EUROPEAN COMMISSION Brussels, 17.11.2021 SWD(2021) 326 final COMMISSION STAFF WORKING DOCUMENT



IMPACT ASSESSMENT

minimising the risk of deforestation and forest degradation associated with products placed on the EU market Accompanying the document Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the making available on the Union market as well as export from the Union of certain commodities and products associated with deforestation and forest degradation and repealing Regulation (EU) No 995/2010 {COM(2021) 706 final} - {SEC(2021) 395 final} - {SEC(2021) 396 final} - {SWD(2021) 325 final} - {SWD(2021) 327 final} - {SWD(2021) 328 final} - {SWD(2021) 329 final}



Table of contents Contents 1Introduction: Political and legal context 1.1EU context 1.2International and national context 2Problem definition 2.1What is/are the problems? 2.2Who is affected by the problem? 2.3What are the problem drivers? 2.3.1 Market and regulatory failures 2.4How will the problem evolve? 3Why should the EU act? 3.1Legal basis 3.2Subsidiarity: Necessity of EU action 3.3Subsidiarity: Added value of EU action 4Objectives: What is to be achieved? 4.1General objective 4.2Specific objectives

4.3Intervention logic 4.4Deforestation-free definition 4.5Cut-off date 5What are the available policy options? 5.1Product Scope 5.2What is the baseline from which options are assessed? 5.3Description of the policy options 5.3.1 Policy option 1: Mandatory due diligence system, relying on a deforestation free definition 5.3.2 Policy option 2: A benchmarking system and a list of contravening operators as a basis for a tiered improved mandatory due diligence system, relying on a deforestation free definition 5.3.3 Policy option 3: Mandatory public certification combined with an improved due diligence requirement, relying on a deforestation free definition 5.3.4 Policy option 4: Mandatory labelling combined with an improved due diligence requirement, relying on a deforestation free definition 5.3.5 Policy option 5: Deforestation-free requirement for placing on the EU market supported by benchmarking and country card systems 5.4Options discarded after the initial viability screening 6What are the impacts of the policy options? 6.1Impacts relevant for Policy Options 1-5 6.1.1 Environmental impacts 6.1.2 Economic impacts 6.1.3 Social impacts 6.1.4 Coherence with other EU policy objectives 6.1.5 Leakage problems

6.2Policy Option 1 – Mandatory due diligence system, relying on a deforestation free definition 6.3Policy Option 2 – A benchmarking system and a list of contravening operators combined with tiered improved mandatory due diligence system, relying on a deforestation free definition 6.4Policy Option 3 – Mandatory public certification combined with an improved due diligence requirement, relying on a deforestation free definition 6.5Policy option 4 – Mandatory labelling combined with an improved due diligence requirement, relying on a deforestation free definition 6.6Policy option 5 - Deforestation-free requirement for placing on the EU market supported by benchmarking and country card systems 7How do the options compare? 8Preferred option 9How will actual impacts be monitored and

evaluated?



Glossary Term or acronym Meaning or definition AFI Accountability Framework Initiative CA Competent Authority CBD Convention on Biologic Diversity COC Chain of Custody COFO Committee on Forestry DD Due Diligence DDS Due Diligence System EP European Parliament EUTR European Union Timber Regulation FAO Food and Agriculture Organization of the United Nations FLEGT Forest Law Enforcement Governance and Trade GATS General Agreement on Trade in Services GATT General Agreement on Tariffs and Trade GDP Gross Domestic Product GHG Greenhouse Gas IA Impact Assessment OPC Online Public Consultation IPBES Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services IPCC Intergovernmental Panel on Climate Change IUU Illegal, unreported and unregulated fishing LULUCF Land Use, Land Use Change and Forestry MS Member State NFRD Non-financial reporting Directive NYDF New York Declaration on Forests RED Renewable Energy Directive REDD Reducing Emissions from Deforestation and Forest Degradation SDG Sustainable Development Goals SME Small and Medium Enterprise TFEU Treaty on the Functioning of the European Union VPA Voluntary Partnership Agreements UNFCCC United Nations Framework Convention on Climate Change UNFF United Nations Forum on Forests WTO World Trade Organisation



11 Introduction: Political and legal context This impact assessment (IA) accompanies the Commission proposal for a regulation to minimise the risk of deforestation and forest degradation associated with products placed on the EU market. The proposal was first announced in the 2019 Commission Communication on Stepping up EU Action to Protect and Restore the World’s Forests(from here onwards “2019 Communication”), and then confirmed in the European Green Deal, the 2030 EU Biodiversity Strategy and the Farm to Fork Initiative, as well as in the Inception Impact Assessment. The proposal is an integral part of and coherent with the overall objectives of the European Green Deal and all the initiatives developed thereunder. In particular it should be complementary to the other measures proposed in the 2019 Communication, in particular: 1) working in partnership with and support to producer countries, crucial to cover aspects related to root causes of deforestation, (such as governance, law enforcement and the fight against corruption), and 2) to minimise leakage (see section 6.1.4) by strengthening international cooperation, with major consumer countries, to promote the adoption of similar measures to avoid products coming from supply chains associated with deforestation and forest degradation being placed on the market. Deforestation is a major cause of biodiversity loss. Over 1 million species are threatened with extinction and the main driver of biodiversity loss on land is changes in land use, including deforestation and agricultural expansion. Emissions from land-use and land-use change, mostly due to deforestation, are the second biggest cause of climate change after burning fossil fuels. Agriculture, forestry and other land use accounted for an estimated 23% of total net greenhouse gas emissions from human activity 2007-2016. Action in this area is therefore also important to fight climate change. Forests are seriously endangered. The Food and Agriculture Organization of the United Nations (FAO) estimates that 420 million hectares of forest — an area larger than the European Union — have been lost between 1990 and 2020. The global rate of deforestation has decreased over the past three decades, but there are strong regional differences. In tropical moist forests, there has been a marked increase in disturbance rates (deforestation and forest degradation) in recent years (+2.1 million ha/year for the past 5 years compared with the period 2005–2014), reaching a level close to that of the early 2000s. Forest degradation is a main contributor to this recent increase, with much of it attributable to short-term disturbances. Forest degradation is caused by both natural and anthropogenic disturbances, and may subsequently lead to deforestation. Without a reduction of the present disturbance rates, undisturbed forests in tropical humid regions will disappear entirely by 2050. (see sections 2.1 and 2.3 defining the problems this initiative aims to address and their drivers) Deforestation and forest degradation are therefore among the most important environmental challenges. Stepping up action to fight deforestation and forest degradation will be an essential element in effectively grappling with the planetary crises that threaten our collective future: the climate and the biodiversity crisis.

Tackling deforestation would also have the additional benefit of removing one of the main pathways of zoonotic diseases, thereby reducing the likelihood of the next pandemic emerging through this route. The public has made it clear that it wants the EU to take action to address the global impacts of deforestation and forest degradation. The Commission’s online public consultation that closed in December 2020 (see Annex II) received nearly 1.2 million contributions, including from partner countries, making it the second most popular in the history of the European Union. An overwhelming majority of respondents furthermore stated that they believed that an EU intervention could reduce global deforestation and forest degradation. This was confirmed also at specific stakeholder events, for example at the meetings of the Multi-Stakeholder Platform on Protecting and Restoring the World’s Forests , gathering a very broad range of stakeholders from the EU and partner countries, including public authorities and representatives of industry, civil society, international organizations and research institutions. In the “Conclusions of the Council and of the Governments of the Member States sitting in the Council on the Communication on Stepping Up EU Action to Protect and Restore the World’s Forests” of 2019. EU Member States expressed their concern regarding the current deforestation situation and stressed the importance of the EU addressing the direct and indirect drivers of deforestation, noting that approximately 80 per cent of global deforestation is caused by agricultural expansion. They emphasised that since current policies and action at global level on conservation, restoration and sustainable management of forests do not suffice to halt deforestation and forest degradation, enhanced EU action is needed to contribute more effectively to the achievement of the UN Sustainable Development Goals (SDGs). The Council specifically supported the Commission announcement in the 2019 Communication that it would assess additional regulatory and non-regulatory measures and that it would present respective proposals. This impact assessment and the accompanying proposal follow up on that announcement. The European Parliament adopted on 22 October 2020 a resolution in accordance with Article 225 of the Treaty on the Functioning of the European Union (TFEU) calling for an “EU legal framework to halt and reverse EU-driven global deforestation”. The resolution requests the Commission to submit, on the basis of Article 192 (1) TFEU, a proposal for an EU legal framework to halt and reverse EU-driven global deforestation. This impact assessment takes into account the recommendations of the European Parliament. As described below in detail, the current legislative framework — at national, EU and international level — is not sufficient to reduce EU-driven deforestation. Therefore, in line with the announcement made in the 2019 Communication, the European Green Deal, the 2030 EU Biodiversity Strategy, the Farm to Fork Initiative, this initiative focuses on forests. While the European Parliament and NGOs advocated for an inclusion of other ecosystems, such an expansion of the scope at this stage was considered detrimental to the effectiveness and enforceability of the policy measures hereby assessed. However, at a later stage, building on lessons learned in implementation of a legislative act focusing on deforestation, it might be considered to expand the measures to cover also other ecosystems. 1.11.1 EU context The existing EU legislative framework addresses deforestation only partially (see also section 4). The EU Forest Law Enforcement Governance and Trade (FLEGT) Action Plan constitutes the key EU policy against illegal logging and associated trade. While it tackles illegal logging and associated trade, it does not address deforestation as such. A key element of the FLEGT Action Plan is a voluntary scheme to ensure that only legally harvested timber is imported into the EU from countries agreeing to take part in this scheme. The internal EU legal framework for this scheme is the Forest Law Enforcement, Governance and Trade Regulation (FLEGT Regulation), which establishes a licensing system that is the basis for FLEGT Voluntary Partnership Agreements. Another key element of the FLEGT Action Plan is the EU Timber Regulation (EUTR) , which prohibits the placing of illegally harvested timber and timber products on the EU market and lays down obligations for operators placing timber on the market for the first time. It requires that they should exercise Due Diligence (DD). Traders must keep a record of their suppliers and customers. The Regulation applies to both imported and domestically produced timber and timber products. Both FLEGT Regulation and EUTR have undergone a Fitness Check, the findings of which have provided input into this impact assessment. Note, that the 2018 Renewable Energy Directive (RED) includes sustainability criteria for bioenergy, covering both biofuels for transport and biomass and biogas for heat and power, which must be met in order to qualify for financial and regulatory support. However, the Directive does not cover the placing on the market of such commodities, nor uses of commodities other than for bioenergy. At EU level, a number of initiatives and instruments form the policy context for this impact assessment. The 2019 Communication sets out the overall objective of protecting and improving the health of existing forests, in particular primary forests and to increase sustainable, biodiverse forest coverage worldwide. In the context of the European Green Deal, both the 2030 EU Biodiversity Strategy and the Farm to Fork Initiative identify the legislative proposal and other measures to avoid or minimise the placing of products coming from supply chains associated with deforestation or forest degradation on the EU market, as important for the achievement of their objectives. Other main EU initiatives that are relevant for the impact assessment given their scope, either already in force, or being prepared at the time of publication of this report, include: 1.The EU Taxonomy Regulation; 2.The EU Land Use, Land Use Change and Forestry (LULUCF) Regulation; 3.The EU Forest Strategy; 4.The legislative initiative on Sustainable Corporate Governance (SCG), which aims to improve the EU regulatory framework on company law and corporate governance; 5.The proposal for a Corporate Sustainability Reporting Directive (CSRD); 6.A legislative initiative on substantiating green claims regarding the environmental performance of products & businesses; 7.The Sustainable Product Initiative (SPI). A comprehensive description of all EU initiatives and instruments relevant for this Impact Assessment is included in Annex 8. 1.21.2 International and national context

