The European Union is becoming a world leader in regulation. On a variety of key policy issues ranging from artificial intelligence to health to housing, Brussels finds itself setting new regulatory precedents as the rest of the world watches on and, often, follows in its footsteps. Where the US has historically set the agenda for the rest of the world to follow, the EU now sometimes assumes that role.
But with great power comes great responsibility. Writing regulation on nuanced and complex policy issues is not easy. There is a risk of the EU rushing into things before they are ready or they have all the information, so tempting is the desire to be able to announce ‘world-first’ legislation. That policymaking strategy is ill-advised, to say the least. When regulation goes awry, it is businesses and citizens who will suffer for years to come, as the rest of the world progresses while Europe sits trapped in unnecessary, counter-productive red tape.
A recent piece of environmental legislation carries all the warning signs of regulation being launched before it is ready. As part of a broader sustainability push, 30 December 2024 will see the first stage of the implementation of the EU Deforestation Regulation (EUDR). The EUDR is a set of rules designed to curb deforestation by compelling companies to cleanse their supply chains of deforesting ingredients. Unfortunately, it is a poorly designed regulation which is far from ready to become law and will have serious consequences.
Tackling deforestation is worthwhile, and some additional regulation may well be part of the answer to achieving that, but the EUDR adopts a clumsy approach. As well as deforestation, it aims to tackle greenhouse gas emissions and biodiversity loss in one fell swoop by effectively requiring companies who want to sell their products in Europe to prove, to the EU’s satisfaction, that every part of their supply chain is sustainable.
Proving things to the EU in this way is not easy. It requires reams of paperwork and thousands of manhours. Compliance with regulations is a normal part of business and a cost companies and entrepreneurs looking to expand are familiar with, but it is incumbent on policymakers to limit those costs wherever possible. The EUDR takes those costs to extreme levels because it demands an absurd level of detail in compliance. A new study suggests just a handful of ingredients will carry EUDR compliance costs of up to $1.5 billion.
The study, from researchers at GlobalData, looked into the practical requirements and costs of companies complying with the EUDR if their supply chains contain rubber or palm oil. By adding up costs for tracing systems required to trace ingredients back to their origins, along with legal support and other administrative costs, they reached their whopping total figure of $1.5 billion. Some, if not all, of those costs will likely be passed onto consumers.
With millions of Europeans already suffering with financial difficulties thanks to the cost of living, artificially inflating prices in this way is unwise in the extreme, especially since the EUDR is likely to hit countless everyday essentials like food and toiletries. According to the WWF, over half of packaged products on shop shelves contain palm oil, which is one of the key ingredients subject to new scrutiny under the EUDR. If every company which uses palm oil in its products has to invest new resources in compliance, it soon becomes clear how the total cost of the regulation can be so extraordinarily high.
Worst of all, the EUDR may not even be necessary to stop deforestation or other undesirable environmental phenomena. Thanks to substantial consumer demand, many industries are already investing in sustainability of their own accord, making costly new regulations unnecessary. In the case of palm oil, thanks to certification schemes coming out of palm oil producing countries like Malaysia (which are recognised by western economies including the UK) over 90% of the palm oil imported into Europe is already certified as sustainable, making the EUDR redundant and its costs pointless. Unsurprisingly, the EUDR has strained EU relations with Malaysia almost to breaking point.
All of this is avoidable. Rather than pursuing ‘world-first’ regulations at all costs, the EU would be better off working directly with companies, and even regulators, in places like Malaysia to work out a common system which lowers barriers to trade and enterprise, rather than erecting new obstacles and lumping costs onto businesses and consumers.
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