The EU Deforestation Regulation is a complex and costly undertaking

The EUDR entered into force in June 2023 and is currently in a transition period until January 1, 2025, after which full compliance will be mandatory. According to the regulation, relevant commodities, including derived products (see figure 1), may not be placed or made available on the EU market or exported from the EU, unless:

Note: The chart shows the seven commodity groups to which the EUDR applies. These groups comprise over 70 different trade codes. Examples of derived products are shown next to the chart. For a complete list, see Annex 1 of the EUDR.

Companies and governments must be ready by the end of 2024

The EUDR legislation sets an ambitious timeline, although some aspects of its implementation remain unclear (see figure 2). The European Commission has yet to set up the Information System to which companies must submit their due diligence statements (DDSs) confirming that products originate from a deforestation-free area. In addition, the risk classification of countries and regions of production into low, standard, and high-risk categories is expected to be published by December 30, 2024. A given country or region’s risk classification will be based on the rate of deforestation and forest degradation, the rate of expansion of agricultural land for relevant commodities, and the production trends of relevant commodities and products. In the event of a delay in implementing the benchmarking or publishing of the risk classification, countries will, by default, be classified as “standard” risk according to the provisions of the regulation.

Although companies will face broadly similar requirements regardless of the risk category of the country from which they are sourcing, any delay in the publication of the risk classification would increase the burden on companies sourcing from low-risk countries or regions, as they would otherwise be subject to simplified due diligence.

Member states and governments also face challenges in preparing for implementation. These include, for example, a likely delay in hiring qualified personnel (including customs officers and competent authorities) to ensure EUDR implementation in such a short period of time. Also, there are different views among EU countries regarding the alignment of the EUDR.

The regulation imposes due diligence obligations on operators (i.e., those who first place relevant commodities or products on the EU market or export them from the EU) and traders (i.e., anyone other than the operator making relevant products available on the EU market), meaning that they must ensure compliance with the regulation.[1]

Figure 3 shows an example of what this means in terms of liability for the beef supply chain. A beef importer in the EU would qualify as an operator as they are the first to place the relevant commodity or product on the EU market. A retailer selling beef would be considered a trader as they make beef available on the market following the operator’s involvement. A beef manufacturer in the EU would qualify as either a trader, if they purchase beef from an importer, or as an operator, if they themselves act as the importer of beef.

[1] The due diligence obligation ends as soon the products are converted into a different product that is not listed in Annex 1.

Ensuring compliant supply chains is challenging

The due diligence system must be applied by relevant companies across the supply chain, regardless of country risk, including the provision of geolocation data for production sites. This poses a significant challenge and cost for some supply chains. Figure 4 outlines the four elements of the system.

It should be noted that relevant companies will have fewer requirements to meet and will be subject to fewer checks (by the authorities) if they ascertain that all relevant products have been produced in low-risk countries. This is defined as simplified due diligence.

In case of infringements, the regulation imposes penalties, including fines with a maximum of at least 4% of a company’s EU turnover in the preceding year.

The due diligence process may look straightforward in the figure, but the procedures that companies must establish to provide the necessary due diligence statements in their supply chains will be complex, with a relatively high administrative burden, and will take time to implement. Industry stakeholders also express concerns about implementation, seeking clarity and urging the European Commission to provide workable solutions.

It is also worth noting that companies face a wide range of deforestation-related requirements. Besides the EUDR, similar legislation is currently being developed in the UK and US. Companies will need to find an efficient way to address all these requirements – as well as any specific demands from their customers, including food retailers, and from foodservice operators downstream.

The regulation will have significant implications and create challenges for businesses and stakeholders along the supply chain of the relevant products, both inside and outside the EU. The main challenges are the traceability of products back to their origin, the provision of geolocation data, and the requirement not to mix non-certified and certified products (i.e., segregated logistics). However, the magnitude of these challenges differs between commodity supply chains (see figure 5). For example, a major challenge for beef is tracing cattle back to indirect suppliers. For soy, the fact that it is traded in bulk adds an additional layer of complexity because the compliant product must be segregated from non-compliant product. For coffee and cocoa, remote production locations may face technical difficulties in providing GPS coordinates. Smallholder palm oil farmers may also struggle to provide GPS coordinates for their crops.

As for due diligence, relevant companies may decide to establish their own processes or seek assistance from expert third parties, such as certification schemes. Most current third-party certification schemes for deforestation-free practices do not yet fully guarantee compliance with the EUDR requirements. However, in the case of soy, for example, certifications like Donau Soja, Europe Soya, and ProTerra demonstrate strong adherence to the EUDR, while other schemes are also rapidly adapting to meet these standards.

Business implications are far-reaching

Compliance with the EUDR will necessitate shifts in companies’ business models, including a move away from a commodity-focused approach to a more differentiated strategy. As companies adapt to the EUDR, sourcing and procurement strategies will evolve toward fewer suppliers and preferred suppliers. Such changes will require new investments in, for example, segregated infrastructure and data-driven techniques. We expect to see more cooperative (consolidated) efforts across supply chains, both vertically and horizontally, leveraging one-tier relationships and technology. While vertical cooperation may serve as a temporary coping strategy, it remains to be seen whether it will lead to a structural change.

Trade will also be affected

Companies face an ambitious timeline, and not all may be prepared to comply by the time of EUDR implementation. This may lead to supply issues and price volatility – especially if demand for EUDR-compliant products exceeds supply. Additionally, trade flows may shift due to commodity substitution. Small-scale farmers are also at risk of being excluded from international supply chains, as their often remote production locations and inability to provide geolocation data may make it particularly difficult for them to comply with the EUDR.

Compliance costs will be significant, and EU consumers may end up footing the bill

Compliance with the EUDR will also entail extra costs. The EUDR impact assessment provides rough estimates of the direct costs for operators to establish and operate the due diligence system, ranging from 0.29% to 4.3% of the value of imports. Companies may also incur additional expenses from assisting suppliers to demonstrate and transition to deforestation-free sourcing and shift to deforestation-free supply chains (if deforestation-free sourcing cannot be achieved in current sourcing channels). Companies are likely to pass on increased costs to consumers, leading to higher prices for affected products. In “return” for paying these higher prices, consumers may expect the EU to demonstrate the impact of the EUDR on its sustainability ambitions.

Member states will also have to bear the enforcement costs. Regarding third countries, the European Commission expects compliance costs to be limited in cases where production rarely involves newly deforested or degraded land. In all instances, compliance costs will depend on current supply chain systems (e.g., whether traceability systems are already in place) and are likely to vary between commodities.