### 2



## 1. Background

As a Party to the Montreal Protocol on Substances that Deplete the Oz one Layer (the Protocol), the United States is subject to a cap on the production and consumption of hydrochlorofluorocarbons (HCFCs). 1 Table 1 presents the HCFC consumption cap and the graduated reductions to allowable HCFC consumption for the U.S. (and all non-Article 5 cou ntries), 2 as needed for compliance with the Protocol. In September 2007, the Parties agreed to strengthen the phaseout of HCFCs; the U.S. is required to red uce consumption by 75 percent by January 1, 2010, as sh own in Table 1.

Table 1: U.S. HCFC Consumption Phaseout Targets Und er the Montreal Protocol

Date Consumption Cap ODP Weighted Quantity (metric tons) a

Jan 1, 1996 Consumption freeze capped at 2.8% of the 1989 ODP-w eighted

CFC consumption plus 100% of the 1989 ODP-weighted HCFC consumption 15,240

Jan 1, 2004 35% reduction of the cap 9,906 Jan 1, 2010 75% reduction of the cap 3,810 Jan 1, 2015 90% reduction of the cap 1,524 Jan 1, 2020 99.5% reduction of the cap 76.2 Jan 1, 2030 100% reduction of the cap 0

a An ODP-metric ton takes into account each ODS’ rela tive contribution to ozone depletion. Note: one me tric ton equals approximately 2,204 pounds.



## 2. Review of Existing Analyses

A full Regulatory Impact Analysis (RIA) of the phas eout of ozone depleting substances (ODS) was conducted in 1993, and since then multiple cost and benefit analyses of specific aspects of the phaseo ut have been conducted. Previously conducted cost and benefit analyses were collected and reviewed. Table 2 below lists each of the memoranda and repor ts reviewed and gives a brief summary of the cost and/or benefit analysis provided in each. Further details from the most relevant documents are presen ted in Section 3, and data from these analyses are pres ented in Appendices A and B.

Table 2. Existing Cost and Benefit Analyses Related to the Phaseout of HCFCs Date Memorandum/Report Title Cost Analysis Benefits Analysis August 12, 1988 Final Rule: Protection of Stratospheric

Ozone The allocated allowance method imposes the smallest burdens on industry and EPA NA

March 12, 1992 Regulatory Impact Analysis: Compliance

with Section 604 of the Clean Air Act for the Phaseout of Ozone Depleting Chemicals Complete costs of ODS phaseout, includes a Regulatory Flexibility Analysis Complete benefits of ODS phaseout using EPA’s Atmospheric and Health Effects Model (AHEF) September 10, 1993 Addendum to the 1992 phaseout regulatory

impact analysis: Accelerating the phaseout of CFCs, halons, methyl chloroform, carbon tretrachloride, and HCFCs HCFC phaseout costs under various phaseout scenarios. Costs based on assumption that alternatives are 10-50% more costly than the HCFCs UV benefits calculated using AHEF

1 Under the Montreal Protocol, production is defined as “the amount of controlled substances produced, minus the amount destroyed...and minus the amount entirely used as fee dstock in the manufacture of other chemicals. The a mount recycled and reused is not to be considered as production.” Con sumption is defined as production plus imports minu s exports (UNEP, 2000).
2 Article 5 countries, primarily developing countrie s identified in the Montreal Protocol, are on a lat er schedule for phasing out ODS.

### 3

Date Memorandum/Report Title Cost Analysis Benefits Analysis September 30, 1999 Report: Costs and Benefits of the HCFC

Allowance Allocation System Reporting and implementation costs for industry and the Agency (similar to an ICR) Refers to the 1993 RIA Addendum

September 26, 2000 Memorandum: Cost/Benefit comparison of

the HCFC Allowance Allocation System Reporting and implementation costs for industry and the Agency, based on the 1999 Report AHEF output based on expected exceedences of theconsumption cap in a noncompliance scenario January 21, 2003 Final Rule: Protection of Stratospheric

Ozone: Allowance System for Controlling HCFC Production, Import and Export March 14, 2005 Memorandum: Recommended scenarios for

HCFC phaseout costs estimation Costs of switching to alternatives NA

March 28, 2006 ICR: Reporting and Recordkeeping

Requirements of the HCFC Allowance System Reporting costs to industry and the Agency NA

June 2006 Report: Global Mitigation of Non-CO2

Greenhouse Gases Cost of switching from HFCs to alternatives NA

April 13, 2007 Memorandum: Estimate of the incremental

cost of accelerating the phaseout of HCFCs in China by 10 years Incremental cost of accelerating the phaseout of HCFCs in China by 10 years NA

