BDI on the European Climate Law

POSITION | CLIMATE POLICY | EU CLIMATE LAW

BDI on the European Climate Law Bringing climate and industry policy together.

29. April 2020

Three things Industry wants to see in the European Climate Law With the "European Green Deal", the new European Commission has placed the issues of climate protection, ecology and sustainability at the centre of its political programme. Among other things, climate neutrality is to be achieved by the middle of the century, an investment plan for a sustainable Europe is to be launched, "green" investments are to be promoted, recycling management is to be completed and a zero-pollutant action plan is to be developed. The European Commission wants to take international leadership in climate protection and sustainability. The "Green Deal" aims at a fundamental transformation of the economy and society and should enable the EU to become climate neutral by 2050. However, there is currently no generally accepted understanding of how exactly climate neutrality is to be defined.

In the view of the BDI, it is right that climate and environmental protection as elements of sustainability have a high political priority in Europe. However, a one-sided approach must not be taken, especially not within and after a pandemic and economic shutdown as in the first half of 2020. Europe's future welfare does not depend solely on the ecological goals of the Green Deal. Such a comprehensive transformation will only succeed if it is based equally on all three pillars of sustainability: environmental, economic and social. The goals we are striving for in climate and environmental protection necessitate a competitive industry. Because without it there can be no innovative technological solutions. A competitive and highly innovative European industry is therefore the key to truly sustainable development – and only companies that earn money can help with realising the huge investments in climate and environmental protection.

The Covid-19-crisis has not yet peaked when this response was prepared. It is unclear how long and to what extent the EU member states will maintain significant interference in public life, commerce and industry. Many of the economic, fiscal and social consequences of the pandemic have not yet been identified and are far from being overcome. However, it is already clear today that this will be one of the most severe crises in recent decades. It is therefore important that the effects of the crisis are initially known and prepared analytically. These effects must be completely taken into account in the impact assessment.

Philip Nuyken | Energy and Climate Policy | T: +49 30 2028-1516 | p.nuyken@bdi.eu | www.bdi.eu

BDI on the European Climate Law

With a European Climate Law (ECL) the EU Commission has to bring back entrepreneurial planning and investment security. To do so it needs to set realistic and feasible objectives that are in line with the holistic approach of the Green Deal. The German Industry as a major supplier of climate-friendly products and systems has an interest in a robust framework that brings climate and industry policy together. Therefore, the BDI´s objective of this paper is to define the three key requirements for a European Climate Law: 1. Translating the three pillars of the European Green Deal into equal objectives within a European Law 2. Establishing a definition on climate neutrality that allows flexibility until 2050 to speed up mitigation efforts 3. Aiming for European industry´s contribution of at least 20 percent to the European GDP which could make the Green Deal Europe´s new Growth Strategy In addition, today it has become even more important than ever to evaluate midterm-targets as well as pathways towards climate neutrality under changing conditions. This also includes the investment potential of different stakeholders as well as the incentivising instruments needed. Under the circumstances of a global pandemic timelines, measures and expectations must be discussed.

This will be fleshed out in due course.

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BDI on the European Climate Law

Contents Three things Industry wants to see in the European Climate Law ................................................ 1 Translating the three pillars of the European Green Deal into equal objectives within a European Law........................................................................................................................................................ 4 Establishing a definition on climate neutrality that allows flexibility until 2050 to speed up mitigation efforts ................................................................................................................................. 6 Efficiency and fuel switch are two major pillars of domestic reductions ............................................... 6 Natural and technical sinks are necessary to bind immitigable emissions ........................................... 7 Climate protection must be addressed internationally .......................................................................... 7 Aiming for European industry´s contribution of at least 20 percent to the European GDP and making the Green Deal Europe´s new Growth Strategy ................................................................. 8 Adjusting the timeline to the investment potential in economically tense times .................................... 9 In times of need trust is the best currency ............................................................................................ 9 Building a robust framework for higher competitiveness and climate protection ................................ 10 Annex.................................................................................................................................................. 12 Impressum ......................................................................................................................................... 13

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BDI on the European Climate Law

Translating the three pillars of the European Green Deal into equal objectives within a European Law 2020 is the start of a long discussion process of how the European Green Deal can successfully provide a robust framework for unique transformation process. BDI sees itself as a constructive force within the political debate combining climate policy with other important areas such as industry, energy, transportation, housing, competition, trade, environment and financial policies. The European Green Deal set up by the European Commission consists of three pillars: Ecology, economy, social affairs.1 In times of a global pandemic and economic crisis that exceeds the 2009 collapse by far uniting the these three pillars is essential for survival of the European Union as a leading power in the world.

