According to the Secretary-General of the United Nations, the planet is heading for “climate hell”. Reducing deforestation is a central issue. Trade regulations around the world are already changing in this regard. Compliance with certain environmental standards is – and will increasingly become – mandatory for international trade. Argentina needs to increase its exports and to do so will have to adapt. How can the country turn these climate challenges into opportunities for economic growth?
Three reasons why Argentina should care about climate change
Argentina is a middle-income country that has been stagnant for more than a decade. It has serious difficulties in reducing poverty and solving structural problems, such as the creation of genuine employment. This occurs in the current scenario of the fight against climate change, whose main cause is the emission of greenhouse gasses (GHG) that pollute the atmosphere. Argentina is responsible for less than 1% of global GHG emissions. So, a legitimate question arises: why should the country be concerned about climate change when it is going through one of the worst socio-economic crises in its history?
1 Climate change threatens our survival
The first reason is strictly environmental: climate change threatens the survival of humanity. Or, at least, life on Earth as we know it. That reason should be enough for all countries to contribute according to their responsibilities to mitigate the impacts of climate change. However, we know that this reason is often not as persuasive as it should be. Thus, it is necessary to provide other types of reasons, economic reasons in particular. Let’s do it.
2 Climate change affects Argentina's export and growth capacity
On the one hand, the still primarized composition of Argentina’s exports makes the country highly vulnerable to extreme weather events such as droughts and floods, which will increase in frequency and intensity (1). In other words, the impacts of climate change affect its capacity to export and accumulate foreign exchange reserves that are key to sustain growth processes.
3 Environmental regulations for international trade and access to financing are becoming more commonplace
On the other hand, environmental regulations for international trade and access to financing in global markets are increasingly the norm. This is what this article is about: such regulations are a challenge and an opportunity for Argentina’s international insertion. Compliance with these new environmental standards must be a driver and not an obstacle to development. Doing so is not only desirable but necessary for the Argentine economy.
New trade regulations are part of the fight against climate change
Any regulation on international trade – not only those linked to achieving climate commitments – implies rearrangements, both for the country that introduced it and for its trading partners. Problems in terms of competitiveness and compliance with the new standards. Ultimately, the trade relationship is at stake.
This is magnified when regulation is implemented not by one economy in isolation but by an entire economic and trading bloc, such as the European Union (EU), which accounts for 15% of world GDP and 14% of world goods trade.
Faced with this scenario, discussing the ultimate purpose of the new regulations is appealing. This has prompted the debate on whether these regulations are new forms of protectionism. But deepening that debate is not the purpose of this article. With limited human and technological resources, entering into this discussion is not the best way to allocate efforts or to seize Argentina’s institutional advantages. Even less so, when the current situation of the planet is approaching points of no return if the necessary measures are not taken (IPCC, 2023). We are interested in how international trade regulations linked to climate change are a central issue for the present and the future.
European Union environmental regulations
New environmental standards are here to stay and change the way the world trades. The Green Deal is the framework where the EU outlined the guidelines to achieve carbon neutrality by 2050 (2). Any country that wants to export to the EU will have to adapt to the new standards.
These regulations have taken various forms, but there is one that is highly relevant for countries exporting raw materials and agricultural products, such as Argentina. This is the Deforestation-Free Products Regulation (DFPR) (3) . As its name suggests, it aims to influence the value chain of certain products identified as drivers of deforestation, restricting their access to the EU if they do not meet certain conditions. Argentina’s exposure to the regulation is considerable, but the country has institutions and initiatives in place, both public and private, with the ability to respond: The glass is half full if Argentina capitalizes on what is already underway.
Deforestation is one of the main issues to be addressed
The human action of deforestation refers to the removal or destruction of forest cover, generally for the purpose of using the land for some productive activity. It is a pressing problem for the planet, for two main reasons.
On the one hand, halting deforestation is essential to reduce GHG emissions and counteract the effects of climate change. In 2019, approximately 22% of GHG emissions came from agriculture, forestry and other land uses. In addition, almost half of these emissions are due to deforestation, which has a direct connection to our consumption patterns.
