EPA moves to phase out powerful GHG refrigerants under bipartisan mandate

On Monday, May 3, 2021, the US Environmental Protection Agency (EPA) released a notice of proposed rulemaking to require a substantial phasedown in production and consumption of hydrofluorocarbons (HFCs) – fluorinated gases widely used in refrigeration, air conditioning, and other applications. The proposed rule follows a bipartisan Congressional mandate that EPA take prompt action to address HFCs. Although the proposal leaves important questions unanswered, EPA estimates the HFC phasedown will yield cumulative climate-related economic benefits of $283.9 billion from 2022 through 2050.

EPA will accept public comment on the proposed rulemaking for 30 days following its publication in the Federal Register (the proposal has not yet been published as of this writing).

Background

HFCs were introduced to replace chlorofluorocarbons (CFCs) – ozone-depleting substances commonly used in refrigeration, air conditioning, aerosols, fire suppressants, and other applications. The international community came together to ban CFCs globally under the Montreal Protocol on Substances that Deplete the Ozone Layer.

Years later, scientists have concluded that HFCs are also powerful greenhouse gases (GHGs), potentially hundreds or even thousands of times more potent than CO₂. Further complicating matters, HFC use is still growing worldwide due to the phaseout of CFCs and the increasing demand for refrigeration and air-conditioning equipment globally.

But the tide may have turned in 2016 with the adoption of the Kigali Amendment to the Montreal Protocol, which seeks a similar global ban of HFCs. The US signed the Kigali Amendment under President Barack Obama, but never ratified it. The Biden Administration has stated its intent to do so. But other federal action on HFCs was adopted in 2020.

In response to climate concerns related to HFCs, Congress passed the bipartisan American Innovation and Manufacturing (AIM) Act, which directs EPA to (1) phase down HFC production and consumption; (2) require increased HFC reclamation while also reducing HFC releases from equipment; and (3) develop sector-based restrictions to facilitate and incentivize the transition to next-generation HFC alternatives. The AIM Act gives EPA only until September 2021 to adopt final regulations implementing the phasedown mandate, but it allows EPA to address the remaining two mandates in future rulemakings.

EPA proposal: Allowance allocation and trading program

EPA’s proposal seeks an 85 percent overall reduction in HFC production and consumption by 2036. EPA would achieve this 15-year phasedown through an allowance allocation and trading program, which EPA would administer. Under the program, individual HFCs would be assigned exchange values prescribed by the AIM Act to account for each HFC’s climate impact relative to CO₂, a measure called global warming potential (GWP). Production or consumption of HFC’s with a higher GWP would require more allowances. 

EPA’s proposal would allocate and allow for trading of production allowances, consumption allowances, and application-specific allowances.  The program would resemble EPA’s prior phaseout of ozone-depleting substances. HFC producers would have to spend both production and consumption allowances. HFC importers would need only consumption allowances. In addition, six HFC uses specified in the AIM Act would qualify for application-specific allowances:

• propellants in metered-dose inhalers
• defense sprays (eg, bear spray)
• structural composite preformed polyurethane foam for marine use and trailer use
• etching of semiconductor material or wafers and the cleaning of chemical vapor deposition chambers within the semiconductor manufacturing sector
• mission-critical military end uses and
• on-board aerospace fire suppression.

The HFC phasedown also diverges from prior efforts in important ways. Under the AIM Act, EPA must not issue allowances in excess of the production and consumption caps, even when including application-specific allowances. Accordingly, unlike the exemptions in EPA’s phaseout of CFCs, application-specific uses under the HFC phaseout receive priority for at least the first five years but are not exempt from the cap.

EPA has not yet determined how to accurately forecast the number of allowances needed for application-specific uses, meaning it also cannot determine how many allowances will remain within the cap for general production or consumption. EPA thus proposes to first set the overall number of allowances and to set individual company allocations each calendar year thereafter. Based on the AIM Act’s phaseout schedule, EPA estimates the maximum number of production and consumption allowances it may allocate per year are as follows:

• 2022-2023: 90 percent (296.1 consumption, 337.5 production)
• 2024-2028: 60 percent (179.4 consumption, 225.0 production)
• 2029-2033: 30 percent (89.7 consumption, 112.5 production)
• 2034-2035: 20 percent (59.8 consumption, 75 production)
• 2036-After: 15 percent (44.9 consumption, 56.3 production)

Allowance values are expressed in million metric tons of exchange value equivalent, which is numerically equivalent to one million metric ton of CO2 equivalent.

Importantly, EPA’s current proposal would establish a framework for allocating allowances in only the program’s first 2 years. EPA intends to revisit its methodology for allowance allocation before the first significant decrease of allowances from 90 percent to 60 percent in 2024. EPA has solicited comments on several concepts for allocating allowances post-2024 (eg, whether allocating allowances based on past HFC production or import is appropriate for a long-term phasedown). But those concepts are not part of the current proposal.   

An ambitious deadline

Congress has given EPA an ambitious deadline to finalize a regulatory framework to phase down production and consumption of HFCs. EPA’s challenge is to meet that deadline while carefully designing the framework to be fair and effective.

EPA's current proposal seeks to meet that deadline with a short-term framework, establishing an allowance allocation and trading program for only the period before the first significant HFC phasedown in 2024. EPA is still considering the program’s long-term structure and is soliciting comments on important aspects of the long-term program, including on whether or how to allocate allowances based on historic levels of HFC production and consumption.

While the HFC phasedown is expected to yield hundreds of billions of dollars in climate-related economic benefits through 2050, EPA must also address the proposal’s outstanding questions to ensure that the program is workable for regulated parties and other potentially affected users of equipment or products containing HFCs.

If you have questions or would like more information regarding EPA’s proposal, please contact any of the authors or your usual DLA Piper relationship partner.