EPA Finalizes Rule Phasing Down Hydrofluorocarbons | Beveridge & Diamond PC

On October 5, 2021, the US Environmental Protection Agency published a final regulation that defines a certificate allocation and trading program for partially halogenated fluorocarbons (HFCs). The rule implements certain key requirements of the American Innovation and Manufacturing Act of 2020 (AIM Act) to phase out domestic manufacturing and import of HFCs over a 15-year period from 2022. HFCs are powerful greenhouse gases that were originally developed to replace ozone-depleting substances. The chemicals are used, among other things, in refrigeration and air conditioning technology, in foaming foam, in fire fighting and as solvents and propellants.

The central theses

• What does this rule do? The final rule provides an initial framework for the allocation and transfer of allowances for the manufacture and import of HFCs; defines the initial values ​​from which the certificates are reduced in accordance with the statutory phase-out plan; and sets rules for compliance and enforcement.
• Does this rule apply to me? This rule may apply to you if you manufacture, import, export, destroy, use as raw material, recover or otherwise distribute HFCs. It can also apply to you if you use HFCs to manufacture products (e.g. foams, aerosols), especially in one of the six applications that are subject to allocation under the AIM Act. The regulation does not directly regulate companies that buy or use HFCs domestically (e.g. for use in stationary refrigeration systems), although the market and price of HFCs are undoubtedly driven by the implementation of the regulation and the step-by-step schedule under the AIM Act to be influenced.
• What should I do? If you think this rule could directly affect you, check the allocation of allowances on October 1, 2021 to see if your company has received its fair share of allowances for 2022. Companies wishing to contest their award can file an application for review with the U.S. Court of Appeals for the DC Circuit by December 6, 2021. If you have not received certificates and believe you are eligible for certificates from the EPA’s retirement pool file the required application with the EPA by November 30, 2021.

The AIM Act sets a timetable for EPA to reduce the “production” and “consumption” of HFCs by 85% over a 15 year period. Production under the AIM Act generally relates to domestic production of HFCs, while consumption relates to net imports of HFCs. Through this final rule, the EPA has developed a framework that requires certificates to manufacture or import HFCs from January 1, 2022 to ensure that the United States meets the milestones set by law.

Essential provisions of the final rule

Production and consumption baselines. Using the equation provided in the AIM Act and data from the Greenhouse Gas Reporting Program and other outreach results, the EPA found that the production base is 382.6 million allowances and the consumption baseline is 303.9 million allowances. Each certificate can be issued for one ton of market value equivalent (EVe) of HFC, which corresponds to around one ton of CO2 equivalent. The AIM law sets the exchange values ​​for eighteen of the most commonly used HFCs.

Allowances. From January 1, 2022, with a few exceptions, certificates will be required for the manufacture or import of HFCs. However, certificates are only required when importing HFCs in “bulk” form, that is, when they have to be transferred to another container or piece of equipment in order to achieve their intended purpose. No certificates are required when importing HFCs contained in a manufactured product (e.g. an aerosol can or air conditioning).

There are three types of authorizations: production authorizations, consumption authorizations and “application-specific authorizations” for one of six uses listed in the AIM Act. The allowances are valid between January 1st and December 31st of each year and cannot be carried over or carried over to the next year.

Allocation framework for allowances. The rule sets a framework for the allocation of production and consumption allowances based on the three highest (not necessarily consecutive) years of a company’s production or imports in the period from 2011 to 2019. The final rule sets this framework for the allocation of allowances only for 2022 and 2023. EPA intends to regulate the allocations separately for 2024 and beyond.

On October 1, 2021, the EPA issued a notice on the allocation of allowances for 2022 to individual companies in accordance with the framework. These certificates include “calendar year certificates” for manufacturing or importing HFCs and “application specific certificates” that can be used to secure HFCs for certain applications identified by Congress in order to obtain the full amount of certificates, at least for the first five years of the AIM law are required. These applications include metered dose inhalers, defense sprays, onboard fire suppression in the aerospace industry, semiconductor manufacturing, certain foams, and mission critical military end uses.

Under the Framework Allocation Rule, the EPA generally issues application-specific certificates to the manufacturers of the end-products that require the use of HFCs to manufacture, with the exception of mission-critical military end-use certificates, which are issued to the Department of Defense. In contrast to production and consumption certificates, the rule provides for the allocation of application-specific certificates based on a company’s HFC use in the previous year, multiplied by the higher of (a) the average growth rate of the company’s HFC use for that application in the last three years or (b) the average growth rate of HFC use over the last three years by all companies applying for this type of application-specific certificate. Companies can also provide information about “unique circumstances” to justify deviations from this formula.

The EPA has also completed a set-aside pool of allowances for three groups of companies: (1) end-users in application-specific sectors that the EPA did not identify at the time of the final allocation rule; (2) importers who would have qualified for consumption allowances but were not identified at the time of the final allocation rule; and (3) importers who are new entrants. The decommissioning pool for 2022 consists of 2.5 million production certificates and 7.5 million consumption certificates. Companies wishing to receive certificates from the decommissioning pool must submit applications to the EPA by November 30, 2021.

Other measures. The rule also imposes an obligation on certain companies that manufacture HFC-23 to capture HFC-23 and either destroy it using special destruction technologies or to issue production and consumption certificates for quantities sold for consumption.

Compliance and Enforcement. The main components of the final rule compliance and enforcement rules include requiring the use of refillable bottles that meet certain labeling requirements; a comprehensive system for tracking HFC shipments by retailers; extensive recording and reporting obligations; Third party reviews of company records, including onerous (and unusual) obligations to have these reviews performed by auditors; and disclosure of certain HFC production and consumption data that the EPA has determined to be non-confidential. To prevent the illegal trade in HFCs, the EPA coordinates with other federal agencies, particularly the U.S. Customs and Border Protection.

Main differences between the proposed and final rules

The final rule is similar in most respects to the proposed rule published by the EPA on May 19, 2021. There are a few key differences, however, and a number of other relatively minor changes.

The EPA originally proposed basing the calendar year certificates issued to each manufacturer and importer on a company’s highest year of production or consumption from 2017 to 2019. In the final rule, the EPA relies on data from three years from 2011 to 2019 as described above.

The EPA further changed its proposal to ban the import or placement of HFCs in single-use bottles from July 1, 2023 and the sale of HFCs in single-use bottles until July 1, 2025. Although the EPA is maintaining the proposed bans in the final rule, the agency pushed for the import / placement ban to be rolled back to January 1, 2025 and the sales ban to January 1, 2027.

The EPA has also completed modest changes to the definitions of certain key terms. In particular, the EPA has expanded the definition of “lend” so that holders of application-specific certificates can secure their HFCs through multi-tier supply chains, which is important to a number of commentators.

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