The EU Taxonomy’s role in combating deforestation: navigating trade challenges

Deforestation, defined as the permanent removal of trees and transformation of forest areas to other land uses, is a major global challenge. Forests cover about 31% of the world’s land area, but between 2010 and 2020, the world lost an estimated 4.7 million hectares of forest each year. This loss was driven primarily by the conversion of forests to agricultural land for crops like soy and palm oil, livestock grazing, urbanisation, and mining activities.

Deforestation hinders our ability to achieve climate neutrality, as forests act as natural carbon sinks, absorbing approximately 2 billion tonnes of CO₂ annually (UN Global Forest Goals Report, 2021). However, the consequences of deforestation extend far beyond climate change. It also contributes to biodiversity loss, soil erosion, disrupts water cycles, and can have devastating impacts on local communities.

The EU Taxonomy for Sustainable Activities is a classification system that aims to guide investments towards environmentally sustainable economic activities. In the context of deforestation, the Taxonomy encourages sustainable forest management practices and discourages investments in activities that contribute to deforestation or forest degradation. This is crucial because directing financial flows towards sustainable activities is essential for achieving the EU’s climate and biodiversity goals.

However, addressing deforestation through trade is complex. Challenges include illegal logging, complex and opaque supply chains that make it difficult to trace the origin of products, and the need for international cooperation to ensure effective regulation and enforcement. For example, the EU imports significant amounts of agricultural products from regions with high deforestation rates, such as South America and Southeast Asia. Ensuring that these products are deforestation-free requires robust traceability systems and collaboration with producer countries.

How the EU is combating deforestation
In response to the rapid decline in forest resources, the European Union is taking action to protect and restore forests through a comprehensive package of regulations aimed at preserving biodiversity and reducing greenhouse gas emissions. To combat deforestation, the EU has adopted a Forest Strategy, which includes commitments to:

• Plant at least 3 billion additional trees by 2030
• Implement a legally binding instrument for ecosystem restoration, including forest ecosystems
• Promote sustainable forest management practices
• Increase the use of wood-based products in construction to store carbon and substitute for fossil-based materials
• Mobilise funds to support sustainable forest management and restoration efforts.

The EU Forest Strategy recognises the important role that forests play in mitigating climate change, preserving biodiversity, and providing a range of ecosystem services. In addition to the Forest Strategy, the EU is also taking action to combat deforestation through its trade policies, working to ensure that its imports of agricultural and forestry products do not contribute to deforestation. The EU is also working to promote sustainable forest management in developing countries. The EU’s efforts to combat deforestation are essential for achieving its climate and biodiversity goals.

The EU Taxonomy and EUDR: key tools in the fight against deforestation
The EU Taxonomy for Sustainable Activities (Regulation 2020/852), adopted in 2020, establishes criteria for determining whether an economic activity qualifies as environmentally sustainable. Two of the six environmental objectives relate to forest protection:

• Climate change mitigation: Requires conducting activities to enhance land-based carbon sinks, including combating deforestation and forest degradation
• Protection and restoration of biodiversity and ecosystems: Requires supporting sustainable forest management, including conducting practices that contribute to increased biodiversity or prevent ecosystem degradation, deforestation, and habitat loss

The EU Taxonomy influences investment decisions and promotes sustainable finance by providing a framework for identifying environmentally sustainable activities. It also encourages companies to assess and report on their environmental impact, including their contribution to deforestation. To meet the Taxonomy’s criteria for environmentally sustainable activities related to forest protection, economic activities must meet several requirements. These requirements are detailed in the Technical Screening Criteria, which outline specific standards and metrics for each environmental objective. For climate change mitigation, activities must demonstrate that they contribute to the conservation, restoration, and sustainable management of forests and other land-based carbon sinks. This could include activities such as afforestation, reforestation, and sustainable forest management practices that increase carbon sequestration. The criteria also exclude activities that lead to deforestation or conversion of natural ecosystems.

By providing a clear framework for identifying environmentally sustainable activities, the EU Taxonomy encourages companies to adopt practices that protect and restore forests. This not only helps to mitigate climate change and preserve biodiversity but also creates opportunities for businesses to access sustainable finance and gain a competitive advantage.

In addition to the EU Taxonomy, the EU has adopted the Deforestation-free products Regulation 2023/1115 (EUDR), which will apply from 30 December 2025 (according to the recently adopted amendment to the EUDR). The EUDR aims to minimise the risk of deforestation and forest degradation associated with products placed on the EU market. It covers a wide range of commodities, including cattle, cocoa, coffee, palm oil, rubber, soy, and wood, as well as derived products such as furniture, paper, and palm oil. Under the EUDR, companies will be required to implement due diligence systems to ensure that the products they place on the EU market are not linked to deforestation or forest degradation that has occurred after 31 December 2020.

This means that companies will need to trace their products back to the source to ensure that they have not been produced on land that was deforested after this date. The EUDR also requires companies to assess the risk of deforestation and forest degradation associated with their products. This assessment should consider factors such as the country of origin, the type of product, and the sourcing practices of the company’s suppliers. Finally, companies will be required to implement measures to mitigate the risk of deforestation and forest degradation. These measures could include sourcing products from sustainably managed forests, working with suppliers to improve their practices, and investing in forest restoration projects.

The EU’s efforts to combat deforestation are also closely linked to the growing focus on environmental, social, and governance (ESG) factors in investment decisions. Investors are increasingly looking to invest in companies that are committed to sustainability and have strong ESG performance. The EU Taxonomy and the EUDR provide a framework for companies to demonstrate their commitment to sustainable forest management and deforestation-free supply chains. This can help companies to attract investment, improve their reputation, and gain a competitive advantage.

Conclusion
Combating deforestation is crucial for achieving climate commitments, as forests absorb CO_{2 from the atmosphere. The last decade was the warmest on record, underscoring the urgency of implementing measures to mitigate and adapt to climate change. Public climate goals for EU member states to achieve climate neutrality require significant changes in business operations. Companies face new obligations related to reporting, which will be important when applying for support from climate transformation funds. By implementing robust due diligence systems, promoting sustainable products, and supporting sustainable forest management, businesses can play a vital role in the fight against deforestation.}