August 31, 2007 Memorandum: Preliminary estimates of the

incremental cost of the HCFC phaseout in Article 5 countries Range of incremental costs for phaseout projects in A5 countries NA

September 12, 2007 Report: Changes in HCFC Consumption and

Emissions from the U.S. Proposed Adjustments for Accelerating the HCFC Phaseout Changes in consumption based on the U.S. proposed adjustments for accelerating the HCFC phaseout Changes in emissions based on the U.S. proposed adjustments for accelerating the HCFC phaseout September 24, 2007 Analysis: HCFC Consumption Results NA Consumption effects of the new phaseout schedule for A5 and A2 countries agreed upon at the 19 th Meeting of the Parties September 24, 2007 Analysis: HCFC Production Results NA Production effects of the new phaseout schedule for A5 and A2 countries agreed upon at the 19 th Meeting of the Parties December 4, 2007 Memorandum: Avoidance of Skin Cancer

Incidences and Mortalities Associated with the Accelerated HCFC Phaseout Schedule NA AHEF output based on the accelerated HCFC phaseout schedule agreed to at the 19th Meeting of the Parties December 7, 2007 Memorandum: Revised Ozone and Climate

Benefits Associated with the 2010 HCFC Production and Consumption StepwiseReductions and a Ban on HCFC Precharged Imports NA Ozone and climate benefits of the 75% reduction of the HCFC cap in 2010

January 17, 2008 Memorandum: Draft Memorandum on Costs

Associated with Refrigerant Substitution from R-22 to R-410A in Pre-charged Equipment Imports Costs of a proposed 2010 ban on pre-charged R-22 imports Ozone and climate benefits (in terms of avoided emissions) ofa proposed 2010 ban on precharged R-22 imports



## 3. Summary of Existing Cost and Benefit Analyses

The many previous analyses reviewed in the preparat ion of this memorandum provide a wealth of information on the costs and benefits of the U.S. H CFC phaseout. The one change to the HCFC phaseout

### 4

schedule since the 1993 RIA Addendum was completed results from the Montreal Adjustment in September 2007 3 and has also been analyzed (see analyses developed in September and December 2007, Table 2). The U.S. phaseout schedule was strengthe ned such that the percent reduction of the 2010 consumption and production caps was changed from 65 % of the baseline to 75% of the baseline, as agreed to by the Parties at the 19th Meeting of the Parties to the Montreal Protocol, September 2007. The review of these analyses reveals many updates over the past fifteen years to the costs and benefits calculated in the 1993 RIA Addendum. Existing data from these analyses are presented in more detail i n Appendices A and B. The most relevant analyses are briefly summarized below.

• The 1993 Addendum to the 1992 phaseout regulatory impact ana lysis: Accelerating the phaseout of CFCs, halons, methyl chloroform, carbon tretrach loride, and HCFCs provides a complete analysis of the costs and benefits of the HCFC phas eout in the United States.

− Costs of the HCFC phaseout are calculated for the s ix phaseout scenarios explored in the RIA. Costs were based on the assumption that HCFC alternatives would be 10 percent to 50 percent more costly than the HCFCs.

− Benefits are calculated using the AHEF model to com pare to costs. The benefits are presented for the entire phaseout of ODS in the Uni ted States under the Montreal Protocol in both health and monetary units and are not calculated separately for HCFCs.

• The 1999 Report Costs and Benefits of the HCFC Allowance Allocation System re-calculates the reporting and administrative costs of the HCFC phas eout presented in the 1993 RIA Addendum. The report does not recalculate benefits.

− Reporting and administrative costs for industry and U.S. EPA are calculated as they are for an ICR. The calculations and assumptions made are documented in great detail. The analysis includes some costs that existed at the ti me, but no longer apply (e.g., start-up costs) and some expected costs that were not realiz ed (e.g., annual site visits to allowance holders).

• The 2000 Memorandum Cost/Benefit comparison of the HCFC Allowance Allo cation System refers to the 1999 Report for its cost estimates an d recalculates the benefits estimates from the 1993 RIA Addendum, tailoring them specifically to t he phaseout of HCFCs.

− Costs were estimated for EPA and industry from 2000 to 2030 and presented as annualized and net present value costs discounted a t 3 and 7 percent. Costs presented in the memorandum remain the same as those presented i n the 1999 report, Costs and Benefits of the HCFC Allowance Allocation System.

