The regulation is perceived by countries including Indonesia and Malaysia as a protectionist measure under the guise of environmental sustainability. There are concerns that the EUDR may lead to the exclusion of smaller producers, who make up a large part of the commodity production in developing countries.

As crucial palm oil producing countries, Indonesia and Malaysia are calling the EUDR ‘discriminatory’ and Malaysia is even looking to double palm oil exports to China in the face of EU restrictions. Still, both countries have established a task force with the European Union to implement the EUDR.

The EUDR’s regulatory requirements represent the latest effort by the EU to exert normative influence on environmental sustainability. Its effects extend beyond EU member states as its enforcement will affect third-party countries exporting commodities to the European Union.

The EUDR stipulates that commodities cannot be grown from land deforested after 2020. Palm oil producers must prove that their products are deforestation-free before selling to the European Union’s 27 member states. It also requires extensive due diligence and reporting for commodity buyers. Companies must conduct due diligence and submit reports to a relevant competent authority. The report must include the quantity, supplier, country of production and the exact geolocation coordinates of the plots of land where the commodities were sourced.

The EUDR comes amid increasing conversations about transparency and traceability. There is a growing belief that climate change mitigation cannot be achieved without regulating commodities associated with deforestation. Investors and consumers are urging companies to embrace a transformative vision of corporate responsibility along supply chains and are demanding that commodities are sourced sustainably. Verified Sourcing Areas have become a growing trend — sites where large volumes of sustainable commodities can be produced at a competitive price and scale.

However, concerns have been raised that the EUDR and related developments favour larger palm oil companies at the expense of smaller producers. Larger companies have the financial resources and technical capacity to provide traceability reports and comply with sustainability requirements. Smaller producers may be cut off from the supply chain if they cannot meet these requirements.

Smaller palm oil producers often need more resources and are typically seen as the weakest link in the supply chain. Independent smallholders are often disorganised and lack strong cooperatives to help them lift standards. Livelihood constraints can also distract smallholders from adopting global norms on environmental sustainability.

Smallholders often lack access to the best land for cultivation or the technical and logistical resources of larger palm oil companies. Lacking access to land, some independent smallholders have resorted to producing palm oil in protected areas such as forest reserves. As a result of traceability issues, palm oil mills are typically reluctant to purchase fresh fruit bunches from smallholders, further exacerbating livelihood problems for smallholders.

Smallholders have protested, expressing fears that they could be excluded from the EU market. In March 2023, several Indonesian smallholders staged protests outside the headquarters of the European Union Delegation in Jakarta. Likewise, Malaysian smallholder associations travelled to Brussels to demand changes to the EUDR. At the same time, smallholder groups such as the Palm Oil Farmers’ Union in Indonesia have supported the EUDR as an opportunity for smallholders to provide palm oil products that are free from deforestation. But these smallholders need support from the European Union.

EU authorities must now confront the EUDR’s implications. Achieving a delicate balance that satisfies all parties remains the European Union’s most challenging task. Clearly the European Union needs to reach an agreement with Indonesia and Malaysia to realise the potential positive impacts of the EUDR along the supply chain.

For Indonesia and Malaysia, the European Union is still a considerable market paying a premium for certified palm oil. Palm oil companies are unlikely to disconnect from the European market completely. Finding export destinations that can replace demand from Europe would be extremely challenging.

In order to move forward, efforts to curb deforestation require the European Union to work together with palm oil producing countries to ensure compliance requirements are achievable. The European Union could also work towards recognising other certification schemes like the Malaysian Sustainable Palm Oil certification scheme.

There also need to be more significant efforts made to bring together relevant stakeholders including local governments, civil society and businesses to assist smallholders. One example is the Roundtable on Sustainable Palm Oil jurisdictional certification processes in Sabah and Seruyan district in Central Kalimantan, Indonesia, which pulls together resources to build smallholders’ technical capacity and address inequities in price and land access.

Institutionalising environmental sustainability requires a receptive audience who can commit adequate resources. The European Union could explore ways to incentivise local multi-stakeholder approaches that support smallholders through training to raise awareness of sustainable practices. Palm oil buyers in Europe also need to do more to support and incentivise improvements as a strategy involving ‘sticks without carrots’ will not work in the long term.

Eugene Mark is a PhD Candidate in the S Rajaratnam School of International Studies, Nanyang Technological University, Singapore.