Therefore, BDI stresses that the purpose of a European Climate Law should be defined by all three pillars and therefore become equal within the European Climate Law: ▪

Ecological pillar: net greenhouse gas emissions (GHG) neutrality

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Economical pillar: modern resource-efficient and competitive economy by maintaining industrial value chains

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Social pillar: just and inclusive transition

For a successful transition towards a net GHG emissions neutral society it needs strong European industries with value chains ensuring a climate friendly production and the ability to create a just and inclusive transition. These are at stake. Shutdowns and the partly breakdown of international value chains hit European industries hard. During March and April 2020 revenues collapsed and with it a large part of its investment potential. In order to get back on track, heading towards a 2050 target, sustaining and enhancing European industries needs a quantified objective that will guide European and national industrial policies such as an ecological objective does for climate policy.

The Federation of German Industries (BDI) commits to the Paris Agreements and its goals of global net zero emissions in the second half of the century. BDI also acknowledges the results of the IPCC Special Report on the impacts of global warming of 1.5 °C above pre-industrial levels. Responding to this the European Commission expressed the aim to be the first climate neutral continent by 2050.

Therefore, the whole society needs to take an active part of this radical transformation process. BDI recognizes its responsibility to take action but needs the support of a European and national integrated framework that ensures competitiveness and incentivizes desperately needed investments. Otherwise such a transformation will fail before it even has started.

The BDI study "Climate Paths for Germany" (2018) 2 has shown that, under strict assumptions, additional investments of 2.300 billion Euros in Germany alone would be necessary to achieve a 95-percentage target by 2050. The European Commission even expects additional annual green investments of 260 billion Euros3 throughout the EU. These investments must be borne by citizens, companies and the public sector. Even in good years, this is an enormous effort.

In terms of climate policy, the pandemic and economic crisis make it more important than ever to tackle the challenge of restructuring our economy as wisely as possible. The corona pandemic means that

COM(2019) 640 final: “It is a new growth strategy that aims to transform the EU into a fair and prosperous society, with a modern, resource-efficient and competitive economy where there are no net emissions of greenhouse gases in 2050 and where economic growth is decoupled from resource use.”

2 BDI (2018): “Klimapfade für Deutschland: https://bdi.eu/publikation/news/klimapfade-fuer-deutschland/ 3 EU Commission, Presentation of the European Green Deal on Dec. 11th 2019: https://ec.europa.eu/commission/presscorner/detail/e%20n/ip_19_6691 1

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BDI on the European Climate Law

government, businesses and citizens have less money available for investment. But the need for green investment remains. The political task is therefore to use fewer public funds to properly stimulate green investments within the regular investment cycle and not to devalue them politically too early – in other words, to make climate policy more intelligent and efficient.

Therefore, BDI welcomes the Commission´s wholistic approach called European Green Deal. Establishing the three pillars equally within a European Climate Law is a crucial part of this approach. With this the European Climate Law can live up to the promises made by the Commission: “[The European Climate Law] aims to ensure an ambitious and just EU climate policy in view of protecting the EU’s welfare, prosperity, health, eco-systems and biodiversity against the threat of anthropogenic climate change as set out in the Communication on the European Green Deal.

The [European Climate Law also] aims to lay down fundamental elements that guide all policies, such as the wellbeing of citizens, the prosperity of society, the competitiveness of the economy, energy efficiency and security, health, protection of vulnerable consumers, fairness and solidarity across society and regions, and a science-based approach.”4

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Roadmap Climate Law: https://ec.europa.eu/info/law/better-regulation/initiatives/ares-2020-119545_en

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BDI on the European Climate Law

Establishing a definition on climate neutrality that allows flexibility until 2050 to speed up mitigation efforts In 2018 BDI has launched its broad climate study on pathways until 2050 (“Climate Path for Germany”).

Part of this study has been a 95 percent path for Germany which comes close to zero emissions.

