# ATTACHMENT 1

EO12866_CAA Part 82A 2060 AQ98 FINAL_FRN_20130305_c lean.docx

### *** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

1 of 86 

## EO12866_CAA Part 82A 2060 AQ98 FINAL_FRN_20130305 BILLING CODE 6560–50–P ENVIRONMENTAL PROTECTION AGENCY 40 CFR Part 82 [EPA-HQ-OAR-2011-0354; FRL-XXXX-X] RIN 2060-AQ98 Protection of Stratospheric Ozone: Adjustments to t he Allowance System for Controlling HCFC Production, Import, and Export AGENCY: Environmental Protection Agency [EPA]. ACTION: Final rule. SUMMARY: EPA is adjusting the allowance system controlling U .S. consumption and production of hydrochlorofluorocarbons (HCFCs) as a result of a 2010 Court decision vacating a portion of the 2009 final rule titled “Protection o f Stratospheric Ozone: Adjustments to the Allowance System for Controlling HCFC Production, I mport, and Export.” EPA interprets the Court’s vacatur as applying to the part of the rule that establishes the company-by-company baselines and calendar year allowances for HCFC-22 and HCFC-142b. On August 5, 2011, EPA published an interim final rule allocating allowanc es for 2011. Today’s action relieves the regulatory ban on production and consumption of the se two chemicals following the Court’s vacatur by establishing company-by-company HCFC-22 and HCFC-142b baselines and allocating production and consumption allowances fo r 2012-2014. DATES: This final rule is effective upon [INSERT DATE OF PUBLICATION]]. ADDRESSES: EPA has established a docket for this action under Docket ID No. EPA-HQOAR-2011-0354 . All documents in the docket are listed on the www.regulations.gov website. Although listed in the index, some information is n ot publicly available, e.g., CBI or other information whose disclosure is restricted by statu te. Certain other material, such as copyrighted

### *** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

2 of 86 

## material, is not placed on the Internet and will be publicly available only in hard copy form. Publicly available docket materials are available e ither electronically through www.regulations.gov or in hard copy at the Air and Radiation Docket an d Information Center, EPA/DC, EPA West, Room 3334, 1301 Constitution Ave. , NW, Washington, DC. The Public Reading Room is open from 8:30 a.m. to 4:30 p.m., M onday through Friday, excluding legal holidays. The telephone number for the Public Readi ng Room is (202) 566-1744, and the telephone number for the Air and Radiation Docket i s (202) 566-1742. FOR FURTHER INFORMATION CONTACT: Luke H. Hall-Jordan by telephone at (202) 343-9591, or by e-mail at hall-jordan.luke@epa.gov, or by mail at U.S. Environmental Protection Agency, Stratospheric Protection Divisio n (6205J), 1200 Pennsylvania Ave., NW, Washington, DC, 20460. You may also visit the websi te of EPA’s Stratospheric Protection Division at www.epa.gov/ozone/strathome.html for further information about EPA’s Stratospheric Ozone Protection regulations, the sci ence of ozone layer depletion, and related topics. SUPPLEMENTARY INFORMATION: Effective Date. This rule concerns Clean Air Act (CAA) restrictions on the consumption and production of hydrochlorofluorocarbon (HCFC)-22 and HCFC-142b during 2012-2014. Section 553(d) of the Administrative Procedure Act (APA), 5 U.S.C. Chapter 5, generally provides that rules may not take effect earlier tha n 30 days after they are published in the Federal Register. EPA is issuing this final rule under sect ion 307(d)(1) of the Clean Air Act, which states: “The provisions of section 553 through 557 . . . of Title 5 shall not, except as expressly provided in this section, apply to actions to which this subsection applies.” Thus, section 553(d) of the APA does not apply to this rule. EPA is neve rtheless acting consistently with the policies underlying APA section 553(d) in making this rule e ffective [INSERT DATE OF PUBLICATION]. APA section 553(d) allows an effectiv e date less than 30 days after

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

3 of 86 

## publication for any action “that grants or recogniz es an exemption or relieves a restriction,” (5 U.S.C. 553(d)(1)). Since today's action relieves a restriction from the regulatory ban on the production and consumption of HCFC-22 and HCFC-142b in the U.S., EPA is making this action effective immediately upon publication to en sure the availability of these HCFCs for servicing air conditioning and refrigeration equipm ent. Acronyms and Abbreviations. The following acronyms and abbreviations are used in this document. CAA – Clean Air Act CAAA – Clean Air Act Amendments of 1990 CFC – Chlorofluorocarbon CDM – Clean Development Mechanism CFR – Code of Federal Regulations EPA – Environmental Protection Agency FR – Federal Register HCFC – Hydrochlorofluorocarbon HVAC – Heating, Ventilating, and Air Conditioning Montreal Protocol – Montreal Protocol on Substances that Deplete the Oz one Layer MOP – Meeting of the Parties MT – Metric Ton ODP – Ozone Depletion Potential ODS – Ozone-Depleting Substances Party – States and regional economic integration or ganizations that have consented to be bound by the Montreal Protocol on Substances that Deplete the Oz one Layer Organization of This Document. The following outline is provided to aid in locati ng information in this preamble.

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

4 of 86 

## I. Does This Action Apply to Me? II. Summary of This Final Action III. 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 Thi s Rulemaking? D. How Does This Action Relate to the 2010 Court De cision? IV. How Is EPA Allocating HCFC-22 and HCFC-142b All owances for 2012-2014? A. What Baselines Is EPA Using for HCFC-22 and HCFC-14 2b Allowances? 1. What Baselines Is EPA Using for 2012-2014? 2. What Baselines Is EPA Considering for 2015-2019? B. What Factors Did EPA Consider in Determining Al location Amounts for HCFC22 and HCFC-142b? 1. How Is EPA Adjusting Estimated Servicing Need t o Account for Surplus Inventory from Past Years? 2. How Is EPA Adjusting Allowances to Encourage Rec overy, Reclamation and Reuse? 3. How Is EPA Accounting for Recovery and Reuse of HCFC-22 in the Supermarket Industry? 4. Did EPA Consider Providing Allowances to Small B usinesses in This Final Action? 5. Does the Installation of Dry-shipped HCFC-22 Equ ipment Affect the Phaseout of HCFC-22? 6. How Is EPA Addressing the Court’s Decision with Regard to 2010 HCFC Allowances? 7. Does EPA Have to Provide the Same Percentage of Baseline for Production Allowances as It Does for Consumption Al lowances? C. How Many HCFC-22 and HCFC-142b Allowances Is EPA Allocating in 2012- 2014?

1. How Many HCFC-22 Consumption Allowances Is EPA Allocating in 2012-2014? 2. How Many HCFC-22 Production Allowances Is EPA Al locating in 2012- 2014? 3. How Many HCFC-142b Consumption and Production Al lowances Is EPA Allocating in 2012-2014? 4. How Does the Aggregate Allocation for HCFC-22 an d HCFC-142b Translate Entity-by-Entity? V. How Is EPA Changing the Regulations Governing Tr ansfers of Class II Allowances? A. How Is EPA Changing the Regulations Governing Pe rmanent Transfers of Class II Allowances? B. How Is EPA Changing the Regulations Governing T ransfers of Article 5 Class II Allowances? VI. Statutory and Executive Order Reviews

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

5 of 86 

## A. Executive Order 12866: Regulatory Planning and Review and Executive Order

13563: Improving Regulation and Regulatory Review B. Paperwork Reduction Act C. Regulatory Flexibility Act D. Unfunded Mandates Reform Act E. Executive Order 13132: Federalism F. Executive Order 13175: Consultation and Coordi nation with Indian Tribal

Governments G. Executive Order 13045: Protection of Children from Environmental Health and

Safety Risks H. Executive Order 13211: Actions Concerning Regu lations That Significantly

Affect Energy Supply, Distribution, or Use I. National Technology Transfer and Advancement A ct J. Executive Order 12898: Federal Actions to Addre ss Environmental Justice in

Minority Populations and Low-Income Populations K. Congressional Review Act I. Does This Action Apply to Me? This rule may affect the following categories:

- Industrial Gas Manufacturing entities (NAICS code 3 25120), including fluorinated hydrocarbon gases manufacturers and rec laimers;

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

- Air-Conditioning and Warm Air Heating Equipment and Commercial and Industrial Refrigeration Equipment Manufacturing en tities (NAICS code 333415), including air-conditioning equipment and c ommercial and industrial refrigeration equipment manufacturers;

- Air-Conditioning Equipment and Supplies Merchant Wh olesalers (NAICS code 423730) , including air-conditioning (condensi ng unit, compressors) merchant wholesalers;

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

6 of 86 

## - Electrical and Electronic Appliance, Television, an d Radio Set Merchant Wholesalers (NAICS code 423620), including air-cond itioning (room units) merchant wholesalers; and

- Plumbing, Heating, and Air-Conditioning Contractors (NAICS code 238220), including central air-conditioning system and comme rcial refrigeration installation; HVAC contractors. This list is not intended to be exhaustive, but rat her provides a guide for readers regarding entities likely to be regulated by this action. Thi s table lists the types of entities that could potentially be regulated by this action. Other type s of entities not listed in this table could also b e affected. To determine whether your facility, compa ny, business organization, or other entity is regulated by this action, you should carefully exam ine these regulations. If you have questions regarding the applicability of this action to a par ticular entity, consult the person listed in the

“ FOR FURTHER INFORMATION CONTACT ” section. II. Summary of This Final Action In today’s final rule, EPA is issuing HCFC-22 and H CFC-142b allowances for the years 2012, 2013 and 2014 in the wake of the U.S. Court o f Appeals for the District of Columbia Circuit (Court) decision in Arkema v. EPA (618 F.3d 1, D.C. Cir. 2010). As discussed in this preamble and in the proposed rule (77 FR 237), the Court vacated HCFC-22 and HCFC-142b company-by-company baseline and calendar-year allow ances for 2012-2014. Baselines and calendar-year allowances for these two substances w ere originally finalized in a December 15, 2009, rule (“2009 Final Rule,” 74 FR 66412). EPA is finalizing HCFC-22 and HCFC-142b baseline al lowances that incorporate the inter-pollutant transfers made by Arkema, Inc., Sol vay Fluorides, LLC, and Solvay Solexis, Inc., (Arkema and Solvay) in 2008, and is setting calenda r-year allowances for the 2012-2014 control

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

7 of 86 

## periods. EPA is providing fewer calendar-year HCFC- 22 consumption allowances 1 

## and more calendar-year HCFC-22 production allowances 2 

## than in the 2009 Final Rule. The agency determined that the need for virgin HCFC-22 in the U.S. is lower than EPA anticipated in the 2009 Final Rule and is adjusting consumption allowa nces accordingly. EPA anticipates this adjustment will foster a smooth transition away fro m ozone-depleting HCFC-22. While EPA is reducing domestic consumption (i.e. production and import for U.S. use), under the recalculated baselines, the overall production allowances will i ncrease. Because other countries have different approaches to phasing out HCFC-22, EPA considers th at this increase in the number of production allowances will also ensure that U.S. co mpanies can continue to meet demand for HCFCs in global markets. This supports the Montreal Protocol’s overall goal of limiting need for new production capacity for controlled chemicals by allowing existing producers scope to better meet the needs of global markets. Additionally, EPA has determined that in the narrow circumstance of the Court’s vacatur of the baseline s in the 2009 Final Rule, it must provide meaningful compensation for 2010 calendar-year HCFC -22 and HCFC-142b allowances that companies would have received under the adjusted ba selines. EPA will issue recoupment allowances for that purpose in 2013 and 2014. EPA is also updating HCFC-142b baselines and annua l allowances and is allocating approximately the same amount of calendar-year cons umption allowances as in the 2009 Final Rule. Due to the recalculation of HCFC-142b baselin es, calendar-year HCFC-142b production allowances are higher than in the 2009 Final Rule, but have been calculated using the same methodology. Therefore, while the percentage of bas eline issued for HCFC-142b is the same for both consumption and production allowances, the rec alculated production baseline is now

1 

### Consumption allowances permit an entity to produce and/or import virgin HCFCs in a given control peri od (i.e., calendar year). 2 

### Production allowances permit an entity to produce virgin HCFCs in a given control period. Domestic pr oduction of HCFCs requires the use of both production and consu mption allowances.

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

8 of 86 

## significantly larger than the consumption baseline, resulting in an overall increase in calendaryear production allowances compared with the 2009 F inal Rule. Finally, EPA is modifying the transfer language at 40 CFR 82.23 to more explicitly reflect EPA’s policy on inter-pollutant HCFC allowa nce transfers; that is, that inter-pollutant HCFC transfers can occur only on an annual basis go ing forward. All other aspects of the 2009 Final Rule not addre ssed in this rulemaking are unaffected, including, but not limited to: HCFC-123, HCFC-124, HCFC-225ca and HCFC-225cb allowances, the formula for determining calendar-ye ar Article 5 allowances, and the use and introduction into interstate commerce restrictions on HCFC-22 and HCFC-142b. This preamble includes a summary of comments EPA received in resp onse to the proposed rule, as well as comments to the 2011 Interim Final Rule that are re levant to this current rulemaking. A full response to comments document (“Response to Comment s”) is available in the docket for this rulemaking. III. Background EPA is undertaking this rulemaking as a result of t he decision issued by the Court in Arkema v. EPA (618 F.3d 1, D.C. Cir. 2010) regarding the Decembe r 15, 2009, final rule titled “Protection of Stratospheric Ozone: Adjustments to the Allowance System for Controlling HCFC Production, Import, and Export,” (“2009 Final Rule,” 74 FR 66412). Certain allowance holders affected by the 2009 Final Rule filed petit ions for judicial review of the rule under section 307(b) of the Clean Air Act. Among other ar guments, the petitioners contended that the rule was impermissibly retroactive because in setti ng the baselines for the new regulatory period, EPA did not take into account certain inter-polluta nt baseline transfers that petitioners had performed during the prior regulatory period. The Court issued a decision on August 27, 2010, agr eeing with petitioners that “the [2009] Final Rule unacceptably alters transactions the EPA approved under the 2003 Rule,”

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

9 of 86 

## ( Arkema v. EPA , 618 F.3d at 3). The Court vacated the 2009 Final Rule in part, “insofar as it operates retroactively,” and remanded it to EPA “fo r prompt 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 EPA’s interpretation of the Court’s decision in section III.D. of this preamble. For 2011, EPA addressed the Court’s partial vacatur in an August 5, 2011, interim final rule, “Protection of Stratospheric Ozone: Adjustmen ts to the Allowance System for Controlling HCFC Production, Import, and Export,” (“2011 Interi m Final Rule,” 76 FR 47451). Today’s final rule follows that action, and establishes a p ath forward for the remainder of the regulatory period ending on December 31, 2014. A. How Does the Montreal Protocol Phase Out HCFCs? The Montreal Protocol on Substances that Deplete the Oz one Layer (Montreal Protocol) is the international agreement aimed at reducing an d eventually eliminating the production and consumption of stratospheric ozone-depleting substa nces (ODS). The U.S. was one of the original signatories to the 1987 Montreal Protocol and the U.S. ratified 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 Protection, 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 i ncludes restrictions on production, consumption, and use of ODS that are subject to acc eleration if “the Montreal Protocol is modified 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 Montreal Protocol and the Clean Air Act (CAA) define consump tion as production plus imports minus exports.

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

10 of 86 

## In 1990, as part of the London Amendment to the Mo ntreal Protocol, the Parties identified HCFCs as “transitional substances” to se rve as temporary, lower ozone depletion potential (ODP) substitutes for CFCs and other ODS. EPA similarly viewed HCFCs as “important interim substitutes that will allow for the earliest possible phaseout of CFCs and other Class I substances” 3 

## (58 FR 65026). In 1992, through the Copenhagen Ame ndment to the Montreal Protocol, the Parties created a detailed p haseout schedule for HCFCs beginning with a cap on consumption for industrialized countries not operating under Article 5 of the Montreal Protocol (non-Article 5 Parties), a schedule to whi ch the U.S. adheres. The consumption cap for each non-Article 5 Party was set at 3.1 percent (la ter 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 formula, the HCFC consumption cap for the U.S. was 15,240 ODPweighted metric tons (MT), effective January 1, 199 6. This became the U.S. consumption baseline for HCFCs. The 1992 Copenhagen Amendment created a schedule of graduated reductions and provided for the eventual phaseout of HCFC consumpt ion (Copenhagen, 23-25 November, 1992, Decision IV/4). Prior to a later adjustment in 2007 , the schedule initially allowed a non-Article 5 country to consume 65 percent of its consumption ca p in 2004, followed by 35 percent in 2010, 10 percent in 2015, 0.5 percent in 2020 for the ser vicing of existing refrigeration and airconditioning equipment, and a total phaseout in 203 0. The Copenhagen Amendment did not cap HCFC productio n. In 1999, the Parties created a cap on production for non-Article 5 Parties throu gh an amendment to the Montreal Protocol agreed by the Eleventh Meeting of the Parties (Beij ing, 29 November – 3 December, 1999, Decision XI/5). The cap on production was set at th e average of: (a) 1989 HCFC production plus 2.8 percent of 1989 CFC production, and (b) 1989 HC FC consumption plus 2.8 percent of 1989

3 

### Class I refers to the controlled substances listed in appendix A to 40 CFR part 82 subpart A. Class I I refers to the controlled substances listed in appendix B to 40 CF R part 82 subpart A.

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

11 of 86 

## CFC consumption. Based on this formula, the U.S. HC FC production cap was 15,537 ODPweighted MT, effective January 1, 2004. This became the U.S. production baseline for HCFCs. To further protect human health and the environment , the Parties to the Montreal Protocol adjusted the Montreal Protocol’s phaseout schedule for HCFCs at the 19 th 

## Meeting 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, 2 008. 4 

## As a result of the 2007 Montreal Adjustment (refle cted in Decision XIX/6), the U.S. and other non-Article 5 countries may only consume 25 p ercent of their HCFC baseline beginning in 2010, rather than 35 percent. Other milestones rema in the same. The adjustment also resulted in a phaseout schedule for HCFC production that parall els the consumption phaseout schedule. All production and consumption for non-Article 5 Partie s is phased out by 2030. Decision XIX/6 also adjusted the provisions for Pa rties operating under paragraph 1 of Article 5 (developing countries): (1) to set HCFC p roduction and consumption baselines based on the average of 2009-2010 production and consumpt ion, respectively; (2) to freeze HCFC production and consumption at those baselines in 20 13; and (3) to add stepwise reductions to 90 percent of baseline by 2015, 65 percent by 2020, 32 .5 percent by 2025, and 2.5 percent by 2030 – allowing, between 2030 and 2040, an annual averag e of no more than 2.5 percent to be produced or imported solely for servicing existing air-conditioning and refrigeration equipment. All production and consumption for Article 5 Partie s will be phased out by 2040. Decision XIX/6, included in the Report of the Nineteenth Meeting of the Parties to the Montreal Protocol on Substances that Deplete the Ozone Layer , is available in the docket for this rulemaking.