On the other hand, forests are home to more than 80% of terrestrial species of plants and animals, which underlines the importance of their preservation (UN, 2023). Accelerated biodiversity loss, along with land degradation and species extinction, pose a significant threat to both the planet and communities, especially those that depend on forests for their livelihoods and well-being. More than half of the global GDP depends on ecosystem services, in particular those provided by forests (FAO, 2022). These services, ranging from water regulation to biodiversity conservation, safeguarding cultural identity and GHG sequestration, are crucial for environmental stability and human well-being.
How has deforestation evolved over the last 20 years?
According to Global Forest Watch, due to deforestation, intensive agriculture, fires and conversion of agricultural land, the world has lost a total of 459 million hectares of forest area between 2001 and 2022, about 12% of the cover that existed in 2000.
Five countries (Russia, Brazil, Canada, the United States, and Indonesia) account for almost 60% of the world’s accumulated deforestation in this period. Argentina ranks 12th, with approximately 6.5 million hectares deforested. In addition, the Parque Chaqueño is the second largest deforestation hotspot in South America after the Amazon (MAyDS, 2020).
The EU Deforestation-Free Products Regulation
The DFPR arises in a context of urgency to reduce deforestation effectively and on a global scale. This has been crystallized in commitments made by world leaders in different frameworks such as the United Nations Framework Convention on Climate Change (UNFCCC), the United Nations Convention on Biological Diversity (UNCBD) and the United Nations Convention to Combat Desertification (UNCCD).
Regulations such as the DFPR become highly relevant. Up to now, efforts to reduce deforestation have focused on providing financial incentives (4). The DFPR represents a paradigm shift because it will work more like a stick than as a carrot.
The raw materials and products targeted by the DFPR identified as drivers of deforestation are wood, soy, bovine cattle, cocoa, coffee, palm oil, and rubber. Also, certain derived products such as leather, chocolate, tyres, and furniture.
Summary of the main points of the DFPR
Entry into full force and effect | January 2025 |
Scope | Import, commercialization in the EU market and export of products which contain, or have been fed or processed using cattle, cocoa, coffee, palm oil, rubber, soy, and wood. |
Conditions for entry of products into the EU | Be deforestation-free after December 31, 2020: covers deforestation (conversion of forests to agricultural use) and forest degradation (structural changes in forest cover) (5) |
Have been produced following the legislation of the producing country. | |
Be supported by a due diligence process that includes: 1) information gathering, 2) risk assessment measures for non-compliance, 3) risk reduction measures, and 4) a due diligence statement. | |
Benchmarking system | Classification of countries into risk levels (high, low or standard) based on: 1) deforestation and forest degradation; 2) expansion of agricultural land associated with regulated commodities; and 3) production trends of regulated commodities and products. |
Risk level determines the thoroughness of the information required. |
Source: Fundar based on EU Regulation 2023/1115.
Conditions for the entry of products into the EU
To enter the EU market, they must meet three conditions that present novel regulatory particularities and major challenges for exporting countries:
Products must have been produced on land that has not been deforested after 31 December 2020 to be considered deforestation-free. This “retroactive” application was intended to avoid intensification of deforestation in the period before entry into full force and effect, set for 2025.
The regulation differentiates between the concept of “deforestation-free” and “legal compliance”, which is the verification that all relevant rules of the producing country were met. Thus, the EU standard prevents the entry of products, even if deforestation is legally authorized in the producing country.
The due diligence process falls on importers and includes gathering information that demonstrates: compliance with the requirements in a conclusive and verifiable manner (7), the assessment of the risk that the materials and products do not conform to the requirements of the standard, the adoption of measures to reduce the identified risk (8) and the submission of the due diligence statement.
However, several key aspects associated with the due diligence process remain without precise definitions. These include the mechanisms to be considered reliable, the level of traceability required and the attention to the particularities of each segment in the value chain.
The regulation establishes a system for benchmarking the risk level of each country, which may be high, low or standard, and will determine the degree of complexity and thoroughness with which the importer must carry out the due diligence process.
Initially, all countries will start with a standard level of risk, but then each country will be categorized as high, standard or low risk. When low, operators may apply a simplified procedure; in case of high, more in-depth controls must be performed.
