The EU's legislative agenda in 2022 was heavily focused on sustainability, human rights and environment issues, and the initiatives proposed or adopted in this regard are likely to significantly impact trade and companies' supply chain operations in the coming years. Moreover, in several of these areas, there has been some alignment with the UK, which has proposed similar instruments, with certain differences, however, meaning that companies may have to adapt to different regulatory requirements for each jurisdiction.
On 13 December 2022, the Council of the EU and the European Parliament reached a provisional agreement on a Regulation establishing a carbon border adjustment mechanism (CBAM), following a 2021 proposal by the Commission. The CBAM aims to address the problem of "carbon leakage" i.e. the situation whereby, due to costs related to the EU's climate policies, companies move their carbon-intensive production abroad to take advantage of laxer standards. The CBAM, which would become fully operational in January 2026, will require EU importers to buy "carbon certificates" reflecting the carbon price that would have been paid for the products under the EU's carbon pricing rules, i.e. the EU Emissions Trading System (ETS). Importantly, as the UK is not among the countries that are currently excluded from the CBAM, the introduction of this measure could significantly affect UK exports to the EU, with UK exports of iron and steel and aluminium being viewed as particularly vulnerable.
Another important landmark of 2022 was the EU institutions reaching an agreement on a Regulation on deforestation-free products on 6 December 2022, following a proposal by the Commission in November of the previous year. This Regulation aims at curbing deforestation and forest degradation driven by EU consumption and production by prohibiting the placing or making available on the EU market, or the export therefrom, of certain commodities unless they are: (i) deforestation-free; (ii) produced in accordance with the relevant legislation of the country of production; and (iii) covered by a due diligence statement. The EU's Regulation appears at this stage to go further than the UK's 2021 Environment Act, which prohibits the commercial use in the UK of certain commodities unless local laws were complied with in the country of production, although the UK secondary regulations which are meant to set out in further detail the companies' obligations are still to come. If the UK chooses not to align further with the EU Regulation, this could make it more complicated for companies to ensure compliance with both jurisdictions.
Finally, in 2022, the European Commission also issued two important and long-awaited proposals on corporate sustainability due diligence (see our article on the proposal here) and a ban on goods made with forced labor (see our blog post on the proposal here). Both instruments are still at the stage of negotiations among the EU institutions, which are likely to be completed in the course of 2023. Importantly, both instruments entail obligations not only for EU but also for non-EU companies active in the EU, to the extent that the latter meet certain turnover thresholds (under the Corporate Sustainability Due Diligence Directive) or sell products on the EU market or export them from the EU (as regards the forced labor ban). While certain aspects of the two measures may still be amended during the negotiations, it is certain that both instruments have the potential to significantly impact the supply chains of EU and UK companies after their entry into force.
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