4 

### Under Article 2(9)(d) of the Montreal Protocol, an adjustment enters into force six months from the d ate the depositary (the Ozone Secretariat) circulates it to the Parties. The depositary accepts all notificati ons and documents related to the Protocol and examines whether all fo rmal requirements are met. In accordance with the p rocedure in Article 2(9)(d), the depositary communicated the ad justment to all Parties on November 14, 2007. The a djustment entered into force and became binding for all Parti es on May 14, 2008.

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

12 of 86 

## In addition, in the Montreal Adjustments, Parties agreed to adjust Article 2F to allow non-Article 5 countries to produce “up to 10 percen t of baseline levels” for export to Article 5 countries “in order to satisfy basic domestic needs ” until 2020. Paragraph 14 of Decision XIX/6 notes that by no later than 2015, the Parties would consider “further reduction of production for basic domestic needs” in 2020 and beyond. Under par agraph 13 of Decision XIX/6, the Parties will review in 2015 and 2025, respectively, the nee d for the “servicing tails” for non-Article 5 and Article 5 countries. The term “servicing tail” refers to an amount of HCFCs needed to service existing equipment, such as certain types o f air-conditioning and refrigeration appliances. B. How Does the Clean Air Act Phase Out HCFCs? The U.S. has chosen to implement the Montreal Proto col phaseout schedule on a chemical-by-chemical basis. In 1992, environmental and industry groups petitioned EPA to implement the required phaseout by eliminating the 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 reductions through a che mical-by-chemical phaseout that employed a “worst-first” approach, which focuses on phasing ou t certain chemicals with higher ODP earlier than others. In 1993, as authorized by section 606 of the CAA, the U.S. established a phaseout schedule that eliminated HCFC-141b first and would greatly restrict HCFC-142b and HCFC-22 next, followed by restrictions on all other HCFCs a nd ultimately a complete phaseout (58 FR 15014, March 18, 1993; 58 FR 65018, December 10, 19 93). On January 21, 2003, EPA promulgated regulations ( “2003 Final Rule,” 68 FR 2820) to ensure compliance with the first reduction mileston e in the HCFC phaseout: the requirement that by January 1, 2004, the U.S. reduce HCFC consumptio n by 35 percent and freeze HCFC production. In the 2003 Final Rule, EPA established chemical-specific consumption and production baselines for HCFC-141b, HCFC-22, and HC FC-142b for the initial regulatory period ending December 31, 2009. Section 601(2) sta tes that EPA may select “a representative

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

13 of 86 

## calendar year” to serve as the company baseline for HCFCs. In the 2003 Final Rule, EPA concluded that because the entities eligible for al lowances had differing production and import histories, no single year was representative for al l companies. Therefore, EPA assigned an individual consumption baseline year to each compan y 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 provide d for new entrants that began importing 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 e nsure that small businesses that might not have been aware of the impending rulemaking would b e able to continue in the HCFC market. The 2003 Final Rule apportioned production and con sumption baselines to each company in amounts equal to the company’s highest “producti on year” or “consumption year,” as described above. It completely phased out the produ ction and import of HCFC-141b by granting zero percent of that substance’s baseline for produ ction and consumption in the table at 40 CFR 82.16. EPA did, however, create a petition process to allow applicants to request small amounts of HCFC-141b until 2015. The 2003 Final Rule also g ranted 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 allowances for HCFC- 22 and HCFC-142b at 100 percent of baseline because, in light of the concurrent comple te phaseout of HCFC-141b, the allocations for HCFC-22 and HCFC-142b, combined with projections fo r consumption of all other HCFCs, remained below the 2004 cap of 65 percent of the U. S. baseline. EPA allocates allowances for specific years; they are valid between January 1 and December 31 of a given control period (i.e., calend ar year). Prior to December 15, 2009, EPA had not allocated any HCFC allowances for 2010 or b eyond. 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. Absent the granting of calendar-year all owances, section 82.15 would have

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

14 of 86 

## prohibited the production and import of HCFC-22 and HCFC-142b after December 31, 2009. The 2009 Final Rule allowed for continued productio n and consumption, at specified amounts, of HCFC-142b, HCFC-22, and other HCFCs not previous ly included in the allowance system, for the 2010-2014 control periods. In the U.S., an allowance is the unit of measure t hat controls production and consumption of ODS. EPA establishes company-by-company baseline s (also known as “baseline allowances”) and allocates calendar-year allowances equal to a p ercentage of the baseline for specified control periods. A calendar-year allowance represents the p rivilege granted to a company to produce or import one kilogram (not ODP-weighted) of the speci fic substance. EPA allocates two types of calendar-year allowances – production allowances an d consumption allowances. “Production allowance” and “consumption allowance” are defined at section 82.3. To produce an HCFC for which allowances have been allocated, an allowance holder must expend both production and consumption allowances. To import an HCFC for which allowances have been allocated, an allowance holder must expend consumption allowances . An allowance holder exporting HCFCs for which it has expended consumption allowances ma y request a refund of those consumption allowances by submitting proper documentation and r eceiving approval from EPA. Since EPA is implementing the phaseout on a chemic al-by-chemical basis, it allocates and tracks production and consumption allowances on an absolute kilogram basis for each chemical. Upon EPA approval, an allowance holder ma y transfer calendar-year allowances of one type of HCFC for calendar-year allowances of an other type of HCFC, with transactions weighted according to the ODP of the chemicals invo lved. Pursuant to section 607 of the CAA, EPA applies an offset to each HCFC transfer by dedu cting 0.1 percent from the transferor’s allowance balance. The offset benefits the ozone la yer since it “results in greater total reductions in the production in each year of . . . class II su bstances than would occur in that year in the absence of such transactions” (42 U.S.C. 7671f).

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

15 of 86 

## The U.S. remained comfortably below the aggregate H CFC cap through 2009. The 2003 Final Rule announced that EPA would allocate allowa nces for 2010-2014 in a subsequent action and that those allowances would be lower in aggrega te than for 2003-2009, consistent with the next stepwise reduction for HCFCs under the Montrea l Protocol. EPA stated its intention to determine the number of allowances that would be ne eded for HCFC-22 and HCFC-142b, bearing in mind that other HCFCs would also contrib ute to total HCFC consumption. EPA noted that it would likely achieve the 2010 stepwise redu ction by applying a percentage reduction to the HCFC-22 and HCFC-142b baselines. EPA subsequent ly reviewed market conditions to estimate servicing needs and market adjustments in the use of HCFCs, including HCFCs for which EPA did not establish baselines in the 2003 F inal Rule. In the 2009 Final Rule, EPA estimated the need for HCFC-22 during the 2010-2014 regulatory period, and determined the percentage of that need for which it was appropriate to allocate allowances. As described in section IV.B.3 . of the proposed rule (77 FR 237), EPA determined that the percentage of the estimated nee d allocated in the form of allowances should not remain constant from year to year but rather sh ould decline on an annual basis. For 2010, EPA allocated allowances equal to 80 percent of the estimated need for HCFC-22, concluding that reused, recycled, and reclaimed material could meet the remaining 20 percent. Under the 2009 Final Rule, the percentage of estimated need f or which there was no allocation, and therefore would need to be met through recycling an d reclamation, rose from 20 percent in 2010 to 29 percent in 2014 to ensure the U.S. market wou ld have a viable reclamation industry and could meet the 2015 stepwise reduction under the Mo ntreal Protocol. As explained in the Background section, EPA is unde rtaking this rulemaking as a result of the decision issued by the Court in Arkema (618 F.3d 1, D.C. Cir. 2010), in which the Court vacated portions of the 2009 Final Rule. C. What Sections of the Clean Air Act Apply to This Rulemaking?

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

16 of 86 

## Several sections of the CAA apply to this rulemaki ng. 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 Fin al Rule (74 FR 66416), section 606 provides EPA authority to set a more stringent phaseout sche dule than the schedule in section 605 based on an EPA determination regarding current scientifi c information or the availability of substitutes, or to conform to any acceleration unde r the Montreal Protocol. EPA previously set a more stringent schedule than the section 605 schedu le through a rule published December 10, 1993 (58 FR 65018). Through the 2009 Final Rule, EP A accelerated the section 605 schedule to reflect the acceleration under the Montreal Protoco l as agreed to under the Montreal Protocol in September 2007. The more stringent schedule establi shed in that rule is unaffected by the 2010 Court decision and is therefore still in effect. Section 606 provides EPA authority to promulgate re gulations that establish a schedule for production and consumption that is more stringe nt than what is set forth in section 605 if: “(1) based on an assessment of credible current sci entific information (including any assessment under the Montreal Protocol) regarding harmful effe cts on the stratospheric ozone layer associated with a class I or class II substance, th e Administrator determines that such more stringent schedule may be necessary to protect huma n health and the environment against such effects, (2) based on the availability of substitut es for listed substances, the Administrator determines that such more stringent schedule is pra cticable, taking into account technological achievability, safety, and other relevant factors, or (3) the Montreal Protocol is modified to include a schedule to control or reduce production, consumption, or use of any substance more rapidly than the applicable schedule under this tit le.” 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 cons umption of HCFC-22 and HCFC-142b.

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

17 of 86 

## As noted in the 2009 Final Rule, while section 606 is sufficient authority for establishing a more stringent schedule than the section 605 phas eout schedule, section 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. Thus, section 614 (b) requires the agency to establish phaseout schedules at least as stringent as the schedules co ntained in the Montreal Protocol. To meet the 2010 stepdown requirement, EPA is continuing to all ocate HCFC allowances at a level that will ensure the aggregate HCFC production and consumptio n will not exceed 25 percent of the U.S. baselines. For more discussion of this point, see 7 4 FR 66416. Finally, section 607 addresses transfers of allowan ces both between companies and chemicals. EPA is further clarifying the policy and procedures applicable to inter-pollutant transfers in this action, and is making a minor cha nge to the regulations governing inter-pollutant transfers to provide additional clarity to stakehol ders. D. How Does This Action Relate to the 2010 Court De cision? Certain allowance holders affected by the 2009 Fin al 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, a nd Solvay Solexis, Inc., contended that the rule was impermissibly retroactive because in setti ng the baselines for the new regulatory period, EPA did not take into account certain inter-polluta nt baseline transfers that petitioners had performed during the prior regulatory period. The 2 011 Interim Final Rule contained a description of those transfers and the EPA approval s of those transfers. As explained in the 2011 Interim Final Rule, 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 production allowance transfers on A pril 18, 2008. Each company requested EPA’s approval to convert HCFC-142b allowances to H CFC-22 allowances, and checked a box

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

18 of 86 

## on the EPA transfer form indicating that “baseline” allowances would be transferred. EPA sent non-objection notices to Solvay Solexis, Inc. and S olvay Fluorides, LLC on February 21, 2008, and March 20, 2008, and to Arkema, Inc. in April 20 08. The transfer requests and EPA’s nonobjection notices were attached to petitioners’ cou rt filings and are available in the docket for this action. In the Notice of Proposed Rulemaking titled “Prote ction of Stratospheric Ozone: Adjustments to the Allowance System for Controlling 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 baseline inter-polluta nt 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 Propose d Rule resulted in a larger amount of HCFC-22 baseline allowances overall and therefore 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 other HCFC-22 allowance holders, and increases for the petitioners: Arkema and Solvay. In the 2009 Final Rule, after considering comments, EPA determined that allowing interpollutant transfers from one regulatory period to b ecome a part of the baseline in the next regulatory period could undermine the agency’s chem ical-by-chemical phaseout approach and encourage market manipulation. EPA also concluded t hat section 607 of the CAA was best read as limiting inter-pollutant transfers to those cond ucted on an annual basis. For these reasons, EPA did not take the 2008 inter-pollutant transfers into account in establishing the baselines for the 2009 Final Rule covering 2010-2014.

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

19 of 86 

## The Court issued a decision on August 27, 2010, agr eeing with petitioners that “the [2009] Final Rule unacceptably alters transactions the EPA approved under the 2003 Rule” ( Arkema v. EPA , 618 F.3d at 3). The Court vacated the rule in par t, “insofar as it operates retroactively,” and remanded to EPA “for prompt res olution,” (618 F.3d at 10). The Court withheld the mandate for the decision pending the d isposition of any petition for rehearing. On November 12, 2010, EPA filed a petition for reheari ng, which was denied on January 21, 2011. The mandate issued on February 4, 2011. EPA presented its interpretation of the Court’s dec ision with regard to baseline allowances and 2011-2014 calendar-year allowances i n the 2011 Interim Final Rule (76 FR 47456). EPA has not changed that interpretation but is repeating it here for ease of reference. Because the Court vacated the rule only in part, an d because various parts of the rule are intertwined, EPA relied on its expertise in adminis tering the HCFC phaseout regulations under Title VI of the CAA to determine how to apply the v acatur within the confines of the balance of the rule, which was not vacated. First, EPA noted t hat the rule contains elements that were not at issue in the litigation. EPA concluded that the vac atur had no effect on allowances for any substances other than HCFC-142b and HCFC-22, since the petitioners’ claims and the opinion itself discuss only those two substances. Similarly , EPA concluded that other discrete portions of the rule, such as the provisions on use and introdu ction into interstate commerce, were unaffected by the vacatur. The baselines for HCFC-142b and HCFC-22 were clearl y at issue in the litigation and indeed are the focus of the Court’s opinion. The Co urt found that “the agency’s refusal to account for the Petitioners’ baseline transfers of inter-pollutant allowances in the Final Rule is impermissibly retroactive,” (618 F.3d at 9). Becaus e baseline and calendar-year allowances are

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

20 of 86 

## inextricably linked, 5 

## EPA determined that the Court’s vacatur voided the HCFC-22 and HCFC142b baselines in 40 CFR 82.17 and 82.19 as well as the percentage of baseline allocated for those specific substances in 40 CFR 82.16 for all c ompanies listed in those sections. 6 

## This meant that in the absence of this rule, production and im port of these two substances were prohibited under 40 CFR 82.15. Recognizing this scenario, EPA sent letters in January 2012 and January 2013 to affected stakeholders informing them that t he agency would exercise enforcement discretion for a limited period provided their prod uction and import did not exceed specified levels and 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 the Court i ntended and a good fit for the specific circumstances, which include the goals and design o f the HCFC allowance program and the basic structure of the 2009 Final Rule. While this interpretation is appropriate in this instance, it is possible that another interpretation would be mo re appropriate in a case involving a program with different goals, design, or structure. EPA’s initial response to the Court’s partial vacat ur was to issue the 2011 Interim Final Rule (76 FR 47451). That rule allocated allowances for 2011 only. Through today’s notice, EPA is addressing the Court’s decision as it relates to the remainder of the regulatory period ending December 31, 2014. IV. How Is EPA Allocating HCFC-22 and HCFC-142b All owances for 2012-2014? EPA is continuing the system established in previou s rulemakings (68 FR 2820, 74 FR 66412, 76 FR 47451) for HCFC production and import in the U.S. The process works as follows for each HCFC: First, all the company-specific base lines listed in the tables at 40 CFR 82.17 and

5 

### Baseline and calendar-year allocations are inextri cable because calendar-year allocations are express ed as a percentage of baseline, and the percentage of basel ine allocated for a specific substance varies depen ding on the sum of all company baselines for that substance. The pr ocess is described in greater detail in section IV. 6 

### The companies’ allocations are inter-related becau se, as noted in footnote 5, the percentage of basel ine allocated varies according to the sum of the company-specific baselines.

