*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

1 of 64 EO12866_CAA Part 82A 2060 AQ98 NPRM_FRN_20110630
ENVIRONMENTAL PRO TECTION AGENCY
40 CFR Part 82 [EPA-HQ-OAR-2011-0354; FRL-xxxx-x] RIN 2060-AQ98 Protection of Stratospheric Ozone: Adjustme nts to the Allowance System for Controlling HCFC Production, Import, and Export
AGENCY: Environmental Protec tion Agency [EPA].
ACTION: Proposed rule.
SUMMARY: EPA is proposing to adjust the allowa nce system controlling U.S. consumption and production of hydrochlorofluorocarbons (HCFCs ) as a result of a recent court decision vacating a portion of the rule titled “Protection of Stratosphe ric Ozone: Adjustments to the Allowance System for Controlling HCFC Produc tion, Import, and Export; Final Rule.” EPA interprets the court’s vacatur as applying to the part of the rule that establishes the company-bycompany baselines and calendar-year allowanc es for HCFC-22 and HCFC-142b. Following the (INSERT IFR PUBLISH DATE) interim final rule allocating allowances for 2011, this action proposes to relieve the regulatory ban on produc tion and consumption of these two chemicals following the court’s vacatur by establishi ng company-by-company HCFC-22 and HCFC-142b baselines and allocating production and consumption allowances for 2012-2014.
DATES: Written comments on this proposed rule mu st be received by the EPA Docket on or before [INSERT DATE 30 DAYS AFTER PUBLICA TION IN FEDERAL REGISTER] , unless a public hearing is reque sted. Any party requesting a p ublic hearing must notify the contact listed below under FOR FURTHER INFORMATION CONTACT by 5 p.m. Eastern Standard Time on [INSERT DATE 7 DAYS AFTER PUBLICATION IN FEDERAL REGISTER] . If a public hearing is requeste d, the hearing would be held on [INSERT DATE*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

2 of 64 15 DAYS AFTER PUBLICATION IN FEDERAL REGISTER] and commenters will have until [INSERT DATE 45 DAYS AFTER PUBLI CATION IN FEDERAL REGISTER] to submit comments before the close of the comment period. If a hearing is he ld, it will take place at EPA headquarters in Washington, DC . EPA will post a notice on our website, http://www.epa.gov/ozone/strathome.html , announcing further informa tion should a hearing take place.
ADDRESSES: Submit your comments, identified by Docket ID No. EPA-HQ-OAR-2011-
0354 , by one of the following methods:

• www.regulations.gov : Follow the on-line instructions for submitting comments.

• Email: a-and-r-docket@epa.gov

• Mail: Docket # EPA-HQ-OAR-2011-0354, Air and Radiation Docket and Information Center, U.S. Environmenta l Protection Agency, Mail code: 6102T, 1200 Pennsylvania Ave., NW, Washington, DC 20460

.

• Hand Delivery: Docket #EPA-HQ-OAR- 2011-0354 Air and Radiation Docket at EPA West, 1301 Constitution Avenue NW, Room B108, Mail Code 6102T, Washington, D.C. 20004. Such deliveries are only accepted during the Docket’s normal hours of operation, and special arrangements should be made for deliveries of boxed information.
Instructions: Direct your comments to Docket ID No. EPA-HQ-OAR-2011-0354

. EPA's policy is that all comments received will be included in the public docket without change and may be made available online at www.regulations.gov , including any personal information provided, unless the comment includes information claimed to be Confidential Business Information (CBI) or other information whose disclosure is restrict ed by statute. Do not submit information that you consider to be CBI or ot herwise protected through www.regulations.gov or e-mail. The www.regulations.gov website is an “anonymous access” system, which means EPA will not*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

3 of 64 know your identity or contact in formation unless you provide it in the body of your comment. If you send an e-mail comment direct ly to EPA without going through www.regulations.gov , your e-mail address will be automatically captured and in cluded as part of the comment that is placed in the public docket and made av ailable on the Internet. If you submit an electronic comment, EPA recommends that you include your name and other contact information in the body of your comment and with any disk or CD-ROM you subm it. If EPA cannot read your comment due to technical difficulties and cannot contact you for cl arification, EPA may not be able to consider your comment. Electronic files should avoid th e use of special characters, any form of encryption, and be free of any def ects or viruses. For additional information about EPA’s public docket, visit the EPA Dock et Center homepage at www.epa.gov/epahome/dockets.htm

. FOR FURTHER INFORMATION CONTACT: Luke H. Hall-Jordanby telephone at (202) 343-9591, or by e-mail at ha ll-jordan.luke@epa.gov, or by mail at U.S. Environmental Protection Agency, Stratospheric Protection Di vision, Stratospheric Program Implementation Branch (6205J), 1200 Pennsylvania Avenue, NW , Washington, D.C., 20460. You may also visit the Ozone Protection website of EPA’s Stratospheric Protection Division at www.epa.gov/ozone/strathome.html for further information about EPA’s Stratospheric Ozone Protection regulations, the science of oz one layer depletion, and related topics.
SUPPLEMENTARY INFORMATION: Acronyms and Abbreviations. The following acronyms and abbr eviations are used in this document. CAA – Clean Air Act CAAA – Clean Air Act Amendments of 1990 CFC – Chlorofluorocarbon CFR – Code of Federal Regulations EPA – Environmental Protection Agency*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

4 of 64 FR – Federal Register HCFC – Hydrochlorofluorocarbon HVAC – Heating, Ventilating, and Air Conditioning Montreal Protocol – Montreal Protocol on Substances that Deplete the Ozone Layer MOP – Meeting of the Parties MT – Metric Ton ODP – Ozone Depletion Potential ODS – Ozone-Depleting Substances Party – States and regional economic integrati on organizations that have consented to be bound by the Montreal Protocol on Substances that Deplete the Ozone Layer Organization of This Document. The following outline is provided to aid in locating information in this preamble. I. General Information A. Does This Action Apply to Me? B. What Should I Consider as I Prepare My Comments for EPA? 1. Confidential Business Information (CBI) 2. Tips for Preparing Your Comments II. Background A. How Does the Montreal Protocol Phase Out HCFCs? B. How Does the Clean Air Act Phase Out HCFCs? C. What Sections of the Clean Air Act Apply to This Rulemaking? D. How Does This Action Relate to the Recent Court Decision? III. How Does EPA Propose to Allocate HCFC-22 and HCFC-142b Allowances for 2012-
2014?*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

5 of 64 A. What Baselines Does EPA Propos e to Use for HCFC-22 and HCFC-142b Allowances? B. What Factors Did EPA Consider inProposing Allocation Amounts for HCFC-22 and HCFC-142b? 1. How Important is HCFC-22 Rela tive to HCFC-142b for Servicing Existing Equipment? 2. Can Servicing Needs be Met with Virgin and Recovered Material? 3. How Would EPA Reduce the Amou nt Allocated in 2012-2014? 4. How Will EPA Address the Court’s Decision with Regard to 2010 HCFC Allowances? C. How Much HCFC-22 and HCFC-142b Would Be Allocated in 2012-2014? 1. How Does EPA Propose to Allocate HCFC-22 Consumption Allowances for 2012-2014? 2. How Does EPA Propose to Allocate HCFC-22 Production Allowances for
2012-2014? 3. How Does EPA Propose to Allocate HCFC-142b Consumption and Production Allowances for 2012-2014? 4. How Would the Aggregate for HCFC-22 and HCFC-142b Translate Entity-by-Entity? D. Are HCFC-141b, HCFC-123, HCFC -124, HCFC-225ca, and HCFC-225cb Allowances Affected by This Rulemaking? E. How Will EPA Allocate Other HCFCs? IV. How Does EPA Propose to Change the Regul ations Governing Transfers of Allowances of Class II Controlled Substances?*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

6 of 64 A. How Does EPA Propose to Change the Regulations Governing Permanent Transfers of Class II Allowances? B. How Does EPA Propose to Change the Regulations Governing Transfers of Article 5 HCFC Allowances? V. Statutory and Executive Order Reviews A. Executive Order 12866: Regulatory Pl anning and Review and Executive Order 13563: Improving Regulation and Regulatory Review B. Paperwork Reduction Act C. Regulatory Flexibility Act (RFA) D. Unfunded Mandates Reform Act E. Executive Order 13132: Federalism F. Executive Order 13175: Consultation and Coordination with Indian Tribal
Governments G. Executive Order 13045: Protection of Children from Environmental Health and Safety Risks H. Executive Order 13211: Actions th at Significantly Affect Energy Supply, Distribution, or Use I. National Technology Transfer and Advancement Act J. Executive Order 12898: Federal Actions to Address Environmental Justice in Minority Populations and Low-Income Populations
I. General Information A. Does This Action Apply to Me? This rule will affect the following categories:

- Industrial Gas Manufactur ing entities (NAICS code 325120), including fluorinated hydrocarbon gases ma nufacturers and reclaimers;*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

7 of 64 - Other Chemical and Allied Products Merchant Wholesalers (NAICS code 422690), including chemical gases and compressed gases merchant wholesalers;

- Air-Conditioning and Warm Air Heati ng Equipment and Commercial and Industrial Refrigeration Equipment Manufacturing entities (NAICS code 333415), including air-conditioning equipm ent and commercial and industrial refrigeration equipment manufacturers;

- Air-Conditioning Equipment and Supplie s Merchant Wholesalers (NAICS code 423730) , including air-conditi oning (condensing unit, compressors) merchant wholesalers;

- Electrical and Electronic Appliance, Television, a nd Radio Set Merchant Wholesalers (NAICS code 423620), incl uding air-conditioning (room units) merchant wholesalers; and

- Plumbing, Heating, and Air-Conditioning Contractors (NAICS code 238220), including Central air-conditioning system and commercial refrigeration installation; HVAC contractors. This list is not intended to be exhaustive, but rather provides a guide for readers regarding entities likely to be regulated by this action. This tabl e lists the types of entities that could potentially be regulated by this action. Other types of entities not listed in th is table could also be affected. To determine whether your facility, company, business or ganization, or other entity is regulated by this action, you should carefully ex amine these regulations. If you have questions regarding the applicability of this action to a particular entity, consult the person listed in the

“ FOR FURTHER INFORMATION CONTACT ” section. B. What Should I Consider as I Prepare My Comments for EPA? 1. Confidential Business Information (CBI)*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

8 of 64 Do not submit confidential business information (CBI) to EPA through www.regulations.gov or e-mail. Clearly mark the part or al l of the information that you claim to be CBI. For CBI information in a disk or CD-R OM that you mail to EPA, mark the outside of the disk or CD-ROM as CBI and then identify electronically within th e disk or CD-ROM the specific information that is claimed as CBI. In addition to one complete version of the comment that includes information claimed as CBI, a c opy of the comment that does not contain the information claimed as CBI must be submitted for inclusion in the public docket. Information so marked will not be disclosed except in accordance with procedures set forth in 40 CFR 2.2. 2. Tips for Preparing Your Comments When submitting comments, remember to do the following:

• Identify the rulemaking by docket number and other identifying information (subject heading, Federal Register date and page number).

• Follow directions. The agency may ask you to respond to specific questions or organize comments by referencing a Code of Federal Regulati ons (CFR) part or section number.

• Explain why you agree or disagree with the proposal; suggest alternatives and substitute language for your requested changes.

• Describe any assumptions and provide any technical information and/or data that you used in preparing your comments.

• If you estimate potential costs or burdens, explain how you arrived at your estimate in sufficient detail to allow for it to be reproduced.

• Provide specific examples to illustrate your concerns, and suggest alternatives.

• Explain your views as clearly as possible, avoiding the use of profanity or personal threats.

• Make sure to submit your comments by the comment period deadline identified.*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

9 of 64 II. Background EPA is undertaking this rulemaking as a result of the decision issued by the U.S. Court of Appeals for the District of Columbia Circuit (Court) in Arkema v. EPA (618 F.3d 1, D.C. Cir. 2010) regarding the December 15, 2009 final rule titled “Protection of Stratospheric Ozone: Adjustments to the Allowance System for C ontrolling HCFC Production, Import, and Export,” published at 74 FR 66413 (2009 Fi nal Rule). Certain allowanc e holders affected by the 2009 Final Rule filed petitions for j udicial review of the rule under section 307(b) of the Clean Air Act. Among other arguments, the petitioners contended that the rule was impermissibly retroactive because in setting the baselines for the new regulatory period, EPA did not take into account certain inter-pollutant base line transfers that petitioners had performed during the prior regulatory period. The Court issued a decision on August 27, 2010, agreeing with petitioners that “the [2009] Final Rule unacceptably alters trans actions the EPA approved under the 2003 Rule” ( Arkema v. EPA , 618 F.3d at 3). The Court vacated the ru le in part, “insofar as it operates retroactively,” and remanded to EPA “for pr ompt resolution,” (618 F.3d at 10). The Court withheld the mandate for the decision pending the disposition of any petition for rehearing. EPA’s petition for rehearing was denied on January 21, 2011. The mandate issued on February 4, 2011. More detail is provided on the case and EP A’s interpretation of th e Court’s decision in section II.D. of this preamble. EPA addressed the Court’s part ial vacatur as it relates to 2011 in a (INSERT PUBLISH DATE OF IFR) interim final rule, “Protection of Stratospheric Ozone: Adjustments to the Allowance System for Controlling HCFC Produc tion, Import, and Export ,” (2011 Interim Final Rule). This proposed rule is a follow-on to th at action, and proposes a path forward for the remainder of the regulatory period ending on December 31, 2014. A. How Does the Montreal Protocol Phase Out HCFCs?*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

10 of 64 The Montreal Protocol on Substances that Deplete the Ozone Layer is the international agreement aimed at reducing and eventually eliminating the producti on and consumption of stratospheric ozone-depleting substances (ODS). Th e U.S. was one of the original signatories to the 1987 Montreal Protocol and the U.S. ratifie d the Protocol on April 12, 1988. Congress then enacted, and President George H.W. Bush signed into law, the Clean Air Act Amendments of 1990 (CAAA), which included Title VI on Stratospheric Ozone Prot ection, codified as 42 U.S.C. Chapter 85, Subchapter VI, to ensure that the U.S. could satisfy its obligations under the Montreal Protocol. Title VI includes restric tions on production, consum ption, and use of ODS that are subject to acceleration if “the Montreal Protocol is modi fied to include a schedule to control or reduce production, consumption, or use . . . more rapidly than the applicable schedule” prescribed by the statute (CAA §606). Both the M ontreal Protocol and th e Clean Air Act (CAA) define consumption as producti on plus imports minus exports. In 1990, as part of the London Amendment to the Montreal Pr otocol, the Parties identified HCFCs as “transitional substances” to serve as temporary, lower ozone depletion potential (ODP) substitutes for CFCs and ot her ODS. EPA similarly viewed HCFCs as “important interim substitutes that will allow for th e earliest possible phaseout of CFCs and other Class I substances 1 ” (58 FR 65026). In 1992, through th e Copenhagen Amendment to the Montreal Protocol, the Parties created a deta iled phaseout schedule for HCFCs beginning with a cap on consumption for industrialized (Article 2) Parties, a schedule to which the U.S. adheres. The consumption cap for each Article 2 Party wa s set at 3.1 percent (l ater tightened to 2.8 percent) of a Party’s CFC consumption in 1989, plus a Party’s consumption of HCFCs in 1989 (weighted on an ODP basis). Based on this formul a, the HCFC consumption cap for the U.S. was 15,240 ODP-weighted metric tons (MT), effective January 1, 1996. This became the U.S. consumption baseline for HCFCs.