At international level, there are a range of fora and processes that are either directly or indirectly relevant for the fight against deforestation and forest degradation, mainly under the auspices of the United Nations. The bodies, instruments, processes and commitments relevant for this impact assessment are the following: 1.The UN Framework Convention on Climate Change (UNFCCC) of 1992 and its Paris Agreement, adopted at COP 21 in 2015; 2.The Convention on Biological Diversity (CBD); 3.The UN Sustainable Development Goals (SDGs); 4.The UN Forum on Forests (UNFF); 5.The New York Declaration on Forests (NYDF) 6.REDD+ (Reducing Emissions from Deforestation and Forest Degradation), which is a climate change mitigation solution being developed by the parties to the UNFCCC; 7.The Durban Declaration 2050 vision for forests and forestry in 2015; 8.The Committee on Forestry (COFO) of the FAO; 9.UN Decade of Ecosystem Restoration (2020-2030). 10.United Nations Convention to Combat Desertification (UNCCD) At the national and regional level, the following initiatives are relevant for this impact assessment as they aim to achieve similar objectives: -The Ministerial Conference on the Protection of Forests in Europe; -The Amsterdam Declaration Partnership, an initiative supported by eight EU Member States (Belgium, Denmark, France, Germany, Italy, the Netherlands and Spain) as well as Norway and the United Kingdom; -France’s 2017 due diligence law, and the French national strategy against imported deforestation; -Germany’s draft Supply Chain Act -The draft Schatz bill, introduced in the US Senate to restrict access to the US market for certain commodities that originate from illegally deforested land; -The UK’s proposed law to prevent forests and other natural areas of importance from being illegally converted to agricultural land.

Apart from the above mentioned initiatives and measures that have been taken into account when developing this impact assessment, due consideration had also been given to the existing obligations under international trade rules governed in particular by the General Agreement on Tariffs and Trade (GATT) and the General Agreement on Trade in Services (GATS). A comprehensive description international and national initiatives, instruments and commitments relevant for this Impact Assessment is included in Annex 8. 22 Problem definition 2.12.1 What is/are the problems? Forests are valuable ecosystems that sustain most terrestrial biodiversity and act as a major sink of carbon. Yet forests around the world are being rapidly cut in an unsustainable manner, burnt and degraded. This leads to biodiversity loss and greenhouse gas emissions, which in turn fuel climate change. This also increases the likelihood of new diseases spreading from animals to humans. Around 80% of deforestation is currently driven by the expansion of agricultural land and the demand for commodities and products such as soy, beef, palm oil and wood. The EU is a relevant consumer of those commodities, part of which are produced unsustainably, causing deforestation, and is therefore a contributor to the global problem of deforestation and forest degradation. The EU does not have in place specific and effective rules to reduce its contribution to deforestation and forest degradation. The world currently has a forested area of 4.06 billion hectares, which is 31% of the total land area. Forests contain more than 60 000 different tree species and provide habitats for 80% of amphibian species, 75% of bird species and 68% of mammal species. Forest ecosystems are also the largest terrestrial carbon sink — storing approximately 400 gigatons of carbonthat would otherwise be free in the atmosphere and contribute to ongoing changes in climate patterns. On top of that, around 1.6 billion people depend on forests for their livelihood, including around 70 million indigenous people. Deforestation occurs when forest is cleared to make space for other activities such as agriculture, mining, urban development, or other land uses. Forest degradation is a more gradual process through which a forest's biomass declines, its species composition changes, or its soil quality declines, but the land still meets the definition of a forest regarding surface, crown cover, and tree height. Forest degradation is often a precursor to deforestation. Both deforestation and forest degradation represent significant problems, in particular as they are occurring at an alarming rate. The FAO estimates that 420 million hectares of forest — about 10% of the world’s forests and an area larger than the European Union — have been lost worldwide through deforestation between 1990 and 2020. In terms of net area loss (the difference between area of forest cleared and new surface of forests planted or regenerated), the FAO estimates that the world lost around 178 million hectares of forest cover in the same period of time, which is an area triple the size of France. According to the FAO, the global rate of deforestation has decreased over the last decades. In the most recent five-year period (2015–2020), the annual rate of deforestation was estimated at 10 million hectares per year, down from 12 million hectares per year in the period between 2010 and 2015, and 15 million hectares per year between 2000 and 2010. Figure 1 Forest expansion and deforestation between 1990-2020 Source: FAO, 2020 In terms of net forest loss, there was a decrease due to a reduction of deforestation in some countries, plus increases in forest area in others through afforestation and the natural expansion of forests. The rate of net forest loss declined from 7.8 million hectares per year in the decade 1990–2000 to 5.2 million ha per year in 2000–2010 and 4.7 million ha per year in 2010–2020. It is to be noted that other sources, such as Global Forest Watch, point to an increase in forest cover loss in recent years, specifically in tropical countries. As regards forest degradation, systematic data and statistics are much scarcer in comparison with deforestation. By definition, degradation is more difficult to measure and monitor. As part of the FAO’s 2020 Global Forest Resources Assessment, countries were asked whether and how they monitored forest degradation, with various definitions and criteria reported. Illegal or otherwise unsustainable logging is a principal agent of forest degradation. Major natural causes of forest disturbance include forest fires, insects, disease and severe weather events. Considering forest intactness, the FAO in recent publications concluded that 49% of the global forest area had a high level of integrity, while 10% of the global forests are severely fragmented with little or no connectivity. According to a recent research paper , 106.5 million hectares of tropical moist forests are in a degraded state, representing 10% of the around 1 billion hectares of tropical moist forest area remaining in January 2020. There has been a marked increase in disturbance rates (deforestation and forest degradation) in recent years (+2.1 million ha/year for the past 5 years compared with the period 2005–2014). Forest degradation accounts for 33% of the observed changes in forest cover, with much of it attributable to short-term disturbances such as selective logging, natural events and fire. Note also that, as forest degradation often leads to deforestation, the paper concludes that without a reduction of the present disturbance rates, undisturbed forests in tropical humid regions will disappear entirely by 2050. Also relevant is the fact that deforestation rates and drivers vary widely across different continents. For the period 2015-2020, in terms of gross deforestation, FAO estimates put Africa on top, with 4,4 million hectares lost per year; followed by South America (2.9 million); Asia (2.2 million); North America (436,000); Europe (69,000); and Oceania (42,000.) The figures change significantly in terms of net forest loss, as shown in the chart below, especially for Asia, a continent where some countries are undergoing drastic deforestation while others are investing in reforestation and afforestation programmes. Figure 2 Global annual net forest area change between 1990-2020 by region

