The European Union's new regulation will undoubtedly impact timber supply chains, which is why the EUDR – Deforestation Regulation – is at the centre of attention in both the forestry sector and related industries.
On 29 June 2023, the new European Union regulation on supply chains where goods are sourced from areas free from deforestation (EUDR) came into force. The regulation is intended to prevent forest degradation, particularly in the agricultural sector (livestock farming, soy and palm oil plantations, etc.). The regulation also includes several additional obligations and issues regarding the timber trade.
In order to provide a more comprehensive interpretation of this regulation as quickly as possible, information on the key data already established and the potential practical implications that timber traders will face in 18 months' time – i.e., 30 December 2024 – was provided as part of the EU-funded LIFE Legal Wood project. However, the situation assessments conducted so far are said to be unreliable. No guarantee regarding the accuracy of the assessments was provided during this event. In reality, only interpretations of the published EUDR document are currently available. This should be taken into account when starting work in accordance with the requirements of the Deforestation Regulation.
An explanation was provided that, from 30 December 2024, the replaced Deforestation Regulation (EUTR) will remain in force for another three years for logging that took place before 29 June 2023. It remains to be agreed how to handle timber products in specialised categories. Agreement will also be needed for stands of timber that were harvested before this date but will not be sold by 30 December 2027.
The applicable scope is broader than the EUTR's sphere of influence regarding timber and timber products. The EUDR covers the entire Chapter 44 of the nomenclature, i.e., including glued timber, window scantlings, solid wood panels, charcoal, wooden poles, tool handles, inlaid work, wood shavings and so-called wood flour, as well as printed paper. The exception is recycled products from wood waste and used products that contain no wood.
The EUDR will also expand the range of operators and traders to which this regulation applies. Every exporter is now considered an operator for the purposes of this regulation. Processors are also considered market participants placing a product on the market if they manufacture goods from timber (the product) that fall under a different tariff heading. According to this interpretation, market participants will likely include importers, exporters, companies processing timber within the European Union, and various processing companies.
In the Deforestation Regulation, companies that are not SMEs (small and medium-sized enterprises) – i.e., those that have exceeded at least two of the three size indicators set out in the relevant EU directive at the balance sheet date (total assets: 20 million euros; net turnover: 40 million euros; average number of employees: 250) – are also considered market participants. However, this must always be applied to individual companies, not groups of companies.
A summary has also been compiled of what different operators must do under the EUDR. Those placing a product on the market, as well as large traders and importers, must verify that the goods are not sourced from deforested or forest-degraded areas and have been produced in accordance with local legislation as part of a due diligence system. A due diligence statement must be drawn up for every single delivery. Market participants in the supply chain may refer to their supplier's statement. If a due diligence statement has not been submitted, import and export customs clearance is not possible. A due diligence statement can potentially also be issued by an authorised representative (forestry association, etc.). An information system should be made available where the statement can be uploaded. It also performs a rough credibility check – whether the specified areas are actually located in the relevant territory. By submitting a declaration, the person assumes responsibility for the legality of the goods.
The content of the due diligence statement must include the name and address of the operator, as well as a description of the product, including quantity and tree species, the country of harvest, including geographic coordinates, and the number of any existing statement for that delivery. It must also confirm that a due diligence system has been applied and that the product is low risk.
Regarding data protection, only customs and authorities should be able to access the actual due diligence statement.
The supply chain itself works with reference numbers, or it should be able to use so-called tokens to control who can view what information. In some scenarios, supplier protection remains problematic until concrete solutions for information transfer are found.
SME traders and operators who are not distributors do not have to create a due diligence statement, but must collect information provided by their supply chain predecessors and successors and keep it for five years. There is still uncertainty as to whether and how such a market participant should assume responsibility and liability in the event of a challenge to the product's origin.
Traders who are not SMEs must submit a due diligence statement, and their task is also to ensure that suppliers have applied the correct due diligence system. A credibility check may be required here. It remains to be determined exactly what applies if an SME trader is in the middle of a supply chain and does not have to provide any other proof of legality other than a reference number. Contractual arrangements providing for the transfer of information from the previous supplier are possible. Otherwise, liability is also difficult to manage in this case. Depending on the size of the company, exporters have the same obligations as SMEs and non-SME market participants.