1 Class I refers to the controlled substances listed in appendi x A to 40 CFR part 82 subpart A. Class II refers to the controlled substances listed in appendix B to 40 CFR part 82 subpart A.*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

11 of 64 The 1992 Copenhagen Amendment created a sc hedule with graduated reductions and the eventual phaseout of HCFC consumption (Cope nhagen, 23-25 November, 1992, Decision IV/4). Prior to a later adjustment in 2007, the schedule in itially called for a 35 percent reduction of the consumption cap in 2004, followed by a 65 percen t reduction in 2010, a 90 percent reduction in 2015, a 99.5 percent reduction in 20 20 (restricting the remaining 0.5 percent of baseline to the servicing of existing refrigerati on and air-conditioning equipment), with a total phaseout in 2030. The Copenhagen Amendment did not cap HC FC production. In 1999, the Parties created a cap on production for Article 2 Parties through an amendment to the Montreal Protocol agreed by the Eleventh Meeting of the Parties (B eijing, 29 November – 3 December 1999, Decision XI/5). The cap on production was set at the average of: (a) 1989 HCFC production plus 2.8 percent of 1989 CFC production, an d (b) 1989 HCFC consumption plus 2.8 percent of 1989 CFCconsumption. Based on this formula, the HCFC production cap for the U.S. was 15,537 ODPweighted MT, effective January 1, 2004. This be came the U.S. production baseline for HCFCs. To further protect human health and the enviro nment, the Parties to the Montreal Protocol adjusted the Montreal Protocol’s pha seout schedule for HCFCs at the 19 thMeeting of the Parties in September 2007. In accordance with Article 2(9 )(d) of the Montreal Protocol, the adjustment to the phaseout schedule was effective on May 14, 2008. 2 As a result of the 2007 Montreal Adjustment (reflected in Decision XIX/6), the U.S. and other industrialized countries are obligated to reduce HCFC production and consumption 75 percent below the established baseline by 2010, rath er than 65 percent as previously required. The other milestones remain the same. The adjustment also resulted in a phaseout schedule for HCFC production that parallels the consum ption phaseout schedule. All production and consumption for Article 2 Parties is phased out by 2030.

2 Under Article 2(9)(d) of the Montreal Protocol, an adjustment enters into force six months from the date the depositary (the Ozone Secretariat) circulates it to the Pa rties. The depositary accepts all notifications and documents related to the Protocol and examines whether all formal re quirements are met. In accor dance with the procedure in Article 2(9)(d), the depositary communicated the adjustment to all Parties on November 14, 2007. The adjustment entered into force and became binding for all Parties on May 14, 2008.*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

12 of 64 Decision XIX/6 also adjusted the provisions for Parties operating under paragraph 1 of Article 5 (developing countries): (1) to set HC FC production and consumption baselines based on the average 2009-2010 production and consumption, respectively; (2) to freeze HCFC production and consumption at thos e baselines in 2013; and (3) to add stepwise reductions of 10 percent below baselines by 2015, 35 percent by 2020, 67.5 percent by 2025, and 97.5 percent by 2030 – allowing, between 2030 and 2040, an annual aver age of no more than 2.5 percent to be produced or imported solely for servicing existin g air-conditioning and refr igeration equipment. All production and consumpti on for Article 5 Parties will be phased out by 2040. In addition, Decision XIX/6 ad justed Article 2F to allow industrialized countries to produce “up to 10 percent of baseline levels” for e xport to Article 5 countrie s “in order to satisfy basic domestic needs” until 2020. 3 Paragraph 14 of Decision XIX/ 6 notes that no later than 2015, the Parties would consider “further reduction of production for basic domestic needs” in 2020 and beyond. Under paragraph 13 of Decision XIX/ 6, the Parties will review in 2015 and 2025, respectively, the need for the “servicing tails” for industrialized and developing countries. The

3 Paragraphs 4-6 of adjusted Article 2F read as follows: “4. Each Party shall ensure that for the twelve-month period commencing on 1 January 2010, and in each twelve-month period the reafter, its calculated level of consumption of the controlled substances in Group I of Annex C does not ex ceed, annually, twenty-five per c ent of the sum referred to in paragraph 1 of this Article. Each Party produc ing one or more of these substances shall, for the same period s, ensure that its calculated level of production of the controlled substances in Group I of Annex C does not exceed, annually, twenty-five pe r cent of the calculated level referred to in paragraph 2 of this Article. However, in order to satis fy the basic domestic needs of the Parti es operating under paragraph 1 of Article 5, its calculated level of production may exceed that limit byup to ten per cent of its calculated leve l of production of the controlled substances in Group I of Annex C as referred to in paragraph 2. 5. Each Party shall ensure th at for the twelve-month period commencing on 1 Ja nuary 2015, and in each twelve-month period there after, its calculated level of consumption of the controlled substances in Group I of Annex C does not exceed, annually, ten per cent of t he sum referred to in paragraph 1 of this Article. Each Party producing one or more of these substances shall, for the same periods, e nsure that its calculated level of production of the cont rolled substances in Group I of Annex C does not exceed, annually, ten per cent of th e calculated level referred to in paragraph 2 of this Article. However, in order to satisfy the basic domestic needs of the Parties operatin g under paragraph 1 of Article 5, its calculated level of production may exceed th at limit by up to ten per cent of its calculated level of produ ction of the controlled substances in Group I of Anne x C as referred to in paragraph 2. 6. Each Party shall ensure th at for the twelve-month period commencing on 1 Ja nuary 2020, and in each twelve-month period there after, its calculated level of consumption of the controlled substances inGroup I of Annex C does not exceed zero. Each Party producing o ne or more of these substances shall, for the same periods, ensure that its calculated level of production of the controlled substances in Group I of Annex C does not exceed zero. However: i. each Party may exceed that limit on consumption by up to zero point five per cent of the sum referred to in paragraph 1 o f this Article in any such twelve-month period ending before 1 January 2030, provided that such consump tion shall be restricted to the servici ng of refrigeration and air conditioning e quipment existing on 1 January 2020; ii. each Party may exceed that limit on production by up to zero poi nt five per cent of the averag e referred to in paragraph 2 of this Article in any such twelve-month period endi ng before 1 January 2030, provided that suchproduction shall be restricted to the servicing of refrigeration and air conditioning e quipment existing on 1 January 2020.”*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

13 of 64 term “servicing tail” refers to an amount of HCFC s used to service existing equipment, such as certain types of air-conditioning and refrigeration appliances. B. How Does the Clean Air Act Phase Out HCFCs? The U.S. has chosen to implement the M ontreal Protocol phas eout schedule on a chemical-by-chemical basis. In 1992, environm ental and industry groups petitioned EPA to implement the required phaseout by eliminating th e most ozone-depleting HCFCs first. Based on the available data at that time, EPA believed the U.S. could meet, and possibly exceed, the required Montreal Protocol redu ctions through a chemical-by-chem ical phaseout that employed a “worst-first” approach focusing on certain chemi cals earlier than others . In 1993, as authorized by section 606 of the CAA, the U.S. establishe d a phaseout schedule that eliminated HCFC-141b first and would greatly restri ct HCFC-142b and HCFC-22 next, followed by restrictions on all other HCFCs and ultimately a complete phaseout (58 FR 15014, March 18, 1993; 58 FR 65018, December 10, 1993). On January 21, 2003 (68 FR 2820), EPA promul gated regulations (2003 Final Rule) to ensure compliance with the first reduction milestone in the HCFC phaseout: the requirement that by January 1, 2004, the U.S. reduce HCFC consumption by 35 percent and freeze HCFC production. In the 2003 Final Rule, EPA establ ished chemical-specific consumption and production baselines for HCFC -141b, HCFC-22, and HCFC-142b for the initial regulatory period ending December 31, 2009. Section 601(2) stat es that EPA may select “a representative calendar year” to serve as the company baseline for HCFCs. In the 2003 Final Rule, EPA concluded that because the entities eligible for allowances had differing production and import histories, no single year was representative for all companies. Therefore, EPA assigned an individual consumption baseline year to each company by selecting its highest ODP-weighted consumption year from among the years 1994 through 1997. EPA assigned individual production baseline years in the same manner. EPA also provided for new entrants that began importing*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

14 of 64 after the end of 1997 but before April 5, 1999, the date the advanced notice of proposed rulemaking was published. EPA took this action to ensure that small businesses that might not have been aware of the impending rulemaking woul d be able to continue in the HCFC market. The 2003 Final Rule apportioned production and consumption baselines to each company in amounts equal to the amounts in the compa ny’s highest “production year” or “consumption year,” as described above. It completely pha sed out the production and import of HCFC-141b by granting 0 percent of that substance’s baseline for production and consumption in the table at 40 CFR 82.16. EPA did, however, create a petition pro cess to allow applicants to request small amounts of HCFC-141b beyond the phaseout. The 2003 Final Rule also granted 100 percent of the baselines for production and consumption of HCFC-22 and HCFC-142b for each of the years 2003 through 2009. EPA was able to allocate al lowances for HCFC-22 and HCFC-142b at 100 percent of baseline because, inlight of the concurrent comp lete phaseout of HCFC-141b, the allocations for HCFC-22 and HCFC-142b, combined with projections for consumption of all other HCFCs, remained below the 2004 cap of 65 percent of the U.S. baseline. EPA allocates allowances for specific year s; they are valid between January 1 and December 31 of a given control period (i.e., ca lendar year). Prior to December 15, 2009, EPA had not allocated any HCFC allowances for year 2010 or beyond. The regulations at section 82.15(a) and (b) only addressed the production and import of HCFC-22 and HCFC-142b for the years 2003-2009. Through the 2009 Final Rule (74 FR 66412), EPA addressed the production and import of HCFC-22 and HCFC-142b for the 2010-2014 control periods. Absent the granting of calendar-year allowances, section 82.15 would have prohibited the pr oduction and import of HCFC-22 and HCFC-142b after December 31, 2009. Th e 2009 Final Rule allowed for continued production and consumption, at specified amount s, of HCFC-142b, HCFC-22, and other HCFCs not previously included in the allowan ce system, for the 2010-2014 control periods.*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

15 of 64 In the U.S., an allowance is the unit of measure that cont rols production and consumption of ODS. EPA establishes company-by-company ba selines (also known as “baseline allowances”) and allocates calendar-year allowances equal to a percentage of the baseline for specified control periods. A calendar-year allowance represents the privilege grante d to a company to produce or import one kilogram (not ODP-weighted) of the sp ecific substance. EPA a llocates two types of calendar-year allowances – production allowanc es and consumption allowances. “Production allowance” and “consumption allowance” are de fined at section 82.3. To produce an HCFC for which allowances have been allocated, an a llowance holder must e xpend both production and consumption allowances. To import an HCFC fo r which allowances have been allocated, an allowance holder must expend consumption allo wances. An allowance holder exporting HCFCs for which it has expended consumption allowanc es may obtain a refund of those consumption allowances upon submittal of proper documentation to EPA. Since EPA is implementing the phaseout on a chemical-by-chemical basis, it allocates and tracks production and consumption allowances on an absolute kilogram basis for each chemical. Upon EPA approval, an allowance holde r may transfer calendar-year allowances of one type of HCFC for calendar-year allowances of another type of HC FC, with transactions weighted according to the ODP of the chemicals involved. Pursua nt to section 607 of the CAA, EPA applies an offset to each HCFC transfer by deducting 0.1 percent from the transferor’s allowance balance. The offset benefits the ozone layer since it “results in greater total reductions in the production in each year of . . . class II s ubstances than would occur in that year in the absence of such transactions” (42 U.S.C. 7671f). The U.S. remained comfortably below th e aggregate HCFC cap through 2009. The 2003 Final Rule announced that EPA would allocate allowances for 2010-2014 in a subsequent action and that those allowances would be lower in aggregate than for 2003-200 9, consistent with the next stepwise reduction for HCFCs under the Montreal Protocol. EPA stated its intention to*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

16 of 64 determine the number of allowances that would be needed for HCFC-22 and HCFC-142b, bearing in mind that other HCFC s would also contribute to tota l HCFC consumption. EPA noted that it would likely achieve the 2010 reduction st ep by applying a percentage reduction to the HCFC-22 and HCFC-142b baselines. EPA subse quently monitored the market to estimate servicing needs and market adju stments in the use of HCFCs, including HCFCs for which EPA did not establish baseline s in the 2003 Final Rule. In the 2009 Final Rule, EPA determined both the estimated demand for HCFC-22 during the 2010-2014 regulatory period and the percentage of that estimated demand for which it was appropriate to allocate allowances . As described in section III.B. of this action, EPA determined that the percentage of the estimated demand allo cated in the form of allowances should not remain constant from year to year but rather should decline on an annual basis. For 2010, EPA allocated allowances equal to 80 percent of th e estimated demand for HCFC-22, concluding that reused, recycled, and reclaimed material coul d meet the remaining 20 percent. Under the 2009 Final Rule, the percentage of estimated demand for which there was no allocation, and therefore would need to be met through recycling and reclamation, rose from 20 percent in 2010 to 29 percent in 2014 to ensure the U.S. market woul d have a viable reclam ation industry and could meet the 2015 stepwise reduction un der the Montreal Protocol. The determinations EPA made in the 2009 Fina l Rule regarding (1) the total estimated demand for HCFC-22 in 2010-2014 and (2) the percentage of that estimated demand that EPA would address through an allowance allocation we re not at issue in the litigation and are unaffected by the Court’s decision. As such, EPA did not revisit either determination with respect to 2011 in the 2011 Interi m Final Rule (76 FR XXXXX), butrather relied on the existing record from the 2009 Final Rule (74 FR 66412). The 2011 Interim Final Rule established new baselines that (1) credited the 2008 in ter-pollutant trad es at issue in Arkema v. EPA based on the Court’s decision and (2) reflected inter-company, single-pollutant base line transfers that*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