95 percent GHG reduction would push the boundaries of foreseeable technical feasibility and current social acceptance. Such a reduction (three quarters more than the 80 % path) requires practically zero emissions for most sectors of the German economy. In addition to more or less phasing out all fossil fuels5, this would for example mean importing renewable fuels (power-to-liquid/gas), the selective use of currently unpopular technologies such as carbon capture and storage (CCS), and even reducing emissions from livestock. Successful implementation seems only imaginable if most other countries pursue similarly high ambitions. In a best-case scenario about 2.300 billion Euros in additional investments are required – only for Germany – for the 95 percent path next to further conditions (cf. BDI “Klimapfade für Deutschland”6). These additional investments are needed for a climate-friendly production, energy efficiency, research and development and huge private efforts. Therefore, it is crucial that climate policy provides a framework that paves a cost-efficient for a transition. Consequently, any definition of GHG neutrality has to be broad and include three major aspects: domestic mitigation, sinks and international mitigation.

Until 2020 there has not been a common understanding on the definition of the central term “GHG neutrality” yet. But without clear and commonly shared definition there cannot be any robust political framework. Due to this BDI suggests for the purpose of the European Climate Law the following definitions: ▪

“European net greenhouse gas neutrality” means a balance between greenhouse gas emissions covered by the European Climate Law and removals by natural and technical sinks of greenhouse gases. For the European Union this also includes international mitigation until 2050 to speed up global transformation, based on a robust Article 6 agreement in the Paris Rulebook. These international mitigations (except the use of sinks) will constantly be reduced after 2050 aiming for global net greenhouse gas emissions neutrality as soon as possible in the second half of this century.

Efficiency and fuel switch are two major pillars of domestic reductions The European Union has committed itself to a 40 percent reduction on domestic ground until 2030.

The BDI study has shown that efficiency and fuel switch within the energy mix are the two main pillars accounting for around 75 percent of national emission reduction7. The domestic mitigation potential in Europe is limited and regionally different. That’s why the EU has established the effort sharing flexibility mechanism which needs to be improved for cost-efficient EU-wide mitigation.

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Solid, liquid, and gaseous energy carriers are generally referred to below as combustibles. Liquid and gaseous fuels used in the transport sector are referred to below as fuels.

6 BDI (2018): “Klimapfade für Deutschland, chapter 1 for key findings and chapter 2 for requirements: https://bdi.eu/publikation/news/klimapfade-fuer-deutschland/ 7 In a 95 percent path efficiency accounts for 217 mega tonnes of carbon equivalents of emission reduction while a fuel switch including the defossilisation of the electricity, heat and transport sectors accounts for 480 mega tonnes of carbon equivalents of emission reduction.

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BDI on the European Climate Law

Natural and technical sinks are necessary to bind immitigable emissions GHG emissions have different origins. Next to energy-based emissions there are process-based emissions and those from the agricultural. From today’s perspective the two latter ones are partly immitigable which means that for a net neutrality they have to be stored somewhere. Basically, there are two ways of storing, a natural and a technical one8. This is followed by the necessity to support the analysis of natural sink potential and the development of efficient and safe storage capacities and technologies.

In a long-term the IPCC Special Report of 2018 states that Bio-Energy carbon capture use and storage (BECCS9) is needed as well. For a successful transition natural and technical sinks are inevitable and need to be part of any definition of climate neutrality.

Climate protection must be addressed internationally From today's perspective, greenhouse gas neutrality for the EU by 2050 is only possible with crossregional trading schemes and offsetting mechanisms to encourage international projects – based on Art. 6 of the Paris Agreement. Such projects can cover mitigation or the storage of GHG emissions.

Mitigation projects have the potential to increase cost-efficiency of global climate protection because reduction potential varies over regions which calls for cross-regional cooperation that maximize mitigation efforts and at the same time minimize mitigations costs. In addition, those projects can speed up global climate protection efforts and provide a contribution to the transfer of technologies.

Furthermore, the potential for natural and technical sinks differs world-wide. While i. e. Russia and Brazil have a high potential regarding capturing GHG emissions this is limited in countries as Germany or Belgium. Using these different availabilities for the establishment of an offsetting mechanism is reasonable.