The eventual costs of these controls as well as their format (unified at the EU level or differentiated among the countries of the bloc, and unified at the level of the country of origin or regional level) are items on which there is still uncertainty and are rightly being raised to postpone the classification, as has recently transpired (Bounds et al., 2024).
Finally, the regulation incorporates the legal provision to extend the scope to other products, such as corn or biofuels, and to other ecosystems in addition to forests, such as grasslands, peatlands and wetlands.
What is the scope of DFPR in commercial terms?
What are the products targeted?
In 2022, EU imports of DFPR-targeted products were USD 136 billion (4.3% of the total). When disaggregated by type of raw material (and derived products), wood is the most significant with a total of USD 57 billion, representing 42% of imports reached by the EU DFPR. In order of importance, this is followed by rubber, soy, coffee, palm oil, cocoa and bovine cattle.
Which countries have the highest exposure to the DFPR?
China leads the ranking of EU supplier economies with the highest export value potentially affected by the DFPR with around USD 23 billion (17.1% of EU imports reached). It is followed by Brazil (14.0%), the United States (7.1%), Indonesia (6.2%), the United Kingdom (5.1%), Malaysia (3.9%) and Turkey (3.4%). Argentina ranks 8th (3.4%), with approximately USD 4,645 million potentially affected by the DFPR (mainly soy and beef cattle), representing 5% of its annual exports of goods.
In terms of products, China is the main supplier of wood and rubber, accounting for 31% and 24% of EU imports of these products, respectively. Brazil is the leading supplier of soy, coffee and beef cattle, accounting for 46%, 34% and 21% of imports of these products, respectively. As for palm oil, Indonesia is the main supplier to the EU (42%), while in the case of cocoa, Côte d’Ivoire ranks first (40%).
Argentina stands out as the second most important supplier of soy and the third most important supplier of beef cattle, accounting for about 20% and 16% of EU imports of these products, respectively.
Can the DFPR significantly reduce global deforestation?
Answering this question would require assessing how much deforestation occurs and how the converted land is used in each case. However, a first approximation suggests that the potential is considerable since various of the economies in Figure 3 are also those that have deforested the most between 2001 and 2022, as we saw in Figure 1: 6 of the 10 most exposed to DFPR rank within the top 12 in terms of cumulative deforestation (Brazil, United States, Indonesia, China, Malaysia, and Argentina).
How is Argentina prepared?
To comply with regulations and continue exporting these products to the EU, Argentina will need to account for how and where the goods being exported were produced and, in particular, ensure that no deforestation occurred on those lands. This requires:
- A traceability system, which allows the origin of raw materials and products to be known and tracked throughout the entire value chain, in this case, from the field to the port.
- Integrating that information with available data on deforestation and land use change.
Ability to guarantee product traceability
The public sector has information systems for soy commercialization at the Federal Administration of Public Revenue (AFIP) and for livestock at the National Agrifood Health and Quality Service (SENASA).
Since 2019, the private sector of the soy chain has been developing the ViSeC initiative (Sectorial Vision of the Gran Chaco Argentino), a Monitoring, Reporting and Verification system to follow the traceability of soy and their by-products, which was recently joined by the beef value chain. The objective is that ViSec will serve to ensure a deforestation-free origin. In the last quarter of 2023, as part of the ViSec pilot tests, Argentina sent three shipments of geo-referenced soy guaranteeing its deforestation-free origin. The result was satisfactory.
Availability of land use change information
Argentina has a National Forest Law, enacted in 2007, that introduced two key instruments:
- the mandate for the subnational governments to carry out a Native Forest Territorial Ordinance in each of their territories.
- the creation of the National Fund for the Enrichment and Conservation of Native Forests. This Fund was created with the objectives of strengthening the Local Enforcement Authorities and the National Enforcement Authority, and financially supporting forest holders in the implementation of sustainable forest management schemes.
In terms of monitoring, several state instruments have been implemented, such as the Environmental Information Center, the Integrated Environmental Information System, the National Native Forest Monitoring System of the Argentine Republic, and an Early Deforestation Warning System to prevent illegal deforestation and control legal deforestation.
These institutional and regulatory milestones, as well as the private sector initiative, are key to understanding the situation of Argentina: the glass is half full if the country capitalizes on what is already underway.
