Balancing Act: The EU’s Deforestation Regulation and Its Global Economic Impact

By Kate Capparelle

The European Union, a world leader in environmental protection, has taken a historic step towards counteracting deforestation and forest degradation. The EU Deforestation Regulation (EUDR), enacted on 29 June 2023 and set to take full effect on 30 December 2024, seeks to decrease deforestation, greenhouse gas emissions, and biodiversity loss by restricting commodity imports and exports linked to deforestation. The main target of the EUDR is “agricultural land that is linked to the production of commodities like cattle, wood, cocoa, soy, palm oil, coffee, rubber, and some of their derived products, such as leather, chocolate, tyres, or furniture.” These commodities were selected because they are major drivers of deforestation due to agricultural expansion, which is identified by the Food and Agriculture Organization of the United Nations as the leading cause of global deforestation (see Annex I for the full list of products). The EUDR obliges all operators and traders globally to ensure that these commodities sold on the EU market do not contribute to forest degradation or come from land deforested after 2020. Producers must also comply with their respective local laws including land use rights, environmental protection regulations, forest management and biodiversity conservation rules, labor rights, human rights, and tax laws. Lastly, all products must include a due diligence statement with the operator’s contact information, product details, production geolocation, and compliance confirmation. In the case of non-compliance, corrective action and penalties listed in Articles 24 and 25 include rectifying formal violations, recalling or disposing of products, fines up to 4% of annual EU-generated turnover, confiscation of products and revenues, temporary exclusion from public procurement and funding, and other penalties proportionate to the severity of the infringement.  

The EUDR is one critical law within the monumental scope of the European Green Deal which seeks to make Europe the first climate-neutral continent by 2050. First introduced in December 2019, the European Green Deal encompasses various environmental sectors including climate, energy, agriculture, transportation, and finance. According to the European Parliament, agriculture – forests converted into cropland and livestock grazing – is the main driver of deforestation in all regions except Europe. In Europe, urbanization – construction and road expansion – is the main driver of deforestation. As of 2023, EU consumption accounts for 10% of global deforestation. With this, the EUDR is expected to impact international trading partners more than domestic producers due to differing levels of reliance on agriculture. Still, the EUDR will significantly reduce the EU’s impact on deforestation and forest degradation, marking a major expansion from the previous European Union Timber Regulation (EUTR) of 2010, which focused solely on illegal logging.

While there is strong backing for the EUDR and other European Green Deal policies, approval is not universal. In December 2020, nearly 1.2 million submissions to the EU’s public consultation on deforestation “demanded a strong EU law to protect the world’s forests and the rights of people who depend on them,” making it the largest public consultation on environmental issues in the history of the EU. In April 2023, the new EUDR law was adopted with 552 votes to 44 and 43 abstentions. In March 2024, however, 20 out of 27 EU member states’ agricultural ministers asked in a closed-door meeting to revise, delay, and possibly suspend the EUDR because of worries the policy would hurt small farmers. For months, farmers have been protesting in Brussels over tightening regulations, cheap imports, and the financial burden the EUDR and other rules have placed on domestic farmers. Other EU environmental representatives questioned why countries raised these concerns about the rule only a few months before EU Parliament elections in June when members had already spent years deliberating on the deforestation law and approved it in 2023. Even after the elections in early June, however, EU lawmakers have remained divided over whether to delay the implementation of the deforestation law.

Internationally, the EU’s trade partners are displeased with the new red tape the EUDR will introduce. The American Forest & Paper Association, whose forest product exports to the EU are valued at over $3.5 billion, released a briefing in May stating the EU must reconsider its deforestation law because it imposes “unachievable requirements that create significant technical barriers, which risks trade between the EU and the U.S.” The US ships roughly 60% of the EU’s supply of specialty pulp that is used to make products including diapers, menstrual, and incontinence products. The AF&PA’s main trepidation is “the complexity and impractical nature of the traceability requirement” and how this will disrupt trade. The complexity of the supply chain, where wood chips from numerous small, individual farmers are combined by larger organizations to produce the final product, increases the risk that a single non-compliant wood chip could render an entire batch of pulp ineligible for sale on the European market due to deforestation concerns. AF&PA is not the only concerned bloc calling for a delay in implementation.