Source: FAO, 2020 The main drivers of deforestation also vary geographically. Expansion of agricultural land dedicated to palm oil plantations is a major cause of deforestation in Southeast Asia, for example, while clearing of forests for pastures for cattle and for soy plantations and land speculation (land grabbing, often associated with forced displacement of local communities) are the top drivers in South America. The expansion of cocoa plantations has had a relevant impact on deforestation in Central and West Africa, while other areas of the continent have more mixed factors in play. With regard to European forests, FAO’s 2020 Global Forest Resources Assessment indicates that Europe has seen a net forest expansion in each of the three decades between 1990-2020. The State of Europe’s Forests 2020 reports that forest cover across Europe continuously increased between1990-2020, although the rate of increase is slowing down. The picture is, however, a bit different in terms of annual gross deforestation, which does not take into account afforestation and reforestation efforts. Gross deforestation across the whole of Europe (including the Russian Federation), increased from 88,000 hectares in 1990-2000, to 201,000 hectares in 2010-2015, and then fell to 69,000 hectares in 2015-2020 (FAO, 2020). As regards the situation of forests within the EU, the State of Europe’s Forests 2020 report states that, between 1990 and 2020, the area of forests in Europe has increased by 9%, carbon stored in the biomass has grown by 50% and wood supply has risen by 40%. However, less than 5% of European forests areas in the EU are considered undisturbed, or natural, according to the European Environment Agency’s State of the Environment 2020 report. As the EU forests are considerably less under threat of deforestation and degradation than forests elsewhere, it is expected that the proposed initiative will have less impact in the EU in terms of costs for operators sourcing relevant commodities domestically. However, where there are serious problems with deforestation and degradation, the legislation will provide a basis to tackle them. The impact of deforestation and forest degradation on greenhouse gas emissions is also a source of concern. The Intergovernmental Panel on Climate Change (IPCC) estimates that 23% of total anthropogenic greenhouse gas emissions (2007-2016) come from agriculture, forestry and other land uses. About 11% of emissions are from deforestation and conversion of natural ecosystems, while the remaining 12% are direct emissions from agricultural production such as livestock and fertilizers. It is crucial to consider forest degradation as a risk factor of deforestation and as an indicator of climate change and climate oscillations. The IPCC has also argued that most paths to keeping global warming within the limits agreed in the Paris Agreement involve reducing deforestation. “All assessed modelled pathways that limit warming to 1.5ºC or well below 2°C require land-based mitigation and land-use change, with most including different combinations of reforestation, afforestation, reduced deforestation, and bioenergy.” Deforestation and forest degradation are among the top drivers of biodiversity loss. For terrestrial and freshwater ecosystems, land-use change has had the largest relative negative impact on nature since 1970. Agricultural expansion is the most widespread form of land-use change. This expansion has come largely at the expense of forests. The contribution of deforestation and forest degradation to biodiversity loss is therefore very worrying. More species are now threatened with extinction than ever before, according to the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES). Around 1 million species already face extinction unless action is taken to reduce the intensity of drivers of biodiversity loss; without, there will be a further acceleration in the global rate of species extinction. In addition to contributing to climate change and biodiversity loss, deforestation and forest degradation threaten human health in an even more direct way. Deforestation and degradation can often lead to increased interaction between humans and animals, increasing the likelihood of zoonotic diseases spreading from animals to humans. The majority of new infectious diseases affecting humans, including the SARS-CoV2 virus that caused the current COVID-19 pandemic, are zoonotic and their emergence may be linked to such interaction. Deforestation and forest fragmentation are increasing the risk of viral disease outbreaks. 2.22.2 Who is affected by the problem? People around the world are affected by the loss of biodiversity, the effects of climate change and the emergence of new zoonotic diseases. Many of the countries experiencing serious levels of deforestation and forest degradation are among the poorest in the world. The poorest and most marginal segments of society, such as smallholder farmers, indigenous and local communities are disproportionately impacted by the effects of deforestation and forest degradation. The IPCC assessment indicates that the world needs to remain under 1.5-2 degree increase in order to avoid the worst effects of climate change, including the increased likelihood of severe, pervasive and irreversible impacts for people and ecosystems (e.g. heatwaves, extreme precipitation, acidification of the ocean and global sea level rise are some of the most likely effects). This is also the goal of the Paris Agreement, which is jeopardised by ongoing deforestation. As described above, most scenarios to meet the Paris Agreement objectives involve reduced global deforestation. In addition around 1.6 billion people depend on forests for their livelihoods, including 70 million indigenous people, according to FAO. The formal forestry sector globally provides more than 45 million jobs, with additional 41 million jobs in the informal sector, also according to FAO. Furthermore, ‘wood and non-wood forest products’ provide up to 20% of the income of rural households in developing countries. 2.32.3 What are the problem drivers? While there are a number of drivers of deforestation and forest degradation, agricultural expansion continues to be the main one, together with illegal logging. An analysis of data for 46 tropical and subtropical countries found that agriculture alone causes 73% of all deforestation, with commercial agriculture accounting for 40% of deforestation, followed by local or subsistence agriculture, which is related to 33% of deforestation. Infrastructure accounts for 10%, urban expansion for 10%, and mining for 7%. The same analysis lists logging as a main driver of forest degradation. Forest degradation is also often the first step of conversion from forest to other land uses. Agricultural expansion is driven by global demand for specific products and commodities, market pressures, dietary preferences, and lack of efficiency in agricultural practices and waste. As such there is a very strong link between deforestation and forest degradation and international trade. Different studies have attempted to measure the impact of the production/harvest of particular commodities and/or the EU’s consumption on global deforestation and forest degradation. They show that a limited number of agricultural commodities are responsible for most deforestation and forest degradation globally, and that the EU is among the major global consumers of some of these. The product scope section (chapter 5) of this Impact Assessment identifies cattle, wood, palm oil, soy, cocoa and coffee as the most relevant commodities to be considered.

A 2013 study used two different models to estimate the impact of EU consumption on deforestation. The first model estimated that EU imports of crops and livestock were responsible for about 9 million hectares of deforestation globally over the period 1990-2008 (i.e. 500 000 Ha/year on average). This meant almost 36% of all embodied deforestation in crop and livestock products traded internationally during that period or 7% of global embodied deforestation if non-traded products consumed domestically were included. The second model based on consumption of final products estimated EU contribution to global embodied deforestation to be 732 000 Ha/year, or 10% of the total global embodied deforestation (including domestic consumption). The different estimates resulted from methodological differences of the two models. Based on the model and data included in a recent research paper, EU consumption during the period 2008-2017 was responsible for 19% of the tropical deforestation embedded in the international imports of the six commodities selected in the product scope (6% if domestic consumption of producing countries is considered). The following figure presents the contribution of EU consumption to deforestation risk for each of the main commodities (palm oil, soy, cattle, cocoa, coffee and wood – see also chapter 5). Figure 3 Contribution of imported consumption to risk of deforestation for selected commodities (average of period 2008-2017 in thousands of hectares per year; only countries larger than 10% are shown in the charts for individual commodities). Source: own elaboration based on data from Pendrill et al (2020). (RoW: rest of the world). The overall lower figures in relation to those found in previous studies are consistent with the significant growth in commodity consumption by the rest of the world economies compared to the more stable consumption of the EU during the past decade, as shown in the following figure. Figure 4 Relative growth of import of selected commodities (in tonnes) by the EU and the rest of the world in the period 2008-2017. Source FAOSTAT. Based on palm oil, soy, beef, cocoa and coffee. Imports in 2008 = 100. 2.3.12.3.1 Market and regulatory failures At the global and regional level there are a number of general, political commitments regarding the protection and conservation of forests. However, while consumption of the abovementioned commodities drives the problem of deforestation and degradation, the markets currently fail to account for these environmental costs. They therefore do not provide sufficient incentive to change EU consumption away from these products with harmful supply-chains and equally do not encourage the consumption of deforestation-free commodities and products in the EU. This first failure is that market prices do not reflect how one activity produces costs or benefits for other activities or impacts on environmental and social issues. Specifically, deforestation results in negative externalities, including increased release of carbon into the atmosphere associated with global climate change, biodiversity loss through loss of habitat, loss of associated ecosystem services with subsequent impacts on agricultural yields, and increased risks of pandemics by bringing nature and people more in contact through land clearing. These externalities are not reflected in the price of the products provoking deforestation. Solutions to externalities include ensuring that prices reflect the externality more accurately (i.e. internalise) or by correcting the market through regulation of the particular activity. The second failure is the lack of a level playing field for EU operators that want to source sustainable products. A recent report focusing on 500 relevant corporations and financial institutions concluded that 43% of them did not have in place any deforestation commitments. This means companies aiming to clean their supply chains and prevent deforestation and forest degradation are forced to compete on the EU market with companies that do not implement sustainability considerations in their supply chains and face at the same time the increased costs of sourcing sustainably. It is then no surprise that a majority of industry associations and businesses advocate for binding EU rules that level the playing field, establishing the same requirements for all competitors. The online public consultation of this impact assessment specifically asked respondents whether “EU-level demand-side measures would reduce unfair competition from other businesses that have not made voluntary pledges/commitments.” About 51% of businesses and industry associations answered ‘yes,’ 34% said ‘may be’, and only 9% answered ‘no.’ A recent position paper issued by COCERAL, FEDIOL and FEFAC argued: “Many of our companies involved in the soy and palm oil supply chain are already voluntarily implementing a (horizontal) due diligence. Making the implementation of such tool mandatory would not only enhance the level playing field across European companies, but also increase awareness among all supply chain actors.” The third failure is the absence of a dedicated EU legal framework and of a legally binding international instrument for the protection of forests against deforestation and degradation. At EU level, as explained in the first chapter, existing legislation addresses some drivers of deforestation (illegal logging or biofuel consumption), but not the main one, which is agricultural expansion. As explained in the text box below the FLEGT/VPA legal framework did not deliver on its objectives Box 1. FLEGT Regulation / VPAs: Key findings from the Fitness Check The Fitness Check of the FLEGT Regulation has confirmed the achievements of FLEGT VPAs in terms of enhanced stakeholder participation and improved forest governance frameworks in partner countries and, at the same time, highlighted a number of shortcomings of the FLEGT Regulation. It also points to the fact that there is limited evidence that the VPAs overall have contributed to reducing illegal logging. While the EU system itself would be an efficient tool to lower the compliance costs for EU operators, the main instrument for its operationalization, i.e. the VPAs, has not delivered. One of the main problems as regards the FLEGT Regulation is the fact that the main EU trade partners have never shown interest to engage in VPA processes, resulting in only 3% of timber imports covered by an operational VPA system. Progress in VPA implementation has also been slow and there is no clear evidence of their impact in terms of supporting the implementation of the FLEGT Regulation and stopping illegal timber from being placed on the EU market. Only one country of the 15 with which the EU has engaged in a VPA process, has an operating FLEGT licensing system in place, more than 15 years after the FLEGT Action Plan set the basis for these processes in 2003. Only one country from the top 10 EU timber trading partners is engaged in a VPA process. VPAs are complex and legally binding trade treaties, covering labour, social and human rights dimension of the forest sector. This means the negotiations are detailed and complex, usually taking years to finalize and implement — far from the quick and flexible tool they were expected to become. They are a unique tool with no clear parallels outside the EU and outside the timber sector, despite the fact that many economic fields share similar environmental, social and human rights implications (infrastructure, mining, food, textile…). As VPAs are trade treaties for a single commodity and derived products, the EU lacks the leverage of its full economic weight and the advantage that it enjoys when it negotiates broad Free Trade Agreements. The concept underlying the FLEGT Regulation, in particular the VPAs, is not fit for the expansion of the scope from legality to sustainability based on a harmonised definition of deforestation and forest degradation free. Looking at the results so far, further investment of considerable resources into VPA processes cannot be justified. Considering that timber and derived products covered by FLEGT VPAs cover only 3% of timber imports into the EU, the benefits do not justify the costs. At international level, the existence of a legally binding international instrument has been discussed since the United Nations Conference on Environment and Development in Rio de Janeiro in 1992, but the global community has not been able to agree on the need for, the possible structure and commitments of such an instrument. No discussions are currently ongoing that would indicate that developments will go beyond the current non-binding initiatives and fora. At national level while some Member States such as France have taken or are contemplating steps to address issues related to the transparency and accountability of supply chains, action at EU level would ensure a coherent approach across the EU, ensure a level playing field and leverage the impact on deforestation and forest degradation. The fourth failure consists of an underlying lack of transparency and information asymmetries derived from the lack of common standards and reliable information available to market actors. Information asymmetries occur when, in an economic transaction, one party has more information than the other does. 2.42.4 How will the problem evolve? The population of the earth is expected to grow to 10 billion by 2050, which will lead to a growth of consumption. The changing climate will in addition affect food production in many areas of the planet. We therefore have to expect both an increased demand for agricultural land and pressure on forests.