17 of 64 occurred since the 2009 Final Rule was signed. Th e 2011 Interim Final Rule also (3) allocated HCFC-22 and HCFC-142b allowances for 2011, (4) clarified EPA’s policy on all future interpollutant transfers, and (5) updated company names. C. What Sections of the Clean Ai r Act Apply to This Rulemaking? Several sections of the CAA apply to this rulemaking. Section 605 of the CAA phases out production and consumption and restricts the use of HCFCs in accordance with the schedule set forth in that section. As discussed in the 2009 Final Rule (74 FR 66416), section 606 provides EPA authority to set a more stringent phaseout sc hedule than the schedule in section 605 based on an EPA determination regarding current scientific information or the availability of substitutes, or to conform to any acceleration under the Montreal Protocol. EPA previously set a more stringent schedule than the section 605 schedule through a rule published December 10, 1993 (58 FR 65018). Through the 2009 Final Rule, EPA made a further adjustment to the section 605 schedule based on the acceleration under the Montre al Protocol as agreed to at the Meeting of the Parties in September 2007. The more stringe nt schedule established in that rule is unaffected by the recent Court decision and is theref ore still in effect. Section 606 provides authority for EPA to pr omulgate regulations that establish a schedule for production and consumpti on that is more stringent than what is set forth in section 605 if: “(1) based on an assessment of credible current scientific information (including any assessment under the Montreal Protocol) regardi ng harmful effects on th e stratospheric ozone layer associated with a class I or class II substanc e, the Administrator determines that such more stringent schedule may be necessary to protect human health and the environment against such effects, (2) based on the availability of subs titutes for listed substances, the Administrator determines that such more stringent schedule is practicable, taking into account technological achievability, safety, and other re levant factors, or (3) the Mont real Protocol is modified to include a schedule to control orreduce production, consumption, or use of any substance more*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

18 of 64 rapidly than the applicable schedule under this title. ” It is only necessary to meet one of the three criteria. In the 2009 Final Rule, EPA determined th at all three criteria had been met with respect to the schedule for phasing out production and consumption of HCFC-22 and HCFC-142b. As noted in the 2009 Final Rule, while section 606 is sufficient authority for establishing a more stringent schedule than the section 605 phaseout schedule, sec tion 614(b) of the CAA provides that in the case of a conflict between the CAA and the Montreal Protocol, the more stringent provision shall govern. T hus, section 614(b) requires the Agency to establish phaseout schedules at least as stringent as the schedules contained in the Montreal Protocol. To meet the 2010 stepdown requirement, EPA is continuing to allo cate HCFC allowances at a level that will ensure the aggregate HCFC produc tion and consumption will not ex ceed 25 percent of the U.S. baselines. For more discussion of this point, see 74 FR 66416. Finally, section 607 addresses transfers of allowances both between companies and chemicals. EPA is further clarifying the policy and procedures applicable to permanent interpollutant transfers in this acti on, and is proposing a minor change to the regulations governing inter-pollutant transfers to provide additional clarity to stakeholders. D. How Does This Action Relate to the Recent Court Decision? Certain allowance holders affected by the 2009 Final Rule filed petitions for review in the U.S. Court of Appeals for the District of Columbia Circuit. Among other arguments, the petitioners, Arkema, Inc., Solvay Fluorides, LLC, and Solvay Solexis, Inc., contended that the rule was impermissibly retroactive because in se tting the baselines for the new regulatory period, EPA did not take into account ce rtain inter-pollutant baseline transfers th at petitioners had performed during the prior regul atory period. The transfers at issue occurred in 2008. Solvay Solexis, Inc. submitted two Class II Controlled Substance Transfer Forms for consumption allowance transfers to Solvay Fluorides , LLC on February 15, 2008, and March 4, 2008. Arkema, Inc. submitted two Class II Controlled Substance Transfer Forms for consumption and*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

19 of 64 production allowance transfers on April 18, 2008. Each company requested EPA’s approval to convert HCFC-142b allowances to HCFC-22 allo wances, and checked a box on the EPA transfer form indicating that “baseline” allowances w ould be transferred. EPA sent non-objection notices to both Solvay Solexis, Inc. and Solvay Fluorides, LLC on February 21, 2008 and March 20, 2008 and to Arkema, Inc. in April 2008. The tr ansfer requests and EPA’s approvals were attached to petitioners’ court filings and ar e available in the dock et for this action. In the Notice of Proposed Rulemaking tit led “Protection of Stratospheric Ozone: Adjustments to the Allowance System for C ontrolling HCFC Production, Import, and Export,” published in the Federal Register at 73 FR 78680 on December 23, 2008 (2008 Proposed Rule), EPA requested comments on establishing baselines fo r the 2010-2014 regulatory period “with or without” taking into account ba seline inter-po llutant transfers made during the 2003-2009 regulatory period (73 FR 78687). The proposed regul atory text accounted for the inter-pollutant transfers discussed above. The increase in HCFC -22 baseline allowances for Arkema, Inc. and Solvay Fluorides, LLC presented in the 2008 Pr oposed Rule resulted in a larger amount of HCFC-22 baseline allowances overall and theref ore a lower percentage of HCFC-22 baselines allocated across the board in each control period. Specifically, the proposed shift resulted in a 16 percent decrease in allocation share for all othe r HCFC-22 allowance holders, and increases for the petitioners: Arkema and Solvay. For more detail on the effect of these transfers, see section III.C. of this preamble. In the 2009 Final Rule, after c onsidering comments, EPA dete rmined that allowing interpollutant transfers from one regulatory period to become a part of the baseline in the next regulatory period could undermine the Agency’s chemical-by-chemical phaseout approach and could encourage market manipulation. EPA also c oncluded that section 607 of the CAA was best read as limiting inter-pollutant transfers to thos e conducted on an annual ba sis. For these reasons,*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

20 of 64 EPA did not take the 2008 inter-pollutant transfer s into account in establishing the baselines for the 2009 Final Rule covering 2010-2014. The Court issued a decision on August 27, 2010, agreeing with petitioners that “the [2009] Final Rule unacceptably alters trans actions the EPA approved under the 2003 Rule” ( Arkema v. EPA , 618 F.3d at 3). The Court vacated the ru le in part, “insofar as it operates retroactively,” and remanded to EPA “for pr ompt resolution,” (618 F.3d at 10). The Court withheld the mandate for the decision pending th e disposition of any pe tition for rehearing. On November 12, 2010, EPA filed a petition for re hearing, which was denied on January 21, 2011. The mandate issued on February 4, 2011. Because the Court vacate d the rule only in part, without specifying which part or parts were vacated, EPA may adopt a r easonable interpretation of the vacatur’s extent. In doing so, EPA is relying on its expertise in administering th e HCFC phaseout regulations under Title VI of the CAA. First, EPA notes that the rule contains elements that were not at issue in the litigation. EPA concludes that the vacatur has no effect on a llowances for any substances other than HCFC142b and HCFC-22, since the petitioners’ claims and the opinion itself discuss only those two substances. Similarly, EPA concl udes that other discrete porti ons of the rule, such as the provisions on use and introduction into interstate commerce, are unaffected by the vacatur. The baselines for HCFC-142b and HCFC-22 were clearly at issue in the litigation and indeed are the focus of the Court’s opinion. Th e Court found that “the Agency’s refusal to account for the Petitioners’ baseline transfers of inter-po llutant allowances in the Final Rule is impermissibly retroactive,” (618 F.3d at 9). Beca use baseline and calendar year allowances are inextricably linked4 , EPA has determined that the Court’s vacatur voided the HCFC-22 and

4 The reason baseline and calendar-year allocations are inextricable is because calendar-year allocations are expressed as a percentage of baseline, and the percentage of baseline allocated for a specific substance varies depending on the sum of all company baselines for that substance. The process works as follows for each specific HCFC: First, all the company-specific baselines listed inthe tables at 40 CFR 82.17 and 82.19 are added to determine the aggregate amount of baseline production and consumption, respectively. Second, EPA determines how many consumption allowances the market needs for a given year, taking into account recycled, reused, and*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

21 of 64 HCFC-142b baselines in 40 CFR 82.17 and 82.19 as we ll as the percentage of baseline allocated for those specific substances in 40 CFR 82.16 for all companies listed in those sections. 5 This means that until EPA establishes new baselines and allocates new calendar-year allowances, production and import of these two substances is prohibited unde r 40 CFR 82.15. Recognizing this scenario, on January 28, 2011, EPA sent letters to affected stakeholders informing them that the Agency would exercise enforcement discre tion for a limited period provided their production and import did not exceed specified levels a nd provided that they adhered to additional conditions. In determining the meaning of the Court’ s vacatur, EPA considered whether this interpretation was consistent with what th e Court intended and a good fit for the specific circumstances, which include the goals and de sign of the HCFC allowance program and the basic structure of the 2009 Final Rule. While this in terpretation is appropriate in this instance, it is possible that another interpretation would be more appropriate in a case involving a program with different goals, design, or structure. EPA’s initial response to the Court’s partial vacatur was to issue the 2011 Interim Final Rule (76 FR XXXX). Through today’s notice, EP A is proposing a way to address the Court’s decision as it relates to the remainder of the regulatory period ending December 31, 2014. In addition, the Agency is taking comment on whether the vacatur and remand should be interpreted as applying to the 2010 allocations, and if s o, how allowances might be adjusted to reflect this. See section III.B.4. for EPA’s pr oposed approach to a ddress 2010 allowances.

reclaimed material, and divides that amount by the a ggregate amount of baseline allowances. The resulting percentage listed in the table at section 82.16 becomes wh at each company is allowed to consume in a given control period. For example, a company with 100,000 kg of HCFC-22 baseline allowances would multiply that number by the percentage allowed for 2011 (for example, 32 percent) to determine its calendar-year allowance is 32,000 kg. Historically and in this proposed rule, EPA has allocated the same percentage of baseline allowances for production as it does for consumption. 5 The companies’ allocations are inter-re lated because, as noted in footnote 4, the percentage of baseline allocated varies according to the sum of the company-specific baselines.*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

22 of 64 III. How Does EPA Propose to Allocate HCFC-22 and HCFC-142b Allowances for 2012-
2014? EPA is proposing to continue the system es tablished in previous rulemakings (68 FR 2820, 74 FR 66412, INSERT FRNs for 2011 rule on ce published) to address HCFC production and import in the U.S. The process works as follows for each specific HCFC: First, all the company-specific baselines listed in the tables at 40 CFR 82.17 and 82.19 are added to determine the aggregate amount of base line production and consump tion, respectively. Second, EPA determines how many consumption allowances th e market needs for a given year, taking into account recycled, reused, and re claimed material, and divides that amount by the aggregate amount of baseline allowances. The resulting pe rcentage listed in th e table at section 82.16 becomes what each company is allowed to cons ume in a given control period. For example, a company with 100,000 kg of HCFC-22 baseline a llowances would multiply that number by the percentage allowed for the year (for example, 32 percent in 2011) to determine its calendar-year allowance is 32,000 kg. Historically, EPA has allo cated the same percentage of baseline allowances for production as it does for consum ption. However, U.S. companies in aggregate typically use fewer of their consumption allo wances than production allowances because consumption allowances are returned once companies document that they exported HCFCs. This process is described in more detail in 40 CFR 82.20. Specifically, EPA is proposing to (1) establish 2012-2014 company-by-company consumption and production baselines for HCFC -22 and HCFC-142b in the tables at 40 CFR 82.17 and 82.19 identical to the baselines establis hed in the 2011 Interim Final Rule (INSERT FRN CITATION once published), (2) allo cate company-by-company production and consumption allowances for these substances for 2012-2014 by establis hing percentages of baseline in the table at secti on 82.16, (3) provide additional allo wances to the petitioners in Arkema v. EPA and others reflecting lost opportunities to produce or consume in 2010 and (4)*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

23 of 64 revise the regulatory text at 40 CFR 82.23 to make the procedure for all future inter-pollutant transfers clear. EPA will addr ess the allocations for the control periods beyond 2014 at a later date. All aspects of th e 2009 Final Rule promulgated on De cember 15, 2009 (74 FR 66412) that are not addressed in this proposed rule are unchanged. Additionally, EPA notes that beginning January 1, 2015, section 605 of the CAA prohibits the use and intr oduction into interstate commerce of any HCFC unless it “(1) has been used, recovered and recycled; (2) is used and enti rely consumed (except for trace quantities) in the production of other chemicals; or (3) is used as a refrigerant in app liances manufactured prior to January 1, 2020.” In addition, EPA’s regulati ons at 40 CFR 82.15 restrict use and introduction into interstate commerce of HCFC-141b, HC FC-142b, and HCFC-22 beginning in 2010, with limited exceptions. If entities will need HC FCs in 2015 and beyond for uses other than the exemptions contained in section 605, they s hould contact EPA prior to 2013. Entities should understand that the statutory prohibition in section 605 generally will prevent EPA from accommodating such needs, with the possibl e exception of de minimis quantities. A. What Baselines Does EPA Propose to Us e for HCFC-22 and HCFC-142b Allowances? In the 2009 Final Rule, EPA presented the a llocation structure for HCFC-22 and HCFC142b for the control periods 2010-20 14: allocating a percentage of the baseline production and consumption allowances. The rationale for this system is discussed further at 74 FR 66412. The Court found no fault with EPA’s framework for al locating HCFCs in the 2009 Final Rule, except the aspects of the rule deemed to be retroactive, i.e., not taking into account inter-pollutant baseline transfers that occurred in the prior regulatory period in establishing company-specific baseline allowances. To address this, EPA is proposing to establish baselines for 2012-2014 identical to the HCFC-22 and HC FC-142b baselines established in the 2011 Interim Final Rule (Insert FRN once published) that reflect past inte r-pollutant baseline tran sfers deemed permanent by the Court.*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