It can be assumed that the cost difference between reductions achieved in the EU and elsewhere will shrink if other states also step up their ambitions. Irrespective of this, a transformation like the one envisaged in the Green Deal can only be successfully managed in coordination with the main competitors like China and the United States. The development of the associated regulatory framework must include all three aspects of climate neutrality.

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Natural sinks cover i. e. oceans, forests and moors while technical sinks describe emissions stored by carbon capture and storage.

9 IPCC Special Report (2018), Annex I, (Sink; Anthropogenic removals) https://www.ipcc.ch/site/assets/uploads/sites/2/2019/06/SR15_AnnexI_Glossary.pdf.

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BDI on the European Climate Law

Aiming for European industry´s contribution of at least 20 percent to the European GDP and making the Green Deal Europe´s new Growth Strategy Aiming for climate neutrality from 2050 on requires a robust long-term framework and a strong industrial basis for innovation and a climate friendly production. European policies must be consistent with the ecological, economic and social objectives. In order to specify the economic pillar, BDI stresses that the following objective should apply for a European Climate Law: To ensure the preservation of European industrial value chains by increasing the contribution of European industry in a five-year average to at least 20 percent of the European GDP starting in 2025 Over a period of 30 and more years it is essential that such a framework gives space for flexibility within the transformation of the European economy and society as whole. This means flexibility between sectors with an overall but no specific sector targets as well as flexibility within the periods first from 2020 to 2030 and second between 2030 and 2050. This helps to make the extremely expensive transformation at least cost-efficient and helps to enable and support innovations and investments more easily. In addition, BDI rejects an increase of EUs current reduction target of – 40 percent for 2030 as intended by Art.2 III ECL as long as proper Carbon Leakage measures, which are fully accepted to be effective by the stakeholders at risk, cannot be assured and until the breakthrough technologies are scaled. At the moment there is not even a political framework that enables economy and society to effectively deliver on EUs NDC. An increase holds the enormous risk of carbon and investment leakage. First, there has to be a policy framework in place that incentivises investments and necessary technologies rollouts while maintaining competitiveness of existing plants during the transition. Without alternatives to which consumers – companies or citizens – can switch, there is no transformation but increase of burdens and decrease of acceptance. Second, it needs an impact assessment of the target adjustment against the background of the framework and its effectiveness. And third, there follows a decision about such a target adjustment.

In the end a pathway towards European Union’s climate neutrality needs to be organised in different stages until 2050 and after. A clear framework points out when which stage starts and ends. Currently the European Union organises its climate policy in three main phases: 1. European NDC for 2030 demands a 40 percent reduction compared to 1990. This requires supporting policies such as an industry strategy with the European Green Deal, 2. European net greenhouse gas emissions neutrality in 2050 allowing international mitigation which will constantly be reduced from 2050 on, 3. Global net GHG emissions neutrality post 2050.

Pathway towards European Union’s climate neutrality

2020

• European Green Deal • Industrial Strategy

2030 EU -40 %

• Intensivise use of carbon and natural + technical sinks • Global climate protection through offsetting

2050 EU netzero

• enable global partners to become netzero

Post2050 global net-zero

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BDI on the European Climate Law

Having identified these stages a European Climate Law and the European Green Deal policy needs to work out a political and regulatory foundation for this unique transformation. The presentation of a longterm strategy for Europe's industrial future has been overdue. The future of Europe is closely linked to the future of European industry. An integrated internal market with a strong and innovative industry is a prerequisite for Europe to be able to help shape the answers to global future issues such as climate change or digitisation with its own technologies and concepts on an equal footing with the USA and China.

Adjusting the timeline to the investment potential in economically tense times The coronavirus crisis took the European Union by surprise. The economic slowdown will lead to a decrease in growth that is at least comparable to the one in 2009 when the EU-wide GDP decreased by 4.3 percentage10. Consequently, the public sector will have to play a greater role in financing and attracting the investment needed and establishing the right regulatory conditions so that the market can follow with confidence and certainty.

Furthermore, it calls for a reassessment of situation. On the one hand, for long-term planning the affirmation of the 2050 target as well as the NDC for 2030 is important. Within this target framework a maximum of flexibility is essential to move on in the transformation process started. This flexibility needs to include a European Recovery Plan where ▪ short-term measures (12 – 24 months) focus on economic stability, ▪ mid-term measures (2 – 5 years) focus on testing and deployment of new technologies to pave the way for a sustainable long-term transformation and make way for the investments needed.