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

21 of 86 

## 82.19 are added to determine the aggregate amount o f baseline production and consumption, respectively. Second, EPA determines how many consu mption allowances the market needs for a given year, taking into account sources other than new production and import, and then divides that amount by the aggregate amount of baseline all owances. The resulting percentage is listed in the table at section 82.16 and becomes what each co mpany is allowed to consume in a given control period. For example, a company with 100,000 kg of HCFC-22 baseline consumption allowances would multiply that number by the percen tage allowed for the year (for example, 17.7 percent in 2012) to determine its calendar-yea r consumption allowance is 17,700 kg. In this rulemaking EPA is (1) establishing 2012-201 4 company-by-company consumption and production baselines for HCFC-22 an d 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 (76 FR 47468); (2) allocating company-by-company productio n and consumption allowances for these substances for 2012-2014 by establishing allowed pe rcentages of production and consumption baselines in two tables at section 82.16; and (3) r evising the regulatory text at 40 CFR 82.23 to make the procedure for all future inter-pollutant t ransfers clear. EPA will address the baselines and allocations for the control periods beyond 2014 at a later date. All aspects of the 2009 Final Rule promulgated on December 15, 2009, (74 FR 66412 ) that are not addressed in this final rule are unchanged. EPA again notes that beginning January 1, 2015, sec tion 605 of the CAA prohibits the use and introduction into interstate commerce of an y HCFC listed as a class II substance unless it “(1) has been used, recovered and recycled; (2) is used and entirely consumed (except for trace quantities) in the production of other chemicals; ( 3) is used as a refrigerant in appliances manufactured prior to January 1, 2020; or (4) is li sted as acceptable for use as a fire suppression agent for nonresidential applications in accordance with section 612(c).” In addition, EPA’s

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

22 of 86 

## regulations at 40 CFR 82.15 restricted use and intr oduction into interstate commerce of HCFC141b, HCFC-142b, and HCFC-22 beginning in 2010, wit h limited exceptions. A. What Baselines Is EPA Using for HCFC-22 and HCFC -142b Allowances? In the January 4, 2012, notice, EPA proposed to es tablish 2012-2014 company-bycompany consumption and production baselines for HC FC-22 and HCFC-142b that were identical to the baselines established in the 2011 Interim Final Rule (see 40 CFR 82.17 and 82.19). EPA also provided advance notice that it wo uld consider updating baselines for the 2015- 2019 regulatory period, especially if there is an e nvironmental benefit to doing so. 1. What Baselines Is EPA Using for 2012-2014? Four companies commented on how EPA should proceed with establishing baselines for 2012-2014. Arkema and Solvay both support EPA’s inc lusion of past inter-pollutant transfers of baseline allowances, and believe that the proposed baselines are fully consistent with the Arkema decision. On the other hand, DuPont and Honeywell s tate that Arkema does not require EPA to recognize the inter-pollutant baseline transfers be yond 2009, nor does it address the validity of the 2008 transfers. These commenters also state tha t recognizing these transfers beyond 2009 is contrary to section 607, EPA’s transfer regulations , and the agency’s interpretation of those regulations for chemicals that are being phased dow n. In addition, they assert that if EPA does take those transfers into account in establishing b aselines for 2012-2014, the agency should only allocate the percentage of the transferred baseline s that would be allocated if the baselines had never been converted from HCFC-142b to HCFC-22. The y state that recognizing the transfers has the effect of increasing the baseline share of the petitioners in Arkema and reducing the share of other companies in violation of their due proces s rights. Finally, they state that under the Arkema decision, their share of the baseline is vested. EPA cited several reasons why it would prefer to s et baselines without taking into account inter-pollutant transfers in the 2009 Final Rule (74 FR 66420), in the Response to

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

23 of 86 

## Comments document included in the record for that r ulemaking and in the 2011 Interim Final Rule (76 FR 47451). These considerations remain imp ortant, and are the basis for EPA’s policy on future inter-pollutant transfers, which is discu ssed in section V of this notice. However, EPA must act in accordance with the Court’s holding reg arding the 2008 transfers. In Arkema , the Court concluded that EPA’s non-objection notices fo r the 2008 transfers created “vested rights” in the transferred baselines, which EPA must reflec t in rules governing the current regulatory period, at least to the extent such rules continue to use the historical production and consumption baselines. The Court explicitly held that “the Agen cy’s refusal to account for the Petitioners’ baseline transfers of interpollutant allowances in the Final Rule is impermissibly retroactive,” ( Arkema , 618 F.3d at 24). Given the Arkema decision, and given the recent decision in Honeywell International, Inc. v. EPA , D.C. Cir. No. 10-1347 (January 22, 2013) (“ Honeywell”) , EPA is recognizing the 2008 transfers in establishi ng the baselines through 2014. Thus, the baselines finalized for 2012-2014 in today’s rule a re identical to the HCFC-22 and HCFC-142b baselines established in the 2011 Interim Final Rul e. The commenters assert that the Arkema decision did not determine the validity of the transfers. They further assert that EPA lacked auth ority to approve permanent inter-pollutant baseline transfers, that the 2008 transfers as char acterized by the Court are thus invalid, and that EPA should not recognize them in setting baselines. The validity of the 2008 transfer approvals was challenged in Honeywell . The brief filed by the agency on January 30, 2012 , provides further response to several of the arguments that H oneywell and DuPont make in their comments on the proposed rule and is included in the docket for this rulemaking. The commenters do not assert that EPA lacked author ity to approve inter-pollutant transfers whose effects were limited to the regulat ory period ending in 2009. Rather, they assert that EPA lacked authority to approve inter-pollutan t transfers with effects lasting beyond 2009. They state that Arkema did not determine the validity of such transfers. Yet the Arkema Court

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

24 of 86 

## found contrary to the Agency’s position, that EPA h ad “approved permanent changes to the baseline as a result of inter-pollutant transfers” and that the Agency could not “undo these completed transactions,” ( Arkema , 618 F.3d at 23). It is not plausible that the Cou rt would have reached this holding if it viewed EPA’s authority t o approve inter-pollutant transfers with effects beyond the immediate regulatory period as open to d ebate. As the Court stated in Honeywell , “the Arkema Court necessarily concluded that permanent inter-p ollutant transfers were permissible under the statute” (slip op. at 7). The Honeywell Court noted that it was bound by Arkema and denied commenters’ petition for review of the 2008 transfers. The Honeywell decision is available in the docket for this action

. Contrary to the commenters’ assertions, section 607 of the CAA is ambiguous with regard to whether inter-pollutant transfers may hav e permanent effects that carry forward to subsequent regulatory periods. EPA has discretion u nder section 607 to determine how to treat such transfers. While EPA did not intend its non-ob jection notices to confer permanence to the 2008 inter-pollutant transfers, EPA disagrees with commenters’ implication that under section 607, the agency could not have done so. That would be true only if section 607 exp ressly prohibited permanent inter-pollutant transfers, whi ch it does not. As discussed in more detail in section V.A. of this preamble, for policy reasons E PA will approve only annual inter-pollutant transfers in the future. EPA also believes that whi le section 607 is not clear on its face, it is best interpreted as precluding permanent inter-pollutant transfers, as explained in section V.A. of this preamble. As noted by the Court in Arkema , interpreting section 607 to preclude permanent inter-pollutant transfers “may more accurately trac k the statutory mandate,” ( Arkema, 618 F.3d at 22). Commenters assert that EPA has departed from its o wn regulations in proposing to recognize the 2008 inter-pollutant transfers in the baselines for 2012-2014. Commenters ignore, however, the Court’s interpretation of those regula tions. EPA’s intent in the 2003 Rule, which

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

25 of 86 

## established the transfer provisions, was to preclud e permanent inter-pollutant transfers of baseline allowances (see 68 FR 2835). EPA notes tha t until the rulemaking that resulted in the 2009 Final Rule, the agency did not specifically de velop a policy on whether inter-pollutant transfers could ever carry forward to a new regulat ory period following one of the intermediate phasedown steps. Nonetheless, the Arkema decision found that the agency’s conclusion in the 2009 Final Rule not to carry inter-pollutant transf ers forward to a new regulatory period “departed from the policy it had adopted in the 200 3 Rule,” ( Arkema , 618 F.3d at 6). EPA cannot disregard the Court’s holding on the ground that th e 2003 Rule prohibited permanent interpollutant transfers where the Court has found other wise. The commenters are also incorrect that EPA previou sly interpreted its regulations as creating a “phasedown follows the allowance” princi ple. Commenters assert that under this principle, EPA should only allocate the percentage of the transferred baselines allocated for HCFC-142b. However, EPA has never adopted such a pr inciple. Preamble statements leading up to and accompanying the 2003 Rule refer to the elim ination of HCFC-141b baseline upon the chemical’s complete phaseout, “regardless of what i nter-pollutant transfers had taken place,” (68 FR 2835). That is a different matter from a partial phasedown, like the phasedown of HCFC-22 and HCFC-142b in 2010. Additionally, the commenters ’ approach runs counter to the way EPA allocates allowances as described in section IV of this preamble. Finally, the commenters assert that EPA has violate d their due process rights by decreasing their market share, which they argue is a vested right under Arkema . From a substantive perspective, what they assert is a vest ed right (i.e., a specific share of allowances) is not in fact a vested right, nor is it protected und er the due process clause. The Court held that EPA’s actions in approving the 2008 transfers creat ed vested rights in the transferred baselines. The Court placed particular emphasis on the fact th at the Agency took affirmative actions that appeared to ratify the transfers: “The Agency’s app roval and acknowledgement of Petitioners’

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

26 of 86 

## actions distinguishes this case from situations whe re a company’s unilateral business expectations are thwarted by a change in the regula tory framework,” ( Arkema , 618 F.3d at 20). The Court did not examine the issue of whether comp anies possessed vested rights in baseline or calendar-year allowances generally, or in a specifi c share of allowances. Nor did the Court hold that the transferred baselines, baseline allowances generally, or calendar-year allowances, are property rights protected under the Due Process Cla use. Furthermore, it did not state that companies had any right to a specific number of pro duction or consumption allowances. On the contrary, the Court noted that “the 2010 stepdown g ave the EPA occasion to adjust its distribution of allowances,” ( Arkema , 618 F.3d at 25). EPA’s regulatory definitions specify that productio n and consumption allowances are privileges, not rights ( see 40 CFR 82.3). As discussed in Section II, the U.S. is in the process of phasing out production and consumption of HCFCs, cu lminating in a complete phaseout in 2030. EPA’s regulations prohibit production and consumpti on of HCFCs without allowances (40 CFR 82.16(a), (b)). In the absence of this final rule, no allowances would exist for 2012 or beyond. In this regulatory environment, no company has an enti tlement to a specific number or share of HCFC allowances. In addition, under this final rule, commenters are receiving the same number of baseline allowances they received under previous HCFC alloca tion rules. Recognition of the 2008 transfers in the aggregate HCFC-22 consumption base line does not require EPA to extract baseline allowances from other companies. From a procedural perspective, commenters were give n multiple opportunities to comment on or challenge the effects of the 2008 tra nsfers at issue in Arkema on baselines for the current regulatory period. As noted in Honeywell , they had “notice and an opportunity to present [their] views during EPA’s pre- Arkema regulatory proceedings, during the Arkema litigation, and during EPA’s subsequent post- Arkema proceedings” (slip op. at 7). They commented on th e

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

27 of 86 

## 2009 Final Rule, the 2011 Interim Final Rule and th e proposal for this final rule. They also had the opportunity to intervene in the Arkema lawsuit and the opportunity to challenge the 2011 Interim Final Rule, in which EPA actually reflected the 2008 transfers in establishing baselines. A more detailed summary of the comments on this iss ue, as well as the Agency’s response to issues not addressed in the preamble or the briefs, is included in the Response to Comments, found in the docket for this rulemaking. 2. What Baselines Is EPA Considering for 2015-2019? Looking ahead to the next regulatory period, the ag ency received four comments on whether it should use more recent production and im port data in establishing baselines for 2015- 2019. Two commenters recommend using data from 2005 -2007 because these years were used to establish baselines in the 2009 Final Rule for newl y-controlled HCFCs (74 FR 66412). In addition, using the highest production and import l evels from 2005-2007 would reflect current and stable market conditions. One commenter points out that production and consumption in 2008 and 2009 were likely affected by the economic downturn, while 2010 and 2011 fall under the stepdown established by the 2009 Final Rule. An other commenter believes that updating baselines would avoid rewarding companies for attem pting to manipulate their baselines by converting allowances from HCFCs with lower future market value (i.e., HCFC-142b) to HCFC allowances they knew would retain value in the next regulatory period (i.e., HCFC-22). Two other commenters do not support revised baselin es. One of the commenters believes that the current allocation method is the fairest m ethod because it is transparent and well understood by all market participants. The other co mmenter sees no benefit to updating baselines, but says future reductions in allocation s will benefit the environment by promoting reclamation. Since EPA did not propose to establish baselines f or 2015-2019, the agency will continue to assess the merits of using a more recent set of years to establish baselines in a later

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

28 of 86 

## rulemaking. The agency is still receptive to the id ea of updating baselines in 2015, but notes that it did not receive any evidence that there is an en vironmental benefit to doing so. B. What Factors Did EPA Consider in Determining All ocation Amounts for HCFC-22 and HCFC-142b? In the 2009 Final Rule, EPA decided to allocate HCF C-22 and HCFC-142b allowances based on the projected servicing needs for those su bstances, taking into account the portion of need that can be met through recycling and reclamat ion. EPA is not changing that general approach, and continues to believe it is necessary in order to promote the use of used, recycled, and reclaimed material in anticipation of the 2015 phasedown step. In accordance with the Court’s decision in Arkema , the agency proposed, and is now finalizing, basel ines that reflect 2008 inter-pollutant baseline transfers. This appro ach necessitates issuing a different percentage of company baselines in order for the aggregate num ber of calendar-year HCFC-22 consumption allowances to be less than or equal to the 2009 Fin al Rule. In fact, EPA proposed to allocate significantly fewer consumption allowances for HCFC -22 relative to the 2009 Final Rule based on an analysis of updated market conditions. Specifically, the agency considered to what extent servicing need can be met by (1) significant inventories of existing HCFC-22, (2) in creased reclamation capacity, and (3) re-use of HCFC-22 within supermarkets. See “Analysis of HCFC- 22 Servicing Needs in the U.S. Air Conditioning and Refrigeration Sector: Additional C onsiderations for Estimating Virgin Demand” (Adjustment Memo), included in the docket t o this rulemaking. In the Adjustment Memo, EPA considers a higher and a lower HCFC-22 al location scenario for each year. In the larger allocation scenario: (1) surplus inventory f rom past years (hereinafter called “existing inventory”) meets 6,000 MT of estimated need each y ear; (2) recovery and reclamation meet 12,500 MT of need, the same amount as in the 2009 F inal Rule; and (3) 20 percent of total need in the large retail food sector is met by in-house recovery and reuse. In the smaller allocation

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

29 of 86 

## scenario: (1) existing inventory also meets 6,000 M T of estimated need each year; (2) recovery and reclamation meet 19,700 MT of estimated servici ng need; and (3) 70 percent of total need in the large retail food sector is met by in-house rec overy and reuse. As shown in Table 4 of the Adjustment Memo, the age ncy proposed to issue HCFC-22 consumption allowances as follows: (1) between 25,1 00 and 36,200 MT in 2012 (a decrease of 11 to 38 percent relative to the 2009 Final Rule); (2) between 20,800 and 31,400 MT in 2013 (a decrease of 13 to 42 percent); and (3) between 16,4 00 and 26,300 MT in 2014 (a decrease of 15 to 47 percent). These proposed amounts correspond t o allocations of 17.7 to 25.5 percent of baseline in 2012, 14.7 to 22.1 percent in 2013, and 11.6 to 18.5 percent in 2014. The agency took comment on its analysis of market conditions, which specifically looked at existing inventory, reclamation capacity, and HCFC-22 reuse in the supe rmarket industry. EPA also asked for comment on potential difficulties faced by small bu sinesses and on whether or not the installation of dry-shipped HCFC-22 condensing unit s affects the phaseout. Between the 2011 Interim Final Rule and the propos ed rule, the agency received a total of 50 comments (some with multiple signatories) on the market conditions (see section 2 of the Response to Comments) considered in allocating HCFC -22 and HCFC-142b allowances. As discussed in the proposed rule, the need for HCFC-2 2 to service existing equipment is the primary factor affecting EPA’s overall allocation o f production and consumption allowances for the current regulatory period. Thus, the Adjustment Memo only discusses HCFC-22 and most comments, as well as the agency’s response, focus p rimarily on HCFC-22. Additionally, EPA received 13 comments, four from t he Interim Final Rule and nine from the proposed rule, on whether or not to provid e more HCFC-22 and/or HCFC-142b consumption and/or production allowances as compens ation for lost opportunities during 2010 (“recoupment”). Lastly, the agency proposed to allo cate different annual percentages of baseline for consumption than for production (“decoupling”). Without decoupling the baselines, the

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

30 of 86 

## percentage of baseline allocated for production wou ld be the same as that for consumption for a given HCFC. Nine comments specifically addressed de coupling of baseline percentages. 1. How Is EPA Adjusting Estimated Servicing Need to Account for Surplus Inventory from Past Years? The agency proposed to account for existing inven tory of HCFC-22 produced in previous years by making downward adjustments to the consump tion allocation of 6,000 MT each year. EPA’s analysis indicated the amount of existing inv entory was between 22,700 MT and 45,400 MT. Including relevant comments received on the 201 1 Interim Final Rule, EPA received eight comments on its assessment of existing inventory of HCFC-22. Seven comments state there are significant volumes of HCFC-22 in existing inventor y and that accounting for this inventory is essential for supporting recovery and reclamation. One of those commenters indicates the 6,000 MT proposed annual adjustment and the 45,400 MT sto ckpile estimate should be considered a minimum, not maximum amount. Another also supports EPA’s consideration of existing inventory, and believes the estimates used in the p roposed rule may be too low based on their own inventory and their own estimates of industry-w ide inventory. All comments on EPA’s analysis, including confiden tial comments, indicate EPA’s estimate of existing inventory is reasonable and th at an annual adjustment to the estimated servicing need of 6,000 MT is supportable. EPA cons idered a wide range of existing inventory (between 22,700 MT and 45,500 MT), but comments sup port the proposed 6,000 MT adjustment regardless of the total stock of existing inventory . Based on the information provided, the agency does not believe the annual adjustment or the estim ate of existing inventory should be increased. Overestimating the amount in inventory could limit the ability of consumers to service their equipment, resulting in systems being prematurely d ecommissioned. EPA provides a full summary of comments and agency responses in the Res ponse to Comments, but notes here that all commenters who addressed the proposed 6,000 MT adjustment specifically were in support of

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

31 of 86 

## an adjustment at least that large. EPA is finalizin g the consumption allocation with the proposed adjustment for existing inventory. 2. How Is EPA Adjusting Allowances to Encourage Rec overy, Reclamation and Reuse ? In the 2009 Final Rule, the agency recognized that servicing needs 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 recl aimed. The 2009 Servicing Tail Report analyzed various reclamation scenarios, and after s everal rounds of industry feedback, the agency decided to issue allowances 12,500 MT below estimated need in 2010-2014. For 2010, 12,500 MT was 20 percent of the estimated need. EPA continues to believe that reused, recycled, and reclaimed material can help meet HCFC-22 servic ing needs. The agency published new projections of reclaim capabilities in the Adjustme nt Memo, and took comment on those projections via this rulemaking. Out of the 15 comments EPA received on reclaim cap abilities, 14 comments (some signed by multiple organizations) supported EPA’s a nalysis that the reclamation industry has the capacity to reclaim more than 19,700 MT per year. O ne comment stated that the infrastructure to effectively and efficiently recover, recycle, redis tribute, and reuse HCFC-22 likely will take several years to develop. In addition, one company agreed that the industry has the capacity to meet reclaim needs, but disagreed with the base ass umption that this activity will automatically take place. In the Adjustment Memo, EPA considered annual recl amation levels of 12,500 MT and 19,700 MT. Several organizations state that the 19, 700 MT figure should be a minimum, rather than a maximum, because established companies that reclaim refrigerants have the technical capacity to recover 19,700 MT or more in 2012 alone and could easily expand capacity to meet additional need. One company comments that reclamat ion companies will be able to expand to cover the need that will ultimately be driven by hi gher prices and a decrease in supply. However,