A 'simplified due diligence' should create a small reduction in bureaucracy on this issue. It provides for the classification of all countries in the world into low, standard and high deforestation risk countries. For timber sourced from a low-risk country, only the collection of information should be required under the due diligence system. Risk assessment and risk mitigation do not need to be carried out. Unfortunately, in most cases, collecting information will likely mean the greatest problems anyway. Compared to the EUTR, this is supplemented by evidence of compliance with human rights, tax and labour laws applicable in the producing country. Proof of the absence of corruption and prior dialogue with stakeholders, such as indigenous peoples, will also be required. The list of these countries is unlikely to be prepared by the end of 2024.
Information collection also includes precise geocoordinates – to six decimal places – for the plot of land where the timber was harvested. If the area is smaller than 4 hectares, a single point is sufficient, but if the area is larger than 4 hectares, a polygon is required. All possible plots of origin must always be indicated. In addition to Google Maps, there are other sources, so the coordinate system used must always be specified.
Evidence must also be provided that the product has not contributed to deforestation or forest degradation. In case of doubt, a precise definition of forest must be used here. Generally, plantations and unforested areas resulting from logging or natural disasters are also considered forests, but agroforestry activities are not. Deforestation, in turn, is solely the conversion of forest into agricultural land, not, for example, road construction. The reference date to assess whether deforestation has occurred is 31 December 2020. Timber from areas that were considered forest up to this point and were subsequently deforested may no longer be placed on the market. Various services can be used to determine this status from one's desk at home. Various user-friendly tools should be created by the end of 2024.
Forest degradation, on the other hand, is the conversion of primary forest or naturally regenerating forest into a planted forest, plantation forest, or other forest land. Here, too, the key date is 31 December 2020. Timber may not be imported from land that has been converted from primary forest status to planted forest or plantation forest – or other afforested land – or from naturally regenerating forest status (more than 50% of the final stock) into plantation forest or other afforested land. It is still unclear how exactly naturally regenerating forests should be definitively distinguished from planted forests. Satellite imagery, forest management plans, or internal and/or external audits can be used. Logging and afforestation in primary forests are not generally prohibited under the EUDR.
If a risk assessment has to be carried out, i.e., in the case of standard due diligence rather than 'simplified due diligence', the EUDR provides appropriate criteria that allow for distinguishing between negligible and non-negligible risk. For example, it includes a country assessment, as well as indications of deforestation or forest degradation in the specific region, as well as corruption problems, the emergence of armed conflicts, and cooperation with any indigenous groups and their claims to the relevant timber harvesting and production territory. Furthermore, the risk of mixing with illegal goods and legitimate concerns of third parties, which must be verified by the authorities – accordingly, a credibility check must be carried out – must be taken into account. The assessment also takes into account the complexity of the supply chain.
In the case of the EUDR, an FSC or PEFC certificate is still not considered a sufficient risk mitigation measure, but it still has a positive impact. Imports from FLEGT countries are still considered legal. Deforestation and forest degradation must still be assessed. CITES is not mentioned in the EUDR. However, a licence can also be used as proof of legality, starting from additional information on audits conducted by independent third parties to scientific reports. In case of doubt, all possible tools must be applied to conduct a full check (as is the case with the EUTR). Risk management practices and comprehensive reporting will be required – and for operators that are not SMEs, the appointment of a management-level compliance officer will also be required. In any case, large companies will have to prepare annual reports on the application of the EUDR.
The world currently loses 10 million hectares of forest every year. EU imports are responsible for 10% – i.e., 1 million hectares – of deforestation caused by land use.
The main reason (according to current research, approximately 90-99% in the tropics) is agriculture, not logging.
Consequently, it is questionable whether the inclusion of timber in this regulation will actually be able to prevent significant losses, while its implementation – possibly unnecessarily – creates additional work for many companies. It also reduces import business opportunities for those countries that will most strictly observe EUDR requirements. Conversely, it is easier to enter the European Union market elsewhere. It is precisely on this issue that greater hopes are pinned on the EUDR, which replaces the EUTR (the previous regulation), because it not only provides for establishing liability for every individual stage of the supply chain but also introduces minimum inspection requirements for the authorities themselves. Authorities will be required to check 1% of imports from low-risk countries, 3% from standard-risk countries, and 9% from high-risk countries. This is intended to prevent trade diversion to less demanding member states. A high range of penalties must also be set – the maximum penalty must be at least 4% of the market participant's turnover in the EU. However, this remains at the discretion of the authorities. A 'blacklist' of companies convicted of EUDR violations must also be published.