On the other hand, any assessment of even more ambitious climate targets for 2030 should be reconsidered in the light of the Corona pandemic (cf. Art. 2 III ECL) as well as a constant tightening of the planned 5-year-targets (cf. Art. 3 I ECL) in the EU Climate Law. Hijacking EU and Member States climate policy of its flexibility will result in higher costs and investment. Especially in a recession efficiency needs to be put first and flexibility granted. Otherwise the investment needed cannot be provided by any stakeholder, companies, citizens and not even by the Member States itself. As a result, the timeline laid out in the EU Climate Law should be adjusted to the overall disruption in early 2020.

In times of need trust is the best currency Enabling Europe to become the first climate neutral continent in the world is a task of a century with the difference that the EU aims for its fulfilment in less than 30 years. Such a project needs all stakeholders to be fairly involved. On a legislative basis this requires the full engagement of all the European player – Commission, Council and Parliament. The delegated acts (cf. Art. 9 ECL) oppose this principle and should therefore be taken back.

Furthermore, new emission targets must be formulated in such a way that citizens, companies or interest groups are neither directly restricted in their rights, nor are they given the opportunity to derive directly enforceable rights from the GHG target.

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Eurostat (2020): https://ec.europa.eu/eurostat/statistics-explained/index.php?title=National_accounts_and_GDP/de

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BDI on the European Climate Law

Building a robust framework for higher competitiveness and climate protection In designing and implementing the Green Deal, the Commission must therefore be careful to ensure that the competitiveness and sustainability of European industry is an objective in itself. European decision-makers must strengthen the economic efficiency of production in Europe and maintain the value chains of European companies. The industrial policy strategy announced will be essential to this end.

A strategy for the future of industry in Europe must take a holistic approach that goes far beyond climate and environmental policy. It must support digital change and provide a coordinated response to the massive global distortions of competition. With a view to the goals of the Green Deal, the strategy should include the following core elements: ▪ Modernising state aid and competition law: To maintain Europe's industrial competitiveness, the European competition regime must be strengthened. It should aim to promote business cooperation, improve merger control procedures, take greater account of global competition in merger decisions and energy subsidies, and focus state aid law on promoting investment and innovation. The European industry is undergoing a fundamental transformation towards climate neutral technologies and to deliver the shared ambition of the Green Deal there needs to be an effective partnership between the industry, public authorities (including the EU) and social partners. The investment required to transform plants, skills, products and R&D is very substantial. In particular, the commercialisation of climate-friendly breakthrough technologies requires tailor-made funding models to address the high capital and operational costs.

▪ Creating a business model for investments: In the planned re-evaluation of existing EU law for its Green Deal compatibility, the EU Commission should also examine the incentive effect of the legal acts. In the planned reform of the EU Energy Tax Directive, technology-neutral incentives for GHG savings should be set in order to create business models. Reliable framework conditions are crucial here.

▪ Develop a European import strategy for renewable energy sources: Even a climate-neutral Europe will remain an energy importer. The demand for climate-friendly energy in the European basic industry as well as in the transport and heating sectors will not be able to be met from within Europe alone. In addition, the sun- and wind-rich locations outside the EU offer significant cost advantages for electricity and hydrogen production. The establishment of such new import relations – which also make sense in terms of trade and development policy – should be accompanied by an EU strategy.

▪ Mobilise infrastructure investments: Europe needs modern infrastructures to remain fit for the future. This includes energy infrastructures, but also modern and efficient digital infrastructures and trans-European transport networks. The gradual conversion of gas networks to infrastructures for climate-friendly gases must be coordinated at European level in order to avoid individual national solutions and not create additional barriers to the internal gas market.

▪ Think Europe digitally: Europe needs a digital transformation of its economy in order to become more (resource) efficient and thus more sustainable in every respect. This requires the establishment of a European data space, the promotion of industrial, digital business models and an industryfriendly implementation of Horizon Europe.