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

32 of 86 

## companies will not expand until there is a need. An other company also states that it could easily triple its current capacity, and believes the same is true for many reclamation companies. Many companies support an allowance reduction to encoura ge an increase in reclamation capacity and volume. These commenters, including 20 EPA-certifie d reclaimers that submitted a single comment, all believe that the capacity exists to ha ndle increased reclamation volumes. Several commenters believe sufficient recovery and reclamation capacity exists, but that the supply chain of used refrigerant from equipment -in-use to reclamation facilities is fragmented and complex. The concern is not whether capacity exists, or whether reclaimers could quickly expand capacity, but whether material is actually being recovered and brought to reclaimers. A group of recovery companies believes that existing reclaimers have the capacity to process more than enough HCFC-22 to meet the indust ry needs, but are not convinced that given the present situation, there will be enough refrige rant recovered to meet the raw material needs of the reclaimers. However, a group of recovery compan ies that focuses exclusively in recovering used refrigerant from retiring equipment does belie ve reducing allowances will change the incentives for recovery. Finally, one company belie ves that EPA’s estimate of the potential for recovery and reuse is too optimistic during 2012-20 14, particularly because residential air conditioners use only small quantities of the gas. EPA’s assessment that the reclamation industry has the capacity to reclaim 19,700 MT of HCFC-22 per year, as presented in the Adjustment Me mo, is supported by most of the comments received. The amount of used refrigerant that can b e recovered from retiring equipment is sufficient to allow for the reclamation of 19,700 M T per year, based on expected recovery rates used in the Vintaging Model 7 

## . Included in the docket for this rulemaking is a n ew supporting

7 

### The Vintaging Model is the primary tool that EPA u ses to estimate projected HCFC consumption. The Vin taging Model estimates the annual chemical emissions from industry sectors that have historically used ODS, i ncluding air conditioning, refrigeration, foams, solvents, aeros ols, and fire protection. Within these industry sec tors, there are over fifty independently-modeled end uses. The mode l uses information on the market size and growth fo r each of the end uses, as well as a history and projections of the market transition from ODS to alternatives. As ODS are

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

33 of 86 

## memo titled “Recovered HCFC-22 Available to Meet Se rvicing Needs” (Recovery Memo). In this memo EPA shows the amount of HCFC-22 that can be recovered from HCFC-22 equipment that reaches its end of life under two scenarios. I n the first scenario, EPA uses the end-of-life assumptions in the Vintaging Model to determine how much HCFC-22 is recovered from retiring equipment. The Vintaging Model uses a 35 percent re covery rate in retiring residential air conditioning systems. The Recovery Memo details all the recovery assumptions used, which are nearly identical to those used in the 2009 Servicing Tail Report . These numbers are similar to those presented in table 4-5, “Scenario 50: 50% Rec overy Rate,” which was also presented in the 2009 Servicing Tail Report . In the second scenario, EPA assumes all HCFC-22 i s recovered at the end-of-life. The intent of this memo is to show that it is technically feasible to recover and reclaim 19,700 MT of HCFC-22 per year between 2012- 2014, even when only 35 percent of the HCFC-22 is recovered from residential air condition ing systems—the largest use for HCFC-22. However, EPA agrees with some commenters that the a mount of refrigerant that is available to be recovered does not necessarily equa l the amount that is recovered in practice, and that it will take time for recovery practices to ch ange. The agency recognizes that assuming 19,700 MT of annual servicing need can be met by re covered and reclaimed material—instead of 12,500 MT—does not mean that amount will actually b e reclaimed each year. EPA’s adjustment to encourage recovery and reclamation could also en courage transition to HCFC-22 alternatives and more recovery and reuse of HCFC-22 in systems t hat require a large refrigerant charge. Although both of these outcomes are difficult to me asure and predict, EPA expects that these outcomes will sufficiently deal with any gap betwee n the adjustment in allocation and realized

phased out, a percentage of the market share origin ally filled by the ODS is allocated to each of its substitutes. The model tracks emissions of annual “vintages” of new equipment that enter into operation by incorporatin g information on estimates of the quantity of equipme nt or products sold, serviced, and retired or conve rted each year, and the quantity of the compound required to manufa cture, charge, and/or maintain the equipment. EPA’s Vintaging Model uses this market information to build an annu al inventory of in-use stocks of equipment and the ODS refrigerant and non-ODS substitutes in each of the end uses. This information is used to project the s ervicing needs of ODS-containing equipment. Additional information on the Vintaging Model is available in the 2009 Servicing Tail Report , which can be found in the docket for this rulemaking.

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

34 of 86 

## reclamation levels. EPA adopted the same general ap proach in the 2009 Final Rule (using 12,500 MT instead of 19,700 MT) to foster recovery and rec lamation. In addition, EPA has received anecdotal information from stakeholders that reclai mers are already offering increased incentives to return recovered refrigerant and that this will continue as long as there is an economic incentive to do so. As the supply of virgin refrige rant shrinks, the incentive to recover and reclaim used refrigerant will likely increase. EPA provides a full summary of comments and agency response in the Response to Comments. EPA does not believe any of the concerns raised sho uld preclude the agency from increasing the adjustment for reclamation from 12,5 00 MT to 19,700 MT to foster reclamation, especially in light of the 2015 Montreal Protocol c ap and the 2020 phaseout of HCFC-22 production and import. EPA believes increased recov ery and reclamation is necessary to ensure a smooth transition between now and 2020 and is incre asing the difference (relative to the 2009 Final Rule) between estimated servicing need and th e allocation for virgin production and import. The agency is finalizing the proposed 19,70 0 MT adjustment to foster increased HCFC22 recovery and reclamation. 3. How Is EPA Accounting for Recovery and Reuse of HCFC-22 in the Supermarket Industry? In the proposed rule, EPA considered adjusting the allocation for virgin HCFC-22 production and import to account for current recove ry and reuse practices in the supermarket industry. Specifically, the agency estimated that b etween 20 percent and 70 percent of annual servicing need in the large retail food sector coul d be met by HCFC-22 recovered and reused inhouse. In addition to the analysis conducted to dev elop the Adjustment Memo, EPA considered late comments that addressed recovery and reuse of HCFC-22 in supermarkets. The comments, combined with EPA’s findings presented in the Adjus tment Memo, indicate that supermarkets deal with recovered refrigerant in a variety of way s. Some appear to meet 10-20 percent of their

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

35 of 86 

## annual servicing need with material they recovered from internal existing prior uses. Others have the material reclaimed and do not reuse or bank any of the material. A third group meets 80 to 100 percent of their annual need with reused materi al. EPA received an additional comment on reuse by larg e end users, but not specifically supermarkets. The commenter notes that large users retiring equipment can efficiently and effectively capture the majority of refrigerant fro m commercial refrigeration and air conditioning units. These users can recover refrigerant for futu re servicing of other equipment they own. These users do not require reclamation technology o r equipment, and can recover and reuse significant volumes of refrigerant. Such recovery a nd reuse should continue to be considered as a source of HCFC-22 service refrigerant. EPA agrees that large end users, including supermar kets and other large commercial applications, can be a source for recovered HCFC-22 . However, the agency only received information on how six companies reuse refrigerant in-house, and their reuse percentages are very different. Since the agency does not have suff icient data on in-house reuse, EPA is not accounting for supermarket reuse as its own categor y. However, the agency’s Vintaging Model has reasonable estimates for actual recoverable mat erial for various sectors, and EPA is using those modeled recovery rates for supermarkets to he lp support overall recovery and reuse estimates in this rule (see the Recovery Memo for s pecifics on modeled recovery rates). 4. Did EPA Consider Providing Allowances to Small B usinesses in This Final Action? In response to the 2011 Interim Final Rule, one sma ll business informed EPA that it could not acquire either HCFC allowances or the HCF Cs it needs to manufacture its HCFC blend (see the letters from ICOR dated May 17, 2011 and S eptember 6, 2011, available in the docket for this action). To remedy this situation, the com menter requested that EPA provide unused allowances to companies that purchased either HCFCs or HCFC consumption allowances in 2008 and 2009. In the proposed rule, EPA noted that the inability to acquire allowances and/or

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

36 of 86 

## HCFCs themselves does not appear to be a widespread problem, as numerous companies have made a significant number of transfers over the las t year alone, and no other company has commented that it cannot acquire HCFCs. However, EP A took comment on whether other companies were having difficulty acquiring HCFCs or HCFC allowances. In the proposed rule, the agency also provided some historical background on how EPA provided flexibility for small businesses when establishing the HCFC allocation sy stem. EPA received four comments on providing allowances to manufactures of HCFC blends, all of which were in opposition. Two companies poin t to the flexibility for companies without baselines to obtain HCFCs or HCFC allowances by pur chasing them from others. Another commenter notes that EPA provided for new entrants when it established the allocation system in
2003. Since EPA did not receive any additional comments i n support of providing HCFC allowances to manufacturers of HCFC blends, and bec ause the agency has previously stated its belief that the current allocation system provides significant flexibility for new entrants (as documented in the revised Flexibility Memo), EPA is not providing allowances for new entrants at this time. EPA also sought comment on the concept of providing HCFC-22 allowances to reclaimers, but expressed reservations. EPA receive d eight comments on this topic: four in opposition and four in support. Comments in opposit ion state that providing allowances to reclaimers could encourage blending of refrigerant, instead of reclaiming refrigerant. They also cite administrative hurdles in establishing allowan ces for reclaimers and their skepticism that reclaimers would actually use the allowances to rec laim more material. All three commenters state that the proposed reduction in allowed produc tion and import will encourage recovery and reclamation (without providing allowances).

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

37 of 86 

## One comment in support encouraged EPA to provide al lowances to reclaimers as a reward for reclamation activities. The commenter al so stated that manufacturers create a difficult working environment for reclaimers, claiming, for e xample:

• The manufacturers exert pressure on wholesalers and contractors not to return their used refrigerants to a reclaimer, using their supply of virgin refrigerants as leverage.

• 

## The manufacturers have asked cylinder manufacturers not to sell pre-labeled DOT 39 cylinders for their blends to reclaimers.

• 

## The manufacturers or their agents will buy an accou nt back by offering a higher price for the used refrigerants than justified. The commenter argues that the desire of manufacture rs to promote their own best self-interest results in a difficult environment for a refrigeran t reclaimer to prosper. EPA continues to have serious concerns about prov iding allowances to reclaimers that did not historically produce or import HCFC-22 and have not already acquired HCFC-22 allowances. As stated in the proposed rule, the age ncy’s primary concern is that providing allowances for reclaimers could foster unsustainabl e reclamation practices that rely on blending, instead of investment in the technology to fully re claim HCFCs. Reclamation through separation and distillation will be more important in 2015 whe n the HCFC-22 allocation must drop by at least 45 percent from 2010 levels, and it will be a bsolutely necessary by 2020, at which time production and import of HCFC-22 must be phased out entirely. In addition, many businesses have either found a way to secure reliable access t o virgin HCFCs or have made investments to reclaim HCFCs in a sustainable way, without a direc t allocation of allowances. EPA continues to believe that allocating fewer allo wances—rather than providing allowances to reclaimers—is the best way to foster reclamation and recovery. In this final rule, EPA is taking significant steps to encourage recove ry and reclamation by providing fewer

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

38 of 86 

## HCFC-22 consumption allowances. Fewer allowances fo r new production and import increases the value of existing HCFCs, which in turn increase s the incentives for recovery and reclamation. While the agency appreciates the concerns raised by reclaimers about the difficulties they encounter in the refrigerant reclamation business, these barriers have not stopped companies from becoming EPA-certified reclaimers—currently th ere are more than 50. Given the considerations above, the agency is not providing a llowances to reclaimers at this time. 5. Does the Installation of Dry-shipped HCFC-22 Equ ipment Affect the Phaseout of HCFC-22? In the proposed rule, EPA took comment on whether a llowing repairs using HCFC-22 dry-shipped condensing units affects the phaseout o f HCFC-22. Eight commenters believe the repairs of existing equipment that involve installa tion of dry-shipped HCFC-22 condensing units is affecting the phaseout and/or should be stopped. They claim that continued installation of dryshipped condensing units effectively allows the man ufacture of otherwise banned HCFC-22 airconditioning systems, increasing demand for HCFC-22 and undercutting the market for alternative refrigerants. One company does not beli eve dry-shipped condensing unit repairs can be properly addressed through a reduction in HCFC-2 2 allocation levels. Cost associated with the HCFC-22 refrigerant needed for the re-charging of the HCFC-22 system is quite small (<5% of the total servicing cost), so even a significant inflation of the cost of HCFC-22 will still have a minimal impact on the end-user’s decision. Two comm enters ask EPA to ban repairs using HCFC-22 dry-shipped condensing units, one explicitl y asking for this action in lieu of further reducing HCFC-22 production. Another commenter is c oncerned about the negative effects of dry-shipped condensing units on equipment efficienc y. One joint comment from several environmental groups indicated that the market for dryshipped HCFC-22 units is expanding rapidly; however , no data were provided. The commenters express concern that because newly-produced HCFC-22 is so cheap, service technicians are

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

39 of 86 

## venting HCFC-22 from broken units, installing dry-s hipped units in their place, and then charging the unit with virgin HCFC-22. EPA received seven comments saying installation of dry-shipped condensing units does not significantly affect the phaseout and/or that d ry-shipped HCFC-22 condensing unit repairs should not be banned. These commenters believe dry- shipped condensing units are providing consumers a legal, affordable repair option, and th us not actually increasing demand for HCFC22 or displacing the sale of new systems. They cont end that the primary application of the uncharged HCFC-22 replacement condensing units is a s a service option to major compressor and coil failures. While two of the equipment manufacturers who do not support a ban on dryshipped unit repairs also do not support reduced al locations of HCFC-22, another equipment manufacturer believes that addressing the availabil ity of the refrigerant is the appropriate driver for phasing out virgin HCFC-22, and that the instal lation of dry-shipped HCFC-22 condensing units does not have a negative effect on the phaseo ut. Another commenter suggests that if EPA has verifiable evidence that the servicing or repai r of HCFC-22 appliances is resulting in increased emissions of the refrigerant, then EPA sh ould consider extending the leak repair requirements to all appliances, not just appliances with a refrigerant charge greater than 50 lbs. Five additional comments discuss HCFC-22 condensin g units in more general terms. One organization suggests that EPA consider that most d ry-shipped condensing units are being sold and installed with multi-year warranties, which may require a revision to EPA’s servicing tail analyses if HCFC-22 replacement refrigerants are no t approved by the compressor and equipment manufacturers for warranty servicing beyo nd 2015. Two other commenters state that the installation of HCFC-22 condensing units affect s the need for HCFC-22. One commenter states that contractors prefer selling new R-410a s ystems instead of repairing older systems, since it is much more profitable, but that American consumers are struggling to pay bills. One commenter states that further reductions in consump tion allowances might discourage

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

40 of 86 

## installation and field charging of new condensing u nits with HCFC-22. The commenter also states that continued installation of such units wi ll only increase the challenge of meeting the 2015 stepdown and in turn increase emissions of HCF C-22 to the atmosphere. The issue of whether repairs involving the installa tion of dry-shipped HCFC-22 condensing units “affects the phaseout” can be brok en into several questions. First, do repairs involving installation of dry-shipped HCFC-22 conde nsing units increase demand for HCFC-22? Second, do such repairs slow transition from HCFC-2 2 equipment to equipment using non-ODS alternatives? And finally, does this practice affec t EPA’s ability to stop the production and importation of virgin HCFC-22 by January 1, 2020? Based on comments, there is no industry consensus o n each of these questions. Specific responses to each comment are included in the Respo nse to Comments found in the docket for this rulemaking. However, given the paucity of conc rete quantifiable information on this subject currently available to the Agency, EPA is not ready to determine whether the installation of dryshipped HCFC-22 condensing units will affect EPA’s ability to phase out HCFC-22 by 2020. The limited data received to date suggest that it w ill not. EPA did not propose to ban dry-shipped condensing units in the proposal and is not taking such action in this final rule. For purposes of future rulemakings, EPA is still interested in quan tifiable information on the number of dryshipped condensing units being shipped, whether the y are being used as a repair in lieu of a compressor or motor replacement, and whether and to what extent condensing unit replacements extend the life of an existing system. EPA will con tinue to evaluate the issue as it develops future regulations. 6. How Is EPA Addressing the Court’s Decision with Regard to 2010 HCFC Allowances? As noted in the proposed rule, EPA interprets the Arkema decision as applying, at a minimum, to the baseline and calendar-year allowanc es for 2011-2014. The agency took comment on whether to interpret the decision as app lying to the 2010 allocation, and if so, how

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

41 of 86 

## allowances in future control periods might be adjus ted to reflect this. EPA also took comment on (1) whether it should provide recoupment allowances for HCFC-22 and HCFC-142b, or just HCFC-22 allowances, and (2) whether it should provi de recoupment for production and consumption, or just consumption allowances. In thi s final action, EPA concludes that it has an obligation to consider 2010 allowances in respondin g to the Court’s remand and that recoupment for both HCFC-22 and HCFC-142b production and consu mption allowances is an appropriate response to the Court’s holding that the agency com mitted legal error in deciding not to carry the 2008 transfers forward when it established the base lines for the current regulatory period. EPA received 13 comments in opposition to recoupme nt. Four comments specifically state that it is too late to address 2010 allowance s, since the Court’s mandate did not issue until 2011, and allowances are only good for the calendar year in which they are issued. Two comments assert that providing recoupment allowance s would allow for banking or transferring of allowances to later years, which is at odds with the CAA and EPA regulations. Most of these comments point out that some allowances conferred i n 2010 actually went unused in that year, and that EPA’s current proposal to reduce allowance s in 2012-2014 is further rationale for not providing additional allowances to compensate for a ny perceived lost opportunity in 2010. They point to EPA’s statement in the proposal that not p roviding recoupment would have advantages for the environment, public health, and the goal of encouraging reclamation. They assert that there was an oversupply of HCFC-22 allowances in 20 10, that Arkema and Solvay were not harmed in 2010, and that recoupment allowances woul d constitute a windfall. They refer to the Court’s denial of Arkema’s and Solvay’s motions for a stay of the 2009 Final Rule as evidence that these companies were not harmed. One commenter also asserts that if Arkema and Solvay believe they are entitled to compensation, they mus t file a claim for compensation under the Tucker Act, 28 U.S.C. 1491. Finally, four comments cite that providing recoupment distorts