24 of 64 EPA cited several reasons why it would pref er to set baselines without taking into account inter-pollutant transf ers in the 2009 Final Rule (74 FR 66420), the Response to Comments document included in the record for that rulemaking, and the 2011 Interim Final Rule (INSERT FRN once published). However, EPA is recognizing the 2008 tran sfers in establishing the baselines through 2014 in accordance with th e Court’s decision. The Agency is providing advance notice that for the 2015-2019 regulatory period, it would consider using more recent production and import data than the 1994-1997 data us ed to set baselines for the first time in the 2003 Final Rule. B. What Factors Did EPA Consider in Propos ing Allocation Amounts for HCFC-22 and HCFC142b? In the 2009 Final Rule, EPA decided to al locate HCFC-22 and HCFC-142b allowances based on the projected servicing needs for thos e compounds, taking into account the amount of those needs that can be met through recycli ng and reclamation. EPA is not changing that approach in this proposed rulema king and continues to believe it is necessary to promote use of reused, recycled, and reclaimed material in anticipation of the 2015 phasedown step. However, the specific amounts allocated pe r company are different due to the changed baselines and the need to apply a different allocation percentage to company baselines in order to keep the aggregate amount allocated the same. While EPA is not changing its pr ojection of servicing needs and the amount of those needs that can be met through recycling an d reclamation at this time, EPA is proposing to allocate more HCFC- 22 through this rulemaking than it did in the 2009 Final Rule for a single year as a result of the unforeseen circumstances presented by the Court’s decision in Arkema v. EPA . Specifically, EPA is considering an approach to the 2013 allocation intended to allocate allowances to account for lo st opportunities to produce and consume in 2010, given that 2010 allowance levels we re based on baselines th at are inconsistent with the Court’s finding (section III.B.4. discusses this in more depth).*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

25 of 64 1. How Important is HCFC-22 Relative to HCFC-142b for Servicing Existing Equipment? HCFC-22 is the most widely-used HCFC. The demand for its use in servicing existing equipment was the primary factor affecting EPA’s allocation of production and consumption allowances of HCFCs for the current regulatory period. Prior to issuing the 2009 Final Rule and the 2009 Servicing Tail Report , EPA issued and sought comment on three versions of a draft report analyzing servicing demand for the HCFC appliances in the U.S. refrigeration and airconditioning sector projected to be in service from 2010-2019 (all versions available at Docket EPA-HQ-OAR-2008-0496: published November 4, 2005 at 70 FR 67172; released at a stakeholder meeting on September 29, 2006; published December 23, 2008, with 2008 Proposed Rule). The Servicing Tail Report focuses on air-conditioning and refrigeration appliances because such equipment represents the bulk of the servicing need. In addition, the servicing exception to the use ban for HCFC-22 and HCFC- 142b pertains only to use as a refrigerant in such equipment. Under 40 CFR 82.15(g) nearly all other uses of newly produced material for these two HCFCs were banned effective January 1, 2010. The projected servicing need for HCFC-22 in 2012 is approximately 53,200 MT. HCFC -142b has primarily been used as a foam blowing agent, a use that was prohibited begi nning in 2010 (40 CFR 82.15(g)). The projected servicing demand for existing refrigeration equi pment containing HCFC-142b is extremely low: approximately 100 MT. EPA therefore focused th e analysis on HCFC-22 because that compound is the predominant HCFC in the installed base of air-conditioning and re frigerant equipment for which servicing in the U.S. will likely continue. As discussed in the 2009 Final Rule, the majority of HCFC-22 equipment that is projected to be in use from this point onwar d will be air-conditioning applications, including window units, packaged terminal units, unitary air-conditioning, chillers , dehumidifiers, water and ground source heat pumps, and motor vehicle air-conditioning in buses and trains. The report*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

26 of 64 projected that approximately 145.6 million units of all such types of HCFC-22 air-conditioning equipment were in use in 2010, decreasing by about 41 percent in 2015 and 86 percent in 2020. In addition, approximately 3.8 million units of HCFC -22 refrigeration equipment were in use in 2010. The installed base of HCFC-2 2 refrigeration equipment is projected to decrease from 2010 levels by about 44 percent in 2015 and 75 percent in 2020. For more on the Servicing Tail Report , see 74 FR 66424 and the Servicing Tail Report included in the docket. EPA estimates that the servicing need for HCFC-22 will continue to decrease each year, and consistent with the 2009 Final Rule, EPA proposes to account for this by allocating a smaller amount for 2012 than was allocated for 2011. This a pproach is described in section III.B.3. of this action. 2. Can Servicing Needs be Met with Virgin and Recovered Material? In the 2009 Final Rule, the Agency recognized that servicing demand can be met with a combination of newly-manufactured or imported HCFCs (virgin HCFCs) and HCFCs that have been recovered and either reused, recycled or reclaimed. Therefore, EPA did not anticipate that virgin HCFC-22 would need to be produced or imported to meet the entire HCFC-22 servicing demand in each year between 2010 and 2014. The Servicing Tail Report analyzes various scenarios regarding reclamation. EPA continues to believe that reused, recycled, and reclaimed material can help meet HCFC-22 servicing needs and is therefore proposing to maintain the same approach to meeting servic ing needs at this time. 3. How Would EPA Reduce the Amount Allocated in 2012-2014? As explained in the preamble to the 2009 Fina l Rule, without year-to-year reductions in the allocations for virgin HC FC-22, the HCFC-22 market coul d be oversaturated, and the contribution of reused, recycle d, and reclaimed refrigerant woul d decrease, both in the total number of kilograms and as th e proportion of overall need.*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

27 of 64 EPA is particularly concerned with en couraging a smooth transition to the 2015 stepdown. At that date, the U.S. must meet a 90 percent reduction belo w the baseline for all
HCFCs. EPA’s Servicing Tail Report shows that even a 20 percen t recovery rate would be insufficient to meet the demand for HCFC-22 in 2015. As shown in Table 4-5 in the report, demand for HCFC-22 in 2015 is projected to be 38,800 MT while the cap for all HCFCs equates to 27,709 MT of HCFC-22 (assuming no allocation for any other HCFCs). In developing the 2009 Final Rule, EPA calculated that to meet the total demand in 2015, the recovery rate would have to increase to 26 percent (representi ng 29 percent of total servicing demand). EPA determined in the 2009 Final Rule the level of allocation that would meet the servicing demand over 2010-2014. Excluding EPA’s proposal to address 2010 allowances (see section III.B.4.), the Agency is proposing to ma intain the overall HCFC-22 allocation levels for 2012-2014 that the Agency determined were appr opriate in the 2009 Final Rule. Should new data become available indicating there is a su rplus of HCFC-22 on the U.S. market, EPA would consider addressing this in the future. Since EPA is continuing to allow the use of existing HCFC-22 a ppliances manufactured prior to January 1, 2010, reused, recycled, and re claimed HCFC-22 will become more valuable as the phaseout progresses. The demand for HCFC-22 to service existing equipment will provide an economic incentive to increase the quantitie s of recovered HCFC-22 available for reuse, recycling, and reclamation. The docket for the 2009 Final Rule (EPA-HQ-OAR-2008-0496) provides further information on EPA’s assumptions regarding the availability of reused, recycled and reclaimed HCFC-22 to meet servicing demand. In the 2009 Final Rule, EPA determined it wa s appropriate to establish an annual stepdown with the assumption that the total demand to be met from recovered HCFC-22 would equal 12,500 MT each year. This is approximately the am ount EPA projected would be needed to meet the servicing demand in 2015. EPA is proposing to retain this approach for 2012-14. Under this*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

28 of 64 approach, the aggregate allocation for consum ption would equal approximately 40,700 MT in 2012, and decrease each year after. These values , shown in Table 1, are derived by subtracting 12,500 MT from the estimated servicing demand each year. EPA will not issue HCFC-22 and HCFC-142b allowances for 2015 or la ter until a future rulemaking.

Table 1 – Proposed Amount of Annual HCFC-22 Demand to be Met by Allocated and Recovered Material

2010 2011 2012 2013 2014 Estimated Demand (MT) 62,500 57,900 53,200 48,400 43,600 Total Allocation (MT) 50,000 45,400 40,700 35,900 31,100 Recovered Amount (MT) 12,500 12,500 12,500 12,500 12,500
As the total servicing demand decreases, a ssuming the supply of recovered HCFCs stays at a constant level results in recovered material comprising a greater proportion of the total demand each year. Using this assumption, the percen tage of the total servicing demand to be met with recovered material will rise from 21.6 per cent of total demand in 2011 to 28.7 percent in 2014, though the total amount of recovered material needed remains at 12,500 MT for each year. EPA still believes this is appropriate as it fa cilitates meeting the demand in 2015, of which at least 29 percent must be met with recovered material. 4. How Will EPA Address the Court’s Decisi on with Regard to 2010 HCFC Allowances? EPA’s first step in addressing the Court’s decision was to establish baselines for 2011 that reflected the 2008 inter-p ollutant transfers that were at issue in the li tigation and to allocate allowances for 2011 as a percentage of those ba selines. As noted in the Interim Final Rule (INSERT FRN once published), EPA interprets the Court’s decision as a pplying, at a minimum, to the baseline and calendar-y ear allowances for 2011-2014. The Agency is taking comment on whether to interpret the decision as applying to the 2010 allocation, and if so, how allowances in future control periods might be adjusted to refl ect this. The petitioners in the case, Arkema and Solvay, have stated that EPA s hould “restore the allowances of which Arkema and Solvay were deprived unlawfully in 2010,” or “provide a me thod to compensate Arkema and Solvay for year*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

29 of 64 2010 allowances that rightfully should have beenavailable” (February 4, 2011 letter to Drusilla Hufford, EPA, from William Hamel, Arkema, an d March 7, 2011 letter to Drusilla Hufford, EPA, from Don Magid, Solvay, both available in th e docket for this rulemaking). As a result of these requests, EPA is considering granting add itional allowances for all companies that would have received higher allocations in 2010 if the 2008 inter-pollutant transf ers had been reflected in the baselines published in the 2009 Final Rule. The companies affected, and the additional allowances they would have received (hereina fter described as “recoupment allowances”), are included in Table 2, below. Table 2 – Proposed Recoupment Allowances Company Chemical Consumpt ion (kg) Production (kg) Arkema HCFC-22 4,749,692 4,611,848 DuPont HCFC-142b 2,339 0 Honeywell HCFC-142b 58,291 107,097 Solvay Fluorides HCFC-22 1,157,895 0 Solvay Solexis HCFC-142b 0 289,800

EPA is taking comment on four possible options with regard to this issue: (1) providing recoupment allowances in 2013 in addition to the aggregate level of production and consumption specified in the 2009 Final Rule; (2) allocati ng recoupment allowances over two years (2013- 2014) in addition to the aggregate level of production and consumption specified in the 2009 Final Rule; (3) allocating recoupment allowances from the aggregate leve l of production and consumption specified in the 2009 Final Rule over two years (2013-2014); and (4) treating missed allowances from 2010 as impossible to recoup. EPA is also taking comment on (1) whether it should provide recoupment for HCFC-22 and HCFC-142b, or just HCFC-22 allowances, and (2) whether it should provide recoupment for producti on and consumption, or just consumption allowances. EPA is seeking comment on these two points because (1) the Court’s decision only addresses the losses of the petitioners Arkema and Solvay, who appear to be most concerned with recoupment for HCFC-22 allowances, (2) neither of the petitioners has*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

30 of 64 specifically requested recoupment for production allowances, and (3 ) while Solvay Solexis could receive recoupment allowances for HCFC-142b production (see Table 2), it would receive nearly ten times more HCFC-142b production allowances under this proposed rule absent recoupment than the 2009 Final Rule, which could avoi d the need for HCFC-142b production allowance recoupment. When considering the options included in this section, comm enters should consider options 1-4 providing or notproviding recoupment for HCFC-142b and providing or not providing recoupment for pr oduction allowances. EPA is proposing to address this issue in addition to the proposed changes to baselines, which reflect the Court’s decision on past inte r-pollutant transfers. Under each of these approaches, the U.S. would still be well below its HCFC cap under the Montreal Protocol. EPA is not proposing a recoupment option that would begin in 2012 because the Agency wants to provide all companies a level of certainty abou t their allocation for the 2012 control period. In addition, waiting until 2013 provides companies that may receive recoupment allowances time to prepare for the increase in calendar-year allowances. Under option 1, each company would get the percentage of baseline listed in proposed section 82.16(a)(1). The companies listed in Table 2 would receive an additional one-time allocation in 2013 of the amount specified in th e table. Granting recoupment allowances under option 1 would add 329 ODP-weighted MT ofallowed HCFC consumption and 280 ODPweighted MT of allowed HCFC production in 2013. The result is an increase in allowed HCFC consumption and production (ODP-weighted) by 17 percent and 15 percent, respectively, beyond that allowed in the 2009 Final Rule. EPA would prefer not to increase the level of HCFC consumption and production. However, while the number of allowances would be higher in 2013 than envisioned in the 2009 Final Rule, it w ould not increase environmental damage during the regulatory period from 2010-2014 relative to the projections in the 2009 Final Rule: approximately 425 ODP-weighted MT of HCFC consumption allowances and approximately*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

31 of 64 930 ODP-weighted MT of HCFC pr oduction allowances were not us ed by allowance holders in 2010 (source: EPA’s ODS Tracking System). This one-year increase in allowances in 2013 would keep the aggregate level of consump tion and production for 2010-2014 below the level envisioned in the 2009 Final Rule. Since the 2014 allocation would be unchanged from the 2009 Final Rule level, option 1 could be preferable to a two-year recoupment option because it could smooth the transition to the 2015 stepdown under th e Montreal Protocol. Option 1 would also restore the companies’ lost opportunity to produce or consume in 2010 without reducing the amount of allowances other companies receive. Option 1 is not without disadva ntages. First, it would increa se the number of allowances available for use in 2013, which might impede th e development of a viable reclamation industry and hamper the transition to the 2015 stepdown. Second, this option signi ficantly increases the number of allowances in 2013 for certain compan ies receiving recoupment, meaning that those companies arguably could have difficulty sell ing the full amount of HCFC-22 produced or imported with allowances that year. However, if companies receiving extra allowances all in one year cannot sell the full amount in that year, th ey may store produced an d/or imported material for sale or use in later years, or sell the allowanc es to other producers or importers for use in that same year. Third, companies not receiving r ecoupment would have the same number of allowances as they would under a no-recoupment s cenario, but they would have a smaller share of all allowances allocated under this opti on compared to a no r ecoupment scenario and compared to the 2008 Proposed Rule. Under the second option, recoupment allo wances would be provided over two years (2013-2014) instead of one year as in option 1. Eachentity listed in Tabl e 2 would receive half of the amount listed in the tabl e in 2013 and 2014 in addition to the percentage of baseline as listed in proposed section 82.16(a)(1). Option 2 would increase allowed consumption and production by 8 percent in 2013 and by 10 percent and 9 percent, respectively, in 2014. This*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