− Benefits are calculated based on expected exceedenc es of the HCFC consumption cap between 2000 and 2010 in a non-compliance scenario. These exceedences are then used as input for the AHEF model and benefits data are p resented in health and monetary units for the period from 2000 to 2030.

• The 2005 Memorandum Recommended scenarios for HCFC phaseout costs esti mation presents three methods for updating the calculation of the c osts of switching from HCFCs to alternatives from the 1993 RIA Addendum.

− Costs of switching to HCFC alternatives are calcula ted in three scenarios based on (1) the

3 Decision XIX/6 reflects the 2007 Montreal Adjustmen t to strengthen the HCFC phaseout.

### 5 results of the 1993 RIA and (2) actual prices of HC FCs and their substitutes. Only Scenario III takes into account complete costs (as were considered in the 1993 RIA Amendment). Scenarios I and II consider only the d ifference in price of the chemicals themselves, and do not include costs of transitioni ng HCFC production facilities and equipment.

• The 2006 ICR

Reporting and Recordkeeping Requirements of the HC FC Allowance System provides an updated calculation of the reporting an d administrative HCFC phaseout costs to industry and U.S. EPA.

− The reporting and administrative costs calculated i n the ICR are generally still up to date and are the most accurate source for estimating cur rent reporting and administrative costs of the HCFC phaseout.

• The 2007 Memorandum Preliminary estimates of the incremental cost of th e HCFC phaseout in Article 5 countries presents a range of incremental costs for phaseout projects in A5 countries, but in doing so provides inputs of cost data for the ph aseout of HCFC consumption and production that is specific to the U.S. These costs could be supplemented to calculate total costs for transitioning to alternatives in the U.S.

− HCFC consumption phaseout costs are calculated for specific equipment conversions in the refrigeration and foam sectors. For each secto r, incremental costs were estimated as the capital cost of converting equipment production lines and the incremental operating costs (IOCs). IOCs were based on changes in costs resulting from switching from HCFCs to alternative refrigerants and also from cha nges in equipment design.

− HCFC production phaseout costs are based on the cos t of building regional and world scale production facilities for alternatives. Acco rding to industry experts, HCFC refrigerant production processes cannot be easily c onverted to produce alternatives and, as a result, new plants must be constructed.

• The 2007 analyses HCFC Consumption Results and HCFC Production Results calculate the effects on consumption and production of the accele rated phaseout schedule agreed to at the 19 th Meeting of the Parties in 2007. Benefits (i.e., av oided emissions) are calculated for both Article 2 and Article 5 countries.

• The 2007 Memorandum Revised Ozone and Climate Benefits Associated with the 2010 HCFC Production and Consumption Stepwise Reductions and a Ban on HCFC Pre-charged Imports calculates ozone and climate benefits of the 2010 p roduction and consumption step-downs in the United States.

− The benefits, expressed in terms of avoided HCFC co nsumption, production, and emissions, are calculated using the Excel tool “201 0 step-down benefits.xls.” See the original memorandum for a more detailed explanation of the tool. These results apply only to the 2010 step-down portion of the overall U .S. HCFC phaseout.



## 4. Summary of Existing Small Business Analyses

The regulatory flexibility analysis in the 1992 RIA examined foam blowing and methyl chloroform industries in detail because they appeared most lik ely to be significantly affected from a financial perspective. The results were as follows:

### 6

• Foam blowing: a large number of facility closings a re note expected; most firms in the industry do not expect a major decline of small-firm viabili ty as a result of CFC regulation.

• Methyl chloroform: significant negative economic im pacts due to the regulation are not expected in this industry.

The regulatory flexibility analysis section in the 2003 phaseout rule stated that “EPA has determined that it is not necessary to prepare a regulatory flexibi lity analysis in connection with this final rule. E PA has also determined that this rule will not have a sign ificant economic impact on a substantial number of small entities.” “Although this final rule will no t have a significant economic impact on a substanti al number of small entities, EPA nonetheless has tried to reduce the impact of this rule on small entitie s” through the following:

• Unlimited inter-pollutant transfers;

• 0.1% offsets, as opposed to 1.0% for Class I substa nces;

• Allowing for late entrants; and

• Consultation with small entities to ensure accuracy of baseline year reports.