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

42 of 86 

## market share, in contradiction to past EPA policy a nd the Arkema decision as it relates to vested rights. On the other hand, the two companies that would ben efit most from recoupment, Solvay and Arkema, state that EPA should provide recoupmen t and that the agency must do so in order to comply with the Court’s decision in Arkema . Solvay states that EPA deprived it of its rightfu l allowances by failing to recognize its permanent in ter-pollutant trades in the 2009 Final Rule and that recoupment is necessary to remedy that error. Arkema asserts that its losses were significant because of its inability to compete effectively in the after-market, stockpile material for sale in later years, and sell other refrigerants to one-sto p shoppers. The primary rationale the commenters present in fav or of providing recoupment is that when an agency “...commits legal error, the proper remedy is one that puts the parties in the position they would have been in had errors not bee n made,” ( AT&T Corp. v. FCC , 448 F.3d 426, 433 (D.C. Cir. 2006) ( quoting Exxon Co. v. FERC , 182 F.3d 30, 48 (D.C. Cir. 1999)). The Court has further held that the proper remedy to an error is “to put the victim of the agency ‘error in the economic position it would have occupied but for the error,’” (Ethyl Corp. v. Browner, 67 F.3d 941, 945 (D.C. Cir. 1995) ( quoting Delta Data Sys. Corp. v. Webster , 744 F.2d 197, 206-07 (D.C. Cir. 1984)). Arkema contends that providing recoupment for losse s would not require improper retroactive action. It states that because there is a strong equitable presumption in favor of retroactivity that would make the injured party who le, EPA can make a correction that goes back to the time the agency error occurred ( Exxon Co. v. FERC , 182 F.3d 30, 48 (D.C. Cir. 1999)). In addition, the commenter argues that in this circums tance EPA may go beyond its otherwise applicable statutory authority. The commenter state s that each agency has “general discretionary authority to correct its legal errors,” which exten ds to imposing retroactive changes, even when

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

43 of 86 

## the statute does not expressly and affirmatively au thorize the agency to do so in the first instance ( Natural Gas Clearinghouse v. FERC , 965 F.2d 1066, 1073 (D.C. Cir. 1992)). As expressed in the proposed rule, EPA’s preferred approach to the 2010 allocation was not to provide recoupment. However, EPA reviewed co mments and considered the policy and legal aspects of providing or not providing recoupm ent. In particular, EPA considered the following questions: (1) does EPA have the obligati on to address 2010 allowances in light of the Court’s decision in Arkema , and (2) does EPA have the ability to provide some form of compensation that would remedy the retroactive aspe cts of the 2009 Final Rule with respect to 2010? EPA believes that the answer to both question s is “yes.” First, EPA believes it has an obligation to address 2010 allowances in light of the Court’s decision in Arkema , to the extent feasible given the design and struc ture of this program. The Court stated that the 2009 Final Rule was, in part, “impermissibly retroactive” because “it attempted to undo the Petitioners’ inter-pollutant baseline transfers” based on what the Court saw as a “new interpretation of section 607” of the Cle an Air Act. The Court vacated the rule “insofar as it operates retroactively” and remanded the case “for prompt resolution,” ( Arkema , 618 F.3d. at 25). EPA believes that on remand, it must put al lowance holders in the position they would have occupied had the agency reflected the Petition ers’ inter-pollutant baseline transfers in the 2009 Final Rule (

AT&T v. FCC , 448 F.3d 426 (D.C. Cir. 2006); Exxon Co. v. FERC , 182 F.3d 30 (D.C. Cir. 1999)). As noted in the proposal, it is appropriate for EPA to consider the 2010 allocation on remand whether or not the Court’s dec ision had the effect of vacating the 2010 allowances. The Court clearly held that the baselin es used in the 2009 Final Rule were invalid, and the 2010 allocation relied on those baselines. Second, EPA believes it is feasible to provide comp ensation for lost 2010 allowances in the form of recoupment allowances, even though the 2010 period has ended and all 2010 allowances have expired. As explained in the propos ed rule, EPA allocates HCFC production

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

44 of 86 

## and consumption allowances for specific calendar ye ars: They are valid for that year only. Such allowances cannot be banked or borrowed. Therefore, EPA cannot provide meaningful compensation by issuing additional 2010 allowances since they would be void upon issuance. In the narrow circumstance of responding to the Court’ s decision, however, EPA finds it appropriate to issue a corresponding number of allo wances in later years to make up for the 2010 allowances that companies would have received if EP A had reflected the Petitioners’ interpollutant baseline transfers in the 2009 Final Rule . These recoupment allowances are designed to compensate for lost opportunities to produce or imp ort HCFCs during 2010 for sale in either 2010 or a later year. In responding to concerns that this is effectively allowing for banking or a transfer of allowances from 2010 to a later year, EPA disagrees . While EPA does not allow banking of allowances beyond the control period in which they are issued , nothing in the regulations bans companies from producing or importing HCFCs with al lowances and then storing the material over time. Companies receiving recoupment were depr ived of their ability to import and/or produce HCFCs in 2010 at a level consistent with th e Court’s decision in Arkema . Had they received the requisite level of allowances in 2010, they could have expended them during 2010 to produce or import HCFCs and banked those HCFCs u ntil at least the years covered by this rulemaking. EPA also disagrees with one commenter’s characterization of recoupment as an effective transfer of 2010 allowances to later year s. Contrary to the commenter’s assertion, EPA did not adopt this characterization in the proposal , but instead simply pointed out that the regulations do not allow banking or borrowing of al lowances. The commenter quotes section 607(a), which states that EPA regulations must ensu re that transfers “will result in greater total reductions in the production in each year of . . . class II substances than would occur in that year in the absence of such transactions.” The commenter asserts that if recoupment is provided, the aggregate allowance total will be higher than it wo uld have been if no recoupment were

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

45 of 86 

## provided. However, EPA disagrees that section 607(a ), which is titled “Transfers,” has any application to this situation. Section 607(a) refer s specifically to “transactions under the authority of this section.” An EPA rulemaking providing allow ances is not such a transaction. The transactions in question are the “transfers” and “t rades” within or between companies explicitly discussed in section 607. EPA has implemented secti on 607(a) by requiring an offset for all intra-company and inter-company transfers. See, e.g ., 40 CFR 82.23(a)(i)(G). Additionally, commenters assert that providing rec oupment allowances would mean taking allowances away from others or distorting ma rket share. One commenter said that providing recoupment is in violation of the Arkema decision, asserting that a company’s allowances, or its share of allowances, are a veste d right. EPA disagrees with this comment on both factual and legal grounds. First, as a result of the Arkema Court’s partial vacatur of the 2009 Final Rule, there are currently no production or co nsumption allowances for HCFC-22 in 2012- 2014. This final rule is filling a gap, rather than reshuffling existing allowances or existing market share. Second, even in the context of today’ s allocation, EPA is not allocating fewer allowances to one company for the purpose of alloca ting more to a different company. EPA is allocating a fixed percentage of baseline to each b aseline holder at a level that in the aggregate is expected to meet servicing demand, taking into acco unt the amount of such demand that can be met through other sources. EPA is then allocating r ecoupment allowances to certain companies on top of that fixed percentage allocation. Regardi ng market share, the allocation of recoupment allowances is limited to two years; thus, as a prac tical matter, it is unlikely to cause a permanent shift in market share. In addition, market share is not a simple reflection of EPA’s allocation of allowances: for example, some companies buy or sell allowances and thus increase or decrease the volume of their business in a particular HCFC o r HCFCs generally. Furthermore, EPA takes issue with the commenter’s characterization of the Arkema decision. In Arkema, the Court held that the petitioners had a vested right in tra nsferred baselines

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

46 of 86 

## where EPA had taken affirmative steps to approve th e transfers by issuing non-objection notices. The commenter attempts to broaden the decision to s tate that allowance holders have vested rights in any and all allowances issued under the s tratospheric ozone program, and in addition, to a specific market share or value attached to those allowances. EPA disagrees with this broad reading and believes the Court’s ruling is closely tied to its factual findings concerning the 2008 transfers. This issue is discussed further at secti on IV.A.1. Two commenters state that there was a significant oversupply of HCFC allowances in 2010, that the petitioners in Arkema were not harmed by the 2010 allocation in the 2009 Final Rule, and that they would receive a windfall if EPA were to provide recoupment allowances. However, the fact that not all HCFC allowances were used in 2010 does not mean that particular companies were not harmed. Companies’ individual si tuations and business plans may differ. Also, although the commenter cites the Court’s deni al of the motions to stay the 2009 Final Rule as evidence that petitioners were not harmed in 201 0, harm to the moving party is only one of the criteria considered by a court in reviewing a stay motion. Thus, it is erroneous to assume that the Court’s denial equates to a ruling that petitioners suffered no harm. Several commenters stated that providing recoupmen t allowances would harm human health or the environment; however, this action as a whole protects human health and the environment by allocating significantly fewer allow ances in 2012-2014 than the agency allocated in the 2009 Final Rule. Viewed in relation to that rule, EPA is reducing the total number of HCFC-22 consumption allowances (after providing for recoupment) by more than 31,100 MT over those three years. As a result, providing reco upment does not increase the allowed amount of HCFC-22 production and importation for U.S. use relative to the 2009 Final Rule. Even with recoupment, total U.S. consumption will be at least 55 percent below the Montreal Protocol consumption cap. This overall decrease in consumpti on also increases the incentives for recovery and reclamation. In addition, as noted in the propo sal, the amount of recoupment being granted

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

47 of 86 

## (329 ODP-weighted MT of allowed HCFC consumption an d 280 ODP-weighted MT of allowed HCFC production) is smaller than the number of allo wances that were not used by allowance holders in 2010 (approximately 425 ODP-weighted MT of HCFC consumption allowances and approximately 930 ODP-weighted MT of HCFC productio n allowances). EPA’s response to additional comments on whether to provide recoupmen t can be found in the Response to
Comments. The agency presented four possible options with re gard to recoupment for 2010: (1) providing recoupment allowances in 2013 in addition to (i.e., on top of) the aggregate level of production and consumption; (2) allocating recoupme nt allowances over two years (2013-2014) in addition to (i.e., on top of) the aggregate level of produc tion and consumption; (3) allocating recoupment allowances from the aggregate level of production and consumption over two years (2013-2014); and (4) not issuing recoupment allowan ces. Five comments specifically support one or more of these options. One comment supports option 1, two comments support option 3, and two comments support option 4. Two additional c omments do not directly support an option, but raise concerns with options 1 and 2. EPA stated in the proposed rule that if it decided to issue recoupment, it would prefer option 1. However, after reviewing comment and cons idering the options further, the agency believes option 2 is the best approach for ensuring a smoother path towards 2015, when U.S. consumption and production of all HCFCs must be at or below 10% of baseline under the Montreal Protocol. In addition, it does not reduce the number of allowances available to companies not receiving recoupment. Also, in light of EPA’s decision to reduce the overall HCFC-22 allocation significantly in relation to the 2009 Final Rule, EPA can adopt option 2 while still issuing fewer consumption allowances in 2013 and 2014 than it did under the 2009 Final Rule.

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

48 of 86 

## Option 1 could flood the market in 2013, providing significantly more allowances in that one year than in either 2012 or 2014, creating an e ven more significant drop-off in the number of allowances between 2013 and 2014. EPA also has seri ous concerns about option 3. Commenters in support of option 3 state that companies were “o n notice” that 2010 allowances were in dispute before the Court, so EPA should reduce allo wances for companies not receiving recoupment to make Arkema and Solvay whole. However , the court rejected petitioners’ stay motion and stayed its own mandate, with the result that companies were operating under the 2009 Final Rule for all of 2010. Thus, companies th at produced or imported HCFCs during 2010 using consumption and production allowances receive d under the 2009 Final Rule were acting in accordance with the regulations in effect at that t ime. Commenters in support of option 3 also claim that since refrigerant customers prefer to purchase all refrigerants from one supplier, and th ey could not provide sufficient quantities of HCFC-22 to some of their customers, the 2009 Final Rule resulted in a loss of sales of other refrigerants during 2010. EPA strongly believes tha t if a company loses its ability to sell to onestop shoppers when it loses allowances, the inverse should also be true: Providing additional allowances in 2013 and 2014 equal to the amounts lo st in 2010 should provide approximately the same ability to compete for sales to one-stop shopp ers as was lost in 2010. Only two comments addressed whether EPA should pro vide recoupment for both HCFC22 and HCFC-142b, or just HCFC-22. One commenter su pported providing recoupment for both substances, as it ensures traceability and consiste ncy. The other commenter believes EPA should provide recoupment for HCFC-142b based on a total a llowance pool of 118 metric tons (the amount allocated for 2010 in the 2009 Final Rule), instead of using a total allowance pool of 463 MT (the amount that results from the revised baseli nes, which are the same as the baselines proposed in 2008). According to the commenter, this means that the agency need only provide 69.8 metric tons of HCFC-142b production allowances in recoupment.

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

49 of 86 

## EPA does not agree with the commenter that it shou ld scale HCFC-142b recoupment production allowances to match the exact amount all ocated in 2010. The agency is providing recoupment production allowances based on what it p roposed in 2008 (73 FR 78680). In 2008, the percent of baseline was the same for both consu mption and production. EPA is therefore using the baseline amount and percentage proposed i n 2008 to calculate recoupment for HCFC142b production. The HCFC-142b production baseline is much larger than the consumption baseline (when accounting for the 2008 transfers), so the resulting 2010 allocation would have been much larger, while the consumption allocation would have been approximately the same under either baseline scenario. Issuing recoupment based on the 2008 proposal results in approximately 397 MT of additional HCFC-142b produc tion allowances. Since manufacturing HCFC-142b in the U.S. for domestic use requires pro duction and consumption allowances, the agency anticipates that the only potential increase in HCFC-142b production as a result of recoupment would be for export. One commenter encouraged EPA to account for a comp any’s unused allowances from 2010 if EPA is providing that company with recoupme nt allowances. To do this, EPA would need to divulge information about how each company uses its allowances: such companyspecific information has never been disclosed in th e HCFC phaseout program, and EPA would need to consider claims of confidentiality before t aking such a step. Also, EPA does not believe it is necessary to account for a company’s unused a llowances because the agency is providing allowances to make up for the lost opportunity to produce or import HCFCs, not the specific usage or lack thereof. As a result, EPA is not adju sting for a company’s unused allowances in
2010. To effectuate option 2, the agency is issuing half of the recoupment allowances for each company in 2013 and the other half in 2014 and is a mending the regulatory text at 40 CFR 82.16(a) accordingly. Recoupment allowances allocat ed for 2013 and 2014 will function in the

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

50 of 86 

## same way as other calendar year allowances: They ca n be used only in the calendar year for which they are issued and will expire at the end of that calendar year. The agency believes the issuance of these recoupment allowances discharges its obligation to consider the 2010 control period in responding to the remand in Arkema . Table 1 lists the companies receiving recoupment, the substance, and the total number of recoupment a llowances: Table 1 – Final Recoupment Allowances Company Chemical Consumption (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

A full summary and response to all other comments are included in the Response to
Comments.
7. Does EPA Have to Provide the Same Percentage of Bas eline for Production Allowances as It Does for Consumption Allowances? In considering how to allocate HCFC-22 production a llowances for 2012-2014, the agency proposed to decouple production and consumpt ion baseline percentages. Historically, there has only been one table at 40 CFR 82.16, whic h lists the percentage of baseline (both production and consumption) that every baseline all owance holder is issued each year. EPA proposed to create two tables, and to allocate a di fferent percentage of baseline for production than for consumption. Decoupling would allow the ag ency to reduce consumption allowances in relation to the 2009 Final Rule without having to m ake the same reductions to production allowances. EPA stated its interpretation that sect ion 605(c) of the CAA does not preclude EPA

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

51 of 86 

## from decoupling baseline percentages and requested comment on this issue. EPA received two comments specifically addressing whether the statut e precludes decoupling. Section 605(c) states that EPA must “promulgate reg ulations phasing out the production...of class II substances in accordance wit h [section 605],” subject to any acceleration under section 606. It further states that EPA must “promulgate regulations to insure that the consumption of class II substances in the United St ates is phased out and terminated in accordance with the same schedule (emphasis added)...as is applicable to the phase-out and termination of production of class II substances un der [Title VI].” Because the phrase “same schedule” is not clear on its face, the agency cons idered three possible interpretations of the phrase “same schedule,” as explained in the proposa l and in the 2011 Interim Final Rule. The agency stated that interpreting “same schedule” as referring to the phaseout schedule that appears in section 605, as accelerated under section 606, w ould be most consistent with the statutory language and purpose. Examples of milestones in the phaseout schedule are the 2010 and 2015 phasedown steps. The agency clarified that it was n ot proposing to allow production in an amount that would be inconsistent with those phased own steps, but simply proposing to allow a greater amount of production than consumption, with both amounts below the Montreal Protocol and CAA caps. The one company that provided comment on this matter agreed with the agency, and said that it does not believe that production a nd consumption allowances are somehow tied to the same regulatory schedule (requiring the same number of allowances or percentages of baseline for production and consumption). Rather, t he commenter states that production and consumption are tied to the same statutory and trea ty schedule, and that the agency should provide for increased production. The other comment on decoupling was from a group of environmental organizations, who supported a decrease in production allowances r elative to the 2009 Final Rule. They believe that the language in section 605(c) equates the qua ntity of consumption and production

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

52 of 86 

## allowances and cannot be interpreted to allow more production than consumption in a given
year. EPA disagrees that the language in 605(c) equates t he quantity of consumption and production allowances. EPA has never allocated the same quantity of production and consumption allowances, only the same percentage of baseline. The agency would have to provide different percentages of baseline for calen dar-year consumption and production allowances to keep the allowance quantities the sam e since the number of aggregate baseline production allowances is not equal to the number of aggregate baseline consumption allowances. Additionally, EPA does not believe there is a singl e “natural reading” of section 605(c), as the comment suggests. Rather, the language is ambiguous . As explained in the proposed rule, there are at least three possible interpretations. EPA’s interpretation that the word “schedule” in section 605(c) refers to the schedule that appears in section 605, as accelerated under section 606, is reasonable. In section 606, Congress used t he word “schedule” to refer to a morestringent schedule than the schedule set forth in section 605 : “The Administrator shall promulgate regulations . . . which establish a sche dule for phasing out the production and consumption of . . . class II substances . . . that is more stringent than set forth in section 7671d [section 605].” The original section 605 schedule l imited production and consumption to baseline quantities in 2015 and required a complete phaseout (with some exceptions) in 2030. It is logical that Congress would have intended the mo re-stringent schedule established under section 606 to have a similar structure: That is, t o cap or eliminate production and consumption on certain milestone dates. EPA in fact established just this type of schedule at 40 CFR 82. 16(b)-(g). EPA has discretion in managing the allow ance system to achieve this schedule. Therefore, the agency believes it can issue calenda r-year consumption and production allowances using different percentages of baseline, as long as it complies with the overall schedule set by Congress, as accelerated under sect ion 606.