While these policies contribute to the viability of compliance with the standard, they also point in the right direction.
In summary, what are the challenges and opportunities for Argentina in the face of this new regulation?
According to the Secretary-General of the United Nations, the planet is heading for “climate hell”. Reducing deforestation is key to combating climate change and contributing to the preservation of biodiversity and the sustainability of communities that are highly dependent on natural ecosystems.
Fulfilling these objectives will not be optional, neither for the world nor for those who want to trade within it. But its fulfillment can also be aligned with creating the growth conditions that Argentina urgently needs. If Argentina wants to grow, it needs to increase its exports. To do so, it will be necessary to comply with international standards, of which the EU DFPR is just one example. Similar regulations are under discussion in other economies of great relevance in the world market, such as the United States.
The way forward is to make a virtue out of necessity: building local capacities and infrastructure to ensure compliance with the new standards can help consolidate Argentina’s position in international markets, comply with its climate and environmental commitments, and improve production practices in key sectors, such as agriculture and livestock. Agricultural activities and land use change account for 39% of GHG emissions, so the transformation of the sector can contribute to the achievement of both goals.
To this end, Argentina needs to:
- support the existing instruments to fight deforestation, such as the Forestry Law and the control and monitoring systems,
- endorse and complement initiatives developed by the private sector,
- strengthen coordination between national and subnational government agencies with an impact on the value chains.
Argentina has to take advantage of what is already underway and finish filling up the glass.
References
Bounds A; A Hancock A; Beattie A. (2024, March 8). EU delays stricter rules on imports from deforested areas. Financial Times.
FAO (2022). The State of the World’s Forests 2022. Forest pathways towards green recovery and building inclusive, resilient and sustainable economies. Rome, FAO.
IPCC (2023). Summary for Policymakers. In: Climate Change 2023: Synthesis Report. Contribution of Working Groups I, II and III to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change [Core Writing Team, H. Lee and J. Romero (eds.)]. IPCC, Geneva, Switzerland, pp. 1-34.
MAyDS (Ministerio de Ambiente y Desarrollo Sostenible de la Nación) (2020). Causas e impactos de la deforestación de los bosques nativos de Argentina y propuestas de desarrollo alternativas. Buenos Aires, Argentina: Dirección Nacional de Bosques, Ministerio de Ambiente y Desarrollo Sostenible de la Nación.
Naciones Unidas (2023). El Informe sobre los Objetivos de Desarrollo Sostenible 2023: Edición especial. Por un plan de rescate para las personas y el planeta. Online ISSN:2521-690.
World Bank (2022). Argentina Country Climate and Development Report. World Bank.
Notes
(1) It is estimated that by 2050 Argentina could lose up to 4% of GDP due to droughts and that floods cause annual losses of up to USD 1.4 billion in assets (World Bank, 2022).
(2) Carbon neutrality implies achieving a net result of zero GHG emissions, that is, absorbing the same amount of emitted gasses.
(3) Also known as European Union Deforestation Regulation (EUDR).
(4) An example of these policies is the REDD+ mechanism, which stands for “reducing emissions from deforestation and forest degradation”.
(5) By including both concepts, this definition broadly follows that developed by FAO. While the first concept implies the elimination of the forest to make room for something else in its place, the second refers not to the reduction of its area, but to the deterioration in terms of soil functioning and the loss of species of flora and fauna.
(6) The notion of due diligence arises from the norms of responsible business conduct and is a widespread concept in terms of respect for human rights. It implies that companies have to identify, prevent, mitigate and account for negative consequences directly related to their operations or services provided by their business relationships. An example is the verification of compliance with child labour standards in their value chains, very present in major multinational apparel and footwear companies.
(7) Includes the description and quantity of products, country of production, geolocation of all plots of land where raw materials were produced, as well as the date or time interval of production, among other data.
(8) These measures may consist of requesting additional information, conducting independent studies or audits and supporting suppliers to comply with the standard.
Suggested citation
Arias Mahiques, M. V.; de la Vega, P.; Park, L. and Villafañe, M. F. (2024). Trade challenges and opportunities in a world fighting climate change and deforestation. Fundar.