▪ Assuming global innovation leadership: Transformation is not possible without technological game changers. Europe must promote R&D and support the dissemination of new technologies at

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an early stage. The EU Commission's announced initiative to promote lead markets is a positive signal and should be jointly implemented. â–Ş Creating an integrated EU internal market: As a prerequisite for a strong and sustainable Europe, the EU institutions should develop and implement an ambitious action plan to complete the single market in all areas. â–Ş Strengthen EU external economic policy and open markets: The EU must do everything in its power to maintain the World Trade Organisation (WTO) as the central regulatory power and to promote an ambitious foreign trade policy, especially in its relations with the United States and China.

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BDI on the European Climate Law

Annex At the beginning of 2020 there has not been a common understanding on the definition of the central term “net greenhouse gas neutrality”. But without clear and commonly shared definition there cannot be any robust political framework. Due to this BDI suggests for the purpose of the European Climate Law the following definitions: ▪ “European net greenhouse gas neutrality” means a balance between greenhouse gas emissions covered by the European Climate Law and removals by natural and technical sinks of greenhouse gases. For the European Union this also includes international mitigation until 2050 to speed up global transformation. These international mitigations will constantly be reduced after 2050 aiming for global net greenhouse gas emissions neutrality as soon as possible in the second half of this century.

▪ “Net greenhouse gas neutrality” is a synonym for climate neutrality.

▪ “Greenhouse gas emissions” means emissions in terms of tonnes as defined in Regulation (EU) No 525/201311.

▪ “Greenhouse gas emissions covered by the European Climate Law” means emissions arising from the territory of the European Union.

▪ “Natural and technical sinks” means a reservoir (natural or human, in soil, ocean, and plants) where a greenhouse gas, an aerosol or a precursor of a greenhouse gas is stored. Note that UNFCCC Article 1.8 refers to a sink as any process, activity or mechanism which removes a greenhouse gas, an aerosol or a precursor of a greenhouse gas from the atmosphere. These include enhancing biological sinks of CO2 and using chemical engineering to achieve long-term removal and storage as well as carbon capture and storage (CCS) from industrial and energy-related sources, which cannot just only mitigate greenhouse gas emissions but can reduce atmospheric CO2 if it is combined with bioenergy production (BECCS).12 ▪ “International mitigation” means a sustainable, permanent and safe reduction of greenhouse gas emissions outside the European Union according to the activity design for article 6 paragraph 4 of the Paris Agreement.13 ▪ Bioenergy with carbon dioxide capture and storage (BECCS) means CCS technology that applies to a bioenergy facility. Note that depending on the total emissions of the BECCS supply chain, CO2 can be removed from the atmosphere.14 ▪ “Carbon dioxide capture and storage” means a process in which a relatively pure stream of carbon dioxide from industrial and energy-related sources is separated (captured), conditioned, compressed and transported to a storage location for long-term isolation from the atmosphere. Sometimes referred to as CCS.15

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Regulation (EU) No 525/2013, https://eur-lex.europa.eu/legal-content/DE/TXT/PDF/?uri=CELEX:32013R0525&from=EN. IPCC Special Report (2018), Annex I, (Sink; Anthropogenic removals) https://www.ipcc.ch/site/assets/uploads/sites/2/2019/06/SR15_AnnexI_Glossary.pdf.

13 Draft CMA decision on the rules, modalities and procedures for the mechanism established by Article 6, paragraph 4, of the Paris Agreement, https://unfccc.int/sites/default/files/resource/CMA2_11b_DT_Art.6.4_.pdf.

14 IPCC Special Report (2018), Annex I, (Bioenergy with carbon dioxide capture and storage) https://www.ipcc.ch/site/assets/uploads/sites/2/2019/06/SR15_AnnexI_Glossary.pdf.

15 IPCC Special Report (2018), Annex I, (Carbon dioxide capture and storage) https://www.ipcc.ch/site/assets/uploads/sites/2/2019/06/SR15_AnnexI_Glossary.pdf.

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BDI on the European Climate Law

Impressum Bundesverband der Deutschen Industrie e.V. (BDI) Breite StraĂ&#x;e 29, 10178 Berlin www.bdi.eu T: +49 30 2028-0 Editorial Mr. Philip Nuyken Manager Energy and Climate Policy T: +49 30 2028-1516 p.nuyken@bdi.eu

BDI Dokumentennummer: D 1171

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