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

53 of 86 

## Discussion of EPA’s policy decision to decouple bas eline percentages is found in section
IV.C.2. C. How Many HCFC-22 and HCFC-142b Allowances Is EPA Al locating in 2012-2014? The agency is revising the tables in 40 CFR 82 tha t together specify the production and consumption allowances available during specified c ontrol periods. The tables at sections 82.17 and 82.19 apportion baseline production allowances and baseline consumption allowances, respectively, to individual companies for specific HCFCs during a particular regulatory period. Complementing these tables, the table at section 82 .16 lists the percentage of baseline allocated to allowance holders for specific control periods. In this rulemaking, EPA is (1) retaining this framework of complementary tables, (2) establishing baselines for 2012-2014 identical to those established in the 2011 Interim Final Rule (76 FR 4 7451), (3) granting 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) providing recoupment allowances. In the 2009 Final Rule, 34.1 percent, 30.1 percen t, and 26.1 percent of each company’s HCFC-22 baselines were allocated for 2012, 2013, an d 2014, respectively. The allocation for HCFC-142b was 0.47 percent of baseline. As discusse d in section III.D. of this final rule, EPA interpreted the Court’s vacatur as applying to the HCFC-22 and HCFC-142b allocations for each of these years as well as the baselines. EPA is put ting in place new allocations through this rulemaking, and proposed various allocation amounts for consumption and production allowances during the remainder of this regulatory period. 1. How Many HCFC-22 Consumption Allowances Is EPA A llocating in 2012-2014? The 2009 Final Rule allocated 40,700 MT of HCFC-22 consumption allowances in 2012, which was 76.5 percent of estimated servicing need, and 59 percent of the total 2012 HCFC consumption cap. EPA arrived at this amount by esti mating the amount of servicing need, taking recovery and reclamation into consideration. EPA th en finalized an allocation that was 12,500

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

54 of 86 

## MT below estimated need. Using a similar approach, EPA proposed to allocate 11 to 38 percent less in 2012 relative to the 2009 Final Rule (see t he Adjustment Memo in the docket for the rationale behind the proposed reduction). In the 20 09 Final Rule, 2013 and 2014 consumption allocations were 35,900 MT and 31,100 MT, respectiv ely. The agency proposed to allocate 13 to 42 percent less in 2013 and 15 to 47 percent less i n 2014. As discussed in sections IV.B.1. and IV.B.2., comme nts directly addressing reclamation, recovery, and reuse, and the availability of existi ng inventory from past years generally support EPA’s estimates of the inventory and recoverable ma terial that are available each year to meet HCFC-22 servicing need. The agency also received 54 comments (some signed by multiple organizations) that address the overall consumption allocation in more general terms. Forty-two comments support the decrease in allowances relativ e to the 2009 Final Rule and 13 comments oppose the decrease. In addition to these comments, EPA received 47 additional comments that oppose a decrease in HCFC-22 production, but use th e word “production” in a general sense. Upon reading, EPA believes the intent was to oppose a decrease in consumption, or “production for U.S. use.” Generally, comments in support of the reduction sta te that a lower allocation will increase the value of HCFC-22, resulting in more reclamation and increased incentives to recover HCFC22 from existing systems. A lower allocation encour ages an orderly phaseout and still provides enough allowances to meet servicing needs. Supporte rs of a lower allocation state that a reduction is justified because of lower-than-expect ed need for HCFC-22 and the availability of existing inventory from past years. Three environme ntal organizations state that a reduction is (1) necessary to protect human health and the envir onment, and (2) practicable in terms of technology, safety, and availability of alternative s. Comments supporting a higher HCFC-22 consumption al location cite concerns about higher price, limited access to refrigerant and une xpected costs, all of which could lead to

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

55 of 86 

## premature system retirements. Others point to U.S. compliance with the Montreal Protocol under the 2009 Final Rule, and are against any reductions to those allocation levels. EPA responds to individual comments in the Response to Comments, but generally agrees that the amount of HCFC-22 provided in the 2 009 Final Rule was too high to foster an orderly transition. In 2015, the U.S. must reduce i ts production and consumption of all HCFCs to below 10 percent of its historic HCFC baseline unde r the Montreal Protocol. By 2020, HCFC production and consumption must be below 0.5 percen t of the historic baseline and under EPA regulations HCFC-22 may not be produced or imported at all. Rather than create a drastic change in 2015, the agency’s goal is to finalize an alloca tion for 2012-2014 that fosters the market transition necessary to prevent future disruptions. Considering that objective, EPA is providing allowa nces in this final rule based on its assessment of market conditions. For 2012, the timi ng of this rule means that EPA is looking back at actual events during 2012 rather than proje cting future needs. The agency is issuing 2012 HCFC-22 consumption allowances at the lowest propos ed amount, because that amount is consistent with the industry’s actual operation in 2012. The appropriateness of this level is supported by the fact that EPA has not received any reports of HCFC shortages during the 2012 air-conditioning season. At the same time, this lev el is commensurate with the amount of consumption authorized in the January 20, 2012, No Action Assurance provided by Cynthia Giles, Assistant Administrator for Enforcement and Compliance Assurance. EPA selected this amount as reasonable for purposes of the No Action Assurance, recognizing that it was within the proposed range. Issuing allowances at the No Ac tion Assurance level enables companies to account for consumption that occurred in 2012 in ac cordance with the No Action Assurance. As stated in the No Action Assurance, any HCFCs produc ed and imported in 2012 pursuant to the No Action Assurance count towards a company’s alloc ation and require the expenditure of 2012 allowances.

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

56 of 86 

## In 2013-2014, EPA is making reductions for existing inventory and for reclamation and reuse, given the support of comments on the agency’ s analysis and additional data provided during the comment period. EPA is not reducing allo wances to account for recovery and reuse in the large retail food sector because there were not sufficient comments or data, and the agency already accounts for supermarket recovery (but not in-house reuse) in its Vintaging Model. With these adjustments, the amount of allowed consumptio n in 2012-2014 is 29 percent below amounts in the 2009 Final Rule for the same period. The agency believes that the amounts in this rulemaking will increase market incentives to prope rly manage and recover HCFC-22 while still allowing for servicing of existing HCFC-22 systems. EPA is finalizing the following HCFC-22 consumption allocations for 2012-2014: 2012: 17.7 percent of baseline, totaling approximat ely 25,100 MT 2013: 18.0 percent of baseline, plus 2,954 MT of re coupment, totaling approximately 28,500 MT 2014: 14.2 percent of baseline, plus 2,954 MT of re coupment, totaling approximately 23,100 MT With this amount, EPA’s total HCFC consumption allo cation in 2012-2014, including recoupment, is at least 55 percent below the Montre al Protocol cap each year, and is below servicing need as estimated in the Servicing Tail Report

. 2. How Many HCFC-22 Production Allowances Is EPA Al locating in 2012-2014? In the proposed rule, EPA described three options f or providing production allowances. In considering each of these options, EPA recognize d that taking the 2008 transfers into account in accordance with the Arkema decision affects not only the HCFC-22 consumption baseline, but the HCFC-22 production baseline as well. Two option s would have decoupled baseline percentage allocated for production and consumption . These options provided (1) approximately the same amount of production allowances as the 200 9 Final Rule or (2) the same percentage of

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

57 of 86 

## baseline as the 2009 Final Rule. The third option w ould have kept production and consumption allowances at the same percentage of baseline, so t he resulting production allocation would be dependent on the final consumption baseline percent age. Option 3 is reflected in the January 2012 and January 2013 8 

## , No Action Assurances sent to allowance holders by the Assistant Administrator for Enforcement and Compliance Assura nce. EPA took comment on providing the following percentages of baseline production in 40 CFR 82.16: Option 1: 28.7% in 2012, 25.3% in 2013, 21.9% in 20 14 Option 2: 34.1% in 2012, 30.1% in 2013, 26.1% in 20 14 Option 3: 17.7% to 25.5% in 2012, 14.7% to 22.1% in 2013, 11.6% to 18.5% in 2014 Under option 1, the aggregate allocation in 2012 wo uld be about two percent lower than in the 2009 Final Rule (37,050 MT in the proposed r ule vs. 37,721 MT in the 2009 Final Rule). The intent would be to keep the aggregate number of allowances at about the same level as the amount finalized in the 2009 Final Rule. The memo t o the docket for this rulemaking titled “Effects of HCFC-22 and HCFC-142b Baseline Changes: 2009 Final Rule vs. 2011 Proposed Rule,” (Baseline Memo) explains these slight differ ences. While this option would keep the aggregate number of allowances at about the same le vel, U.S. production could actually fall under this option, because under Arkema a greater share of the allowances would go to a company that does not produce in the U.S. 9 

## Under option 2, the production baseline percentage would be the same as in the 2009 Final Rule. The petitioners in Arkema would receive the benefit of their 2008 baseline tr ansfers; other companies with production baselines would get the same number of production allowances

8 

### The January 2013 No Action Assurance also preserve d all recoupment options. 9 

### Data submitted to the Greenhouse Gas Reporting pro gram on byproducts of the HCFC-22 production proces s indicates that only three of the four companies hol ding production allowances produced HCFC-22 in 2010 and 2011 (see http://ghgdata.epa.gov/ghgp/main.do and the memo in the docket titled “2010-2011 Green house Gas Reporting Program Data on HCFC-22 Production Byproducts”). Wh ile this company can transfer its allowances to ano ther producer, the fact that they do not produce in the U.S. makes it unlikely that all calendar-year produ ction allowances will be used.

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

58 of 86 

## as they received in the 2009 Final Rule, since thei r baselines did not change. While the percentage is the same as the 2009 Final Rule, sinc e the aggregate production baseline is higher, the number of production allowances increases by 6, 299 MT in 2012, 5,560 MT in 2013, and 4,821 MT in 2014. However, as noted above, this wou ld not necessarily translate to an increase in production. In addition to asking for comment on the two propos ed decoupling options, the agency also asked for comment on several related matters. EPA asked for comment on whether, relative to the 2009 Final Rule, allocating the same percent age of baseline for production allowances, as proposed under option 2, would result in (1) an inc rease in U.S. consumption, (2) an increase in U.S. production, either for domestic use or for exp ort, and/or (3) an increase in worldwide production and/or consumption of HCFCs. EPA also in vited comment on the implications of any such increase for the U.S. economy and the global e nvironment, particularly as it relates to the smooth U.S. phaseout of HCFC-22. EPA received nine comments on EPA’s proposed produc tion allocation. Six comments support a higher level of production allowances tha n consumption allowances (options 1 and 2) and three comments oppose a higher level of product ion allowances. EPA provides a complete summary of and response to all comments in the Resp onse to Comments, but highlights and responds to most of the comments in this preamble. Very few comments voiced a preference for a specifi c production option. However, two commenters specifically support option 2, which pro vides for the same percentage of baseline as provided in the 2009 Final Rule. Five commenters ar e in support of options 1 and 2 so that domestic companies can remain competitive in the gl obal market. One commenter indicates U.S. companies could lose global market share if product ion allowances were not decoupled. Four commenters point out that allocating more productio n allowances than consumption allowances could allow for the possibility of more export, but will not lead to increased domestic

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

59 of 86 

## consumption since consumption allowances limit the amount of newly-produced HCFC-22 entering the U.S. market. Comments also indicate al lowing production in the U.S. could be environmentally beneficial if it displaces producti on at facilities that do not control byproduct emissions of hydrofluorocarbon (HFC)-23, which has a global warming potential of 14,800 10



## . The comment cites the growth of HFC-23 emissions gl obally and indicates that facilities in Article 5 countries do not control HFC-23 emissions to the same degree as companies operating in the U.S. Since U.S. producers of HCFC-22 largely control their HFC-23 byproduct emissions, the comment states that production in the U.S., as opposed to other countries, could actually result in lower greenhouse gas emissions. Comments opposing options 1 and 2 note that the Pro tocol and domestic regulations already allow for additional production in order to serve basic domestic needs of developing countries in the form of Article 5 allowances. They argue that allowing more production than consumption may increase the global surplus of HCFC -22 and decrease price, thus discouraging appropriate handling of the gas. They argue this co uld lead to an increase in global use and emissions of HCFC-22. One commenter also states tha t if a reduction in consumption allowances is justified, so is a decrease in production allowa nces for the same reason. EPA does not agree that options 1 and 2 increase e nvironmental harm relative to the 2009 Final Rule. First, EPA would only be providing the same number of overall production allowances or the same percentage of baseline for p roduction as in the 2009 Final Rule. In the proposal, EPA also noted that production of one kil ogram of an HCFC requires both a production allowance and a consumption allowance (8 2.15(a)(1), (2)). Thus, leaving production allowances at the same percentage or at the same ov erall amount without a corresponding increase in consumption allowances cannot result in greater U.S. consumption. Also, in order to produce for export, a company must submit documenta tion to verify the export of an HCFC for

10 

### Source for the GWP of HFC-23: Intergovernmental Pa nel on Climate Change (IPCC) Fourth Assessment Repo rt: Climate Change 2007 (AR4)

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

60 of 86 

## which consumption allowances were expended in order to request a reimbursement of spent consumption allowances. The agency reviews the docu mentation and issues a notice to either deny or grant the request. Therefore, a company wou ld not be able to produce more HCFC-22 unless it had exported an equal amount of material and been granted a refund of spent consumption allowances. Additionally, since HCFC co nsumption is capped globally under the Montreal Protocol, companies exporting HCFCs are co nstrained by the consumption caps established in the country receiving the material. With regard to HFC-23, EPA has worked with industr y through its HFC-23 Emission Reduction Partnership to encourage companies to red uce HFC-23 byproduct emissions from the manufacture of HCFC-22. In the 2010 U.S. Climate Ac tion Report, the agency noted that “despite a four percent increase in the production of HCFC-22 compared to 1990, EPA estimates that total HFC emissions in 2007 were significantly below 1990 levels. Compared to business as usual, EPA estimates the partnership reduced emissi ons by 17.8 Tg CO2 Eq. in 2007,” (see page 55 of the U.S. Climate Action Report 2010 , available in the docket). Currently, some HFC-23 emissions in Article 5 countries are mitigated thro ugh Clean Development Mechanism (CDM) projects using destruction technologies, namely the rmal oxidation or plasma arc. However, not all HCFC-22 facilities are eligible to earn credits under CDM; therefore, a number of facilities may not have emission reduction technology installe d. There are about 26 plants producing HCFC-22 in Article 5 countries. Approximately 17 pl ants have CDM projects that control HFC23 byproduct emissions. The remaining nine plants m ay not have emissions control technologies installed. HCFC-22 production in the United States may provide environmental benefits in reduced HFC-23 emissions to the extent U.S. product ion supplants the Article 5 production in those specific plants that do not have HFC-23 bypro duct destruction technologies installed. Some commenters argue that EPA will increase the g lobal supply of HCFC-22 by allocating more production than consumption allowan ces. EPA disagrees. First, by decreasing

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

61 of 86 

## consumption allowances relative to the 2009 Final R ule, EPA is decreasing potential U.S. consumption of virgin material by more than 31,100 MT over 2012-2014. Even if every single additional production allowance was used for export , global consumption would still be at least 9,800 MT less than the allocations provided in the 2009 Final Rule if all other factors are constant. Because at least one company holding prod uction allowances does not produce HCFC22 in the United States, it is unlikely that every production allowance will be used. As a result, the net reduction in global consumption of HCFC-22 may be even greater. Finally, starting in 2013, Article 5 countries’ consumption of HCFCs is capped, which further limits global HCFC22 demand ( see Montreal Protocol Art. 5, para. 8 ter .). As noted below, EPA is issuing production allowances using the same percentages as in the 2009 Final Rule only for the 2013 and 2014 control periods. EPA is also concerned that decreasing production al lowances for the remainder of the current regulatory period could deprive certain U.S . manufacturers of existing global business. Article 5 allowances already allow the export of HC FC-22; but only to Article 5 countries. Providing more production than consumption allowanc es could allow companies to continue exporting to non-Article 5 countries, which have th e same overall Montreal Protocol phaseout schedule as the United States but may use a basket approach rather than a chemical-by-chemical approach to phasing out HCFCs. Also, using the same percentage of baseline as the 2009 Final Rule should allow companies to continue their expor ts to Article 5 countries, which are just beginning to phase out HCFCs. Since consumption all owances already limit production for U.S. use, EPA is providing the same percentage of baseli ne for HCFC-22 production as in the 2009 Final Rule beginning in 2013 to avoid a scenario in which U.S. manufacturers might have to decrease their production for global markets relati ve to the amount allowed under the 2009 Final Rule. As noted previously, U.S. production may prov ide environmental benefits when compared to production in plants that lack HFC-23 byproduct destruction technologies.