Without further action, deforestation will most likely continue at rates that are incompatible with many international objectives, including the objective of the Paris Agreement of keeping the temperature rise below 1.5-2 degrees. A feasibility study undertaken for the Commission considered that the global production and the export of globally traded agricultural products coming from supply chains associated with deforestation and forest degradation will continue to grow in the coming years. The major commodities driving this, as identified by the study, will be cattle, palm oil, soy, and timber. The study also found that EU consumption of globally traded agricultural products coming from supply chains associated with deforestation will stagnate for some (e.g. cattle, soy, pulpwood), but increase for other (e.g. palm oil, cocoa and coffee). Overall, it predicted that the amount of deforestation associated with EU consumption would increase, with the approximate range of EU embodied deforestation rate being between 300,000 and 600,000 hectares per year by 2030. Nevertheless, the role of EU production and consumption as a driver of deforestation will decrease proportionally, the same report noted, as Asia will significantly increase its demand for commodities related to deforestation such as soy and beef. This will increase the need for dialogues with other major market players to tackle global deforestation and forest degradation and promote global clean supply chains. The baseline scenario proposed in this impact assessment foresees that, without new EU policy measures the EU’s forest footprint will increase in the coming decade. For more see section 5.2 on baseline. 33 Why should the EU act? 3.13.1 Legal basis EU competence to act in the area of deforestation and forest degradation stems from the articles of the Treaty on the Functioning of the European Union (TFEU) related to the protection of the environment (Articles 21 (2.f) and 191 (2) TFEU). Article 21(2.f) requires the Union “to help develop international measures to preserve and improve the quality of the environment and the sustainable management of global natural resources, in order to ensure sustainable development”. Article 191 (2) requires the Union policy on the environment to aim at a high level of protection. Article 192 (1) states that “the European Parliament and the Council, acting in accordance with the ordinary legislative procedure and after consulting the Economic and Social Committee and the Committee of the Regions, shall decide what action is to be taken by the Union in order to achieve the objectives referred to in Article 191”. 3.23.2 Subsidiarity: Necessity of EU action While environment is a competence shared between the EU and the Member States, the impact of initiatives by EU Member States (such as the ones described above), which might affect the functioning of the internal market and the trade aspect of the initiative, provide a justification for common European action. The absence of applicable rules at the European level put responsible business operators that are ready to clean up their supply chains at a competitive disadvantage and rewards unsustainable behaviour. The supply chains for the products covered by the initiative are international and very often global. It is essential to ensure a level playing field for operators at the EU level in terms of requirements to be met before placing products (commodities and derived products) on the EU market for the first time. For this reason, EU-wide measures are necessary. They should be designed to ensure a common understanding of deforestation and forest degradation-free supply chains and to increase the transparency of such supply chains. Were the EU not to act, the problem of deforestation and forest degradation related to EU consumption would persist and further deteriorate. This could negatively affect the EU's efforts in the field of global biodiversity protection and climate change. While there is currently no regulatory framework to reduce the impact of EU consumption on deforestation and forest degradation, two Regulations (the EUTR and FLEGT Regulation) focusing on the legality of timber placed in the EU market have been developed as part of the FLEGT Action Plan. These instruments could potentially be affected by the new initiative (see section 8.) 3.33.3 Subsidiarity: Added value of EU action The main drivers of deforestation and forest degradation are linked to both the EU market and international trade. Action at EU level to address the consumption footprint of the EU would provide the benefit of the EU experience in dealing with complex supply-chain issues (e.g. stemming from the illegal logging related legislation for example) and would address international trade issues in a coordinated and harmonised way. As some Member States have started taking action at national level, the potential impacts on the internal market and the protection of the internal market also justify action at EU level. The EU action could complement and strengthen national efforts of Member States. 44 Objectives: What is to be achieved? While the problem of deforestation and forest degradation is wide and touches many different areas, including social, economic and environmental issues, this initiative focuses specifically on measures to minimise the placing of products associated with deforestation or forest degradation on the EU market. A single action by the EU (and EU alone) will however only have a limited impact in reducing global deforestation and forest degradation. Therefore, cooperation with producing and consumer countries, as well as with international organisations, is crucial to avoid leakage and to achieve the goal of halting global deforestation.

Work towards these goals is foreseen in the 2019 Communication, which in its annex lists over thirty precise actions across five priorities that the European Commission commits to carry out. Hence assessment of impacts of this initiative needs to be seen also in the context of the other actions being put in place. In particular with regard to producer countries, the EU can build on years of experience in the international forestry area: the Forest Partnership currently being developed will be a useful tool to tailor outreach as well as policy dialogue and financial support for capacity building. The sustainable development chapters in trade agreements could also contribute to addressing the global problem of deforestation. The proposed policy options will require products to have been produced in compliance with the deforestation-free definition (see section 4.4) and with the laws of the country of production. The latter means that labour, environmental and human rights laws applicable in the country of production (both national and international) will need to be taken into account when assessing the compliance of products with this initiative. This includes the rights of indigenous peoples, which is expected to contribute to protecting the rights of vulnerable local communities. Other EU legislative initiatives, such as the one sustainable corporate governance currently being developed, will be specifically designed to address the broader social and human rights aspects. It will do so by requiring companies across all sectors to identify, prevent, and mitigate actual and possible adverse impacts on human rights (including labour right), health and the environment (including the climate), in their own operations and value chains. The present initiative will not specifically target the financial sector and investments. Existing initiatives in the area of sustainable finance, such as the implementation of the EU Taxonomy Regulation and the future Corporate Sustainability Reporting Directive (current NFRD) are better suited to address the deforestation impacts of the finance and investment sectors, thereby complementing and supporting this legislative initiative on deforestation. 4.14.1 General objective The general objective of this initiative is to minimise the EU’s contribution to deforestation and forest degradation worldwide thus reducing the EU contribution to GHG emissions and global biodiversity loss. 4.24.2 Specific objectives Specific objectives are tailored around policy options identified and set out concretely what the policy intervention is meant to achieve: a.Minimise consumption of products coming from supply chains associated with deforestation or forest degradation. b.Increase EU demand for and trade in legal and ‘deforestation free’ commodities and products.



