The EU Green Deal is good for coffee – but who will pay?

EU Green Deal
  • The EU Green Deal aims to make Europe climate-neutral by 2050
  • Coffee traders and roasters are expected to collect detailed information about the farms they source from
  • Inflationary pressure is adding to costs of production and squeezing roasters’ profit margins

THE EU COMMISSION’S ambitious set of actions to become a global leader in the battle against climate change, known as the European Green Deal (EGD), are on the face of it, nothing but positive.

Launched in 2019, the EGD’s overriding intention is to make Europe climate-neutral by 2050. Under this target are a number of initiatives, including the Farm to Fork Strategy, the Biodiversity Strategy for 2030, and the Circular Economy Action Plan.

The aim is to lower the impact of environmental issues such as climate change, a loss of biodiversity, ozone depletion, water pollution, and waste production.

Europe is responsible for nearly a third of the world’s gas emissions that deplete the ozone, while more than half of all ecosystems in Europe are presented with threats from management problems and stresses.

However, while addressing a number of crucial problems head on, the EGD has also thrown up some challenges for those within the coffee sector, particularly for traders.

For one, it has made purchasing requirements stricter. For example, EU demands for lower maximum residue limits (MRLs) means exporting countries must now adjust their practices to meet these standards – or traders won’t be able to buy from them.

Under the EU’s plans, there is also a ban on products linked to deforestation, which includes coffees from certain regions.

As part of this, traders are expected to collect detailed information, including geographical coordinates about the farm where the coffee is produced to prove it complies with the regulation’s requirements.

Failure to demonstrate that the coffee is “deforestation-free” means they will be barred from placing them anywhere inside the European single market.

The EU Green Deal aims to make Europe climate-neutral by 2050

Who pays?

Coffee traders and roasters around the world are already dealing with a “perfect storm” that has seen arabica prices skyrocket.

Only last month did the C price drop below $2 per pound for the first time in almost a year. But a hangover of logistical problems from Covid-19 and the impact of the conflict in Ukraine mean inflationary pressure remains a key issue.

As a result, the introduction of the EU Green Deal, while vital to tackling the impending climate crisis, has come at an inopportune time for traders and roasters.

This is because the associated costs of determining traceability of products and ensuring adequate auditing of processes are high.

Although the question of who will be responsible for these costs is still very much being debated, it’s unlikely to be passed onto the producers themselves, who are already facing costs involved in adjusting production to meet new standards.

The obvious solution is to pass the higher costs onto consumers. But many believe that this is likely to push them towards cheaper alternatives, such as lower quality robusta.

“It’s up to the brands that sell coffee to make the more sustainable cup of coffee the default option, and to get consumers to pay a certain premium,” writes Thijs Geijer, a senior sector economist at ING. 

“In that sense the premiumisation of coffee in developed markets is a favourable trend, but getting that premium will be a tougher nut to crack in growing coffee markets where affordability is of major importance.”

It’s important, therefore, for the EU not to rely solely on traders and roasters to manage climate risks in the supply chain.

As Richard Klein points out in a recent article, traders would likely cancel contracts or sell assets in an effort to reduce their own exposure, which, in turn, would mean smallholder farmers are the ones who ultimately lose out.

Instead, it needs collaboration from everyone, including governments and NGOs.

That said, if the coffee industry, particularly the specialty side, is to stick to its promises of protecting farmers’ livelihoods then it must find a way to incorporate the EDG into its long-term plans.

Incorporating sustainability into their businesses to ensure that coffee farmers can continue to grow high-quality coffee must take priority. Otherwise, it will be the producers who pay.