Addis Abeba – A recent study conducted by the Overseas Development Institute (ODI), a prominent global affairs think tank based in London, highlights the potential adverse impact of the forthcoming European Union Deforestation Regulation (EUDR) on the Ethiopian economy.
The study, titled “Avoiding a ‘Green Squeeze’: Supporting Least Developed Countries in Navigating New Greening Trade Measures,” forecasts that the EUDR, set to take effect on 30 December, 2024, will have significant economic repercussions for Ethiopia.
It predicts a decline in both exports and imports, along with a decrease in government revenue, which the authors anticipate will substantially hinder the country’s economic growth.
The ODI’s modeling exercise, designed to assess the potential economic consequences of the EUDR for Ethiopia, revealed that in the most severe scenario—a complete halt of exports to the European Union—Ethiopia could face a notable economic downturn.
Specifically, the country might experience an 18.4% decline in total exports, a 5.8% decrease in imports, a 3.3% loss in public revenue, and a 0.6% reduction in GDP.
As noted by the study’s authors, “such a scenario would likely exacerbate poverty and inequality within Ethiopia, hindering its progress toward achieving its development objectives.”
The ODI emphasizes that while the global pursuit of a more sustainable future is commendable, it is fundamentally reshaping international trade dynamics and presenting new challenges for developing economies such as Ethiopia.
The organization cautions against a potential “green squeeze” on the world’s most vulnerable nations, where well-intentioned climate-related trade policies may inadvertently impede their economic development.
Ethiopia, Africa’s largest coffee producer and exporter, where the coffee industry constitutes approximately 30 to 35% of the country’s total export revenues, serves as a prime illustration of this predicament, as highlighted by the study.
The European Union constitutes a significant market for Ethiopian coffee, absorbing over a third of the annual shipments sent abroad. However, the ODI emphasizes that novel regulations, such as the EUDR, may lead to substantial disruptions within supply chains.
Enacted by the European Parliament and Council in June 2023, the primary objective of the EUDR is to reduce carbon emissions associated with EU consumption and production of certain commodities by at least 32 million metric tons annually.
The regulation targets products, including coffee and six other commodities (timber, beef, palm oil, soy, cocoa, and rubber), placed on the EU market to be deforestation-free.
To achieve its environmental objectives, the EUDR imposes stringent requirements on coffee production, necessitating traceability and deforestation-free supply chains.
Under the new requirement, importers operating within the European Union who source agricultural commodities, including coffee, from Ethiopian exporters will be required to conduct thorough due diligence assessments during their supplier selection process.
This development poses substantial challenges for the more than six million farmers engaged in coffee cultivation nationwide, as well as for the over ten million individuals involved in the expansive coffee supply chain, encompassing farmers, intermediaries, exporters, and end consumers.
In April 2024, Addis Standard published an in-depth article elucidating the substantial implications of the EUDR for the Ethiopian coffee industry.
In an interview with Addis Standard, Gizat Worku, the general manager of the Ethiopian Coffee Exporters Association (ECEA), emphasized that Ethiopia faces a significant challenge in complying with the requirements of the EUDR.
The general manager highlighted the primary difficulty of verifying compliance among the numerous small-scale farmers engaged in coffee cultivation.
“This verification process, which is likely to involve historical satellite imagery analysis, introduces considerable complexity,” he explained.
Authorities say they are already taking steps to adapt to the changing climate and are proactively addressing the challenges posed by the new regulation.
In February 2024, the government announced that it had developed a national action plan aimed at supporting compliance with the EUDR.
According to Shafi Umer, the deputy director of the Ethiopian Coffee and Tea Authority, the national action plan aims to foster deforestation-free coffee production throughout Ethiopia.
However, the authors of the study emphasize that the timeline for implementation remains tight.
Citing the challenges faced by countries like Ethiopia, which possess fragmented coffee cultivation systems managed by smallholder farmers, Ethiopian officials have sought an extension regarding the enforcement of the EUDR.
During a high-level consultative meeting held between the Ethiopian government and representatives from the embassies of EU Member States in February 2024, Semereta Sewasew, State Minister for Finance, conveyed the government’s expectation of a favorable response from the EU regarding the requested time extension.
“This extension would provide Ethiopia with sufficient time to prepare and offer assurances to Ethiopian coffee buyers in the EU until the country aligns with the EUDR compliance measures,” she stated.
The study emphasizes that there is a significant risk of a “green squeeze” unless country-specific support packages accompany the implementation of innovative measures aimed at greening production and trade.
“While the imperative to address climate change is undeniable, the challenge lies in finding a means to balance the urgent need for climate action with economic progress,” noted the authors.
Without dedicated support, the study predicts severe potential economic effects for Ethiopia, stating even a 10% increase in compliance costs results in almost a one percent reduction in GDP, which translates to a loss of over $1 billion. AS