4.34.3 Intervention logic The above figure captures the intervention logic of the initiative, linking the problems, their drivers and the objectives. The proposed legislative initiative will cover a range of products/commodities associated with deforestation and forest degradation and will be based on a definition of deforestation-free product/commodity. Through an expanded product scope and by adding the requirement of “deforestation free” to the current system based on legality, the proposed measures will address the main driver of deforestation, i.e. agricultural expansion, thereby reducing the EU’s contribution to deforestation and forest degradation. The impact assessment analyses different policy options for achieving these objectives. 4.44.4 Deforestation-free definition In developing the objectives that link the analysis of the problem (and its drivers) to the options for possible demand side measures, operational definitions need to be developed against which the compliance of commodities and products under the scope of the policy tools will be measured. As was the case under the EUTR and the FLEGT Regulation, the policy options in this impact assessment will continue to require the compliance of products with the rules of the country of production — in other words, they will cover their legality. However, they will also go beyond that to assess whether products are deforestation and forest degradation free. To meet the ambition of the initiative, the definition of deforestation and forest degradation should rely as much as possible on internationally-backed criteria, should ensure legal clarity, and should be measurable, based on quantitative, objective data. All available evidence and the inputs from stakeholders suggest this is the right decision to attain the desired goals of this initiative. First, available reports confirm that a sizable part of ongoing deforestation is legal according to the laws of the country of production. Forest Trends estimated in 2014 that almost half of all tropical deforestation between 2000 and 2012 was driven by the illegal conversion of forest lands for commercial agriculture. The same organization estimates that between 2013 and 2019, around 69% of deforestation destined to commercial agriculture in tropical countries was illegal. These reports tend to focus on countries with weak governance — the global share of deforestation that is illegal might be lower —, but already provide clear data signalling that leaving out deforestation that is legal in the country of production would undermine the effectiveness of the policy measures.

Second, focusing only on legality would make the intervention rely on the stringency of non-EU countries’ requirements and their enforcement. This would make it dependent on the decisions taken in third countries and their potential political turns. This could also potentially encourage a race to the bottom in countries highly dependent on agricultural exports that may be tempted to lower their environmental protection with a view to facilitating the access of their products to the EU market. Exports from a country with stricter environmental controls could therefore be adversely affected when compared to those of countries with less demanding controls, regardless of whether the latter presents a higher risk in terms of deforestation. This type of requirement could therefore discourage the adoption of more effective environmental controls. Third, establishing a deforestation definition could facilitate the implementation of the measures. Results from the Fitness Check that looked at the due diligence implemented under the EUTR suggests that due diligence obligations only relying on the laws of the country of origin are sometimes difficult to implement, as companies and public authorities in charge of enforcement need to find their way among foreign documents, certificates and laws, written in foreign languages, and sometimes produced in countries with high levels of corruption where ascertaining the reliability of documents may also be very difficult. A deforestation-free definition opens a new, more straightforward way of checking compliance, whereby an operator or a public authority could check whether a product is deforestation-free by resorting to widely-available satellite monitoring tools (provided that the exact area of production can also be ascertained). Fourth, the overwhelming majority of respondents (88%) to the online public consultation (OPC) carried out for this initiative (see Annex 2) indicated their preference for assessing products based on an EU definition of deforestation-free, rather than only their legality according to the laws of the country of harvest or production. In addition, the OPC showed strong support for a deforestation-free requirement or standard that products must comply with to be placed on the EU market. For these reasons, all proposed policy options rely on a single definition of what is to be considered as deforestation-free, as well as on compliance with the laws of the country of production. This will be the basis for the obligations for EU stakeholders including companies and EU competent authorities. It will also be relevant for stakeholders in third countries that have commercial relations with the EU. A second question is which particular definition — among the different options provided by the literature review and stakeholder consultation — is best suited to fulfil the objectives of the policy intervention. This impact assessment supports the adoption of the definition explained below, which is closely related to the definitions of forest and deforestation used by the members of the Food and Agricultural Organisation (FAO). All policy measures will rely on the following definitions: ·Forest is defined as: “Land spanning more than 0.5 hectares with trees higher than 5 m and a canopy cover of more than 10% (land-cover criteria), or trees able to reach these thresholds in situ. It does not include land that is predominantly under agricultural or urban land use.” This is the definition used by the FAO. Some tree plantations are explicitly recognized as forests by the FAO in the explanatory notes of the forest definition, namely rubber-wood, cork oak and Christmas tree plantations. It is however suggested that all plantations are excluded from the definition of forest or otherwise converting pristine forest into some kinds of plantation would not be considered deforestation. This is the only slight deviation from the FAO approach. ·Deforestation is defined as: “the conversion of forest to other land use, including conversion to plantations, independently whether human-induced or not.” This is also the FAO definition, only slightly modified to cover conversion to all plantations. ·Forest degradation is defined as: “changes within a forest which negatively affect its species composition, structure, and/or function and reduce the capacity to supply products, support biodiversity, and/or deliver services.”, While the FAO does not have a definition of forest degradation, the proposed definition is consistent with descriptions in FAO reports, which say that, “forest degradation entails a reduction or loss of the biological or economic productivity and complexity of forest ecosystems resulting in the long-term reduction of the overall supply of benefits from forest, which includes wood, biodiversity and other products or services.” ·‘Deforestation-free’: “A product/commodity that has neither caused nor contributed towards deforestation or forest degradation.” This choice of definitions has several advantages. First, they rely on internationally used definitions, meaning they have already been discussed and are used among members of the FAO. Second, the concepts of forest and deforestation rely on precise physical characteristics and thresholds that can be measured, often with remote technical tools such as satellite images. Third, these definitions are relatively simple, and can be uniformly implemented across the globe, as they don’t rely on national particularities, easing implementation and enforcement. Several other options were ruled out. The parties to the United Nations Framework Convention on Climate Change (UNFCCC), building on work of the FAO, agreed on a definition of forests that involved a range of thresholds, for example tree canopy between 10% and 30%, leaving countries leeway to select their precise definition. This flexibility was considered inappropriate for this initiative as it would lead to uneven implementation (products from some countries would be subject to a different standard than products from other countries) and would have made monitoring with remote sensing tools more difficult. It is to be noted, however, that the chosen definition falls within the range agreed by the UNFCCC and that national particularities will be taken on board in the preferred policy option by requiring that products also be compliant with the laws of the country of production. Other options ruled out were based on systems like the High Carbon Stock Approach, which try to categorise different types of forests according to their environmental value, which then could be used to better assess degradation. These sophisticated systems were rejected on the grounds that they are not available worldwide, thus jeopardising equal treatment of all products regardless of their origin, and that many times they rely on on-the-ground monitoring, hampering the possibility of remote monitoring with satellite images. 4.54.5 Cut-off date Another essential decision, in relation to the deforestation-free definition, is the cut-off date. This means a specific point in time from which the products issued from newly deforested or degraded land will be penalised by the policy intervention — essentially with a prohibition of placing on the EU market, which is a common measure to all proposed policy options. The cut-off date needs to be uniform for all commodities and products covered by the instrument, in order to facilitate implementation and monitoring. The same cut-off date set in the initial intervention needs to be maintained for future revisions and updates of the product scope, again, in order to facilitate implementation; otherwise, companies might be faced with the task of dealing with similar products covered by different cut-off dates and having to adapt their supply chains to each of them. There is consensus in the literature and among many stakeholders that the cut-off date should not lie in the future, as this could risk triggering a “deforestation rush” in countries, which may be tempted to clear forests quickly — and essentially achieving the opposite objective of what is sought with the EU intervention.