A change to the allocation of HCFCs in 2010 will af fect existing allowance holders. The allocation method chosen may impact small and large allowance holders in different ways, allocating a relatively greater or smaller number of allowances to business es of different sizes (see the March 13, 2008 memorandum Draft Regulatory Options for Allocating HCFC Allowa nces after 2009 for more details on the allocation options). However, large HCFC allow ance holders, which are in direct competition with smaller businesses that hold HCFC allowances, ultim ately sell the majority of their products to small businesses through a complex supply chain. Further more, according to industry experts, there are seve ral different pathways to the aftermarket distribution chain that may represent how HCFC product is ultimately obtained by the consumer, and small comp anies exist throughout the distribution channel. A s such, information to date does not suggest that sma ll businesses as a whole will be subject to differe ntial impacts from the 2010 proposed rulemaking. However , further research into this topic could be conducted.

### 7



## Appendix A: HCFC Phaseout Benefits – Recent Data

Results from two recent analyses of benefits attrib utable to the HCFC phaseout are presented here.



### A.1. 2007 memorandum: Revised Ozone and Climate Ben efits Associated with the 2010 HCFC Production and Consumption Stepwise Reductions and a Ban on HCFC Pre-charged Imports

The 2007 memorandum Revised Ozone and Climate Benefits Associated with the 2010 HCFC Production and Consumption Stepwise Reductions and a Ban on HC FC Pre-charged Imports was delivered on December 7, 2007 along with the spreadsheet entitle d “2010 stepdown benefits.xls.” This spreadsheet contains a tool for calculating the ozone and clima te benefits associated with the 2010 reduction to b oth the HCFC consumption and HCFC production caps in th e U.S. See the original memorandum for a more detailed explanation of the tool. Table A-1 presen ts the ozone and climate benefits calculated using this tool expressed in terms of avoided HCFC consumption , production, and emissions. These results apply only to the 2010 stepdown portion of the overall HC FC phaseout in the U.S.

Table A-1. 2010 Caps Allocated Entirely to HCFC-22 : Total Avoided HCFC Consumption,

Production, and Emissions, 2010-2014; Calculated in 2007 Ozone Benefit Climate Benefit a ODP MT MMTCE MMTCO 2 e Consumption 57,150 513 1,881 Production 58,264 523 1,917 Emissions 42,485 431 1,579

a Avoided GWP-weighted emission results also include avoided HFC-23 emissions.



### A.2. 2007 memorandum: Avoidance of Skin Cancer Inci dences and Mortalities Associated with the Accelerated HCFC Phaseout Sched ule

The 2007 memorandum Avoidance of Skin Cancer Incidences and Mortalities Associated with the Accelerated HCFC Phaseout Schedule presents the benefits of the global HCFC adjustmen ts agreed to at the 19 th Meeting of the Parties in September 2007 in terms of the incidences of skin cancer and mortalities avoided. The avoidance of skin cancer cases and de aths were calculated using the AHEF model. These estimates are based on reductions in global HCFC em issions of 524,000 ODP-weighted metric tons. See the original memorandum for a more detailed explana tion of the calculations. Table A-2 presents these estimates, which are of limited use to a U.S. phase out benefits analysis since they include benefits f rom the accelerated HCFC phaseout schedule globally.

Table A-2. AHEF Model Results of the Avoidance of S kin Cancer Incidences and Mortalities Associated wi th the Accelerated HCFC Phaseout Schedule Calculated in 20 07 Nonmelanoma Skin Cancer Cutaneous Malignant Melanoma Cases Avoided Premature

Mortalities Avoided Cases

Avoided Premature

Mortalities Avoided Total Cases Avoided Total Premature

Mortalities Avoided

191,134 338 5,083 637 196,218 975

### 8



## Appendix B: HCFC Phaseout Costs – Recent Data

Two types of costs are explored here: (1) reporting and administrative costs for both industry and EPA and (2) costs of transitioning from HCFCs to altern atives.


### B.1. Reporting and Administrative Costs for Industr y and the Agency
Reporting and administrative costs were presented i n a 1999 report, a 2000 memorandum, and the 2006 ICR on reporting and recordkeeping for the HCFC all owance system. The results from each analysis are presented for comparison in Table B-1 below. Each of these analyses contains a thorough accounting of reporting and administrative activities and their a ssociated costs. However, the 1999 and 2000 analys es are outdated, as some costs that existed at the tim e but no longer apply (e.g., start-up costs) and so me expected costs that were not realized (e.g., annual site visits to allowance holders). The costs in t he 2006 ICR are generally still up to date and these costs – approximately $140,000 for industry and $220,000 for U.S. EPA annually – are the most accurate source fo r estimating current reporting and administrative costs of the HCFC phaseout.