Producing countries expected to be most impacted by this policy change have voiced significant concerns. In a joint letter released on 7 September 2023, Brazil, representing 17 World Trade Organization members from Asia, Latin America, and the Caribbean, expressed deep reservations about the EUDR. They stated that “the new law is punitive and discriminatory, imposing excessive burdens on producers of agriculture goods in developing countries, especially small producers with limited means to fulfill stringent regulations.” Brazil, in particular, has a major stake in the EUDR. According to the Observatory of Economic Complexity, in 2022 Brazil was the world’s biggest exporter of soybeans ($47.2B), frozen bovine meat ($11B), and coffee ($8.86B), and exported $62.5B to European countries. Soybeans, frozen bovine meat, and coffee are specifically mentioned in Annex I of the EUDR as products that will be regulated starting in December. Despite repeated efforts by the EU’s environmental policy team to assuage concerns over excessive regulations on small producers, Brazil and its allies remain vocal in their fierce criticism. In March 2024, EU Environment Commissioner Virginijus Sinkevicius traveled around South America to Paraguay, Bolivia, and Ecuador to meet with officials who continue to oppose the EUDR in its current form. For these countries and several others, the initial package of €70 million in funding to implement the initiative has been deemed insufficient. Following that trip, China and Brazil’s presidents met and issued a joint statement emphasizing their commitment to tackling illegal logging and deforestation. They plan to enforce their bans on illegal imports and exports, share technologies like the new CBERS 6 satellite for monitoring forest cover, and promote collaboration on forest conservation and sustainable management.

Indonesia and Malaysia also raised renewed concerns about the impact of the deforestation-related ban on their palm oil exports. As the top two producers of palm oil, Indonesia and Malaysia account for 85% of its global production. Even before the introduction of the EUDR, Malaysia and Indonesia had filed complaints in January 2021 with the WTO over the EU’s ability to take environmental and climate-based action under the Renewable Energy Directive (‘RED II’). Malaysia argued that certain measures imposed by the EU through RED II concerning palm oil and oil palm crop-based biofuels were inconsistent with WTO rules. In March 2024, a WTO panel issued what amounted to a minor reprimand for the EU. They confirmed the overall WTO compatibility of the RED II legal framework, but highlighted some inconsistencies in its implementation and design, without imposing fines or other significant penalties. Faced with the prospect of a similar ruling, Indonesia requested a suspension of its case just before the panel was set to release its decision, fearing the same inconsequential outcome. Similar to Brazil’s strengthening ties, Malaysia recently signed a multi-million dollar palm oil trade deal with China in July. Reports have also indicated that Indonesia is considering shifting the focus of its palm oil exports to Africa. This comes after trips by the EU Commission to Indonesia and Malaysia in June 2023, intended to convey the benefits of the EUDR and resulting in the creation of a Joint Task Force working to address and alleviate Indonesia and Malaysia’s concerns. Despite meetings in Jakarta in August 2023 and Brussels in February 2024, with another scheduled for September, progress has been minimal. According to Human Rights Watch, critics argue that the absence of independent civil society groups in these discussions undermines the Joint Task Force’s ability to fully grasp the impact of deforestation on frontline communities. Without their input, the conversation remains incomplete and disconnected from the real consequences of the palm oil and timber industries. 

As attention shifts to the upcoming implementation of the EUDR, Indonesia’s Coordinating Minister for Economic Affairs, Airlangga Hartarto, accused the EU of “regulatory imperialism” with this new deforestation law. He argued that the law will disproportionately harm small palm oil farmers who lack basic technology and will therefore struggle to comply with the geolocation requirements. “Smallholders — defined in Malaysia as farmers who own fewer than 40 hectares, or nearly 100 acres — grow 27% of the country’s oil palms.” Larger corporations, with their substantial financial resources, however, will likely dominate. Additionally, Indonesia fears that being labeled a “high-risk” country could result in more costly inspections of its products. According to its three-tier classification system, importing countries will be ranked beginning in December by the EU on their level of deforestation risk with those in the “high-risk” category facing more stringent oversight. Questions of “fairness” have been raised when comparing the environmental restrictions and responsibility placed on low- and middle-income countries to those of the wealthiest. If proving compliance with the EUDR is overly complex and expensive for many small suppliers, the livelihoods of Malaysian and Indonesian citizens will be threatened, these countries have argued. 

“Combined, Brazil and Indonesia paid more than US$40 billion in subsidies to the palm oil, timber, soy, beef and biofuel sectors in 2009–2012; those two countries also accounted for over half of the total global forest loss in 1990–2010,” according to the FAO. These numbers underscore the significant and longstanding role that the palm oil, timber, soy, beef, and biofuel industries play in the economies of Brazil, Indonesia, and their neighboring countries. Industries that have also historically contributed to extensive forest loss in both Latin America and Southeast Asia. 

The EUDR, as the first regulation of its kind, represents a groundbreaking approach to combating global deforestation. Its success or failure will likely influence other countries’ efforts to implement similar measures. Therefore, the EUDR’s impact on these sectors cannot be underestimated. While the regulation aims to curb deforestation, it also poses substantial economic challenges for countries that rely heavily on these industries. The livelihoods of countless small producers and the broader economic stability of these nations are at stake. As the EU approaches the EUDR’s full implementation in December, it must carefully consider and address these impacts to ensure that the regulation is effective in its environmental goals and equitable in its application. Balancing environmental protection with economic realities will be key to the regulation’s success and to fostering international cooperation on global deforestation efforts.