Beyond that general consensus, the positions among institutions and stakeholders varied widely. The European Parliament, in its resolution with recommendations to the Commission on an EU legal framework to halt and reverse EU-driven global deforestation, proposed “no later than 2015.” The Renewable Energy Directive uses 2008 as the date by which risk fuels are identified according to land expansion criteria. Voluntary certification schemes for different commodities have set different cut-off dates and advocate for EU legislation to use their own. The Forest Stewardship Council initially set 1994 as the date after which plantations converted from natural forest were not qualified for FSC certification. The Rainforest Alliance sets 2014. The Roundtable on Sustainable Palm Oil sets a requirement to protect natural forests with a cut-off date of 2018. In addition, the same discrepancies are present in the industry. FEFAC’s Soy Sourcing Guidelines includes a cut-off date of no later than 2020. The European Cocoa Association, in a letter addressed to the Commission, has defended 2018. Another factor to be taken into account is technology. Satellite monitoring tools, which are essential for monitoring, are improving rapidly — increasing the available resolution of their images and their capabilities —, especially in recent years. For instance, Global Forest Watch data is available since 2000 but the methodology has changed and improved since 2013 due to better technology. In this sense, the more recent the date, the more tools will be available to monitor the implementation of the measures. These factors and the conflicting proposals of different stakeholders were taken into account. Several potential dates were analysed. This impact assessment considers 2020 as the preferable option for a cut-off date. The main reasons are: 1. It would align the cut-off date to the UN Sustainable Development Goals’, whereby countries around the world have committed to halting deforestation by 2020, and the New York Declaration on Forests, aiming at cutting natural forest loss by half by 2020. 2. It will mitigate potentially negative social and economic impacts in partner countries, limiting the amount of smallholders that would be caught working on land whose products cannot be sold to the EU, and ensuring that nearly all current commodity production from producing countries can still make the cut. 3. It would moderate the immediate costs for operators, reducing the administrative and financial burden related to compliance, as most products currently in trade would be sourced from land put into production prior to 2020, providing time for operators to adapt. 4. It would reduce the likelihood of supply difficulties, commodity shortages or sudden price changes. For five of the six relevant commodities (beef, coffee, soy, palm oil and cocoa), the majority of EU imports are from a small number of producer countries. 5. It ensures widespread availability of modern monitoring tools. 6. It will match the main objective of this initiative, which is to halt EU-driven deforestation. Resorting to a date in the past will not bring pristine forests back to their previous state. Other initiatives, both at the EU and global level, deal with afforestation and reforestation efforts. Several other options were considered in particular a cut-off date by 2015, as suggested by the European Parliament. This was not taken up as the main advantages linked to a cut-off date of 2020 would not be achieved, namely: a) 2015 would not be firmly anchored in the Sustainable Development Goals and the New York Declaration on Forests; b) the available monitoring tools would be more limited than for 2020; c) it would increase the potential problems for smallholders in third countries, as well as the likelihood of supply disruptions. The same reasons applied to other possible dates such as 2008, used in the Renewable Energy Directive. The negative effects would be even more pronounced, with fewer tools available to accurately and remotely monitor deforestation by 2008 and a higher risk of supply chain disruption and potential negative impacts in producing countries. 55 What are the available policy options? 5.15.1 Product Scope For the definition and the assessment of impacts of policy options, it is essential to identify the commodities and derived products falling under the scope of this initiative. The range of timber products included in the scope of the EUTR, wasthe starting point. In line with the recommendations of a majority of stakeholders, this impact assessment endorses the view that the product scope should regularly be reviewed and amended – maintaining the same cut-off date for new commodities and products. This will allow to adapt it to changing deforestation patterns and to partly prevent leakage problems that the policy intervention may cause (see more details on leakage on section 6.1.4.) The initial scope delineation has to answer two questions: First, which commodities – other than wood – to include; second, whether and which products derived from those commodities to cover (for example, cookies containing cocoa and palm oil, or meat from animals fed with soy). To answer the first question, the approach aims at selecting a number of commodities where the policy intervention is justified in terms of efficiency. There is a need to understand how European production and consumption has been contributing to global deforestation and forest degradation, on which commodities that impact has concentrated, and then finally to perform a cost-benefit analysis – taking into account the consumption of each of those commodities – to select those where an EU policy intervention could bring highest benefits per unit value of trade. A number of research papers and reports have attempted to use deforestation, agricultural production and trade data to estimate the EU’s deforestation footprint, and to link that footprint to specific commodities. An extensive literature review was carried out by the study supporting this impact assessment with the aim of making a first list of commodities (see also sections 2.3 on problem drivers and 5.2 on baseline). This review, and the underlying research, is not without gaps. The statistics used by some of those reviewed reports are old, and the numbers have substantially changed. Some papers start from a preliminary list of commodities, which makes them uncomprehensive. Others focus only on tropical deforestation. A majority disregards forest degradation, which is much more difficult to measure. In spite of these caveats, the literature review shows consensus on which commodities the EU’s embodied deforestation is mostly concentrated. This review delivered a first list of commodities (beef, wood, palm oil, soya, coffee, cocoa, rubber and maize) that was put to the consideration of stakeholders via the Commission Expert Group/Multi-Stakeholder Platform on Protecting and Restoring the World’s Forests. There was a high level of support for including the selected commodities in the scope, with some stakeholders also indicating a need for further enlarging the list to cover sugar or meat other than beef. The list of the commodities was then further reduced via an efficiency analysis (see table 1.) This efficiency analysis compared the hectares of deforestation linked to EU consumption, as estimated in a recent research paper, for each of those commodities with the average value of EU imports.

Figure 5 Individual share of EU-embodied deforestation due to the eight pre-selected commodities between 2008-2017. Source: Pendrill F., Persson U. M., Kastner, T. 2020. Maize and rubber account for the smallest fraction of embodied deforestation among the commodities analysed, while their trade volumes are very large (around EUR 2.8 billion per year for maize and 17.6 billion for rubber). Including these two commodities in the scope would require a very large effort and significant financial and administrative burden, with limited return in terms of curbing deforestation driven by EU consumption. Table 1 Cost-benefit analysis of commodities for the scope other than wood. Source: Pendrill F., Persson U. M., Kastner, T. 2020, and own elaboration. Commodity Embedded deforestation Ha Volume of annual imports in EUR million Ratio mEUR of imports covered by the policy intervention/Ha Palm oil 67,661.71 5,013 0.07 Soy 65,427.78 11,133 0.17 Beef 9,975.77 4,304 0.43 Cocoa 15,031.63 7,421 0.49 Coffee 13,967.76 8,060 0.58 Maize 3,221.37 2,834 0,88 Rubber 6,830.55 17,064 2,50 The analysis therefore identified six commodities for the scope of the legislative instrument: palm oil , soy , wood , beef (cattle) , cocoa , and coffee . The second question to address in relation to the product scope was how to cover products derived from the identified commodities. Three scenarios have been considered: 1.Targeted scope, where only the selected commodities are covered in the legislative instrument, based on the criteria enumerated above. 2.Progressive scope, where selected commodities and certain derived products are included in a list that undergoes regular reviews. 3.Expanded scope of commodities, whereby all commodities and their derived products are covered in the legislative instrument. The overwhelming majority of NGOs called for including all products derived from the selected commodities from the outset. Some industry associations, such as COCERAL, FEDIOL and FEFAC, also called for including all products. This comment from industry came back on many occasions, where business representatives were referring to the difficulties that a partial scope may cause in terms of compliance and internal organization. Such an expanded scope would increase the effectiveness of the regulation by closing any gaps which allow EU consumption of the relevant commodities in the form of derived products to continue to drive deforestation and forest degradation. This impact assessment considers the scenario of ‘progressive scope’ the most suitable. The decision to limit the list of commodities and derived product stems from the desire to balance the potential benefits with the need to favour implementability and increase the efficiency of the intervention. There needs to be an analysis of derived products, based on potential costs and benefits, similar to the analysis of commodities. The analysis would need to map which products would maximise the impact of the intervention — covering more ground in terms of embodied deforestation — at the smallest potential cost. In addition, simply including all potential products in the scope without a clear map of which products these are would imply that the EU would be proposing new rules whose exact scope and impacts are blurred, which would be against the Better Regulation principles. The progressive scope for both commodities and derived products would also favour flexibility and adaptability to changes in consumption in the EU, global deforestation patterns, as well as to new knowledge or technological developments. The list of commodities and derived products included in the legislative instruments would be regularly reviewed, based on the latest available evidence and scientific data on deforestation and forest degradation associated with those products or potential additional products, and updated to address potential leakage issues (see section 6.1.4.) The identification of derived products to be specified in the scope requires a specific study. Some of the commodities in the scope, in particular palm oil and soya, are present in high number of derived products. Palm oil for example is widely used in food and snacks, cosmetics, biofuel, animal feed, pharmaceutical and other industrial products. The literature review and the consultation with stakeholders, in particular with industry associations, did not provide any ready-made listing or other materials. This made the mapping of derived products to be identified in the scope a daunting task that exceeded the capacity of this impact assessment. Therefore, due to these technical difficulties, it was not possible within this impact assessment to perform the necessary analysis to map and list the products derived from the relevant commodities that should be included in the scope. An exception are wood products, where the product scope of the EU Timber Regulation already provides a base to build on. As a consequence, the conclusion is to initially identify the main trading forms for each commodity — as they appear in trade databases, see table below —, with the exception of wood, where the EUTR scope would be used, and to postpone the detailed listing of derived products to a specific impact assessment and subsequent implementing legislation. Table 2 HS codes of the commodities and products to be included in the initial scope of the EU intervention. Source: Own elaboration.