32 of 64 options shares some of the advantages of op tion 1: (1) the amount a llocated between 2010 and 2014 is still below the amount envisi oned as total usage during that period in the 2009 Final Rule when taking into consideration th e number of allowances not used in 2010, and (2) it restores the companies’ lost opportunity to produce or consume in 2010 without reducing the amount of allowances other companies would receive under no recoupment. A significant downside to this option is thatit increases the number of allowances available in 2013 and 2014, and may hamper the smooth transition in 2015 to 10 percent of baseline under the Montreal Protocol, since the decrease be tween the 2014 allocation and 2015 allocation for HCFC-22 would be larger under this option than in option 1. Also, like option 1, companies who would not receive recoupment woul d have a smaller share of all allowances compared to a no recoupment scenario. Under option 3, EPA could provide recoupmen t allowances as part of the aggregate allocation level in the 2009 Final Rule. The le tters included in the docket from Don Magid, Solvay Fluorides, to Drusilla Hufford, EPA, dated March 7, 2011, and from William Hamel, Arkema, to Drusilla Hufford, EPA, dated Februa ry 4, 2011, express support for this option. One way to do this would be to allocate HCFC-22 allowances ( both recoupment for 2010 and their allotted percentage of baseline for 2013 and 2014 listed in Table 3 below) to the companies listed in Table 2, and then allocate the remainder to all other allowance holders by revising the percentage of baseline allocated. A memo to the docket explains this approach in more detail (see “Memo: Recoupment Options”). Providing all recoupment from the allocated level in the 2009 Final Rule in one year is not possible beca use there are too few allowances to provide recoupment and regular allowances for HCFC-142b. Additionally, the memo explains that if the Agency provides recoupment for HCFC-142b pr oduction allowances, the Agency will have no choice but to increase the aggregat e number of production allowances.*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

33 of 64 The primary benefit of option 3 is that it keeps the overall consump tion allocation at the same level as that in the 2009 Final Rule, and shoul d therefore not negatively affect the transition to the 2015 stepdown or recove ry and reclamation. However, for the years during which recoupment occurred, companies not receiving recoupment under this option would receive fewer allowances, and a smaller share of overa ll allowances, than under the other recoupment scenarios. The amount of allowan ces received by these companies also would be smaller than the amount they would have received under the 2008 Proposed Rule. EPA is also considering option 4, under whic h the Agency would not provide recoupment allowances. As part of the evalua tion of this option, EPA is consid ering the effect of the Court’s partial vacatur and remand on the 2010 allocatio n. The Court issued its decision on August 27, 2010, but stayed the mandate pend ing resolution of any petition for rehearing. The 2009 Final Rule remained in effect during 2010. EPA's petition for rehearing was denied on January 21, 2011, and the mandate issued on February 4, 2011. While EPA has not interpreted the vacatur as nullifying 2010 allowances, EPA is consideri ng whether to address the 2010 allocation on remand even if the partial vacatur does not apply to 2010. EPA notes that all 2010 allowances expire d on December 31, 2010 and therefore have no value in later years. See 74 FR 66415 (“EPA allo cates allowances for specific years; they are valid between January 1 and Decembe r 31 of a given control period ( i.e. , calendar year)”). 40 CFR Part 82 also makes it clear th at allowances are tied to a sp ecified control period. Section 82.16(a) states that “In each c ontrol period...each person is grante d the specified percentage of baseline production allowances and baseline co nsumption allowances for the specified class II controlled substances apportio ned under §§82.17 and 82.19.” Furthermore, the definitions of unexpended allowances in section 82.3 specify th at allowances are valid for specific control periods. The protection of stratospheric ozone allowance system at 40 CFR Part 82 does not allow banking or borrowing of allowances. Sin ce the Court’s mandate issued on February 4,*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

34 of 64 2011, no company could have possessed 2010 allowances on the date the mandate issued, because all unexpended 2010 allowa nces had already expired. EPA seeks comment on whether it is possible to put the petitioners in Arkema v. EPA in the position they would have b een in had they received the fu ll amount of 2010 allowances to which they believed they were entitled. If EP A were to grant the pe titioners additional 2010 allowances now, those allowances would have no value, as 2010 allowances can be expended only in 2010. The three recoupment options di scussed above assume that by providing recoupment allowances in 2013, or 2013-2014, EPA can make up for the lost opportunity to provide or consume a specific amount of HCFC, which might either have been sold during 2010 or placed in inventory for sale during a subsequent year. Advantages of not providing recoupment allowances include (1) not increasin g the amount of HCFC-22 on the market, which has advantages for the environment, public healt h, and for fostering a viable reclamation industry in advance of the 2015 stepdown, and (2) not decreasing the actual number or share of allowances for other allowance holders. If EPA decides to provide recoupment allo wances, EPA prefers option 1 because it has a minimal impact on the 2015 stepdown to 10 percen t of baseline, addresses the Court’s decision in the simplest manner, and does not result in companies receiving a lower amount of allowances in any year than they would have received ha d EPA taken the 2008 inter-pollutant transfers into account in its 2009 Final Rule. EP A welcomes comment on the matter. A memo in the docket for this rulemaking shows how EPA would effectuate eachof the options in the regulatory text at 40 CFR Part 82 (see “Memo: Recoupment Options ”). Additionally, option 1 is detailed in regulatory text at the end of this preamble. Any recoupment allowances allocated for 2013 or 2014 would function in the same way as other calendar-year allowances: for example, they could be used only in the calendar year for which they were issued and would expire at the end of that calendar year.*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

35 of 64 C. How Much HCFC-22 and HCFC-142b Would be Allocated in 2012-2014? As discussed previously, EPA is proposing to revise the tables in 40 CFR 82 that together specify the production and consumption allowances available during spec ified control periods. The tables at sections 82.17 and 82.19 apportion ba seline production allo wances and baseline consumption allowances, respectively, to indi vidual companies for individual HCFCs during a particular regulatory period. Complementing thes e tables, the table at section 82.16 lists the percentage of baseline allocated to allowance holders for specific control periods. EPA is proposing to (1) retain this fr amework of complementary tables , (2) respond to the Court’s remand by establishing baselines for 2012-2014 identical to those established in the 2011 Interim Final Rule (insert FRN once published), (3) grant allowances based on percentages of baselines in a manner that achieves the 2010 phaseout step and lays the groundwork for the next phaseout step in 2015, and (4) introduce a new subparagraph at 82.16(a) to provide recoupment allowances in 2013. In the 2009 Final Rule, 34.1 percent, 30.1 pe rcent, and 26.1 percent of each company’s HCFC-22 baselines were allocated for 2012, 2013, and 2014, respectively. As discussed above, EPA interprets the Court’s vacatur as applying to the allocation for each of these years. EPA intends to put in place new allocations through this rulemaking. EPA is proposing to allocate 28.7 percent, 25.3 percent and 21.9 percent of HCFC-22 baseline for 2012, 2013 and 2014, respectively. The percent allocation for HCFC -142b was 0.47 percent of baseline in the 2009 Final Rule for 2012-2014. EPA is proposing to a llocate 4.9 percent of HCFC-142b baseline for 2012-2014. As a reminder, the percentages allo cated for 2013 and 2014 could be different depending on the recoupment option chosen. Ex cluding recoupment allowances, these changes do not reflect a change in th e total consumption allocation amounts for each substance in aggregate for the United States, as the tota l allocation for HCFC-22 and HCFC-142b in 2012- 2014 remains approximately the same as in the 2 009 Final Rule. Using the same percentage of*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

36 of 64 baseline to allocate production allowances as consumption allowances, and excluding recoupment allowances, the total proposed HCFC -22 production allocation is smaller in each of the three years than in the 2009 Final Rule by abou t two percent. The lower amount is due to the change in company baselines to reflect the C ourt’s decision on the 2008 inter-pollutant baseline transfers, and not a change in the methodology us ed to determine allowances. More information is available on this subj ect in section III.C.2. The 2009 Final Rule, which did not include the 2008 transfers ofHCFC-142b to HCFC22 baseline allowances in the baselines for th e next regulatory peri od, had a total HCFC-22 consumption baseline of 119,384 MT. EPA is refl ecting the baseline transfers in section 82.17 and 82.19 in accordance with the Court’s decision. As a result, the aggregate HCFC-22 consumption baseline has increased to 141,865 MT . Since the aggregate HCFC-22 baseline is now higher due to the incr ease in the number of HCFC-22 baseline allowances for Arkema, Inc. and Solvay Fluorides, LLC, EPA is allocating a smaller percentage of the company-specific baselines than in the 2009 Final Rule to achieve the same total number of HCFC-22 allowances, excluding recoupment allowances. Thus, 40,700 MT of HCFC-22 consumption (the aggregate allocation amount in 2012) is equal to 34.1 percen t of 119,384 MT (baseline) of HCFC-22 in the 2009 Final Rule, and 28.7 percent of 141,865 MT (bas eline) for 2012 in this proposed rule. The aggregate HCFC-22 production baseline is also increasing, from 110,619 MT in the 2009 Final Rule to 129,093 MT, to reflect Arkema, Inc.’s transfer of HCFC-142b baseline production allowances to HCFC-22 base line production allowances. The opposite is true for HCFC-142b, which ha d a larger aggregate consumption baseline in the proposed rule (21,089 MT), but now has a smaller consumption baseline (2,047 MT) since EPA is accounting for inter-pollutant transfers from HCFC-14 2b to HCFC-22. Thus, 100 MT of HCFC-142b consumption allowances (the aggr egate allocation amount in each year between 2012 and 2014) are equal to 0.47 percent of 21,089 MT of HCFC-142b in the 2009 Final Rule,*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

37 of 64 and 4.9 percent of 2,047 MT in this proposed ru le. Aggregate HCFC-142b baseline production allowances are decreasing from 25,090 MT in th e 2009 Final Rule to 9,444 MT in this proposed rule to reflect Arkema, Inc.’s transfer of HCFC-142b baseline production allowances. In summary, EPA is proposing (1) to establish production and consumption baselines for 2012-2014 identical to those established in th e 2011 Interim Final Rule (insert FRN once published) for HCFC-22 and HCFC-142b in the ta bles at sections 82.17 and 82.19. EPA is also proposing (2) to add new specified percentages of baseline for those substances to the table in section 82.16 for the 2012-2014 control periods and (3) to provide or no t provide recoupment allowances in addition to the total allocation am ounts specified in Table 1. EPA is proposing to allocate 28.7 percent of base line for HCFC-22 and 4.9 percen t of baseline for HCFC-142b in 2012. Depending on the option chosen for providing (or not providing) rec oupment allowances, EPA is proposing to allocate between 22.0 to 25.3 percent of the HCFC-22 baseline in 2013, and between 18.6 to 21.9 percent of the HCFC-22 baseline in 2014. For HCFC-142b, EPA is proposing to allocate between 0.4 to 4.9 per cent of baseline in 2013 and 2014, depending on the option chosen to address or not address recoupm ent. As mentioned in section III.B., should new data become available indicating there is a su rplus of HCFC-22 on the U.S. market, EPA would consider addressing this in the future. Table 3- Proposed Phaseout Schedul e for Class II Controlled Substances Control Period Percent ofHCFC141b Percent of HCFC-22 Percent ofHCFC142b Percent of HCFC-123 Percent of HCFC-124 Percent ofHCFC225ca Percent ofHCFC225cb 2003 0 100 100 -- -- -- -- 2004 0 100 100 -- -- -- -- 2005 0 100 100 -- -- -- -- 2006 0 100 100 -- -- -- -- 2007 0 100 100 -- -- -- -- 2008 0 100 100 -- -- -- -- 2009 0 100 100 -- -- -- -- 2010 0 41.9 0.47 125 125 125 125*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

38 of 64 2011 0 32.0 4.9 125 125 125 125 2012 0 28.7 4.9 125 125 125 125 2013 0 22.0 - 25.3 0.4 - 4.9 125 125 125 125 2014 0 18.6 - 21.9 0.4 - 4.9 125 125 125 125

Consistent with the 2009 Final Rule, EPA is allocating different ba seline percentages for HCFC-22 and HCFC-142b because EPA projects th at the needs will differ for servicing airconditioning and refrigeration applian ces during the 2012-2014 control periods. 1. How Does EPA Propose to Allocate HCFC-22 Consumption Allowances for 2012-
2014? For 2012, EPA is proposing to allocate HCFC-22 consumption allowances to meet about 76.5 percent of the servicing need, assuming th e remainder will be met by recovered HCFC-22 that is either reused, recycle d, or reclaimed. This allocation tr anslates into approximately 40,700 MT, or 59 percent of the total HCFC consump tion cap for the 2012 control period. Under EPA’s preferred recoupment option in2013, EPA would allocate 35,900 MT of HCFC-22 consumption allowances, plus an additional 5,908 MT in recoupment allowances. In 2014, EPA would allocate 31,100 MT of HCFC-22 consumption al lowances. In each year between 2012 and 2014, EPA’s total HCFC allocation in cluding recoupment would be at least 36 percent below the Montreal Protocol cap, and would be belo w servicing demand as estimated in the Servicing Tail Report . Section III.B.4. of this preamble al so discusses other recoupment options. 2. How Does EPA Propose to Allocate HC FC-22 Production Allowances for 2012-2014? EPA is proposing not to revisit its determina tion in the 2009 Final Rule to use the same percentages for production and consumption allo cations – deriving the percentages based on estimated need for each individual HCFC. Theref ore, this proposed rule would allocate 37,050 MT to HCFC-22 production in 2012. The aggreg ate allocation in 2012 is approximately two percent lower than the amount allocated in the 2009 Final Rule (37,050 MT in this proposed rule vs. 37,721 MT in the 2009 Final Rule) because th e aggregate amount of baseline production*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

