New Challenges Ahead: The EU Deforestation Regulation

EU’s Vision for Protecting Biodiversity and Achieving Climate Neutrality

The European Union (EU) is committed to safeguarding biodiversity alongside its goal of achieving climate neutrality by 2050. Recognizing the interconnectedness of biodiversity loss and climate change, the EU has established ambitious policies aimed at preserving ecosystems while reducing carbon emissions. A key pillar of this strategy is the European Union Deforestation Regulation (EUDR), which seeks to halt deforestation linked to the production and trade of certain high-risk commodities. By addressing the root causes of deforestation, the EUDR supports the EU’s broader biodiversity goals, ensuring businesses adopt sustainable practices that protect forests and other habitats.

What is EUDR?

EUDR is an environmental regulation that prohibits certain commodities linked to deforestation from appearing on the EU market. The EUDR focuses on the following high-risk commodities and products: 

• Palm oil
• Soy
• Coffee
• Cocoa
• Wood
• Cattle
• Rubber

Based on the EUDR, such commodities and products must fulfil three cumulative requirements to be compliant and allowed on the EU market. They must: 

• Present no or only a negligible risk when it comes to deforestation
• Be produced in accordance with local legislation
• Be accompanied by a due diligence statement (DDS).

What companies must do

In practice, the EUDR requires companies importing from China, for example, to conduct due diligence on their supply chains, implement traceability measures and ensure the legal and sustainable sourcing of raw materials. Companies will need to meet strict compliance criteria and provide robust data to demonstrate that their products are deforestation-free. 

Operators and traders – i.e. every natural or legal person who, in the course of a commercial activity between the EU and China, places relevant products on the market, exports them or makes them available – must comply with the due diligence obligations set out in the EUDR.

A DDS consists of:

• Collected product-related information, data and documents
• Risk assessment measures
• Risk mitigation measures

A DDS must include the following product-related information:

• A description of the product(s), including the trade name and type of good
• The quantity of the relevant products in kilograms and supplementary units
• The country of production and parts thereof
• The geolocation of all plots of land where the commodities contained in the relevant product or used to make it were produced
• Date or time range of production 
• The name, postal address and email address of the business or person that the product was acquired from or sold to
• Conclusive and verifiable information that the relevant products are deforestation-free and produced in accordance with the relevant legislation of the country of production

Risk assessment

The collected information must be used to assess the risk of non-compliant products entering the supply chain. Certification schemes can be used to help with the risk assessment. However, companies are still required to exercise due diligence and they remain responsible for any breach. Initially, therefore, everyone will be required to comply with the risk assessment and, possibly, take risk mitigation measures.

At a later stage, countries (or regions) will receive a risk classification. At that point, operators sourcing commodities entirely from areas classified as low risk will be subject to simplified due diligence obligations. As a result, the risk assessment and mitigation measures may no longer be required.

Risk mitigation 

When the risk assessment reveals a more than negligible risk of non-compliance, mitigation measures need to be taken.

Penalties and consequences of non-compliance

Failure to comply with the EUDR will result in penalties, including fines and restrictions on market access. They can include: 

• A financial penalty of up to 4% of the total annual EU-wide turnover 
• Confiscation of the relevant products and/or revenues earned with the products in question
• Temporary prohibition from making the relevant commodities and products available on the market or exporting them

Infringements will be published on the Commission’s website, including the name of the relevant party, the date of final judgment, a summary of the infringing activities, and the nature and amount of the penalties.

Timeline

The EUDR was originally scheduled to enter into force in December 2024 (June 2025 for SMEs). In response to global feedback, however, the Commission has proposed a 12-month extension, which was supported by the European Parliament and the Council – this will give larger operators until December 2025 and SMEs until June 2026 to fully comply with the new regulation.

China’s perspective on the EUDR

China has expressed significant concerns about the EUDR, rejecting key aspects of the regulation that it views as trade barriers. The regulation places a heavy compliance burden on exporters, requiring detailed information on the origin of goods, which many Chinese companies find challenging to meet due to the complexity of their supply chains. China’s resistance to the EUDR has led to tensions with the EU, raising concerns about a potential supply crisis, especially for commodities like wood, rubber and soy.

What does it mean for companies based in China?

Although the regulation does not impose direct obligations on non-EU companies (without an EORI number), they must still be prepared. EU importers will require detailed information on the origin and sustainability of goods, which means Chinese companies should be prepared to have systems in place to meet these due diligence requirements.

How PwC can help

The numerous requirements laid out by the EUDR present significant challenges for companies. Strong governance frameworks and effective data management are crucial to navigating these obligations. We recommend conducting a thorough assessment of your current compliance status and identifying any potential gaps. We can assist in several key areas to ensure EUDR compliance:

• Impact Assessment: Support in identifying if your company qualifies as an operator or trader handling any affected commodities.
• Due Diligence Processes: Assistance in setting up due diligence procedures, identifying risks and ensuring compliance with EUDR requirements. 
• Governance Model: Assistance in setting up an effective governance model and implementing a control framework for yearly reviews and audits.
• Supply Chain Redesign: Support in creating a sustainable supply chain and adapting distribution processes to meet regulatory requirements, including those that go beyond the EUDR.