Wood HS codes in EUTR scope Beef HS0102, 0201, 0202, 020610, 020622, 020629, 4101, 4104 and 4107 Cocoa HS1801 to 1806 Coffee HS0901 Palm oil HS120710, 1511, 151321, 151329 and 230660 Soy HS1201, 120810, 1507 and 2304 5.25.2 What is the baseline from which options are assessed? The baseline quantified hereafter reflects the deforestation and forest degradation impacts of EU consumption in the context of these existing measures and settings.. The baseline builds on the qualitative and quantitative overview of the commodities placed on the EU market that present a deforestation and forest degradation risk to forests. The baseline attempts to model future consumption trends in the absence of additional policy measures, and to estimate the impact of these trends on deforestation and forest degradation and CO2 emissions. The baseline, therefore, aims to illustrate the impact of EU consumption on deforestation and forest degradation and CO2 emissions. It considers that unsustainable patterns of commodity production will remain the same in the absence of EU policy intervention. The policy options analysed below aim to enable replacing unsustainable consumption with sustainable consumption, by incentivising countries and companies to clean up their commodity production and supply chains. To quantify a baseline one has to draw on data about the production of key selected commodities, the volumes that are placed on the EU market and key impacts associated with their consumption within the EU such as embodied deforestation and greenhouse gas emissions. In estimating the quantitative baseline, the evolution of imports to 2030 was estimated based on projected annual growth rates found in literature (where possible) or otherwise based on historical trends. To calculate the impact of this projected growth in consumption on global deforestation and CO2 emissions, average intensity factors (i.e. deforestation and emission ratios in ha/tonne and tCO2/tonne, respectively) were derived from literature and applied to import volumes (historical and projected). The impact of imports on deforestation and emissions is assumed to remain the same until 2030 (i.e. the same average ‘intensity factors’ are applied on an annual basis between 2009 and 2030). Table 3 Baseline figures for the EU intervention. Source: Analysis based on COMEXT, DG AGRI , OECD-FAO , Jonsson et al. (2021) , Pendrill et al. (2020) , Global Forest Watch (GFW) , and FAOSTAT . 2009-2019 2020-2030 Cumulated total imports placed on the EU27 market (Mtonne) 810.5 1,042.3 Cumulated total embodied deforestation (‘000 ha) 2,302.6 2,516.8 Cumulated total embodied emissions (MtCO2) 1,021.8 1,103.0 The analysis results in 248,000 hectares of embodied deforestation and 110 MtCO2 annual emissions by 2030 linked to the commodities in the scope. These figures will be the basis for the calculation of benefits of policy options in section 6. The figures of cumulated embodied deforestation and emissions need to be read with caution. The simplified approach taken in the underlying study likely results in a conservative estimate of the contribution of EU consumption to global deforestation. Generally figures in the literature and previous studies are not directly comparable due to methodological differences, but are mentioned here in order to underpin the call for caution in using those results. The 2013 study referred to in section 1 estimated that the EU imported commodities resulting in embodied deforestation between 500 000 and 732 000 Ha per year on average during the period 1990-2008. These figures are much higher than the ones resulting from the above baseline. Apart from differences in methodological approach and time periods, the scope of the commodities assessed in the 2013 was broader, and at the time of the analysis the EU included UK, but not Croatia. These factors can all contribute to the different results. Other more recent estimates are closer to the baseline presented in the table above, such as a study for the European Parliament , which estimated the impact of consumption (of maize, soy, rapeseed, other oil crops, sugar crops, and beef) to amount to at least 258 219 ha and 73.8 MtCO2. Pendrill (2020) model estimates EU total embodied deforestation to be 220 000 Ha per year (when considering the complete set of commodities included in the model, which is broader than the commodities covered in the scope). The figure below presents the contribution to the baseline of each commodity considered — taking into account only the commodities of the scope. Figure 6 Baseline prediction of total embodied deforestation of EU27 imports of key commodities, 2009-2030, in hectares 5.35.3 Description of the policy options A list of five possible policy options was elaborated to achieve the objectives of the initiative. The sources and the criteria through which the policy measures were selected are elaborated in section 5.4.

The five policy options have then been assessed following the Better Regulation Guidelines, measuring the extent to which they would achieve the objectives (effectiveness); their respective key economic, social and environmental impacts and benefit/cost ratio, cost-effectiveness (efficiency); and the coherence of each option with other EU policy objectives (coherence). The impacts have been measured against the baseline previously described in order to be able to quantify them more precisely. A summary of this assessment is shown on Table 8. All options described below include the following elements: ·A prohibition to place products on the EU market that have not been produced and/or harvested in accordance with ‘deforestation-free’ definition (as described above) and with the laws of the countries of origin. ·The same product scope covering a number commodities and products derived from them, subject to review and revision (as described in section 5.1 above). Box 2: Key findings from the Fitness Check on the EUTR The Fitness check has shown that the EUTR resulted in an improved situation in third countries, including countries that have chosen not to engage in VPA processes. Main EU trade partners (Brazil, Russia, and Ukraine, for example) have taken steps to strengthen their forest governance systems and reduce illegal logging to meet the requirements of the EUTR. The EUTR – even if hampered by a number of design elements and enforcement weaknesses – has shown some positive results in terms of both effectiveness and efficiency. Its worldwide coverage has provided the EU with a basis to work closely together with other consumer countries to address the problem of leakage. This resulted in some main consumer countries adopting similar legislative approaches. Australia, Japan, and Korea are some of the main trade partners who followed the EUTR albeit with variations, while the US extended existing legislation to cover similar situations as the ones covered by the EUTR (Lacey Act). In the broader deforestation context, this is particularly important to bear in mind, as it shows that the EU, even with a decreasing market share, can have an impact and lead the way globally. The Due Diligence system set up under the EUTR must however be improved to be efficient, inter alia through the introduction of multiple new features which are taken into consideration in this impact assessment and are described below (section 5.3.1.) 5.3.15.3.1 Policy option 1: Mandatory due diligence system, relying on a deforestation free definition This option is based on the due diligence system (taking into account the experiences with the implementation of the EUTR, as explained in Box 2 above) with new features aiming to increase its effectiveness (see below), including universally applicable deforestation definition (see section 4.4.). This due diligence system is the base of policy options 1 to 4. The system essentially consists of a requirement for operators that place relevant commodities or products for the first time on the EU market to exercise due diligence in order to ascertain that: a) Those commodities and products have not been produced on land deforested or degraded after the cut-off date set in the regulation (see section 4.4 and 4.5); b) they have been produced in accordance with the laws of the country of production. If any one of the two requirements is not met — or if the operator cannot attain certainty or a negligible level of risk that the requirements are met —, then the operator shall not place those products on the EU market. The system, therefore, includes a prohibition to place non-compliant products on the EU market. Operators would have to develop and apply a due diligence system to perform their duties. This obligation would apply to all operators seeking to place a relevant product on the EU market for the first time, irrespective of their legal form, size or complexity of their value chains — or where their headquarters are based. In order to exercise due diligence, an operator would have to go through three steps. As step one, operators need to ensure access to all information necessary to determine whether the risk associated with the commodity is negligible. In step two, the operators need to use that information to analyse and evaluate the risk in the supply chain — from harvest or production to placing on the EU market. In step three, except where the risks are found to be negligible, operators need to take adequate and proportionate mitigation measures in order to effectively minimise the risk of placing incompliant products on the EU market to a negligible level. If any of the three steps cannot be undertaken, due for instance to the lack of information available or the lack of robust mitigation tools to eliminate the risk of non-compliant products being placed on the EU market, then the operator shall not place those products on the EU market. EU Member States, in turn, would be obliged to ensure the effective enforcement of the measure. Some of these duties will involve minimum inspections levels and a formal role for customs’ authorities in case of commodities imported from third countries. These measures are described below. The Fitness Check of the EUTR (see box 2) revealed a series of shortcomings in terms of design and implementation that had marred the effectiveness of the due diligence system under EUTR (see section 6.1.1.). These findings, the most recent literature and the feedback from stakeholders have allowed to identify new features for the due diligence system of options 1 to 4 with view to increasing the effectiveness. The new features that are expected to increase its effectiveness in comparison with the EUTR are: 1. Deforestation-free definition. This is the cornerstone of the improved EU intervention. As explained in section 4.4, there is a high degree of consensus among stakeholders and researchers that relying on universally applicable data that can be monitored remotely can increase the effectiveness of the policy measures. 2. Stricter traceability obligations. The proposed due diligence system of options 1 to 4 will require operators to ascertain relevant information on the country and area of production of the commodities or products they intend to place on the EU market. There is broad consensus that good traceability is needed to unleash the full potential of remote monitoring. It is to be noted that some of the commodities in the scope (like beef) are already covered by some traceability obligations due to food safety rules. 3. A formal declaration of conformity with the regulation. Operators will need to present to the authorities a self-declaration before placing relevant commodities or products on the EU market. This is expected to facilitate the work of the member states authorities in identifying operators and, in cases of non-compliance, in building solid court cases. 4. Increased cooperation between Competent Authorities and customs. In the case of commodities and products imported into the EU, custom authorities will receive the self-declaration. Custom authorities will also need to share information with other relevant authorities in the Member States directly in charge of enforcing the regulation. This will address one of the shortcomings identified in the implementation of the EUTR.

