ECONOMY AND INTERNATIONAL TRADE
How could new global climate regulations affect Brazilian agricultural trade?
01/06/23 - Fernanda Kesrouani Lemos | Rodrigo Lima
Environment | Customs | Politics | Land Use
Rafael Marques - Secom - MT
Regulations that have effects in other countries have become increasingly common.
In April 2023, the European Parliament approved the EU Deforestation Regulation (EUDR), which created requirements to control and prevent the import of agricultural products from deforested areas around the world. Other countries, such as the United Kingdom, the United States and China, are developing rules to reduce the risk of deforestation and encourage the mitigation of greenhouse gas (GHG) emissions from imported products.
Another regulation that supports this “green” trajectory is the carbon tax at the border, through the Carbon Border Adjustment Mechanism (CBAM), whose logic is to avoid “carbon leakage” in products exported to the European Union. Thus, obligations to reduce emissions are created for sectors in third countries, considering that these sectors have targets within Europe. Such regulations and taxes generate, in the short term, adaptation costs for countries that are still behind in production technologies, forms of governance and compliance and confidentiality information relating to their environmental assets.
Beyond the border carbon adjustments (BCAs)), there are other measures that can affect trade, such as subsidies granted to promote sectors that contribute to reducing emissions. The United States, for example, approved the “Inflation Reduction Act” at the end of 2022. This is a package of subsidies (US$740 billion) that aims, among other things, to expand the production of renewable energy and sustainable transport within the country.
The World Trade Organization (WTO), by reinforcing the role of global trade as a catalyst for sustainable production of food, energy and services, seeks to adapt to this new context. Carbon measures at the border and policies to curb deforestation are examples of environmental initiatives that affect trade and that aim to have effects in other countries, and are then called extraterritorial regulation.
The European Union will not accept the production of meat, soy, cocoa, timber, paper, charcoal and coffee, among others, in areas deforested after December 31, 2020. In other words, the EU will demand “zero deforestation” in imports of these commodities. The demand requires information from farms proving that there was no conversion of the areas in accordance with the legislation and after the period (legally or illegally).
Capturing this information and its flow throughout the production chain as a compliance mechanism requires a process of adaptation of government bureaucracies and information control and protection mechanisms, as well as real-time validation. This represents a public and private effort that is likely to increase transaction costs.
The regulation also provides that countries and/or regions may be classified as high, medium or low risk. The risk classification will be a guide for decision-making by importers, who will seek to buy from regions with lower risk. This fact will be crucial for Brazil, as states with high deforestation rates may be subject to restrictions, such as Pará, a historical record holder in this regard.
In order to avoid such occurrences, supply chains may use standard documents to be proposed by European Comission. These documents will request a variety of information, including adherence to voluntary sustainability standards or certifications. The European Union has extensive experience with the use of certifications in the biofuels market, which has required intense involvement of ethanol plants in recent years, for example.
The European Commission is a central player in this discussion, as it will have to work with trading partners to reduce the risk of deforestation. The negotiations to approve the EU-Mercosur Agreement seem to be an opportune space for this debate. Brazil, with the “new” Action Plan for the Prevention and Control of Deforestation in the Legal Amazon (PPCDAM) and other policies and measures, has a basis for negotiating cooperative solutions and avoiding trade barriers.
It is worth noting that the version of the PPCDAM public consultation, presented by the government, indicated that, in 2022, 25% of deforestation in the Amazon occurred in private areas, 32% in non-allocated public lands, 29% in agrarian reform settlements, 11% in Conservation Units and 2% in indigenous lands.
Strengthening the monitoring and control of deforestation in private areas, through the Rural Environmental Registry (CAR), is urgent, which requires involving the states in the process of environmental assessment and regularization. This agenda, as long as it is well addressed, can serve as a strategy to reduce the risk classification in environmental policies. due diligence. It is worth remembering that China is also demanding mechanisms to prove compliance with the Forest Code as a form of legal compliance against deforestation. Although this market does not yet require zero deforestation, the Asian country is working to become increasingly “green”.
The reality of the new European rule requires intense involvement from the private sector and the government in order to avoid creating trade barriers by disregarding the risks of deforestation in agriculture. It is essential to define strategies to act in the field of international trade and the environment. Rapidly curbing illegal deforestation is just one of the urgent actions. In parallel, it is necessary to conclude the EU-Mercosur Agreement, as well as new regional agreements, valuing tropical agriculture as a vector for high sustainable production standards.
In this sense, continuing to have the EU as a trading partner and perpetuating relations between the parties in a collaborative manner is essential for Brazil. Around the world, more than 140 countries intend to adopt climate actions in agriculture and food security, and the EU is in a position to influence them directly or indirectly. New measures in favor of sustainability are emerging. It is up to Brazil to see this process as an opportunity to showcase its environmental attributes and price them as an agricultural and environmental power, a role already attributed to the country since the 1990s. It is necessary, however, that its information architectures and its control and compliance mechanisms are capable of transmitting compliance with internal laws and standards and with private measures.
Recommended readings:
Green barrier: ban on importing products from deforested areas poses a risk to Brazil's credibility. O Estado de São Paulo, May 20, 2023.
Bellezoni, R.; Ren, P. & Zhong, Z. The silent greening of China. The State of São Paulo, May 20, 2023.
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GLOSSARY
It is an environmental trade policy that consists of tariffs on imports and sometimes rebates on exports. BCAs reflect regulatory costs that fall on carbon-intensive products produced domestically, but not on the same products produced abroad.
It is the instrument created by the European Union to put a fair price on the carbon emitted during the production of carbon-intensive goods that will enter the economic bloc. The aim is to encourage cleaner industrial production in third countries.
It is the institution that represents and defends the interests of the European Union globally. It materializes the interests of the European Community through the proposal of laws, policies and action programs. It is also responsible for implementing the decisions of the European Parliament and the Council of the European Union.
It is to be in compliance with laws, ethical standards, internal and external regulations. Its function is to minimize risks and guide the company's behavior in the markets in which it operates.
Due diligence, or due diligence process, is a procedure that aims to conduct in-depth research and investigations into a company. In practice, it occurs when a negotiation is underway.
It is the legislative branch of the European Union. Together with the European Council, it adopts European legislation, usually on proposals from the European Commission. The European Parliament is composed of 705 MEPs and represents the second largest democratic constituency (after the Parliament of India) and the largest transnational democratic constituency in the world.
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