39 of 64 allowances in this rulemaking did not increase by the same relative amount as aggregate baseline consumption allowances. Because Solvay did no t transfer its HCFC-142b production allowances to HCFC-22 production allowances, HCFC-22 base line consumption allowances are 18.8 percent higher in this rule, while base line production allowances are only 16.7 percent higher. The memo to the docket for this rulemaking titled “HCF C-22 and HCFC-142b Allocation Adjustments: 2009 Final Rule vs. 2011 Proposed Rule,” discusses the slight differences in allocation amounts in more detail. EPA is proposing to allocate 32,660 MT of HCFC-22 pr oduction allowances in 2013, plus an additional 4,611 MT of one-time recoupment allowances, and 28,271 MT of HCFC-22 production allowances in 2014. While this proposed rule contains the same allocation percentages for production and consumption, EPA welcomes comment on whether it should use different percentages to allocate HCFC-22 production and consumption allowances in 2012-2014. From a policy perspective, EPA is interested in comments on whether an increase in the total number of HCFC-22 production allowances would result in greater to tal HCFC production, either in the U.S. or globally. EPA notes that producti on of 1 kilogram of an HCFC requires both a production allowance and a consumption a llowance (82.15(a)(1),(2 )). Thus, an increase in production allowances without a correspondi ng increase in consumption allo wances does not automatically result in greater production. The most likely scenario is that an increase in production allowances would result in greater U.S. production for export. This is because as stated in 82.20(a), “A person may obtain at any time during the control period...consumption allowances equivalent to the quantity of class II controll ed substances that the person exported from the U.S. and its territories to a foreign state...when that quantity of class II controlled su bstance was produced in the U.S. ...with expended consumption allowances .” In effect, current EPA regulations allow exporters to receive a refund of one consumption allowance for each kilogram they export if they show one consumption and one production allowa nce were expended for the material exported.*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

40 of 64 Therefore, EPA would not necessarily expect anincrease in production allowances to result in greater HCFC consumption in the U.S. EPA welc omes comment on whether an increase in the level of production allowances would result in(1) more U.S. consumption, (2) more U.S. production, either for domestic use or for export, and (3) greater worldw ide production and/or consumption of HCFCs. EPA requests comments on whether section 605 (c) would preclude al locating a different percentage of baseline for production than for co nsumption. Section 605(c) states that EPA must “promulgate regulations phasing out the production . . . of class II s ubstances in accordance with [section 605],” subject to any acceleration under s ection 606. It further states that EPA must “promulgate regulations to insure that the consump tion of class II substances in the United States is phased out and terminated in accordance with th e same schedule . . . as is applicable to the phase-out and termination of production of class II substances under [Title VI].” EPA is considering three possible interpretations of the term “schedul e” as referenced in section 605(c): (1) the schedule that appears on the face of section 605, which contains no deadlines until 2015; (2) the schedule that appears on the face of section 605, as acceler ated under section 606; and (3) the specific allocation percentages or amount s established by EPA through rulemaking for each control period. EPA believes that the second interpretation is the most consistent with the statutory language and purpose. In past actions, the Agency has made the in itial schedule in secti on 605 more stringent to reflect modifications to the M ontreal Protocol phaseout sche dule for HCFCs. Under the 2007 Montreal Adjustment (reflected in Decision XIX/6), the U.S. is obligated to reduce HCFC production and consumption 75 percent below it s aggregate baseline by 2010. EPA is not proposing to increase production to an amount thatwould be inconsistent with that obligation. Instead, EPA is taking comment on whether to allow production to incr ease relative to consumption, without encroaching on the cap. Sp ecifically, EPA is taking comment on whether*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

41 of 64 to decouple the percentage of ba seline allocated for production from the percentage of baseline allocated for consumption. EPA would effectuate this change in its re gulations by replacing the table at 40 CFR 82.16 with two tables. One would a llocate a percent of baseline for consumption allowances consistent with the percentages listed in Table 3. The other would allocate 34.1 percent, 30.1 percent and 26.1 percent of baseline for produc tion allowances in 2012, 2013, and 2014, respectively, consistent with the 2009 Final Ru le. This approach would still provide the petitioners in Arkema v. EPA the benefit of their 2008 baseli ne transfers while giving other companies with production baselines approximate ly the same number of production allowances as they received in the 2009 Final Rule. Compared to the 2009 Final Rule, the net result of this option would increase allowed producti on by 6,299 MT in 2012, 5,560 MT in 2013, and 4,821 MT in 2014. Under this scenario, the U.S. woul d still be below the Montreal Protocol’s production cap (when all HCFCs are included) by at least 33 percent in each year, even when including recoupment (the memo to the docke t entitled, “Montreal Protocol Compliance,” contains more detailed information on the impli cations of each option relative to the Montreal Protocol cap). EPA is seeking comment on whethe r this increase would hi nder the transition to the 2015 phaseout step, under which the U.S. is obligated to reduce HCFC production and consumption 90 percent below its ag gregate baseline. EPA’s preferen ce is to continue to use the same percentages for production and consumption allocations. This is because EPA is concerned this action could increase U.S. production of HC FCs, might decrease the U.S.’s ability to transition to the 2015 stepdown under the Montreal Protocol, and potenti ally increase global production of HCFCs. Nevertheless, the Agencyrequests comment on this option for HCFC-22 production allowances. 3. How Does EPA Propose to Allocate HCFC-142b Allowances for 2012-2014? Establishing HCFC-142b baseline allowa nces that take into account the 2008 interpollutant transfers discussed in section II.D. results in 2,047 MT of aggregate baseline*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

42 of 64 consumption allowances and 9,444 MT of aggregat e baseline production allowances. Consistent with the 2009 Final Rule, EPA is proposing to allocate 100 percent of th e projected servicing need for HCFC-142b identified in that rule: 100 MT of consumption. To get to that level of consumption, EPA is proposing to allocate 4.9 per cent of the aggregate consumption baseline, as reflected in the table at section 82.16. The aggr egate allocation number for consumption is the same as in the 2009 Final Rule. Using the same percentage (4.9 percent), EP A is proposing to allocate 463 MT of HCFC142b production allowances for each control period between 2012 and 2014. The aggregate allocation for production is highe r than the amount allocated in the 2009 Final Rule (463 MT in this proposed rule vs. 118 MT in the 2009 Final Rule). The propos ed allocation is 292 percent higher than in the 2009 Final Rule because th e aggregate amount of baseline HCFC-142b consumption allowances in this rulemaking d ecreased by a significantly larger amount than aggregate baseline HCFC-142b production allo wances. HCFC-142b baseline consumption allowances are 90.3 percent lower in this rule, while baseline production allowances are only 62.4 percent lower. The difference between the ch ange in production and consumption baselines is a result of Arkema trading most of its HCFC-142b production allowances, while Solvay did not. This higher amount of calendar-year production does not affect the U.S.’s ability to meet its obligations under the Montreal Protocol. The me mo to the docket for this rulemaking titled “HCFC-22 and HCFC-142b Allocation Adjustment s: 2009 Final Rule vs. 2011 Proposed Rule,” discusses the differences in exact allocation amounts in more detail. As discussed in section III.B.4. of this preamble, EPA is proposing to allocate recoupment allowances in 2013 in addition to the 4.9 percent of baseline described above. This would result in an additional 61 MT of HCFC -142b consumption allowances and 397 MT of HCFC-142b producti on allowances. 4. How Would the Aggregate for HCFC-22 and HCFC-142b Translate Entity-by-Entity?*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

43 of 64 For 2012, EPA is proposing to allocate (1) approximately 40,700 MT of HCFC-22 consumption allowances, (2) 37,050 MT of HCFC -22 production allowances , (3) approximately 100 MT of HCFC-142b consumption allowanc es and (4) 463 MT of HCFC-142b production allowances. However, EPA actually allocates a llowances to individual companies (i.e., legal entities). Company-specific production and consump tion baselines (also referred to as “baseline allowances”) for HCFC-142b and HCFC-22 are listed at sections 82.17 and 82.19, respectively. The percentage of baseline each entity would receive in 2012-2014 appears at section 82.16(a), as shown in Table 3 above. Allowances allocated for individual contro l periods are called “calendar-year allowances” to distinguish them from the baseline produc tion or consumption allowances. For 2012-2014, EPA is proposing to apportion production and consumption baselines for HCFC-22 and HCFC142b on the same basis as in the 2009 Final Rule , except that EPA is making adjustments to reflect (1) the 2008 inter-pollutanttransfers of baseline allowances deemed permanent by the Court, (2) inter-company, single-pollutant transf ers of baseline allowances that occurred in 2010, and (3) changes in company names that occurred after the 2009 Final Rule was signed. All of these changes were made in the 2011 Interim Final Rule (INSERT FRN), and EPA is proposing to do the same for 2012-2014. Applying the appr oach described above, EPA would apportion production and consumption baselines for HCFC- 22 and HCFC-142b to the following entities in the following amounts:
Table 4: Baseline Production Allowances of HCFC-22 and HCFC-142b in 40 CFR 82.17
Person Controlled Substance Allowances (kg)
Arkema HCFC-22 46,692,336 HCFC-142b 484,369 DuPont HCFC-22 42,638,049 Honeywell HCFC-22 37,378,252 HCFC-142b 2,417,534 MDA Manufacturing HCFC-22 2,383,835*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

44 of 64 Solvay Solexis HCFC-142b 6,541,764 Table 5: Baseline Consumption Allowances of HCFC-22 and HCFC-142b in 40 CFR 82.19
Person Controlled Substance Allowances (kg) ABCO Refrigeration Supply HCFC-22 279,366 Altair Partners HCFC-22 302,011 Arkema HCFC-22 48,637,642 HCFC-142b 483,827 Carrier Corporation HCFC-22 54,088 Coolgas Investment Property HCFC-22 1,040,458 DuPont HCFC-22 38,814,862 HCFC-142b 52,797 H.G. Refrigeration Supply HCFC-22 40,068 Honeywell HCFC-22 35,392,492 HCFC-142b 1,315,819 Mexichem Fluor Inc. HCFC-22 2,546,305 Kivlan & Company HCFC-22 2,081,018 MDA Manufacturing HCFC-22 2,541,545 Mondy Global HCFC-22 281,824 N ational Refrigerants HCFC-22 5,528,316 Refricenter of Miami HCFC-22 381,293 Refricentro HCFC-22 45,979 R-Lines HCFC-22 63,172 Saez Distributors HCFC-22 37,936 Solvay Fluorides HCFC-22 3,781,691 Solvay Solexis HCFC-142b 194,536 USA Refrigerants HCFC-22 14,865

The proposed baselines listed above are identical to the tables presented in the 2011 Interim Final Rule (insert FRN). D. Are HCFC-141b, HCFC-123, HCFC-124, HC FC-225ca, and HCFC-225cb Allowances Affected by this Rulemaking? Since the Court’s decision di d not vacate this portion of the 2009 Final Rule, EPA is not proposing to change baselines and percentages of baseline allocat ed as calendar-year allowances for HCFC-141b, HCFC-123, HCFC-124, HCFC-225 ca, and HCFC-225cb, except to make adjustments for inter-company, singl e-pollutant transfers of baseline allowances, as reflected in the 2011 Interim Final Rule (insert FRN). In the case of HCFC-141b, EPA is continuing to*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

45 of 64 allocate 0 percent of baseline for U.S. cons umption and production, consistent with 40 CFR 82.16(b). E. How Will EPA Allocate Other HCFCs? As a result of EPA’s allocation process, which is largely based on projected demand for HCFC-22 and HCFC-142b, minus an amount of HC FC-22 that is assumed to be reused, recycled, or reclaimed, the tota l allocation is lower than th e aggregate HCFC cap under the Montreal Protocol. EPA recognizes that there could be some additional need for HCFCs not specifically included in this rule. While some ni che applications in the U.S. use other HCFCs, such as HCFC-21, EPA is not aware of add itional need for production or import of these substances at this time, as adequate amounts a ppear to be in inventory. However, EPA is not foreclosing the possibility of additional productio n or import for these niche uses. Also, some amount of HCFC-141b will likely c ontinue to be produced or imported via the petition process during 2012-2014. EPA believes there is sufficient room under the cap for such continued production and import. The current regulations at 40 CFR 82.15 ban the production and import of class II substances for which EPA has a pportioned baseline pr oduction and consumption allowances in excess of allowances held by the producer or importer, but do not ban the production and import of class II substances for which EPA has not apportioned baseline production and consumption allowances. This rule does not alter the current regulations in that respect. The producer or importer of an HCFC that is not subject to the allowance system would be required to report to EPA consistent w ith the existing recor dkeeping and reporting requirements. If necessary, EPA could amend the regulations to set and apportion baselines and issue allowances for these HCFC s. Therefore, retaining room under the cap could provide the benefit of accounting for unanticipated growth in HCFCs that do not have allocations or other unforeseen events. However, EPA is not reserv ing room under the cap fo r the above-described*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

46 of 64 reasons. EPA is allocating allowances based on modeled demand for vi rgin and recovered material in preparation for the next major ste pdown period under the Montreal Protocol in 2015. IV. How Does EPA Propose to Change the Regulations Governing Allowance Transfers
of Class II Controlled Substances? The Agency is concerned about the possibi lity of companies undermining the HCFC chemical-by-chemical phaseout by performing inte r-pollutant transfers in advance of future phaseout steps. The EPA interprets the 2003 Fi nal Rule, which established the transfer provisions at 40 CFR 82.23, as al lowing only single-pollutant, inter-company transfers to be made on a permanent basis. Nevertheless, EPA recognizes that in Arkema v. EPA , the Court found that “EPA’s practice under th e 2003 Rule was to allow petiti oners’ baseline transfers of inter-pollutant allowances” (618 F.3d at 8). Ther efore, EPA clarified its current policy on interpollutant transfers in the 2011 Interim Final Rule (INSERT FRN) and is repeating that clarification in this actio n. EPA is also proposing to modify the regulatory text in order to dispel any possibility of confusion in the future. In addi tion to modifying the regulatory text to address the duration of inter-pollutant tr ansfers, EPA is also proposing to revise the regulatory text to reflect prior Agency statements pertaining to in ter-pollutant transfers of Article 5 allowances. A. How Does EPA Propose to Change the Regulations Governing Permanent Transfers of Class II Allowances? Sections 607(b) and (c) of the CAA addre ss inter-pollutant and inter-company transfers of allowances, respectively. Inter-pollutant tran sfers are the transfer of an allowance of one substance to an allowance of another substance on an ODP-weighted basis. Inter-company transfers are transfers of allowances for the same ODS from one company to another company. Section 607(c) also authorizes inter-company tran sfers combined with inter-pollutant transfers, so long as the requirements of both are met. The corresponding regulatory provisions for HCFCs appear at 40 CFR 82.23.*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