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

62 of 86 

## Recognizing the timing of this rule’s signature, an d the fact that Article 5 countries’ HCFC consumption is not capped until 2013, the agen cy is adopting a different approach for 2012 than for 2013 and 2014. The agency is issuing 2012 HCFC-22 production allowances at the lowest proposed amount, because that amount is cons istent with the industry’s actual operation in 2012. The appropriateness of this level is suppo rted by the fact that EPA has not received any reports of HCFC shortages during the 2012 air-condi tioning season. At the same time, this level is commensurate with the amount of production autho rized in the January 20, 2012, No Action Assurance provided by Cynthia Giles, Assistant Admi nistrator for Enforcement and Compliance Assurance. EPA selected this amount as reasonable f or purposes of the No Action Assurance, recognizing that it was within the proposed range. Issuing allowances at the No Action Assurance level enables companies to account for pr oduction that occurred in 2012 in accordance with the No Action Assurance. As stated in the No Action Assurance, any HCFCs produced in 2012 pursuant to the No Action Assuranc e count towards a company’s allocation and require the expenditure of 2012 allowances. EPA is finalizing production option 2 for 2013 and 2014. In summary, EPA believes providing the same percent age of baseline as used in the 2009 Final Rule for production allowances in 2013-2014 ( 1) cannot lead to an increase in U.S. consumption, (2) allows U.S. producers to produce t he same amount as under the 2009 Final Rule, with potential environmental benefits to the extent that production might otherwise occur in plants that lack HFC-23 byproduct destruction te chnologies, and (3) would not result in a global increase in production or consumption of HCF C-22 beyond the limits agreed to under the Montreal Protocol. In addition, the environmental b enefits achieved by the reduction in consumption allowances outweigh any potential incre ase in U.S. production. As such, EPA is allocating the following amounts of HCFC-22 product ion allowances in 2012-2014:

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

63 of 86 

## - 2012: 17.7% of baseline, resulting in approximately 22,800 MT of HCFC-22 production

- 2013: 30.1% of baseline, plus 2,306 MT of recoupmen t, resulting in approximately 41,200 MT of HCFC-22 production

- 2014: 26.1% of baseline, plus 2,306 MT of recoupmen t, resulting in approximately 36,000 MT of HCFC-22 production Combined with allowed production for other HCFCs, t hese finalized amounts are at least 36 percent below the Montreal Protocol production cap of 3,884.25 ODP-weighted MT. 3. How Many HCFC-142b Consumption and Production Al lowances Is EPA Allocating
in 2012-2014? Establishing HCFC-142b baseline allowances that ta ke into account the 2008 interpollutant transfers results in 2,047 MT of aggregat e baseline consumption allowances and 9,444 MT of aggregate baseline production allowances. Con sistent with the 2009 Final Rule, EPA proposed to allocate 100 MT of consumption allowanc es. To get to that level, EPA would allocate 4.9 percent of the aggregate consumption b aseline, as reflected in the table at section
82.16. Using the same percentage (4.9 percent) of the agg regate production baseline, EPA proposed to allocate 463 MT of HCFC-142b production allowances for each control period between 2012 and 2014. The aggregate allocation for production is higher than the amount allocated in the 2009 Final Rule (463 MT in this ru le vs. 118 MT in the 2009 Final Rule). This is because the 2008 transfers out of HCFC-142b involve d significantly more consumption allowances than production allowances. Taking those transfers into account decreases the HCFC142b consumption baseline substantially but has a l esser impact on the HCFC-142b production baseline.

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

64 of 86 

## The agency received only four comments on HCFC-142 b allocations. Two comments strongly support reducing HCFC-142b consumption and production allowances; one of these commenters states that HCFC-142b is only used in bl ends to service old CFC equipment. Of the other two comments, one supports the consumption al location of 100 MT, noting that HCFC142b is a critical component of a refrigerant blend , but that production allowances need not increase. The other commenter asks that EPA not low er the HCFC-142b production allocation to compensate for any increase in HCFC-22 production. EPA did not propose to decrease HCFC-142b allowanc es in the proposed rule. The agency assessed the need for the chemical in the 20 09 Final Rule and will revisit the need for HCFC-142b for servicing during the rulemaking for t he next regulatory period. For this reason, the agency is finalizing its proposed consumption a nd production allocations for HCFC-142b. There will be 100 MT of HCFC-142b consumption allow ances and 463 MT of production allowances issued in the years 2012, 2013, and 2014 . These allowance amounts are 4.9 percent of the HCFC-142b baselines, and keep the HCFC-142b consumption allocation approximately the same as in the 2009 Final Rule. To provide recoupment to companies for lost opport unities in 2010, EPA is allocating a total of 61 MT of HCFC-142b consumption allowances and 397 MT of HCFC-142b production allowances in addition to the percentage of baselin e issued. Since the agency is providing recoupment over two years, there will be an additio nal 30 MT of consumption allowances and 198 MT of production allowances in 2013 and 2014. S ee section IV.B.6. of this preamble for more discussion on recoupment allowances. 4. How Does the Aggregate Allocation for HCFC-22 an d HCFC-142b Translate Entity-byEntity? For 2012-2014, EPA is setting production and consu mption baselines for HCFC-22 and HCFC-142b on the same basis as in the 2009 Final Ru le, except that EPA is making adjustments

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

65 of 86 

## to reflect (1) the 2008 inter-pollutant transfers o f baseline allowances deemed permanent by the Court, (2) inter-company, single-pollutant transfer s of baseline allowances that occurred in 2010, and (3) changes in company names that occurred afte r the 2009 Final Rule was signed. All of these changes were made in the 2011 Interim Final R ule (76 FR 47451), and EPA proposed to do the same for 2012-2014. Applying the approach descr ibed above, EPA is apportioning production and consumption baselines for HCFC-22 an d HCFC-142b to the following entities in the following amounts: Table 2: 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 Solvay Solexis HCFC-142b 6,541,764

Table 3: 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

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

66 of 86 

## 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 National 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 finalized baselines listed above are identical to the tables presented in the 2011 Interim Final Rule (76 FR 47451).

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

67 of 86 

## V. How Is EPA Changing the Regulations Governing Tr ansfers of Class II Allowances? The agency is concerned about the possibility of co mpanies undermining the HCFC chemical-by-chemical phaseout by performing inter-p ollutant transfers in advance of future phaseout steps. EPA interprets the 2003 Final Rule, which established the transfer provisions at 40 CFR 82.23, as allowing only single-pollutant, in ter-company transfers to be made on a permanent basis. Nevertheless, EPA recognizes that in Arkema , the Court found that “EPA’s practice under the 2003 Rule was to allow petitione rs’ baseline transfers of inter-pollutant allowances” (618 F.3d at 8). Therefore, EPA clarifi ed its current policy on inter-pollutant transfers in the 2011 Interim Final Rule (76 FR 474 59). In January 2012, EPA proposed to modify the regulatory text to dispel any possibilit y of confusion in the future. Through this final action, the agency is modifying 40 CFR 82.23 to address the duration of inter-pollutant transfers, and to reflect prior agency statements pertaining to inter-pollutant transfers of Article 5 allowances. A. How Is EPA Changing the Regulations Governing P ermanent Transfers of Class II Allowances? Sections 607(b) and (c) of the CAA address inter-po llutant and inter-company transfers of allowances, respectively. Inter-pollutant transf ers are the transfer (or conversion) of an allowance of one substance to an allowance of anoth er 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 int er-company transfers combined with interpollutant transfers, so long as the requirements of both are met. The corresponding regulatory provisions for HCFCs appear at 40 CFR 82.23. EPA proposed to modify section 82.23 to clarify tha t the agency will not approve future inter-pollutant transfers of baseline production al lowances or baseline consumption allowances.

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

68 of 86 

## EPA received two comments directly referring to thi s proposal. One comment supports EPA’s proposed changes because it will prevent future man ipulation of the allowance program. The commenter also believes the CAA prohibits permanent inter-pollutant transfers. Another commenter encourages EPA to reconsider its proposed changes and to allow for inter-pollutant baseline transfers if an allowance holder has histo rically made the transfers. EPA also received two comments on the 2012-2014 baselines that are re levant. Both commenters state that section 607 of the CAA prohibits baseline inter-pollutant t ransfers. As discussed in the proposed rule, EPA remains con cerned about the potential for future manipulation of the allocation system if inter-poll utant baseline transfers are allowed to affect a company’s baseline in future regulatory periods. Fo r example, a HCFC-22 producer or importer could dominate the HCFC-123 market in 2015 by conve rting its HCFC-22 baseline to HCFC123 baseline in 2014. Given the different ODPs of H CFC-22 and HCFC-123 (0.055 and 0.02, respectively), converting one baseline allowance of HCFC-22 would result in 2.75 baseline allowances of HCFC-123. Also, since companies hold many more HCFC-22 baseline allowances than HCFC-123 baseline allowances, converting those HCFC-22 baseline allowances would have an overwhelming effect on the current HCFC-123 baseline allowance holders and on the overall market. As another example, in 2020 EPA will no longer be issuing HCFC-22 production or consumption allowances (see section 82.16(e)). EPA expects that companies with only HCFC-22 or HCFC-142b allowances would no longer be producin g or importing HCFCs at that date. If EPA were to allow inter-pollutant baseline transfer s that carried forward into the new regulatory period, companies with HCFC-22 baselines could conv ert them all to baselines for HCFC-123 in 2019. Perpetuating the HCFC-22 baselines in a new f orm would be counter to the design of the chemical-by-chemical phaseout, under which the base line allowances for a particular chemical are intended to drop out of the system upon the pha se-out of that chemical. Thus, there are

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

69 of 86 

## important policy reasons for not taking inter-pollu tant transfers from prior regulatory periods into account in establishing baselines for new regulator y periods. EPA has been clear in its past statements about it s policy on what happens to allowances when a chemical is phased out. In the 1999 Advanced Notice of Proposed Rulemaking (“1999 ANPRM”, 64 FR 16373), EPA discussed options for est ablishing the HCFC allocation system. Referring to HCFC-141b, which was phased out in 200 3. EPA stated at 64 FR 16378: It is important to note that, under any scenario, w hen the phaseout date for HCFC141b is reached in 2003, all HCFC-141b consumption (production + importsexports) will cease. Those who did not participate in the HCFC-141b market will not be affected in 2003. However, those who did par ticipate in the HCFC-141b market— through, for example, producing or importin g HCFC-141b—would no longer receive any allowances associated with their historic HCFC-141b activity, and thus any authorization to produce or import HCF C-141b. Likewise, any company that, through a baseline trade, received al lowances associated with historic HCFC-141b would no longer receive any allo wances associated with the baseline trade in 2003 (emphasis added). In the 2001 Notice of Proposed Rulemaking for the HCFC allocation system (“2001 NPRM,” 66 FR 38064), EPA elaborated further on what happens when a chemical is phased out under a chemical-by-chemical phaseout at 66 FR 3806 8-69: On the first HCFC phaseout date of 2003, those comp anies that received baseline consumption allocations (or received a permanent ba seline transfer)...of HCFC141b would subtract that portion from their total c onsumption allocation. If permanent inter-pollutant trades had been made, an amount equal to the ODPweighted kilograms of baseline HCFC–141b allowances that had been received in the transfer would be deducted from the baseline al location... The same would occur in [later years] for the relevant chemicals b eing phased out (emphasis added). Finally, in the 2003 Final Rule establishing the H CFC phaseout, EPA stated its position at 68 FR 2835: “EPA will allow permanent transfers of baseline allowances with those allowances disappearing at the phaseout date for th e specific HCFC, regardless of what interpollutant transfers had taken place.” Because EPA h as been clear on this point that baseline allowances associated with a specific HCFC—regardle ss of their current owner or current

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

70 of 86 

## status—disappear when that HCFC is phased out, the agency continues to believe allowing interpollutant baseline transfers only on an annual basi s is appropriate. The commenter objecting to the proposed changes to the transfer regulations cited several issues that EPA should consider. The commenter cite s its past practice of annually transferring its HCFC-142b allowances to HCFC-22 and the need to consider the precedent this proposed change might have. The agency notes that prohibitin g inter-pollutant baseline transfers in no way precludes the commenter, or any allowance holder, from continuing to make annual interpollutant transfers. However, when EPA established the “worst-first” HCFC phaseout, the goal was to encourage companies to move out of HCFCs, no t to continually produce or import HCFCs by switching from one chemical to another. Additionally, the commenter envisions a scenario w here an allowance holder could change the focus of its business to produce and sel l a substance that does less harm to the environment. While an allowance holder could move t o an HCFC that is less harmful to the ozone layer, the switch results in no environmental benefit (excepting the 0.1 percent transfer offset) if all of the transferred allowances are us ed. Since transfers are weighted based on their ODP, moving from a higher ODP chemical to a lower O DP chemical would result in more allowances for the lower ODP chemical and an equal environmental footprint. Further, if EPA were to allocate allowances for th e next regulatory period taking interpollutant transfers into account, those transfers w ould only affect aggregate company baselines in specific chemicals, not the total amount allocat ed. In the case of the 2011 Interim Final Rule, when EPA updated baselines to include past inter-po llutant transfers, there was no environmental benefit to doing so. The way EPA allocates allowanc es relies on the estimate of market servicing need for a chemical and then divides that amount up proportionally based on a company’s baseline allowances for that particular chemical (s ee section IV of this preamble for the detailed description). While taking baseline inter-pollutant transfers into account may have tremendous

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

71 of 86 

## benefits for the company making the transfers, it d oes nothing for the environment. As described above, EPA sees this use of inter-pollutant transfe rs as manipulating the system, and is clarifying that baseline inter-pollutant transfers will not be allowed in the future. Two commenters state that modifying the baselines by taking into account inter-pollutant transfers is contrary to the CAA. They argue that s ection 607 of the CAA allows EPA to approve inter-pollutant transfers of allowances only on a y ear-to-year basis, and point to language in section 607(b) stating that EPA regulations are to permit “a production allowance for a substance for any year to be transferred for a production all owance for another substance for the same year on an ozone depletion weighted basis.” Similar argu ments were made in comments submitted on the 2008 Proposed Rule and on the 2011 Interim Fina l Rule. EPA does not agree with the comment that the langu age of section 607(b) is clear on its face. The statutory language is ambiguous, and EPA has discretion to choose a reasonable interpretation of that language. EPA determined in the 2009 Final Rule that section 607(b) is best read as permitting only year-by-year inter-pollutan t transfers. EPA continues to believe that this is the best interpretation of the statutory languag e. Section 607(b) states that EPA’s rules are to permit “a production allowance for 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 a ppears in section 607(c). That section does, however, provide that any inter-pollutant transfers between two or more persons must meet the requirements of section 607(b). As the Court noted, “the agency is certainly entit led 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 transf ers to be conducted on a yearly – and thus temporary – basis going forward is the approach mos t consistent with the wording of section 607(b). Further discussion of the reasons for limit ing inter-pollutant transfers to those conducted

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

72 of 86 

## on a calendar-year basis is available in the Respon se to Comments for the 2009 Final Rule (included in the docket for this rulemaking). Consistent with the Court’s decision regarding past inter-pollutant transfers (those conducted during the prior regulatory period), the baselines established in this action for 2012- 2014 take into account the 2008 inter-pollutant bas eline transfers. EPA is clarifying, however, that it has not approved any inter-pollutant transf ers of baseline allowances in the current regulatory period, and for the reasons given in the 2009 Final Rule, the 2011 Interim Final Rule, and in this action, in the future, EPA will approve inter-pollutant transfers only on a year-by-year basis. Thus, in the context of the allowance system for protection of stratospheric ozone, companies should not expect that any future inter-p ollutant transfers they conduct will affect their baselines either in the current regulatory pe riod or any future regulatory period. EPA is revising the regulations to avoid any furth er dispute about the agency’s position on this issue. The new language clarifies that perm anent inter-pollutant transfers of baseline allowances will not be approved. In addition, EPA i s clarifying that the procedures in section 82.23(a) apply to permanent, single-pollutant trans fers. B. How Is EPA Changing the Regulations Governing Tr ansfers of Article 5 Class II Allowances? Article 5 allowances for Class II substances are t he privileges granted under 40 CFR 82.18(a) to produce the specified HCFC for export o nly to countries listed in 40 CFR Subpart A, Appendix C, Annex 4. The countries listed in that a nnex are developing countries whose control obligations under the Montreal Protocol are address ed in Article 5 of the treaty and hence are referred to as “Article 5 Parties.” EPA proposed 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. EPA promulgated section 82.23 as part of the 2003 F inal Rule (68 FR 2820). EPA specifically discussed the inter-pollutant transfer of Article 5 allowances at 68 FR 2834 stating,

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

73 of 86 

## “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 transf ers [because no other HCFC Article 5 allowances would be available during that period]. In 2010, when...Article 5 allowances for HCFC-22 and HCFC-142b become available, these allow ances will be transferable 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 allo wances. The omission of Article 5 allowances from section 82.23(b) appears to have been an overs ight. Therefore, EPA proposed to revise the regulations to specifically provide for the inter-p ollutant transfers of Article 5 allowances through this rulemaking. As with other types of int er-pollutant transfers, these transfers would be limited in duration to a single year. The agency re ceived two comments on its proposal to revise the text at section 82.23(b), which EPA responds to in the Response to Comments. EPA also proposed to change the text at 82.23(a)(i i) for consistency with its previously stated policy on offsets for transfers of Article 5 allowances. Section 607(a) requires that transfers of production allowances “will result in greater total reductions in the production in each year of...class II substances than would occur i n that year in the absence of such transactions.” In a November 10, 1994, Federal Regi ster notice, EPA stated its interpretation that the section 607 offset requirement applies to Artic le 5 allowance transfers (59 FR 56287): “Interpollutant transfers of Article 5 allowances will co ntinue to require a one percent offset, as required by section 607 of the CAA...” In the May 10, 1995, final rule at 60 FR 24980, EPA stated that “[w]ith today's action, EPA permits int er-pollutant and inter-company transfers of Article 5 allowances as proposed...” meaning, EPA int ended to require an offset for transfers of Article 5 allowances in the class I allowance syste m. This intent to require an offset is also reflected in certain provisions of the class II allowance system in 40 CFR part 82. Section 82.23(a )(i)(G) specifically requires an offset for

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

74 of 86 

## Article 5 allowance inter-company transfers, statin g that the transfer claim must set forth: “For trades of consumption allowances, production allowa nces, export production allowances, or Article 5 allowances, the quantity of the 0.1 perce nt 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 allow ances 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, “E PA will reduce the transferor’s balance of unexpended allowances...by the quantity to be transfe rred,” with no mention of an offset. In addition, in the introductory text for 82.23(a)(ii) , Article 5 allowances are not mentioned: “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 o f that quantity;” EPA proposed to amend 82.23(a)(ii) and 82.23(a)(ii)(A) to require an offs et for transfers of Article 5 allowances. EPA did not receive comments on this proposed clarification to the regulatory text, and is finalizing the clarification as proposed. Section 82.23(a) is now consistent throughout. Section 82.23(b) requires an offset of 0.1 percent for all inter-pol lutant transfers and since EPA is adding Article 5 allowances to section 82.23(b), an offset will auto matically apply. To reflect EPA’s intent to allow inter-pollutant tr ansfers of Article 5 allowances, and the requirement that an offset be deducted when an enti ty is transferring Article 5 allowances, the agency is finalizing the proposed modifications to the regulatory text at 40 CFR 82.23(a)(ii), 82.23(a)(ii)(A), and 82.23(b). VI. Statutory and Executive Order Reviews A. Executive Order 12866: Regulatory Planning and Review and Executive Order 13563: Improving Regulation and Regulatory Review

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

75 of 86 

## Under Executive Order (EO) 12866 (58 FR 51735, October 4, 1993), this action is a “significant regulatory action” since it raises “no vel legal or policy issues.” Accordingly, EPA submitted this action to the Office of Management a nd Budget (OMB) for review under Executive Orders 12866 and 13563 (76 FR 3821, Janua ry 21, 2011) and any changes made in response to OMB recommendations have been documente d in the docket for this action. EPA did not conduct a specific analysis of the ben efits 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 Regulatory Impact Ana lysis: Accelerating the Phaseout of CFCs, Halons, Methyl Chloroform, 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 Allo cation System

.

