Federal environment laws don't apply to logging in Victoria's Central Highlands, home to threatened possums and gliders, the Federal Court has ruled.
VicForests was last year found to have failed to comply with a state and federal regional forest agreement relating to 66 native forest coupes and to the detriment of the greater glider and Leadbeater's possum populations.
As a result, the Victorian government-owned timber company's operations were not deemed exempt from federal environment laws.
VicForests on Monday succeeded in its appeal against the original Federal Court judgment.
Appeal Justices Jayne Jagot, John Griffiths and Sarah Derrington determined VicForests' logging remained exempt from federal environment laws.
They said the original judge erred in finding forestry operations needed to comply with regional forest agreements to remain exempt from the Environment Protection and Biodiversity Conservation Act.
Other VicForests appeal grounds were dismissed.
Environment group Friends of Leadbeater's Possum, which brought the original case, flagged a possible appeal against the latest ruling to the High Court.
"Logging in native forests is killing threatened species and destroying their critical habitat. Against this background, this morning's judgment is very disappointing," the group's president Steve Meacher said.
Wilderness Society spokeswoman Amelia Young said the ruling highlighted the need to reform national environment laws.
The greater glider is considered vulnerable and Leadbeater's possum critically endangered.
The original judgment in May 2020 prompted hotel and hardware giant Bunnings to stop stocking VicForests timber.
At the time, Federal Justice Debra Mortimer said VicForests had failed to avoid serious or irreversible damage in areas of the Central Highlands where greater gliders were found.
The agency also failed to protect Leadbeater possum habitat in an area near Warburton, the judge said.
She did not have confidence in VicForests' ability to change its operations to protect species including the greater glider and the Leadbeater's possum.
Australian Associated Press