47 of 64 The 2009 Final Rule updated the baselines fo r HCFC-22 and HCFC-142b to reflect name changes and inter-company baseline transfers, i.e. , transfers of baseline for a specific type of HCFC from one company to anothe r. Doing so reflected the change s in the marketplace that had occurred since EPA promulgated the 2003 Final Ru le. Inter-company base line transfers provide a mechanism for new entrants to join the HCFC market and for other co mpanies to expand their business. EPA recognizes that in some cases, en tities are no longer activ ely involved in HCFC production, import, and/or export ac tivities. EPA retained the baseli ne for such entities, noting that this had been a mechanism by which new en trants had entered the HCFC allowance system in the past. The 2009 Final Rule also addressed four inte r-pollutant baseline transfers made during the prior regulatory period (see section II.D. and the transfer forms in the docket for this action for more detail). EPA had proposed to adjust th e company baselines to re flect these four interpollutant baseline transfers in the 2008 Proposed Rule. Ei ght commenters opposed, and two commenters supported, these proposed adjustments. At issue was whether the inter-pollutant baseline transfers should be part of the companies’ baseline allowances in the next regulatory period. After reviewing the comments, EPA conclude d that adjusting the baselines to reflect inter-pollutant baseline transfers could create ince ntives for future manipulation of the allocation system in anticipation of future control periods . EPA remains concerned about the potential for such future manipulation if inter-pollutant baseli ne transfers during the cu rrent regulatory period change a company’s baseline for future regulatory periods. For example, in 2020 EPA will no longer be issuing HCFC-22 produc tion or consumption allowances (see section 82.16(e)). EPA expects that companies with HCFC-22 allowances would no longer be in the HCFC market at that date if they did not hold allowances fo r other HCFCs that may still be produced after 2020. If EPA were to allow inter-pollutant baseline transfers that carried forward into the new*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

48 of 64 regulatory period, companies with HCFC-22 base lines in 2019 could convert them all to baselines for HCFC-123. Perpetua ting the HCFC-22 baselines in a new form would be counter to the design of the chemical-by-chemical phase out, under which the baseline allowances for a particular chemical are intended to drop out of the system upon the phase-out of that chemical. As another example, in 2015, a producer or im porter that previously had not participated in the HCFC-123 market could dominate that market by converting its HCFC-22 baseline in 2014 to HCFC-123 baseline. Given the differe nt ODPs of HCFC-22 and HCFC-123 (0.055 and 0.02, respectively), converting one baseline allo wance of HCFC-22 would result in 2.75 baseline allowances of HCFC-123. Also, since companie s hold many more HCFC-22 baseline allowances than HCFC-123 baseline allowances, converti ng those HCFC-22 baseli ne allowances would have an overwhelming effect on the current HCFC-123 baseline allowance holders and theoverall market. EPA agrees with commenters on the 2008 Proposed Rule that taking interpollutant baseline transfers into account in setting baselines could have the effect of moving the U.S. HCFC phasedown from a chemical-by-chemi cal phaseout, as establ ished under the “worstfirst” approach in the 1993 Final Rule, towards an ODP-weighted phasedown. Thus, there are important policy reasons going forward for not taki ng inter-pollutant transfers into account in establishing baselines for new regulatory periods. Some commenters on the 2008 Pr oposed Rule stated that modifying the baselines by taking into account inter-pollutant transfers w ould be contrary to the CAA. One commenter argued that section 607 of the CAA allows EP A to approve inter-po llutant transfers of allowances only on a year-to-year basis. That commenter pointed to language in section 607(b) stating that EPA regulations are to permit “a production allowance fo r a substance for any year to be transferred for a production allowance for another substance for the same year on an ozone depletion weighted basis.” The commenter also discussed the legisla tive history of the 1990 CAA Amendments.*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

49 of 64 EPA does not agree with the commenter that th e language of section 60 7(b) is clear on its face. However, where the statutory language is ambiguous, EPA has discretion to choose a reasonable interpretation of that language. EPA determined in the 2009 Fi nal Rule that section 607(b) is best read as permitting only year-by-year inter-pollutant transfers. EPA continues to believe that this is the best interpretation of the statutory language. S ection 607(b) states that EPA’s rules are to permit “a production allowance fo r a substance for any year to be transferred for a production allowance for another substance for the same year.” This language emphasizes the year-by-year nature of such transactions. No parallel language appears in section 607(c). That section does, however, provide that any inter-po llutant transfers betweentwo or more persons must meet the requirements of section 607(b). As the Court noted, “the Agency is certainl y entitled to . . . institute a program that forbids baseline inter-pollutant transfers in the future,” ( Arkema v. EPA , 618 F.3d at 9). Hence, EPA concludes that requiring all inter-pollutant transfers to be conducted on a yearly – and thus temporary – basis going forward is the approach most consistent with the wording of section 607(b). Further discussion of the reasons for limiti ng inter-pollutant transfers to those conducted on a calendar-year basis is available in the Response to Comments on the 2008 Proposed Rule (included in the docket for this rulemaking). Consistent with the Court’s decision regarding past inter-pollutant transfers (those conducted during the prior regulat ory period), the baselines esta blished in this action for 2012- 2014 take into account the 2008 inter-pollutant base line transfers. EPA is clarifying, however, that it has not approved any inter-pollutant tran sfers of baseline allowances in the current regulatory period, and for the reasons given in the 2009 Final Rule and in this action, in the future, EPA intends to approve inter-pollutant tran sfers only on a year-by-year basis. Thus, in the context of the allowance system for protection of stratospheri c ozone, companies should not*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

50 of 64 expect that any inter-pollutant transfers they c onduct will affect their baselines either in the current regulatory period or any future regulatory period. EPA proposes to revise the regulations to avoid any further disput e about the Agency’s position on this issue. In addition, EPA is propos ing to clarify the procedures that apply to permanent, single-pollutant tran sfers. Specifically, EPA proposes to add a sentence at the beginning and end of section 82.23(d) of 40 CFR Part 82, so the text reads: “(d) Permanent transfers. The procedures in paragraph (a) of this sect ion apply to permanent inter-company transfers of baseline production allo wances or baseline consumption allowances. A person receiving a permanent transfer of baseline production allowances or baseline consumption allowances (the transferee) for a sp ecific class II controlled substance will be the person who has their baseline allowances adjusted in accordance with phaseout schedules in this subpart. No person may conduct permanent inter- pollutant transfers of baseline production allowances or baseline consumption allowances.” B. How Does EPA Propose to Change the Regulations Governing Transfers of Article 5 HCFC Allowances? Article 5 allowances for Class II substan ces are the privileges granted under 40 CFR 82.18(a) to produce the specified HCFC for export onl y to countries listed in 40 CFR Subpart A, Appendix C, Annex 4. The countries listed in thatannex are developing countries whose control obligations under the Montreal Protocol are addre ssed in Article 5 of the treaty and hence are referred to as “Article 5 Parties.” EPA is propos ing to revise the regulations at 40 CFR 82.23(b) to reflect its previously stated intent to allow inter-pollutant transfers of Article 5 allowances. The regulations currently provide clarity on inte r-company (single-pollutant) transfers of Article 5 allowances in section 82.23(a) by stating “a person...may transfer to any other person...any quantity of the transferor’s class II...Article 5 allowances for the same type of allowances...” While 82.23(a) specifically includes Article 5 allowances in the list of allowances that may be*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

51 of 64 transferred to another entity, 82.23 (b), which governs inter-polluta nt transfers, makes no mention of Article 5 allowances. Section 82.23 was promulgated as part of the 2003 Final Rule (68 FR 2820). EPA specifically discussed the inter-po llutant transfer of Article 5 allowances at 68 FR 2834 stating, “For example, after the 2003 phaseout of HCFC-141b and before 2010, a company receiving...Article 5 allowances for HCFC-141b could engage in inter-company transfers of those allowances, but not in inter-pollutant transfers [because no other HCFC Article 5 allowances would be available during that pe riod]. In 2010, when...Article 5 allowances for HCFC-22 and HCFC-142b become available, these al lowances will be tran sferable with the ones for HCFC-141b.” These statements indicate that the Agency intended for companies to be able to perform inter-pollutant transfers of Article 5 a llowances. The omission of Article 5 allowances from section 82.23(b) appears to have been an ov ersight. Therefore, EPA is proposing to revise the regulations to specifically provide for the inter-pollutant transfers of Article 5 allowances through this rulemaking. As with ot her types of inter-pollutant tran sfers, these transfers would be limited in duration to a single year. EPA is also proposing to change the textat 82.23(a)(ii) for consistency with its previously stated policy on offset s for transfers of Article 5 a llowances. Section 607(a) requires that transfers of production allowa nces “will result in greater total reductions in the production in each year of . . . class II substances than woul d occur in that year inthe absence of such transactions.” In a November 10, 1994, Federal Re gister notice, EPA stated its interpretation that the section 607 offset requirement applies to Article 5 allowance transfers (59 FR 56287): “Inter-pollutant transfers of Article 5 allowances will continue to require a one percent offset, as required by section 607 of the CAA...” In th e May 10, 1995 final rule at 60 FR 24980, EPA stated that “With today's action, EPA permits inter-pollutant and inte r-company transfers of*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

52 of 64 Article 5 allowances as proposed...” meaning EPA in tended to require an offset for transfers of Article 5 allowances in the class I allowance system. This intent to require an offset is also re flected in certain prov isions of the class II allowance system in 40 CFR 82. Section 82.23(a)(i)(G) specifically requires an offset for Article 5 allowance inter-company transfers, stating that the transfer claim mu st set forth: “For trades of consumption allowances, production allowances , export production allo wances, or Article 5 allowances, the quantity of the 0.1 percent offset applied to the unweighted quantity traded that will be deducted from the transferor's allowance balance.” The offset is also mentioned at section 82.23(a)(iii): “In the case of transfers of . . . Article 5 allowances, EPA will reduce the transferor's balance of unexpended allowances by the quantity (in kilograms) to be converted plus 0.1 percent of that quantity.” This contrasts with section 82.23(a) (ii)(A), which states that in the case of Article 5 allowances, “EPA will reduce the transferor’s balance of unexpended allowances . . . by the quantity to be transferred, ” with no mention of an offset. In addition, in the introductory text for 82.23(a)(ii), Article 5 allowances are not men tioned: “The transfer claim is the quantity (in kilograms) to be transferred plus, in the case of transfers of production or consumption allowances, 0.1 percent of that quantity;” EPA is proposing to amend 82.23(a)(ii) and 82.23(a)(ii)(A) to require an o ffset for transfers of Article 5 allowances. This will make section 82.23(a) consistent th roughout. Section 82.23(b) curren tly requires an offset of 0.1 percent for all inter-pollutant transfers. Thus, if EPA adds Article 5 allowances to section 82.23(b), an offset will automatically apply. To reflect EPA’s intent to allow inter-pollutant transfers of Article 5 allowances, and the requirement that an offset be deducted when an entity is transferring Article 5 allowances, the Agency is proposing to modify the regulatory te xt. EPA is proposing to modify the text at 40 CFR 82.23(a)(ii) to read:*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

53 of 64 “(ii) The Administrator will determine whether th e records maintained by EPA indicate that the transferor possesses unexpended allowances sufficien t to cover the transfer claim on the date the transfer claim is processed. The transfer claim is the quantity (in kilograms) to be transferred plus 0.1 percent of that quantity. The Administrator will take into account any previous transfers, any production, and allowable imports and exports of class II controlled substances reported by the transferor. Within three working days of receiving a complete transfer claim, the Administrator will take action to notify th e transferor and transferee as follows:” EPA is proposing to modify the text at 40 CFR 82.23(a)(ii)(A) to read: “(A) The Administrator will issue a notice indicati ng that EPA does not object to the transfer if EPA's records show that the transferor has sufficient unexpended allowances to cover the transfer claim. In the case of transfers of production or consumption allowances, EPA will reduce the transferor's balance of unexpended allo wances by the quantity to be transferred plus 0.1 percent of that quantity. In th e case of transfers of export pr oduction or Article 5 allowances, EPA will reduce the transferor's balance of une xpended allowances, respectively, by the quantity to be transferred plus 0.1 per cent of that quantity. The transfer or and the transferee may proceed with the transfer when EPA issues a no objection notice. However, if EPA ultimately finds that the transferor did not have suffi cient unexpended allowances to c over the claim, the transferor and transferee, where applicable, will be held lia ble for any knowing violations of the regulations of this subpart that occur as a result of, or in conjun ction with, the im proper transfer.” The Agency is also proposing to modify the text at 40 CFR 82.23(b) by adding Article 5 allowances to the list of allowances that can be traded between pollutants. The text would read: “(b) Inter-pollutant transfers. (1) Effective January 1, 2003, a person (transferor) may convert consumption allowances, production allowances or Article 5 allowances for one class II controlled substance to the same type of allowan ce for another class II controlled substance listed*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

54 of 64 in Appendix B of this subpart, following the proce dures described in para graph (b)(3) of this section.” V. Statutory and Executive Order Reviews A. Executive Order 12866: Regulatory Planning and Review and Executive Order 13563: Improving Regulation and Regulatory Review Under Executive Order (EO) 12866 (58 FR 51735, October 4, 1993), this action is a "significant regulat ory action” since it raises “novel legal or policy issues.” Accordingly, EPA submitted this action to the Office of Mana gement and Budget (OMB) for review under Executive Orders 12866 and 13563 (76 FR 3821, Ja nuary 21, 2011) and any changes made in response to OMB recommendations have been documented in the docket for this action. EPA did not conduct a specific analysis of th e benefits and costs associated with this action. Many previous analyses provide a wealth of information on the costs and benefits of the U.S. HCFC phaseout including:

• The 1993 Addendum to the 1992 Phaseout Regulato ry Impact Analysis: Accelerating the Phaseout of CFCs, Halons, Methyl Chlo roform, Carbon Tetrachloride, and HCFCs

.

• The 1999 Report Costs and Benefits of the HCFC Allowance Allocation System

.

• The 2000 Memorandum Cost/Benefit Comparison of the HCFC Allowance Allocation System

.

• The 2005 Memorandum Recommended Scenarios for HCFC Phaseout Costs Estimation

.

• The 2006 ICR Reporting and Recordkeeping Requirem ents of the HCFC Allowance System

.

