The European Union is becoming a global leader in regulation. On a range of key policy issues, from AI to health to housing, Brussels is setting new regulatory precedents while the world watches and often follows in its footsteps. While the United States has historically set the agenda for the rest of the world to follow, the EU now sometimes takes on that role.
But with great power comes great responsibility. Regulation on subtle and complex policy issues is not easy. It is tempting to introduce ‘world-first’ legislation, as there is a risk of rushing into action before the EU is ready or has all the information. To say the least, such a policy-making strategy is unwise. If regulation goes wrong, it will be businesses and citizens who will suffer for years to come, as Europe is mired in unnecessary and counterproductive bureaucracy while the rest of the world moves forward.
Recent environmental legislation has all the warning signs that regulation is starting before it is ready. As part of a broader drive for sustainability, the first phase of implementation of the EU Deforestation Regulation (EUDR) will begin on 30 December 2024. The EUDR is a set of rules designed to curb deforestation by forcing companies to clean up deforestation-derived ingredients in their supply chains. Unfortunately, the regulations are not ready to become law and are poorly designed regulations with serious consequences.
Tackling deforestation is a worthwhile undertaking, and some additional regulation could be part of the answer to achieving it, but the EUDR takes a clumsy approach: it seeks to tackle both greenhouse gas emissions and biodiversity loss at once, effectively requiring companies that want to sell in Europe to demonstrate to the EU’s satisfaction that all parts of their supply chain are sustainable.
Proving to the EU in this way is not easy. It requires a huge amount of paperwork and thousands of hours of labor. Compliance is a normal part of business and a familiar cost to companies and entrepreneurs looking to expand, but policymakers have a duty to limit these costs as much as possible. The EUDR takes these costs to extremes because it requires an absurd level of detail in compliance. A new study suggests that just a few ingredients could cost up to $1.5 billion in EUDR compliance.
This study by researchers at GlobalData looked at the practical requirements and costs for companies to comply with the EUDR if their supply chain includes rubber or palm oil. The combined cost of the traceability system required to trace ingredients back to their origin, along with legal support and other administrative costs, came to a staggering $1.5 billion. Some, or all, of these costs are likely to be passed on to consumers.
At a time when millions of Europeans are already struggling financially due to the cost of living, artificially raising prices in this way is extremely unwise, especially since the EUDR is likely to affect many everyday essentials, such as food and toiletries. According to WWF, more than half of packaged products on store shelves contain palm oil, one of the main ingredients subject to new review under the EUDR. If every company that uses palm oil in their products has to invest new resources to comply, it will soon become clear how enormous the total cost of the regulation could be.
The worst part is that EUDR may not be necessary to stop deforestation or other undesirable environmental phenomena. Many industries are already investing in sustainability themselves, thanks to significant consumer demand, and costly new regulations are unnecessary. In the case of palm oil, more than 90% of palm oil imported into Europe is already certified as sustainable thanks to certification schemes in palm oil producing countries like Malaysia (and recognized by Western economies including the UK), making EUDR unnecessary and costly. Unsurprisingly, EUDR has strained relations between the EU and Malaysia to the point of near-destruction.
All of this is avoidable. Rather than seeking ‘world-first’ regulations at all costs, the EU would be better off working directly with businesses and regulators in places like Malaysia to create a common system that lowers barriers to trade and business, rather than erecting new hurdles and passing the costs on to businesses and consumers.
