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The EU Deforestation-Free Regulation, popularly known as EUDR, is part of the EuropeanGreen Deal, an European Union effort to cut emissions by 55% by 2030 and achieve net-zero emissions by 2050. It is seen as groundbreaking legislation with significant environmental benefits. The regulation is expected to set high standards for similar initiatives globally. Nonetheless, the regulation has been strongly criticized by exporting countries by its short deadline and implementation challenges.
The EUDR specifically targets the EU’s indirect responsibility for 10% of global deforestation linked to agriculture, driven by the production of commodities such as cattle, wood, soy, palm oil, and cocoa. The regulation requires businesses to demonstrate that their products do not originate from recently deforested land or contribute to forest degradation. Companies have until December 2024 to comply, with an additional six-month extension for small businesses, defined as those with revenues below €10 million.
Commodities affected by EUDR regulation:
Key challenges for EUDR compliance include political, economic, and technological barriers faced by commodity producers in shifting to sustainable alternatives, as well as by buyers and traders in mapping and monitoring their supply chains. Politically, the lack of government involvement in defining and aligning public and private sector solutions has been an issue in several producing countries. Additionally, the scrutiny around deforestation areas will likely exclude some farmers from their traditional commercial agreements. Finding alternative business opportunities for these farmers is a key part of the local political solutions needed to ensure a sustainable transition, which also means fostering economic development. This holistic approach can also reduce the risk of leakage and fraud in the compliance process.
In economic and technological terms, traceability requirements demand that commodities be tracked back to their production areas, creating logistical challenges in complex supply chains involving numerous intermediaries and smallholder farmers. Traders and buyers are hesitant to make the necessary investments to comply and are seeking alternative markets for their commodities, such as China, which tripled its imports of palm oil from Indonesia andMalaysia since early 2024.
From a market perspective, financial incentives are generally more effective than punitive measures. In the case of Least Developed Countries (LDCs), the challenge goes beyond behavior change, as it also involves addressing the financial and technical capacity needed for compliance.
A promising global solution is to foster partnerships between the private and public sectors to build the necessary human and technological capacity for compliance. This approach would address the increased complexity and costs faced by Least Developed Countries, helping them meet stricter regulations and market standards. As The Nature Conservancy notes, "one important solution would be for the EU to leverage cooperation and investment in this essential and tough transition" (The Nature Conservancy, n.d.).
The EUDR applies to both operators and traders, with non-SMEs required to follow key steps for compliance: collecting information, conducting risk assessments, and mitigating risks if needed. Companies must first gather detailed product information, including geo data of the production land, to ensure no deforestation or forest degradation occurred after 31December 2020. They must also verify that local legal regulations were followed, often needing cooperation with upstream suppliers.
Next, a risk assessment evaluates the likelihood of non-compliance, factoring in risks like deforestation in the production country and source reliability. If the risk is negligible, a due diligence statement can be submitted, allowing the product to be traded.
If the risk is significant, companies must take additional measures to reduce it, such as gathering more information, conducting audits, or working with suppliers. Without successful mitigation, the due diligence statement cannot be submitted, and the product cannot enter the European Union market.
Due diligence statements must be transparent and accessible to authorities, traders, and the public. Companies are also required to pass along due diligence reference numbers throughout the supply chain to ensure compliance.
The EUDR regulation will have a profound impact on many countries worldwide, with a particularly challenging effect on less-developed nations that must adapt their agricultural practices to meet strict environmental legislation. For several trading partners, these requirements may seem unattainable in the near future. The most critical issue is the unilateral nature of the regulation, as the legislative process was undertaken without sufficient consultation with affected exporting countries. This has resulted in standards and methodologies that are difficult to comply with.
The EUDR has raised concerns and criticism from several exporting countries, including key players such as Argentina, Brazil, Indonesia, and Malaysia. These nations argue that the regulation does not fully consider local circumstances, national deforestation efforts, or the principle of shared responsibilities. They view the EUDR as potentially unfair and are calling for greater engagement, particularly to ensure that smallholders are not disproportionately affected by compliance requirements.
Indonesia and Malaysia, which together supply 85% of the world’s palm oil, have been especially vocal, expressing concerns that the EUDR could negatively impact their agricultural sectors by increasing operational costs and potentially hindering their environmental goals.
The EUDR is expected to have a significant impact on Africa, where agriculture accounts for up to 25% of GDP and employs as much as 60% of the population in some countries. Key commodities like cocoa, coffee, and palm oil, which are central to the regulation, are also vital economic drivers for African nations. Cocoa, in particular, plays a crucial role in poverty alleviation, creating jobs in rural areas and contributing to export revenues, especially for top producers like Côte d'Ivoire, Ghana, Cameroon and Nigeria.
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Ghana has announced the development of an integrated national traceability system to track cocoa beans from farms to the point of shipment. This system will assist farmers in providing the necessary documentation to meet EU requirements. The decision to adopt a national approach was largely influenced by the mandate of COCOBOD, the Ghanaian cocoa regulator, which is legally responsible for aggregating the country's cocoa production and selling it on international markets. COCOBOD has also taken on the task of providing smartphones and internet access to cocoa buyers and depot managers, essential for the system's operation. Ghana has received support from the European Union, which helped coordinate efforts within the country and organized a workshop with relevant stakeholders.As a result, Ghana is now one of the African nations best positioned to comply with theEUDR on time.
On October 2, 2024, the European Commission proposed delaying the enforcement of theEUDR by 12 months, moving the deadline to December 30, 2025, for non-SMEs. This proposal has prompted mixed reactions. On one hand, NGOs have expressed concerns about the potential for additional deforestation during the delay, arguing that the extended deadline undermines businesses that have already made significant investments to comply on time. They also warn that the credibility of the entire EU regulatory system could be compromised by yielding to market pressure and failing to enforce the EUDR as planned.
On the other hand, market analysts, governments, and business representatives argue that enforcing the regulation now, without adequate prior support and investment, would disproportionately harm smaller and local organizations, particularly in under developed countries. This could negatively affect the livelihoods of thousands of families and exacerbate global inequalities, working against the objectives of SDGs 1, 2, 8, and 10.
As an example of the potential impacts of EUDR implementation, ODI analyzes the case ofEthiopia: "A recent modelling exercise conducted by ODI for Ethiopia explores some of the potential economic fallout of the EUDR. In the most extreme scenario, where exports to theEU cease completely, Ethiopia could face an 18.4% drop in overall exports and a 3.3%reduction in public revenue. This would exacerbate poverty and inequality in the country, undermining its development goals" (ODI, n.d.)
Maintaining the current deadlines could also disrupt global markets and prices in unpredictable ways. For example, Malaysia’s Plantation Minister, Fadillah, has threatened to halt palm oil exports in coordination with Indonesia, a move that could have serious consequences for Europe, given the commodity's significance to the food industry.
At Ramo, we believe that a delay presents an opportunity to foster more sustainable businesses and markets on a global scale. Producers could strengthen their relationships with traders, improve financial stability through supply chain formalization, and be motivated to halt forest conversion. Increased formalization and transparency would not only benefit compliant farmers but also create more business and investment opportunities across the market. Both businesses and financial institutions could gain reputational advantages from supporting sustainability efforts.
Despite the challenges, this delay offers the European Union a valuable opportunity to enhance its leadership on the international stage. By reinforcing its image as a reliable and fair evaluator, the EU can set a positive example in addressing critical global challenges, such as illegal deforestation.
One way or another, RAMO can help your business to get compliant with EUDR Regulation.
