodiversity loss.

What commodities and derived products would be affected?

The draft legislation targets six commodities which represent the largest share of EU-driven deforestation: palm oil, soy, wood, cocoa, coffee and beef. Products that have been fed with or have been made using these commodities such as e.g. chocolate, leather and furniture would also be caught by the proposed Regulation.

Key proposals

The draft Regulation proposes to introduce mandatory due diligence rules on operators to ensure that only commodities and derived products that satisfy the following conditions can be placed on the EU market and/or exported outside the EU market:

• the relevant commodity/product is “deforestation-free”. A commodity or product will be considered “deforestation-free” if it has been produced on land that has not been subject to deforestation/forest degradation after 31 December 2020;
• the relevant commodity/product has been produced in accordance with the relevant legislation of the country of production (what will be looked at are the rules relating to the legal status of the area of production in terms of land use rights, environmental protection, third parties’ rights and relevant trade and customs regulations); and
• the relevant commodity/product is covered by a due diligence statement made by the operator. The statement would require operators to confirm that due diligence has been carried out and that no risk, or only negligible risk, was identified.

The due diligence process would require operators to adopt a three-step approach:

• collect relevant information and documents to demonstrate that the commodities/products are “deforestation-free” and have been legally produced. This would include collecting the geographic coordinates of the land where the commodities/products they place on the EU market and/or export from the EU market were produced. The European Commission believes that this obligation will strengthen the effectiveness of the Regulation as national authorities will be able to check, through the use of satellite technology, whether a particular commodity/product is deforestation-free;
• verify and analyse the information collected and carry out a risk assessment to establish whether there is a risk that the relevant commodities/products are non-compliant;
• where the risk assessment indicates a non-negligible risk, take risk mitigation measures and other adequate measures to reach no or negligible risk.

An operator that would not be able to carry out the required due diligence, or that would not be able to demonstrate that the risk of non-compliance is zero or negligible, would be prohibited from placing the relevant commodities/products on the EU market or from exporting such commodities/products outside the EU.

The European Commission also proposes to introduce a country benchmarking system whereby countries would be assessed as either presenting a low, standard or high risk depending on, amongst other things, the rate of deforestation/ forest degradation, the rate of expansion of agricultural land for the relevant commodities and production trends within their jurisdiction. Simplified due diligence requirements would apply for commodities and derived products produced in low risk countries.

Penalties for infringing the proposed legislation would be set at Member State level. The draft Regulation however prescribes that the penalties should include, as a minimum, fines proportional to the level of environmental damage and the value of the relevant commodities/products concerned, confiscation of the relevant commodities and products, confiscation of revenues gained from trading relevant commodities/products and temporary exclusion from public procurement processes.

What about the UK?

Similar provisions have already been introduced through the landmark Environment Act albeit with a more limited scope.

Under Schedule 17 to the Environment Act, companies above a certain turnover threshold (to be determined by the Secretary of State through secondary legislation) will be prohibited from using certain commodities (“forest risk commodities”) and derived products as part of their commercial activities in the UK unless such forest risk commodities/derived products were produced in accordance with relevant laws in the country where they were produced. Specific requirements that regulated persons will see imposed on them include establishing and implementing a due diligence system and submitting an annual report to the relevant authority. An exemption will apply where the amount of forest risk commodities used by the regulated person as part of its UK commercial activities during a reporting period falls below a prescribed threshold. Such threshold is yet to be set by secondary legislation.

On the face of it Schedule 17 to the Environment Act does not go quite as far as the European Commission’s proposal. It is however satisfying to see the UK’s views being aligned with those of the EU and that both parties recognise the need to take further action to address deforestation/ forest degradation. It will be interesting to see whether the publication of the EU’s proposal will lead the UK to adopt secondary legislation that will widen the scope of the Act in that respect. One example where the UK could go beyond the EU’s initiative is if it decides to include rubber to the list of commodities that would be subject to these new provisions.

The government has published a consultation on the implementation of the due diligence provisions set out in the Environment Act. The consultation seeks views on:

• which commodities will be in scope of the secondary legislation; 
• which businesses will be subject to the provisions; 
• what businesses in scope will be required to undertake and report on regarding their due diligence exercise;   
• how the requirements will be enforced.

The consultation closes on 11 March 2022.