Table B-1. Summary of Previously Analyzed HCFC Phas eout Reporting and

Administrative Costs for Industry and US EPA

Annual Industry Costs Annual US EPA Costs Source Min (3%

Discount) Max (7%

Discount) Min (3%

Discount) Max (7%

Discount) 2006 ICR (2006$) $138,963 $222,261 2000 Memorandum (1997$) $235,600 $241,100 $129,000 $129,800 1999 Report (1997$) $512,255 $523,183 $171,780 $173 ,069



### B.2. Costs of Switching to Alternatives

Costs to transition from HCFCs to other chemicals c an be broken down into two categories—chemical costs and costs associated with manufacturing modif ications. Previous analyses have shown chemical costs to be variable at any given time and unstable over time due to changing regulatory and market conditions. Costs associated with manufacturing mo difications can include changes to manufacturing processes, manufacturing equipment and design of th e final products.

Data from two memoranda that analyze the cost of th e HCFC phaseout are presented here.

B.2.1. 2007 Memorandum: Preliminary estimates of the incremental cost of th e HCFC phaseout in Article 5 countries

The 2007 memorandum Preliminary estimates of the incremental cost of th e HCFC phaseout in Article 5 countries includes U.S. based cost data for the phaseout of consumption and production of HCFCs. Details on the calculations and their limitations c an be found in the original memorandum. HCFC consumption phaseout costs from this memorandum are presented in Table B-2. For each sector, incremental costs were estimated as the capital cos t of converting equipment production lines and the incremental operating costs (IOCs). IOCs were base d on changes in costs resulting from switching from HCFCs to alternative refrigerants and also from cha nges in equipment design. While the costs for converting manufacturing facilities can vary widely based on equipment and volume produced, proxy equipment conversions were chosen to represent enti re sectors.

### 9

Table B-2. Costs of Phasing out HCFC Consumption in the Refrigeration and Foam Sectors Calculated in 2 007

Sector Proxy Example Incremental Cost per Kg (US$/kg) Incremental Cost per ODP

Kg (US$/ODP kg) Domestic AC Converting an HCFC-22 window AC unit t o an R-410A

unit $6.00 $109.07

Commercial AC Converting an HCFC-22 positive displacement chiller

to an HFC-134a unit $16.91 $307.37

Rigid PU Foam Converting an HCFC-141b based appliance spray

foam manufacturing facility to HFC-245fa based foam $12.42 $112.93

XPS Foam Converting an HCFC-142b based XPS foam

manufacturing facility to HFC-134a based foam $16.86 $259.32

HCFC production phaseout costs from this memorandum are presented in Table B-3. According to industry experts, HCFC refrigerant production proce sses cannot be easily converted to produce alternatives and, as a result, new plants must be c onstructed. Thus, the cost of converting HCFC production facilities to produce alternatives was b ased on the capital cost of building world and regi onal scale facilities.

Table B-3. Costs of Phasing out HCFC Production in the Refrigeration and Foam Sectors Calculated in 2007 Data Point Cost per Unit Unit Capital cost of building a world-scale refrigerant production facility (>10,000 MT/yr) $200,000,000 per facility

Capital cost of building a regional-scale refrigerant production facility (<10,000 MT/yr) $10,000,000 per facility

Total capital cost for all facilities $2,640,000,000 US$ Total Incremental Cost per ODP Kg $129.01 US$/ODP kg

Because the data in Tables B-2 and B-3 above is cal culated based on recent data and input from industr y experts, it is the most accurate source for estimat ing current costs of switching to HCFC alternatives

.
B.2.2. 2005 Memorandum: Recommended scenarios for HCFC phaseout costs estim ation

The 2005 memorandum Recommended scenarios for HCFC phaseout costs estim ation calculates costs of switching to HCFC alternatives based on (1) the res ults of the 1993 RIA and (2) actual prices of HCFCs and their substitutes. Only Scenario III takes int o account complete costs (as were considered in the 1993 RIA Amendment). Scenarios I and II consider only t he difference in price of the chemicals themselves, and do not include costs of transitioning HCFC prod uction facilities and equipment.

Table B-4. Cost of Transitioning from HCFCs to Alte rnatives Calculated in 2005

Scenario Minimum Cost per ODP kg Maximum Cost

per ODP kg I. HCFC substitute is assumed to be ten to fifty pe rcent more expensive than HCFC $0.20 $4.00

II. Actual prices of HCFCs and HCFC substitutes are used ($3.65) $5.08 III. Limited RIA data used – includes replacement e quipment costs, energy costs, training, scraping of obsolete equipment, an d other sector specific costs $286 $1,432