• The 2007 Memorandum Preliminary Estimates of the In cremental Cost of the HCFC Phaseout in Article 5 Countries

.*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

55 of 64 • The 2007 Memorandum Revised Ozone and Climate Benef its Associated with the 2010 HCFC Production and Consumption Stepwise Reductions and a Ban on HCFC Precharged Imports

. A memorandum summarizing these anal yses is available in the docket.
B. Paperwork Reduction Act This action does not impose any new in formation collection burden. EPA already requires recordkeeping and reporting for HCFC s, and this action does not amend those provisions. The Office of Management and Budget (OMB) has prev iously approved the information collection requirements contained in the existing regulations at 40 CFR part 82, subpart A under the provisions of the Paperwork Reduction Act, 44 U.S.C. 3501 etseq . and has assigned OMB control number 2060-0498. The OMB c ontrol numbers for EPA's regulations in 40 CFR are listed in 40 CFR part 9. C. Regulatory Flexibility Act (RFA) The Regulatory Flexibility Act (RFA) gene rally requires an agency to prepare a regulatory flexibility analysis of any rule subject to notice-and-comment rulemaking requirements under the Administrative Procedure Act or any other statute, unless the agency certifies that the rule will not have a signifi cant economic impact on a substantial number of small entities. Small entities include small businesses, small organizations, and small governmental jurisdictions. We have considered the economic impacts of this proposed rule on small entities. For purposes of asse ssing the impacts of this rule on small entities, a small entity is defined as: (1) a small business as define d by the Small Business Administration’s (SBA) regulations at 13 CFR 121.201; (2) a small government al jurisdiction that is a government of a city, county, town, school district or special district with a popul ation of less than 50,000; and (3)*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

56 of 64 a small organization that is any not-for-profit enterprise whic h is independently owned and operated and is not dominant in its field. This action will affect the following categories:

- Industrial Gas Manufactur ing entities (NAICS code 325120), including fluorinated hydrocarbon gases ma nufacturers and reclaimers;

- Other Chemical and Allied Products Merchant Wholesalers (NAICS code 422690), including chemical gases and compressed gases merchant wholesalers;

- Air-Conditioning and Warm Air Heati ng Equipment and Commercial and Industrial Refrigeration Equipment Manufacturing entities (NAICS code 333415), including air-conditioning equipm ent and commercial and industrial refrigeration equipment manufacturers;

- Air-Conditioning Equipment and Supplie s Merchant Wholesalers (NAICS code 423730) , including air-conditi oning (condensing unit, compressors) merchant wholesalers;

- Electrical and Electronic Appliance, Television, a nd Radio Set Merchant Wholesalers (NAICS code 423620), incl uding air-conditioning (room units) merchant wholesalers; and

- Plumbing, Heating, and Air-Conditioning Contractors (NAICS code 238220), including Central air-conditioning system and commercial refrigeration installation; HVAC contractors. After considering the economic impacts of this proposed rule on small entities, I certify this action will not have a significant economic im pact on a substantial number of small entities as it relieves a regulatory ban on production and consumption that would otherwise apply in the wake of the Court’s vacatur. EPA is conti nuing to allocate pro duction and consumption*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

57 of 64 allowances using the same appro ach described in the 2009 Final Rule with adjustments to reflect (1) 2008 inter-pollutant transfers of baseline allowances deemedpermanent by the Court, (2) inter-company, single-pollutant transfers of base line allowances that occurred in 2010, and (3) changes in company names that occurred afte r the 2009 Final Rule was signed. EPA is not modifying the recordkeeping or reporting provi sions and thus is not increasin g the burden to small businesses. EPA’s HCFC P haseout Benefits and Costs Mem o, included in this docket, provides a summary of previous small business analyses, as well as the most recent cost and benefit data used for the 2009 Final Rule. D. Unfunded Mandates Reform Act This action contains no Federal mandates under the provisions of Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), 2 U.S. C. 1531-1538 for State, local, or tribal governments or the private sector. First, UMRA doe s not apply to rules that are necessary for the implementation of international treaty obligations. This rule implements the 2010 milestone for the phaseout of HCFCs under the Montreal Protocol. Second, this action relieves the regulatory ban on production and consumption that would ot herwise apply. This action will not have any significant direct impacts or State, local and tribal governments or pr ivate sector entities. Therefore, this rule is not subject to the requirements of sections 202 or 205 of UMRA. This rule is also not subject to the re quirements of section 203 of UMRA because it contains no regulatory require ments that might significantlyor uniquely affect small governments. This action apportions production and consumption allowances and establishes baselines for private entiti es, not small governments. E. Executive Order 13132: Federalism Executive Order 13132, titled “Federalism” (64 FR 43255, August 10, 1999), requires EPA to develop an accountable process to ensure “meaningful and timely input by State and local officials in the development of regulatory policies that have fede ralism implications.”*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

58 of 64 “Policies that have federalism implications” is defined in the Executive Order to include regulations that have “substanti al direct effects on the States , on the relationship between the national government and the States, or on the di stribution of power and responsibilities among the various levels of government.” This action does not have federalism impli cations. It does not have substantial direct effects on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government, as specified in Executive Order 13132. This action is expected to primarily affect producers, importers, and exporters of HCFC s. Thus, the requirements of s ection 6 of the Executive Order do not apply. F. Executive Order 13175: Consultation and Coor dination with Indian Tribal Governments This action does not have tribal implicat ions, as specified in Executive Order 13175 (65 FR 67249, November 9, 2000). This action does notsignificantly or uniquely affect the communities of Indian tribal governments. It does not impose any enforceable duties on communities of Indian tribal governments. Thus , Executive Order 13175 does not apply to this action. G. Executive Order 13045: Protection of Child ren from Environmental Health and Safety Risks This action is not subject to EO 13045 ( 62 F.R. 19885, April 23, 1997) because it is not economically significant as defi ned in EO 12866. The Agency nonetheless has reason to believe that the environmental health or safety risk a ddressed by this action may have a disproportionate effect on children. Depletion of stratospheric ozone results in gr eater transmission of the sun’s ultraviolet (UV) radiation to the earth’s surface. The following studies describe the effects of excessive exposure to UV radiati on on children: (1) Westerdahl J, Olsson H, Ingvar C. “At what age do sunburn episodes play a crucial role for the development of malignant melanoma,” Eur J*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

59 of 64 Cancer 1994: 30A: 1647-54; (2) Elwood JM JapsonJ. “Melanoma and sun exposure: an overview of published studies,” Int J Cancer 1997; 73:198-203; (3) Armstrong BK, “Melanoma: childhood or lifelong sun exposure,” In: Grobb JJ, Stern RS Mackie RM, Weinstock WA, eds. “Epidemiology, causes and prevention of skin diseases,” 1 st ed. London, England: Blackwell Science, 1997: 63-6; (4) Whiteman D., Green A. “Melanoma and Sunburn,” Cancer Causes Control, 1994: 5:564-72; (5) Heenan, PJ. “Doe s intermittent sun exposure cause basal cell carcinoma? A case control study in Western Aust ralia,” Int J Cancer 1995; 60: 489-94; (6) Gallagher, RP, Hill, GB, Bajdik, CD, et. al. “Sunli ght exposure, pigmentary factors, and risk of nonmelanocytic skin cancer I, Basal cell carcinoma,” Arch De rmatol 1995; 131: 157-63; (7) Armstrong, DK. “How sun exposure causes skin cancer: an epidemiological perspective,” Prevention of Skin Cancer. 2004. 89-116. This action implements the U.S. commitme nt to reduce the total basket of HCFCs produced and imported to a level that is 75 perc ent below the respective baselines. While on an ODP-weighted basis, this is not as large a step as previous actions, such as the 1996 Class I phaseout, it is one of the most significant remaini ng actions the U.S. can take to complete the overall phaseout of ODS and further decrease impacts on children ’s health from stratospheric ozone depletion. H. Executive Order 13211: Actions that Signific antly Affect Energy Supply, Distribution, or
Use This action is not a “significant energy action” as defined in Executive Order 13211 (66 FR 28355 (May 22, 2001)), because it is not likely to have a significant adverse effect on the supply, distribution, or use of energy. The ru le issues allowances for the production and consumption of HCFCs. I. National Technology Transfer and Advancement Act*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

60 of 64 Section 12(d) of the Na tional Technology Transfer and Advancement Act of 1995 ("NTTAA"), Public Law No. 104-113, 12(d) (15 U. S.C. 272 note) directs EPA to use voluntary consensus standards in its regul atory activities unless to do so would be inconsistent with applicable law or otherwise impractical. Volunt ary consensus standards are technical standards (e.g., materials specifications, test methods, samp ling procedures, and busi ness practices) that are developed or adopted by voluntary consensus standards bodies. The NTTAA directs EPA to provide Congress, through OMB, explanations whenthe Agency decides not to use available and applicable voluntary consensus standards. This action does not involve technical standards. Therefore, EPA did not consider the use of any voluntary consensus standards. J. Executive Order 12898: Federal Actions to Address Environmental Justice in Minority Populations and Low-Income Populations Executive Order (EO) 12898 (59 FR 7629 (Fe b. 16, 1994)) establishes federal executive policy on environmental justice. It s main provision directs federal ag encies, to the greatest extent practicable and permitted by law, to make environmental justice part of their mission by identifying and addressing, as appropriate, disp roportionately high and adverse human health or environmental effects of their programs, policie s, and activities on minority populations and lowincome populations in the U.S. EPA has determined that this action will not have disproportionately high and adverse human health or environmental effects on minor ity or low-income populations because the 2010 phaseout step increases the level of environmenta l protection for all aff ected populations without having any disproportionately hi gh and adverse human health or environmental effects on any population, including any minority or low-income population
. This action continues the implementation of the U.S. commitment to re duce the total basket of HCFCs produced and imported to a level that is 75 percent below th e respective baselines. While on an ODP-weighted basis, this is not as large a st ep as previous actions, such as the 1996 Class I phaseout, it is one of*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

61 of 64 the most significant remaining actions the U.S. cantake to complete the overall phaseout of ODS and further lessen the adverse human hea lth effects for the entire population.

List of Subjects in 40 CFR Part 82 Environmental protection, Admi nistrative practice and procedure, Air pollution control, Chemicals, Exports, Hydrochl orofluorocarbons, Imports

DATED: ____________________________

___________________________________ Lisa P. Jackson,
Administrator.

40 CFR part 82 is amended to read as follows:

PART 82-PROTECTION OF STRATOSPHERIC OZONE 1. The authority citation for part 82 continues to read as follows: Authority: 42 U.S.C. 7414, 7601, 7671– 7671q. 2. Amend §82.16 by revising paragr aph (a) to read as follows: §82.16 Phaseout schedule of class II controlled substances. (a) Calendar-year Allowances. (1) In each control period as indicated in the following table, each person is granted the specified percentage of baseline production allowances and baseline consumption allowances for the specified cla ss II controlled substa nces apportioned under §§82.17 and 82.19: Protection of Stratospheric Ozone: Adju stments to the Allowance System for Controlling HCFC Production, Import, and Export (Page 61 of 64)*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

62 of 64 Control Period Percent ofHCFC141b Percent of HCFC-22 Percent ofHCFC142b Percent of HCFC-123 Percent of HCFC-124 Percent ofHCFC225ca Percent ofHCFC225cb 2003 0 100 100 -- -- -- -- 2004 0 100 100 -- -- -- -- 2005 0 100 100 -- -- -- -- 2006 0 100 100 -- -- -- -- 2007 0 100 100 -- -- -- -- 2008 0 100 100 -- -- -- -- 2009 0 100 100 -- -- -- -- 2010 0 41.9 0.47 125 125 125 125 2011 0 32.0 4.9 125 125 125 125 2012 0 28.7 4.9 125 125 125 125 2013 0 25.3 4.9 125 125 125 125 2014 0 21.9 4.9 125 125 125 125

(2) Recoupment allowances. In the control period beginning January 1, 2013 and ending December 31, 2013, the following companies are granted a one-time amount of HCFC consumption and production allowances in addition to the percentage of baseline listed in the table at paragraph (a)(1 ) of this section: 4,749,692 kg of HCFC-22 consumption allowances and 4,611,848 kg of HCFC-22 production allowanc es to Arkema; 2,339 kg of HCFC-142b consumption allowances to DuPont; 58,291 kg of HCFC-142b consumption allowances and 107,097 kg of production allowances to Honeyw ell; 1,157,895 kg of HCFC-22 consumption allowances to Solvay Fluorides; and 289,800 kg of HCFC-142b production allowances to Solvay Solexis.
* * * * * 3. Amend §82.23 by revising paragraphs (a)(ii)(A ), (b), and (d) to read as follows: §82.23 Transfers of allowances of class II controlled substances. (a) * * * (ii) The Administrator will determin e whether the records maintained by EPA indicate that the transferor possesses une xpended allowances sufficient to cover the transfer claim on the*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

63 of 64 date the transfer claim is processed. The transf er claim is the quantity (in kilograms) to be transferred plus 0.1 percent of that quantity. The Administrator will take into account any previous transfers, any producti on, and allowable imports and e xports of class II controlled substances reported by the transferor. Within thre e working days of receiving a complete transfer claim, the Administrator will take action to notify the transferor and transferee as follows: (A) The Administrator will issue a notice indicating that EPA does not object to the transfer if EPA's records show that the transferor has sufficient unexpended allowances to cover the transfer claim. In the case of transfers of production or consumption allowances, EPA will reduce the transferor's balance of unexpended allo wances by the quantity to be transferred plus 0.1 percent of that quantity. In th e case of transfers of export pr oduction or Article 5 allowances, EPA will reduce the transferor's balance of une xpended allowances, respectively, by the quantity to be transferred plus 0.1 percent of that quant ity. The transferor and th e transferee may proceed with the transfer when EPA issues a no objection notice. However, if EPA ultimately finds that the transferor did not have suffi cient unexpended allowances to c over the claim, the transferor and transferee, where applicable, will be held lia ble for any knowing violations of the regulations of this subpart that occur as a result of, or in conjun ction with, the improper transfer.
* * * * * (b) Inter-pollutant transfers. (1) Effective January 1, 2003, a pe rson (transferor) may convert consumption allowances, production allowances or Article 5 allowances for one class II controlled substance to the same type of allowan ce for another class II controlled substance listed in Appendix B of this subpart, following the proce dures described in para graph (b)(3) of this section.
* * * * * (d) Permanent transfers. The procedures in paragraph (a) of this sect ion apply to permanent inter-company transfers of baseline production allo wances or baseline consumption allowances.*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review ***

64 of 64 A person receiving a permanent transfer of baseline production allowances or baseline consumption allowances (the transferee) for a sp ecific class II controlled substance will be the person who has their baseline allowances adjusted in accordance with phaseout schedules in this subpart. No person may conduct permanent inter- pollutant transfers of baseline production allowances or baseline consumption allowances.
* * * * *