All Eyes on Europe

On Nov 17, 2021, the European Commission (EC) published its draft proposal for a regulation on the import and export of commodities and products associated with deforestation and forest degradation (Draft Regulation), as well as a number of accompanying documents.

The rules are expected to cover six commodities – cattle, cocoa, coffee, palm oil, soybean and wood. Annex 1 lists specific products – namely those that contain, have been fed with, or have been made using the commodities – to which the regulation will also apply.

The Draft Regulation will prohibit the import of the six commodities and their export from the EU market ‘unless they are deforestation-free and have been produced in accordance with the relevant legislation of the country of production’.

On June 28, 2022, the Council of the EU adopted its position regarding the Draft Regulation. The European Parliament’s Committee on Environment, Public Health and Food Safety (ENVI Committee) had presented a Draft Report on April 20, introducing Compromise Amendments to the Draft Regulation. On July 12, the ENVI Committee adopted the Draft Report with 60 votes in favour, 2 against and 13 abstentions.

The Compromise Amendments will expand the scope of commodities covered by the Draft Regulation, adding swine, sheep and goats; poultry; palm-oil based derivates (see Box); maize; rubber; and other products, including charcoal and printed paper products, to the list.

Significant proposals
The ENVI Committee’s Draft Report further proposes a change to the meaning of the concept of ‘deforestation’, with four new definitions: ‘ecosystem conversion’, ‘agricultural use’, ‘other wooded land’ and ‘natural ecosystem’. The intention is to ensure that the Draft Regulation will cover not only land classified as ‘forest’, but also other land and ecosystems that are not classified as ‘forest’.

Currently, the definition of ‘deforestation’ in the Draft Regulation states that it ‘means the conversion of forest to agricultural use, whether human-induced or not’. This definition has been criticised by various organisations for being vague and not covering other ecosystems.

Therefore, the ENVI Committee proposes to define ‘deforestation’ as the ‘conversion, whether human-induced or not, of forests or other wooded land to agricultural use or to plantation forest’ (emphasis added).

The definition of ‘other wooded land’ means ‘land not classified as forest, spanning more than 0.5 ha, with trees higher than 5 metres and a canopy cover of 5-10%, or trees able to reach these thresholds in situ, or with a combined cover of shrubs, bushes and trees above 10%, excluding land that is predominantly under agricultural or urban use’.

Such definitions are particularly relevant as the ENVI Committee also proposes to include the assessment of forest conversion as part of the criteria to classify countries in ‘low’, ‘standard’, or ‘high-risk’ categories. If adopted in the final text, the definitions will have an impact on the classification of countries, as one criterion will be the ‘rate of deforestation, forest degradation and forest conversion’.

With respect to due diligence and enforcement, the ENVI Committee’s Draft Report notes that ‘while no country or commodity will be banned, companies placing products on the EU market would be obliged to exercise due diligence to evaluate risks in their supply chain’.

Importantly, the due diligence requirements will be derived from the ‘country benchmarking system’. In other words, obligations for operators and authorities in EU member-states will vary depending on the classification given to each country.

Notably, operators from ‘low-risk’ countries will have less onerous due diligence obligations, compared to those in ‘high-risk’ countries. The latter would have to provide, inter alia, a risk assessment to establish whether the relevant commodities and products are non-compliant with the requirements of the proposed regulation.

Under the EC’s Draft Regulation, such due diligence obligations only relate to deforestation and forest degradation or the production of products in accordance with ‘relevant legislation of the country of production’.

However, the ENVI Committee’s Draft Report proposes to amend the definition of ‘non-compliant’ to include the notion that a product must be also produced in accordance with ‘relevant laws and standards, including the rights of indigenous people, tenure rights of local communities, and the right to free, prior and informed consent, and which were not covered by an accurate due diligence statement’.

For example, traders and operators would need to provide information that the production of palm oil and derived products does not cause deforestation and forest degradation, and that it also complies with laws and standards regarding indigenous peoples’ rights.

Unless operators are able to prove that these products come from deforestation-free areas when originating in countries labelled as ‘standard’ or ‘high-risk’, the products look poised to be banned from the EU market.

Implications for palm oil
The Draft Report proposes to include specific palm oil and palm kernel oil-based derivatives within the scope of the Draft Regulation. These include ‘palmitic acid, stearic acid, their salts and esters’, which are used in food production.

While this could provide some clarity on the palm oil products to be covered, it is worth noting that there is no similar amendment regarding soybean derivatives, for example. Once again, a different approach towards palm oil can be observed. This appears to be discretionary and discriminatory in nature.

It would be in Malaysia’s interests to call upon the EC to classify countries according to transparent, science-based and objective criteria, with datasets gathered and verified with respect to all the commodities covered by the Draft Regulation.

This process of classification must also recognise Malaysia’s efforts and commitments towards the environment and sustainable production of palm oil and of all other commodities, whether or not they fall within the scope of the Draft Regulation.

Additionally, it should be emphasised that under the Malaysian Sustainable Palm Oil certification scheme, mandatory rules already confirm product compliance with a number of social and environmental standards. These should be counter-checked with the social and environmental elements referenced in the Draft Regulation.

The European Parliament is scheduled to vote on its Draft Report in September 2022. When it is adopted by the plenary, it will become the European Parliament’s position for the inter-institutional ‘trilogue’ negotiations with the Council and the EC, scheduled to begin after the summer recess.

The three institutions must agree on the text of the Draft Regulation, which will then have to be approved by the European Parliament’s plenary and by the Council. The EC will publish the measure in the EU’s Official Journal for adoption and implementation.

MPOC Brussels