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Jun 286 min read

The EU regulation on Deforestation Free Products and its impact on Indian economy


In order to address the global issue of increasing deforestation and to promote sustainable. Practices in international trade, the European Union passed the European Union Deforestation-Free Products Regulation (EUDR) on June 29, 2023 (EU, 2023). A vital part of the EU. Biodiversity Strategy for 2023 and the larger European Green Deal, this regulation is scheduled to go into effect on December 29, 2024 (EU, 2023). These programs seek to lessen the effects of climate change and drastically cut the EU's global emissions of greenhouse gases. The EU has set high goals under the Green Deal, such as reaching carbon neutrality by 2050 and cutting greenhouse gas emissions by at least 55% by 2030 (Commission, 2023). The EUDR helps

achieve these objectives in the following ways:


  1. By prohibiting the use and consumption of goods linked to deforestation and forest degradation.

  2. Cutting annual carbon emissions in the EU by 32 million metric tons.

  3. Taking action against the deforestation caused by increased agriculture. (EU, 2023).

 According to the recently passed law, exporters who want to sell their products in the EU have to complete a due diligence form confirming that, after December 31, 2020, their products were produced sustainably and were not obtained through deforestation or other forms of forest degradation (Bhavishyata, 2023). The exporters must demonstrate their compliance with national laws, indigenous rights, land-use rights, and human rights by paying additional fees for this certification process. This will likely have an effect on major agriculturally related products like wood, tires, coffee, cocoa, soy, palm oil, rubber, and furniture (FEFAC, 2023). Given that 90 percent of the global deforestation is caused by agricultural products (FAO, 2021), deforestation contributes to CO2 emissions and biodiversity loss. The EU alone imports 13–16% of the world's trade in deforestation, resulting in 116 million tons of CO2 emissions into the atmosphere (Sielski, 2023). 154 million tons of agricultural products, including coffee, soybeans, oil seeds, cereals, tropical fruits, and nuts, were imported in 2023. Given that the country imports a sizable amount of these goods, trade and business will undoubtedly be impacted, possibly compelling them to adopt sustainable and alternative practices. According to the regulation, small businesses, who are more likely to be shut out of international trade and business, have 24 months (until June 2025) to adjust, while well-established businesses have 18 months (until December 2024) to implement the new rules (RVO, 2024). While this regulation won't completely prohibit the sale of products made from deforested land, those who do so will face harsh penalties. A four-step penalty process will be implemented, which includes financial penalties, revenue confiscation, product confiscation, and exclusion from public procurement processes.


Changes to international trade laws that are significant enough to affect major exporters to the EU like Brazil, Costa Rica, India, China, Malaysia, Indonesia, and others are likely to have unexpected negative effects (Bhavishyata, 2023). To demonstrate that deforestation prevented agricultural products from being grown, they currently need to be traceable back to their original location. Commodity supply chains often involve multiple actors and are fragmented, which poses logistical challenges (Chettiar, 2024). It could also be difficult for farmers who don't have access to basic technology to follow the traceability regulations. The EU's action, which is perceived as discriminatory and protectionist, aims to support domestic farmers and agricultural industries while imposing strict regulations on exporting nations. Violations will result in heavy fines. Furthermore, it is seen as a move outside the regulations of the World Trade Organization since it increases import tariffs in an effort to expand its export base and reduce imports (Shrivastava, 2023).


Effect on Indian Exports:

One of the largest traders, India, which ships 23.6% of its goods to the EU, will suffer greatly. India exports 479 items worth $1.3bn goods including wood furniture, coffee, cocoa, oil seeds, leather hide, and paper, to name a few (Shrivastava, 2023; Bhavishyata, 2023) The coffee industry accounts for 50– 70% of exports to the EU market, which is anticipated to slow down. Indian exporters are now obliged to trace the coffee's origin and confirm that the beans were removed to create "deforestation-free" goods. Similar to this, the leather industry (30–40% export), rubber (25%), wood furniture, and paper industry (GTRI, 2023) will all be severely impacted because of the significant amount of exports going to the EU market and the time consuming nature of tracing their originality when operating in a complicated supply chain. The GTRI report states that these goods are subject to the Indian tariff lines 777–1200 of the EUDR, which will put more of an administrative strain and cost on Indian exporters to comply with regulations. It might be difficult for small and medium-sized businesses (SMEs) to handle these extra costs, which will likely force them out of the market. This move will eventually affect the competitiveness of Indian products in the EU market (Chettiar, 2024).


Provisions:

According to Article 30 of the EUDR, producing nations have to work with other nations to fill gaps and improve international cooperation through alternate mechanisms (Sielski, 2023). Multi Stakeholders in this partnership will also include SMEs, international organizations, and other pertinent actors. Priorities include providing financial and technical support to least developed nations on the regulation's list. In order to achieve the EUDR's objectives and lower associated risks, this cooperation framework is a crucial component that will also build momentum for long-term procedures that will guarantee the project's successful execution.


Moving forward:

In order to prevent non-compliance and exclusion from the EU market, exporters in India will need to apply for exemptions and concessions for their exports under the EUDR and collaborate with EU partners on mutual recognition of certification (Sielski, 2023). Exporting countries ought to make the most of these provisions in order to set up a system for cooperation and ongoing engagement with the European Commission. This will eventually increase efficiency, lower risks, and generate momentum on a global scale. For this to happen, they need to concentrate on the beneficial aspects of digital technology use, geographic information, and capacity building.


  • Increasing capacity and efficiency will require engaging and investing in the private sector. Streamlining supply chains and investing more in improved technologies can help businesses ensure that their products are "deforestation-free."

  • Since supply chains involve multiple parties, from land acquisition to agricultural product sales, coordination and collaboration are essential for knowledge sharing, coherence, and cost reduction.

  • Private sector investments in research and development can help in the creation of environmentally friendly farming practices, tools, and land-use planning technique.


Conclusion:

The EUDR is likely to have an effect on producers and exporters who sell goods that must be "deforestation-free" on the EU market. Put another way, they will have to follow the EUDR certification to ensure that the products they extract are not associated with any form of deforestation or degradation of the forest. This law will affect coffee, soy meal, cattle, rubber, palm oil, wood, and products made from them like paper, wooden furniture, and leather hides. The requirement for India, a major trading partner of the EU, to produce a compliance certificate may have an effect on Indian exporters and may keep SMEs out of the race. Thus, private sector investments will be needed to acquire a competitive edge and improve cooperation between civil society, research institutions, industry associations, the private sector, and policymakers in order to prevent its exclusion from the EU market. Despite the fact hat implementing alternative practices can be difficult and time-consuming, doing so will eventually help in the mitigation of climate change.


References-

(This Article is written by Shreeya Patil , EICBI Fellow)

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