Brazil fears that EU environmental rules will cut exports – 06/24/2023 – Market

The new European Union (EU) rule to bar the purchase of goods produced in deforested areas comes into force next Thursday (29). Although there is an 18-month transition period, the measure is viewed with concern by the government of Luiz Inácio Lula da Silva (PT) and by productive sectors, who fear a decline in Brazilian exports to the bloc depending on the model to be adopted.

The EU is now one of the main destinations for Brazilian agribusiness exports, being a major market for some products — such as coffee. Without clarity on how some conditions will be implemented, Brazilian representatives project an eventual increase in costs as a potential obstacle to the sale of national products to the bloc.

“It’s not enough that you comply with European legislation, there is a cost to prove that you comply with legislation, and this is an aspect that needs to be taken into account”, emphasizes Tatiana Prazeres, foreign trade secretary at the Ministry of Development, Industry, Commerce and Services (Mdic).

The European norm makes it mandatory for importing companies headquartered in the bloc to implement due diligence systems to monitor supply chains and mitigate any negative impacts of the foreign goods they buy. The products affected by the new legislation are cattle, cocoa, coffee, palm oil, soy, rubber, wood and derivatives of these items. The rules will go into effect on December 29, 2024.

The objective, according to the Europeans, is to minimize the risk of environmental degradation, promote biodiversity, reduce the weight of the EU in the climate crisis and ensure that items are produced in a way that respects indigenous peoples and human rights in general.

In practice, it will be up to exporters to prove that the products do not come from deforested areas. Otherwise, serious penalties are foreseen, such as destruction of goods. For this, it will be necessary to improve the tracking of the entire production chain through satellite monitoring tools, audits and training of suppliers, for example.

The Brazilian authorities have defended, together with the EU, the adoption of data from national monitoring systems, such as Prodes (Project for Monitoring Deforestation in the Legal Amazon by Satellite, of the Brazilian government). According to people involved in the negotiations, the Europeans were open to cooperating.

For members of the Ministry of Agriculture and Livestock, the CAR (Rural Environmental Registry) could be used to prove the green seal of the Brazilian product. This register brings together information on permanent preservation areas, reserves and areas of rural properties. But parliamentarians from the ruralist group and representatives of the private sector say that registration is not unified throughout the country and, therefore, this would not be the appropriate certification.

There are still doubts about who will be responsible for the sustainable product certificate to be required by the European bloc—and whether it would be a Brazilian or international agency.

Based on this background information, countries will be classified by the EU at different levels of risk of deforestation and forest degradation. As shown to Sheetthe idea of ​​the Lula government is to defend that Brazil be declared a country with low risk of deforestation.

For those classified as high risk, export requirements will be even heavier. In addition to collecting information about products, it will also be necessary to present an assessment of potential deforestation, in case of non-negligible risk, a mitigation project must be carried out.

Additional adequacy requirements imply higher costs, which will be reflected in the prices of products that will enter the European market, potentially generating a loss of competitiveness against producers in other countries.

Another discussion that arises is whether the whole of Brazil will be classified in a single standard or if, as a country of continental dimensions, regional differences will be taken into account in the leveling.

Some members of Lula’s team defend that there should be a regionalization for the rules, considering the particularities of states and biomes. The theme is still undergoing discussions to be dealt with in negotiations with the European bloc.

For the president of Instituto Pensar Agropecuária (IPA) and former deputy Nilson Leitão, the government has to guarantee the country’s sovereignty in the debate, since Brazil “has legislation that authorizes partial deforestation” of each area for planting — which varies by region. The Institute brings together nearly 50 entities from the agricultural production sector.

The conditions for the EU to buy products, according to Lula’s assistants, are not considered unreasonable and are in line with the demands of the contemporary world. It is the lack of definitions about the application of these rules that generate insecurity, according to the Mdic’s foreign trade secretary.

“Many segments of the Brazilian agro understand that they already reach internationally recognized sustainability standards. The big question is to what degree this effort and this result will be recognized in this process”, he says.

“If it can be recognized, the cost of compliance [cumprimento de normas] is small. If that’s not taken into account, you have much higher costs.”

There is still no estimate of the size of the financial impact of the measure, since the sectors are not uniformly affected and there are direct and indirect costs.

Prazeres points out that there is a big question mark because it is the Europeans themselves who define the metrics, methodology and bases of the calculation. “You see yourself in a situation where the European Union is both a judge and an interested party in this process. Evidently, these barriers contribute to protecting the European producer”, he says.

She also warns that the action of the Europeans brings a risk of fragmentation in the rules of international trade. “Without a common methodology, without a common taxonomy, this will lead to a multiplication of trade barriers and increased costs.”

IMPACT OF THE CARBON TAX COLLECTION

In addition to the deforestation law, another rule that has the potential to affect the Brazilian export market is the carbon emission control mechanism at the border (Cbam). Among the sectors most affected by this point is the steel industry, as it is one of the main emitters of carbon dioxide in the world.

The “anti-pollution” charge will be effective from 2026, with the beginning of a transitional phase in October of this year. The amount will be adjusted based on the weekly carbon price in the EU. Today, the rate would be below 100 euros per ton of carbon dioxide produced, but this amount could still vary greatly in the coming years.

Marcela Carvalho, executive secretary at Camex (Chamber of Foreign Trade), draws attention to the weight of this rate in emerging markets. “The value of 83 euros per ton of carbon emitted is about 3% of the minimum wage in Germany, but it is 33% of our minimum wage. So the impact on the developed and developing world is completely different.”

At first, the rule will not consider indirect carbon emissions in the calculation — a decision that is seen as an excessive barrier to Brazilian products in the steel sector, such as steel, iron and aluminum.

For Carvalho, this measure causes an “immense disadvantage for Brazil in terms of competitiveness”, since the country has a cleaner energy matrix and could position itself better in the European market compared to other competitors.

According to people involved in the negotiations, the Europeans have recently shown themselves to be open to understanding other methodologies and to discussing the possibility of including indirect emissions in the final calculation of the Cbam.

In addition to the new environmental regulations, the EU is already recognized for being a market with access barriers of different types, especially sanitary and phytosanitary, but also technical barriers and in the area of ​​services or products.

Brazil, for example, cannot export pork to the EU because local authorities do not recognize the quality and efficiency of the Brazilian sanitary control system due to the history of foot-and-mouth disease in some states.

Some Brazilian exporters also had the sale of agricultural products affected by not being able to adapt in time for the deadline stipulated by the European bloc after the reduction of the maximum residue limits for pesticides.

NEW EU ENVIRONMENTAL RULES FOR FOREIGN TRADE

Law on commodities and products associated with deforestation

What does the measure predict? The due diligence obligation per transaction with the aim of proving that traded products are not associated with deforested areas, increasing supply chain transparency, promoting biodiversity and combating climate change, as well as respecting indigenous peoples and human rights in general.

Affected products: cattle, cocoa, coffee, palm oil, soy, rubber, wood and by-products.

Potential trade impact for Brazil: high costs for exporters to adapt, especially small and medium-sized companies; possible loss of a share of the European market to producers from other countries; and forecast of falling exports.

Frontier Carbon Adjustment Mechanism (Cbam)

What does the measure predict? Tax goods based on the greenhouse gases emitted during production. The idea is that, to reach the EU, they have to pay the same price that the bloc’s producers already pay for carbon.

Affected products: Steel, iron, aluminum, cement, fertilizers and electricity.

Potential trade impact for Brazil: Increase in export prices; high adaptation costs for companies can, in some cases, make shipments to Europe unfeasible; and eventual loss of a slice of the European market.