5. A reinforced substantiated concerns mechanism. Like in the EUTR, natural or legal persons will be entitled to submit substantiated concerns to Competent Authorities when they deem that one or more operators are breaching the regulation. Competent Authorities will take necessary steps to detect possible breaches, including inspections or and hearing of operators, or otherwise justify their decision not to take action. This mechanism was widely demanded by NGOs in the OPC. 6. Minimum inspection levels. Member States will be expected to conduct inspections covering a relevant share of the commodities and products placed on the EU market, which was not the case under the EUTR. In option 2 (see section 5.3.2), the inspections could target companies that trade with commodities produced in countries with higher risk of deforestation. Certification (or verification) schemes may, in some cases, contribute to achieving compliance with the due diligence requirement, however the use of certification does not automatically imply compliance with due diligence obligations. There is abundant literature on certification schemes shortcomings in terms of governance, transparency, clarity of standards, reliability of monitoring systems, etc. (see more in section 5.4). The consensus is that these schemes on their own have not been able to provide the changes needed to prevent deforestation. This is the position defended by the European Parliament and by most NGOs, whereas businesses in general advocate for a more prominent role of certification, including a way for companies to use these systems as proof of compliance with binding EU rules. Maintaining operators’ responsibility for correctly implementing due diligence obligations when they use certification aims at ensuring that authorities remain empowered to monitor and sanction incompliant behaviour, as the reliability of those systems has repeatedly been challenged by evidence on the ground. 5.3.25.3.2 Policy option 2: A benchmarking system and a list of contravening operators as a basis for a tiered improved mandatory due diligence system, relying on a deforestation free definition Policy option 2 builds on the due diligence system laid out in policy option 1. It includes a country benchmarking system that will assign a risk level to countries taking into account deforestation and forest degradation linked to relevant commodities. These assessments would be based on objective, comparable and scientific data. Thresholds based on deforestation rates as a share of the country’s forest area or absolute deforestation figures will be set up to classify countries (both member states and third countries) in three categories of risk: Low, standard and high risk. The Commission would make the country risk categorisation publicly available and update the list regularly. Countries will be updated by the Commission of their classification in one or another category. The obligations for operators and member states authorities will be adapted according to the level of risk of the country of production, with simplified due diligence duties for low risk and enhanced scrutiny for high risk. Commodities produced in low risk countries would allow operators to apply simplified due diligence that will consist of making sure that these products or commodities have been produced in the low-risk country. Risk assessment and risk mitigation obligations would not apply in this case . The enhanced scrutiny for commodities stemming from high-risk countries would include higher minimum inspection rates obligations for member states over those shipments. In addition, there will be a list of contravening operators. The Commission would publish in the Official Journal of the European Union a list of contravening operators, conceived as a shame list with no legal consequences. An operator or trader would be placed on the list if a Member State administrative authority or court has imposed final administrative or criminal sanction or penalty for infringing their obligations under this regulation. Member States would inform the Commission without undue delay about any such sanctions or penalties. Upon receipt of such notification the Commission would include the operator or trader concerned on the list without delay and inform him of its inclusion. If, for a certain period after the final administrative or criminal sanction or penalty, no further reports of sanctions or administrative or criminal proceedings concerning alleged contravening activity have been reported by the respective Member State authority, the Commission would remove the operator or trader from the list. There are several ways in which policy option 2 could contribute to increase the effectiveness — and reduce the costs — of the EU intervention as compared to the due diligence system of the EUTR and option 1: 1. Incentives for third countries. The benchmarking system is meant to create incentives for countries to protect their forests, as stronger environmental protection and governance will bring easier market access for their products to the EU. It will also mitigate the risk of leakage (see section 6.1.4), increasing the overall effectiveness of the intervention. 2. More focused enforcement resources. The benchmarking system would help member states authorities concentrate scarce enforcement resources where they are most needed — via stronger monitoring obligations for standard and high risk countries. 3. Reduced companies’ compliance costs. By singling out low and high risk countries, the Commission would facilitate the risk assessment that companies need to do as part of their due diligence obligations. The availability of simplified due diligence for operators sourcing from low risk countries is also expected to reduce compliance costs. 4. Stronger dissuasive power. The list of contravening operators is meant to increase the dissuasive power of the regulation, also increasing its effectiveness. Nonetheless, there is a risk that the list of contravening operators, where it applies to natural persons, might interfere with rights protected under Article 7 and 8 of the Charter of fundamental rights (Respect for private and family life and Protection of personal data). Limitations to these rights need to be justified under Article 52(1) of the Charter, i.g. the measure needs to be proportionate and serve an objective of general interest. In the present case, this could be debated, if other measures, which are less limitative on those rights, achieved the same deterrent effect (i.e. financial sanctions). Legal entities do not held the before mentioned rights, still the measure would need to be justified, especially if the sanction applied by the national competent authorities is already sufficiently deterrent. 5.3.35.3.3 Policy option 3: Mandatory public certification combined with an improved due diligence requirement, relying on a deforestation free definition Policy option 3 also builds on the due diligence system laid out in policy option 1. In addition, the EU would, upon request from a Member State or third country, review and approve mandatory public certification systems on a country level. The approval would be contingent on the reliability of such a system in ensuring compliance with the requirements of the EU policy intervention, in particular the deforestation-free definition. This would include specific requirements in terms of transparency and reliability. Mandatory public certification would need to be mandatory in the country of origin, covering all operators. These approved mandatory public certification systems would, in turn, certify that relevant commodities and products are compliant with the EU requirements. Operators could then use the approved systems to facilitate their compliance with the EU legislation as a risk mitigation tool within the due diligence requirements, maintaining, however, operators’ liability in case of non-compliance (as in option one). Policy option 3 seeks to achieve some of the same benefits of option 2, namely creating incentives for countries to engage and protect their forests (in exchange for improved market access), as well as facilitating compliance — and reducing costs — for operators. However, in contrast with option 2, which can be applied to all countries, policy option 3 would rely on the willingness of countries to create their own mandatory public certification systems and request its recognition. 5.3.45.3.4 Policy option 4: Mandatory labelling combined with an improved due diligence requirement, relying on a deforestation free definition

Policy option 4 also builds on the due diligence system laid out in policy option 1. In addition, companies will be required to label relevant commodities and products signalling compliance with the EU intervention. This label would be for information purposes only, as non-compliant products would not be allowed to be placed on the EU market, in line with the general prohibition established in the underlying due diligence system. Mandatory labelling would provide consumers with the information that products placed on the EU market are not coming from supply chains associated with deforestation and/or forest degradation, potentially increasing awareness about the subject. 5.3.55.3.5 Policy option 5: Deforestation-free requirement for placing on the EU market supported by benchmarking and country card systems This option is the only one not based on a due diligence system. It would be based, with the necessary adaptations, on the current EU rules to prevent, deter and eliminate illegal, unreported and unregulated fishing (IUU). The system would consist of several features to implement and enforce the deforestation-free definition and the requirement for the relevant commodities and products to be produced according in respect of the laws of the country of production: a) Public certification systems in producing countries intending to place their commodities and products on the EU market; b) a benchmarking system to support the implementation and enforcement of the measure; c) a country carding system; d) penalties for EU operators not adhering to the laws and a list of contravening operators. Producing countries would issue and validate certificates for the placing of commodities/products on the EU market, including basic information about the consignment, as well as specifying that the commodities and products were harvested/grown/produced in compliance with national and international legislation as well as in compliance with the ‘deforestation-free’ definition defined at EU level. Member states would be in charge of receiving, inspecting and monitoring the commodities and products, as well as their certificates. An EU entity would be in charge of monitoring the certification systems of the countries. It would also be in charge of the benchmarking system. Countries (EU and non-EU) identified as experiencing serious rates of deforestation and forest degradation and as having inadequate measures in place to prevent and deter activities associated with deforestation and/or forest degradation may be issued with a formal warning (yellow card). Yellow cards would trigger a dialogue process between the country in question and the Commission, which over time, and in the absence of corrective measures, may lead to a red card, which would be the basis for a ban for their products on the EU market. 5.45.4 Options discarded after the initial viability screening A total of 17 policy measures (see Figure 7.2) were considered in the initial viability screening of this Impact Assessment. The list of potential measures covered a wide range of possible interventions which were alternative to one another, included regulatory and non-regulatory instruments, and went from soft to hard interventions. The information sources used to select and assess those policy measures were the following: a)An initial list put forward in the Inception Impact Assessment based on: a.Previous EU policy choices, such as the EUTR and the FLEGT Regulation, the EU regulation to prevent, deter and eliminate illegal, unreported and unregulated fishing (IUU), the Renewable Energy Directive, the Conflict Minerals Regulation or the rules governing the EU Organic Logo. b.The political commitments laid out in the 2019 Communication, the European Green Deal, the EU Biodiversity Strategy and the Farm to Fork Strategy. c.Inputs received ahead of the launch of the legislative initiative from stakeholders, EU member states, third countries, etc. These were gathered for example in bilateral meetings with Commission services and position papers. b)The public feedback received on the Inception Impact Assessment (a total of 99 contributions). c)The European Parliament resolution of 22 October 2020 with recommendations to the Commission on an EU legal framework to halt and reverse EU-driven global deforestation. d)The positions expressed by the Council of the EU, in particular the Council conclusions on the 2019 Communication. e)The stakeholder consultation of this impact assessment, including the online public consultation with nearly 1.2 million contributions and the targeted consultation where 49 organisations and 92 individuals were consulted via specific interviews and focus groups. The outcome of the online public consultation showed a high level of support for binding measures (e.g. deforestation-free requirement, IUU-like approach, mandatory due diligence, mandatory public certification, etc.) whereas voluntary measures (e.g. voluntary due diligence, private certification schemes, voluntary labelling) received the lowest rates of support (see detailed results on annex 2.) In general, targeted interviews and position papers showed that businesses and NGOs agree on the need for binding EU rules. Both groups showed a high level of support for mandatory due diligence. Businesses argue that homogeneous, mandatory EU rules can level the playing field and advocate, in general, for more lax due diligence rules. NGOs argue that putting responsibility on companies via due diligence obligations is the right way to go and advocate in general for stricter due diligence rules. f)Further stakeholder, EU member states and third countries’ consultation, in particular via individual meetings with Commission services, seminars and public events organized by third parties. g)The meetings of the Commission Expert Group/Multi-Stakeholder Platform on Protecting and Restoring the World’s Forests, including the EUTR and the FLEGT Regulation. Since the launch of the roadmap for this legislative initiative in February 2020, the group has met nine times in different configurations — and included four specific workshops to gather inputs on policy options studied in the impact assess