EU Faces Growing Backlash for Deforestation Rules
But also — Austrian elections, French budget, Commerzbank and UniCredit
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The Briefing
In just over a year, the European Union has drawn the ire of many of its trade partners due to a demanding regulation banning the sale and export of products linked to deforestation.
With the enforcement of these rules fast approaching, third countries and businesses are raising alarms: many producers believe they are not ready to meet the requirements of this regulation.
The EU faces a dilemma: Should it maintain the environmental ambition of the regulation at the risk of destabilizing trade flows for certain goods, or delay implementation to ease tensions with its trade partners?
WHAT’S HAPPENING • On December 30, 2024, the EU's Deforestation Regulation (EUDR) will start to apply. From this date onwards, the sale or export of any product linked to deforestation will be banned.
Until now, the EU had a regulation concerning illegal logging but not deforestation in general — for example, deforestation related to agricultural expansion wasn't systematically covered.
The main products affected by this new regulation include livestock, cocoa, coffee, palm oil, rubber, soy, and wood.
By the end of the year, companies selling these products will need to provide evidence that they are 100% "deforestation-free", meaning they do not come from recently deforested land and have not contributed to forest degradation.
The level of evidence required is precisely what is worrying third countries and their companies. Businesses will need to assess deforestation risks across their entire supply chain, provide the geographical coordinates for all plots of land where the commodities were produced, and implement risk mitigation measures.
In every EU Member State, authorities will be responsible for conducting regular checks on the affected products. Non-compliance could result in fines of up to 4% of the companies' turnover.
CRITICISM • For over a year, the EU has faced harsh criticism related to the EUDR. The EU is accused of having adopted an overly ambitious regulation which remains ambiguous on certain key points and does not give businesses enough time to prepare.
Malaysia and Indonesia — the world’s two largest palm oil producers — have been particularly vocal in their opposition to the new rules. In early September, the Indonesian palm oil producers' association lamented the "lack of meaningful consultation between EU policymakers and their trade partners" which has led to "widespread uncertainty over how this regulation will be implemented."
Both countries accuse the EU of disregarding local certification practices by imposing methods that cannot always be replicated, especially by small producers.
The pressure is also mounting in Brazil, where $15 billion in exports could be affected, according to the Brazilian Ministry of Agriculture.
CHALLENGES • In the United States, opposition to the new rules is bipartisan. In May, US Trade Representative Katherine Tai urged the European Commission to delay the application of the rules until certain issues were resolved.
One of these issues is the lack transparency on some aspects of the regulation. Earlier this year, the European Commission was expected to announce the deforestation risk level for each country in the world — low, standard, or high. This risk level directly affects the mitigation measures producers must take.
Under pressure from certain countries, the Commission decided to temporarily assign a standard risk level to all countries. This means that companies using resources from countries with almost no deforestation risk are subject to the same constraints as those sourcing from Brazil or Indonesia.
Several documents and guidelines meant to help businesses prepare for the rules' enforcement have not yet been published by the Commission.
SUSPENSE • Opposition to the regulation is also emerging within the EU, where the rules were adopted by the European Parliament and the Council following the ordinary legislative procedure.
German Chancellor Olaf Scholz has recently called for a delay in implementing the rules. Austria and the Czech Republic have also voiced concerns.
In the European Parliament, the European People's Party (EPP, centre-right) wants to postpone the regulation's enforcement, while the Social Democrats (S&D, centre-left) and the Greens want the rules to go into effect as planned, warning that any delay would harm the EU's credibility.
Without this regulation, the European Commission estimates that European consumption would cause 248,000 hectares of deforestation and 110 million tons of CO2-equivalent emissions per year by 2030.
Although the Commission maintains that the rules will apply from December 30, 2024, rumors suggest that Ursula von der Leyen might propose a backup plan in the coming weeks.
DIPLOMACY • The fate of the deforestation regulation raises questions about the EU’s ability to impose its environmental standards on other countries. The Carbon Border Adjustment Mechanism (CBAM) has faced similar criticism.
The increasing number of standards linked to the European Green Deal highlights the need for better use of diplomatic channels to increase the acceptability of EU policies on environmental issues.
UK PERSPECTIVE • In the UK, Rishi Sunak’s government had been planning a Forest Risk Commodity law which would prohibit firms from sourcing products from illegally deforested land and requiring them to establish due diligence for each commodity, but the law had not been tabled by the July general election this year, which Sunak lost.
Despite recent pressure from retailers for the newly elected British PM Keir Starmer to introduce a UK deforestation bill similar to the EU’s, Starmer has not made any mention of plans to do so as of yet.
In Case You Missed It
AUSTRIA • Yesterday, Austria's far-right Freedom Party (FPÖ) came out on top in the parliamentary elections, securing 29% of the vote. The party had previously garnered 24.5% in the European elections.
In this election, the FPÖ widened its lead over its traditional rivals: the ruling Austrian People's Party (ÖVP), which received 26%, and the Social Democrats (SPÖ), who earned 21%. However, the FPÖ's participation in a future coalition government remains uncertain.
BUDGET • The European Commission has granted the French government an extension to submit its 2025 budget plan and a medium-term structural plan detailing budgetary goals and priority reforms.
The deadline has been extended from September 20 to October 15, at the request of several Member States. Paris is also currently under an excessive deficit procedure, along with six other EU countries. France’s deficit currently stands at 5.6% of GDP and could exceed 6% in 2025.
COMMERZBANK • Subject to approval by the European Central Bank (ECB), Italian bank UniCredit could potentially soon own around one third of Commerzbank, Germany’s second-largest bank.
In early September, the German government decided to sell part of its stake in Commerzbank — Germany was until now the company’s first shareholder.
UniCredit purchased 4.5% of the bank’s shares, before revealing it had already acquired a similar stake on the market, accumulating 9% in total. Last week, UniCredit announced it had acquired an additional 11.5% through financial instruments. UniCredit’s operations caught the German government off-guard.
UniCredit has now announced its plans to acquire up to 29.9% of the shares pending the European Central Bank’s approval. The ECB must greenlight any operation involving an entity acquiring more than 10% of a bank’s shares to ensure that the acquirer has the necessary financial soundness and that the targeted bank will continue to meet its prudential requirements. The ECB must also give its approval when a shareholder surpasses 20%, 30%, and 50%.
Olaf Scholz came out against UniCredit’s strategy, calling it “unfriendly” and “hostile.” The German government also declared that it would not sell the remaining 12% of its shares, as initially planned.
Berlin fears that UniCredit may offer less favorable loan terms to businesses, affecting the Mittelstand, a network of highly innovative German SMEs, for which Commerzbank is the main lender.
In his recent report, Mario Draghi suggested that consolidation in the banking sector could reduce the cost of capital and strengthen European financial actors' position in international markets. The German government has been accused of prioritizing national interests over European ones.
What We’ve Been Reading
Four good reads on regulation: Martin Wolf in the FT and Andrew McAffee in his newsletter The Geek Way argue that overregulation is holding back the European economy. Kamil Sekut and J. Scott Marcus (for Bruegel) and Oscar Guinea and Oscar du Roy (for the ECIPE) show that the level of complexity of EU law is still trending upward.
This edition was prepared by Augustin Bourleaud, Noé Piloquet, Chloé Joubert, Antoine Langrée, Lidia Bilali, Maxence de La Rochère, and Hana Rajabally. See you next week!