• 

## The 2005 Memorandum Recommended Scenarios for HCFC Phaseout Costs Esti mation

.

• 

## The 2006 ICR Reporting and Recordkeeping Requirements of the HC FC Allowance System

.

• 

## The 2007 Memorandum Preliminary Estimates of the Incremental Cost of th e HCFC Phaseout in Article 5 Countries

.

• 

## The 2007 Memorandum Revised Ozone and Climate Benefits Associated with the 2010 HCFC Production and Consumption Stepwise Reductions and a Ban on HCFC Precharged Imports

.

• 

## The 2009 ICR Reporting and Recordkeeping Requirements of the HC FC Allowance System

. A memorandum summarizing these analyses is availabl e in the docket. B. Paperwork Reduction Act

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

76 of 86 

## This action does not impose any new information co llection burden. EPA already requires recordkeeping and reporting for HCFCs, and this action does not amend those provisions. The Office of Management and Budget (OM B) has previously approved the information collection requirements contained in th e existing regulations at 40 CFR part 82, subpart A under the provisions of the Paperwork Red uction Act, 44 U.S.C. 3501 et seq . and has assigned OMB control number 2060-0498. The OMB cont rol numbers for EPA's regulations in 40 CFR are listed in 40 CFR part 9. C. Regulatory Flexibility Act The Regulatory Flexibility Act (RFA) generally requ ires 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 significant economic impact on a substantial number of small entities. Small entities include small busine sses, small organizations, and small governmental jurisdictions. We have considered the economic impacts of this final rule on small entities. For purposes of assessing the impacts of this rule on small entities, a small entity is defined as: (1) a small business as defined by the Small Business Administration’s (SBA) regulations at 13 CFR 121.201; (2) a small governme ntal jurisdiction that is a government of a city, county, town, school district or special dist rict with a population of less than 50,000; and (3) a small organization that is any not-for-profit ent erprise which is independently owned and operated and is not dominant in its field. This action may affect the following categories:

- Industrial Gas Manufacturing entities (NAICS code 3 25120), including fluorinated hydrocarbon gases manufacturers and rec laimers;

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

77 of 86 

## - Other Chemical and Allied Products Merchant Wholesa lers (NAICS code 422690), including chemical gases and compressed ga ses merchant wholesalers;

- Air-Conditioning and Warm Air Heating Equipment and Commercial and Industrial Refrigeration Equipment Manufacturing en tities (NAICS code 333415), including air-conditioning equipment and c ommercial and industrial refrigeration equipment manufacturers;

- Air-Conditioning Equipment and Supplies Merchant Wh olesalers (NAICS code 423730) , including air-conditioning (condensi ng unit, compressors) merchant wholesalers;

- Electrical and Electronic Appliance, Television, an d Radio Set Merchant Wholesalers (NAICS code 423620), including air-cond itioning (room units) merchant wholesalers; and

- Plumbing, Heating, and Air-Conditioning Contractors (NAICS code 238220), including central air-conditioning system and comme rcial refrigeration installation; HVAC contractors. After considering the economic impacts of this fin al rule on small entities, I certify that this action will not have a significant economic im pact on a substantial number of small entities. In determining whether a rule has a significant eco nomic impact on a substantial number of small entities, the impact of concern is any signif icant adverse economic impact on small entities, since the primary purpose of the regulato ry flexibility analyses is to identify and address regulatory alternatives “which minimize any signifi cant economic impact of the rule on small entities.” 5 USC 603 and 604. Thus, an agency may c ertify that a rule will not have a significant economic impact on a substantial number of small en tities if the rule relieves regulatory burden, or otherwise has a positive economic effect on all of the small entities subject to the rule.

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

78 of 86 

## This rule relieves a regulatory ban on production a nd consumption that would otherwise apply in the wake of the Court’s vacatur. Additiona lly, EPA is continuing to allocate production and consumption allowances using the same approach described in the 2009 Final Rule with adjustments to reflect (1) 2008 inter-pollutant tra nsfers of baseline allowances deemed permanent by the Court, (2) inter-company, single-p ollutant transfers of baseline allowances that occurred in 2010, (3) changes in company names that occurred after the 2009 Final Rule was signed and (4) an updated picture on the need for v irgin HCFC-22 as assessed in the Adjustment Memo and sections IV.B.1-3 of this preamble. EPA is not modifying the recordkeeping or reporting provisions and thus is not increasing the burden to small businesses. EPA’s HCFC Phaseout Benefits and Costs Memo, included in this docket, provides a summary of previous small business analyses, as well as the cost and be nefit data used for the 2009 Final Rule. We have therefore concluded that today's final rule will relieve regulatory burden for all affected small entities. 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. 1531-1 538 for State, local, or tribal governments or the private sector. UMRA does not ap ply to rules that are necessary for the ratification or implementation of international tre aty obligations. This rule implements the 2010 milestone for the phase-out of HCFCs under the Mont real Protocol. Therefore, this action is not subject to the requirements of sections 202 or 205 of UMRA. This action is also not subject to the requirement s of section 203 of UMRA because it contains no regulatory requirements that might sign ificantly or uniquely affect small governments. This action apportions production and consumption allowances and establishes baselines for private entities, not small governmen ts. E. Executive Order 13132: Federalism

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

79 of 86 

## This action does not have federalism implications. It will 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 amon g the various levels of government, as specified in Executive Order 13132. This action is expected to primarily affect producers, importers, and exporters of HCFCs. Thus, the requir ements of section 6 of the Executive Order do not apply. F. Executive Order 13175: Consultation and Coordin ation with Indian Tribal Governments This action does not have tribal implications, as specified in Executive Order 13175 (65 FR 67249, November 9, 2000). This action does not s ignificantly or uniquely affect the communities of Indian tribal governments. It does n ot impose any enforceable duties on communities of Indian tribal governments. Thus, Exe cutive Order 13175 does not apply to this action. G. Executive Order 13045: Protection of Children f rom Environmental Health and Safety Risks This action is not subject to EO 13045 (62 F.R. 19 885, April 23, 1997) because it is not economically significant as defined in EO 12866. Th e agency nonetheless has reason to believe that the environmental health or safety risk addres sed by this action may have a disproportionate effect on children. Depletion of stratospheric ozon e results in greater transmission of the sun’s ultraviolet (UV) radiation to the earth’s surface. The following studies describe the effects of excessive exposure to UV radiation 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 Cancer 1994: 30A: 1647-54; (2) Elwood JM Japson J. “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 diseas es,” 1 st 

## ed. London, England: Blackwell

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

80 of 86 

## Science, 1997: 63-6; (4) Whiteman D., Green A. “Mel anoma and Sunburn,” Cancer Causes Control, 1994: 5:564-72; (5) Heenan, PJ. “Does inte rmittent sun exposure cause basal cell carcinoma? A case control study in Western Australi a,” 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 Dermatol 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. commitment to redu ce the total basket of HCFCs produced and imported to 25 percent of the respecti ve baselines. While on an ODP-weighted basis, this is not as large a step as previous acti ons, such as the 1996 Class I phaseout, it is one o f the most significant remaining actions the U.S. can take to complete the overall phaseout of ODS and further decrease impacts on children’s health f rom stratospheric ozone depletion. H. Executive Order 13211: Actions Concerning Regul ations That Significantly Affect Energy Supply, Distribution, or Use This action is not a “significant energy action” a s 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 rule is sues allowances for the production and consumption of HCFCs. I. National Technology Transfer and Advancement Ac t Section 12(d) of the National 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 regulatory activities un less to do so would be inconsistent with applicable law or otherwise impractical. Voluntary consensus standards are technical standards (e.g., materials specifications, test methods, samp ling procedures, and business practices) that are

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

81 of 86 

## developed or adopted by voluntary consensus standar ds bodies. NTTAA directs EPA to provide Congress, through OMB, explanations when the agency decides not to use available and applicable voluntary consensus standards. This acti on does not involve technical standards. Therefore, EPA did not consider the use of any volu ntary consensus standards. J. Executive Order 12898: Federal Actions to Addre ss Environmental Justice in Minority Populations and Low-Income Populations Executive Order (EO) 12898 (59 FR 7629 (Feb. 16, 19 94)) establishes federal executive policy on environmental justice. Its main provision directs federal agencies, to the greatest extent practicable and permitted by law, to make environme ntal justice part of their mission by identifying and addressing, as appropriate, disprop ortionately high and adverse human health or environmental effects of their programs, policies, and activities on minority populations and lowincome populations in the United States. EPA has determined that this action will not have disproportionately high and adverse human health or environmental effects on minority o r low-income populations because it increases the level of environmental protection for all affected populations without having any disproportionately high 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 reduce the total basket of H CFCs produced and imported to a level that is more than 75 percent below the respective baseli nes. While on an ODP-weighted basis, this is not as large a step as previous actions, such as th e 1996 Class I phaseout, it is one of the most significant remaining actions the U.S. can take to complete the overall phaseout of ODS and further lessen the adverse human health effects for the entire population. K. The Congressional Review Act The Congressional Review Act, 5 U.S.C. 801 et seq., as added by the Small Business Regulatory Enforcement Fairness Act of 1996, genera lly provides that before a rule may take

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

82 of 86 

## effect, the agency promulgating the rule must submi t a rule report, which includes a copy of the rule, to each House of the Congress and to the Comp troller General of the U.S. EPA will submit a report containing this rule and other required in formation to the U.S. Senate, the U.S. House of Representatives, and the Comptroller General of the U.S. prior to publication of the rule in the Federal Register. A major rule cannot take effect u ntil 60 days after it is published in the Federal Register. This action is not a “major rule” as defi ned by 5 U.S.C. 804(2). This rule will be effective [INSERT DATE OF PUBLICATION IN THE FEDERAL REGISTER ]

. List of Subjects in 40 CFR Part 82 Environmental protection, Administrative practice a nd procedure, Air pollution control, Chemicals, Exports, Hydrochlorofluorocarbons, Impor ts

DATED: ___________________________

___________________________________ Bob Perciasepe, Acting Administrator.

40 CFR part 82 is to be 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 paragraph (a) to read as follows: §82.16 Phaseout schedule of class II controlled sub stances. Protection of Stratospheric Ozone: Adjustments to t he Allowance System for Controlling HCFC Production, Import, and Export (Pa ge 82 of 86)

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

83 of 86 

## (a) Calendar-year Allowances. (1) In each control period as indicated in the fol lowing tables, each person is granted the specified percentage of baseline production allowances and baseline consumption allowances for the specified class II c ontrolled substances apportioned under §§82.17 and 82.19: Calendar-year HCFC Production Allowances
Control Period Percent of
HCFC141b Percent of

HCFC-22 Percent of

HCFC142b Percent of

HCFC-123 Percent of

HCFC-124 Percent of

HCFC225ca Percent of

HCFC225cb
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 17.7 4.9 125 125 125 125
2013 0 30.1 4.9 125 125 125 125
2014 0 26.1 4.9 125 125 125 125

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

84 of 86 

## Calendar-year HCFC Consumption Allowances
Control Period Percent of
HCFC141b Percent of

HCFC-22 Percent of

HCFC142b Percent of

HCFC-123 Percent of

HCFC-124 Percent of

HCFC225ca Percent of

HCFC225cb
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 17.7 4.9 125 125 125 125
2013 0 18.0 4.9 125 125 125 125
2014 0 14.2 4.9 125 125 125 125

* * * * * 3. Amend §82.16(a) by inserting the following parag raph: §82.16 Phaseout schedule of class II controlled sub stances. (a) * * * 

## (2) Recoupment allowances. In the control period beginning January 1, 2013 an d ending December 31, 2013, and again in the control period beginning January 1, 2014 and ending December 31, 2014, certain companies are gra nted HCFC consumption and production allowances in addition to the percentage of baselin e listed in the table at paragraph (a)(1) of this section. The following companies will receive the a mounts listed below in both 2013 and 2014:

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

85 of 86 

## 2,374,846 kg of HCFC-22 consumption allowances and 2,305,924 kg of HCFC-22 production allowances to Arkema; 1,170 kg of HCFC-142b consump tion allowances to DuPont; 29,146 kg of HCFC-142b consumption allowances and 53,549 kg o f HCFC-142b production allowances to Honeywell; 578,948 kg of HCFC-22 consumption allowa nces to Solvay Fluorides; and 144,900 kg of HCFC-142b production allowances to Solvay Sol exis.
* * * * *

4. Amend §82.23 by revising paragraphs (a)(ii)(A), (b) , and (d) to read as follows: §82.23 Transfers of allowances of class II controll ed substances. (a) * * * (ii) The Administrator will determine whe ther the records maintained by EPA indicate that the transferor possesses unexpended allowances sufficient 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 i mports 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 the transferor and transferee as follows: (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 sufficie nt unexpended allowances to cover the transfer claim. In the case of transfers of product ion or consumption allowances, EPA will reduce the transferor's balance of unexpended allow ances by the quantity to be transferred plus 0.1 percent of that quantity. In the case of transf ers of export production or Article 5 allowances, EPA will reduce the transferor's balance of unexpen ded allowances, respectively, by the quantity to be transferred plus 0.1 percent of that quantity . The transferor and the transferee may proceed with the transfer when EPA issues a no objection no tice. However, if EPA ultimately finds that the transferor did not have sufficient unexpended a llowances to cover the claim, the transferor

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

86 of 86 

## and transferee, where applicable, will be held liab le for any knowing violations of the regulations of this subpart that occur as a result of, or in co njunction with, the improper transfer.
* * * * * (b) Inter-pollutant transfers. (1) Effective January 1, 2003, a person (transfero r) may convert consumption allowances, production allowances or Ar ticle 5 allowances for one class II controlled substance to the same type of allowance for another class II controlled substance listed in Appendix B of this subpart, following the proced ures described in paragraph (b)(3) of this section.
* * * * * (d) Permanent transfers. The procedures in paragra ph (a) of this section 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 speci fic class II controlled substance will be the person who has their baseline allowances adjusted i n accordance with phaseout schedules in this subpart. No person may conduct permanent inter-poll utant transfers of baseline production allowances or baseline consumption allowances.
* * * * *

# ATTACHMENT 2

EO12866_CAA Part 82A 2060 AQ98 FINAL_FRN_20130305_c hanges.docx*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

1 of 87 EO12866_CAA Part 82A 2060 AQ98 FINAL_FRN_20130305 BILLING CODE 6560–50–P ENVIRONMENTAL PROTECTION AGENCY 40 CFR Part 82 [EPA-HQ-OAR-2011-0354; FRL-XXXX-X] RIN 2060-AQ98 Protection of Stratospheric Ozone: Adjustments to t he Allowance System for Controlling HCFC Production, Import, and Export AGENCY: Environmental Protection Agency [EPA]. ACTION: Final rule. SUMMARY: EPA is adjusting the allowance system controlling U .S. consumption and production of hydrochlorofluorocarbons (HCFCs) as a result of a recent 2010 Court decision vacating a portion of the 2009 final rule titled “P rotection of Stratospheric Ozone: Adjustments to the Allowance System for Controlling HCFC Produc tion, Import, and Export.” EPA interprets the Court’s vacatur as applying to the part of the rule that establishes the company-by-company baselines and calendar year allowances for HCFC-22 and HCFC-142b. On August 5, 2011, EPA published an interim final rule allocating allowanc es for 2011. Today’s action relieves the regulatory ban on production and consumption of the se two chemicals following the Court’s vacatur by establishing company-by-company HCFC-22 and HCFC-142b baselines and allocating production and consumption allowances fo r 2012-2014. DATES: This final rule is effective upon [INSERT DATE OF PUBLICATION]]. ADDRESSES: EPA has established a docket for this action under Docket ID No. EPA-HQOAR-2011-0354 . All documents in the docket are listed on the www.regulations.gov website. Although listed in the index, some information is n ot publicly available, e.g., CBI or other information whose disclosure is restricted by statu te. Certain other material, such as copyrighted*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

2 of 87 material, is not placed on the Internet and will be publicly available only in hard copy form. Publicly available docket materials are available e ither electronically through www.regulations.gov or in hard copy at the Air and Radiation Docket an d Information Center, EPA/DC, EPA West, Room 3334, 1301 Constitution Ave. , NW, Washington, DC. The Public Reading Room is open from 8:30 a.m. to 4:30 p.m., M onday through Friday, excluding legal holidays. The telephone number for the Public Readi ng Room is (202) 566-1744, and the telephone number for the Air and Radiation Docket i s (202) 566-1742. FOR FURTHER INFORMATION CONTACT: Luke H. Hall-Jordan by telephone at (202) 343-9591, or by e-mail at hall-jordan.luke@epa.gov, or by mail at U.S. Environmental Protection Agency, Stratospheric Protection Divisio n (6205J), 1200 Pennsylvania Ave., NW, Washington, DC, 20460. You may also visit the websi te of EPA’s Stratospheric Protection Division at www.epa.gov/ozone/strathome.html for further information about EPA’s Stratospheric Ozone Protection regulations, the sci ence of ozone layer depletion, and related topics. SUPPLEMENTARY INFORMATION: Effective Date. This rule concerns Clean Air Act (CAA) restrictions on the consumption and production of hydrochlorofluorocarbon (HCFC)-22 and HCFC-142b during 2012-2014. Section 553(d) of the Administrative Procedure Act (APA), 5 U.S.C. Chapter 5, generally provides that rules may not take effect earlier tha n 30 days after they are published in the Federal Register. EPA is issuing this final rule under sect ion 307(d)(1) of the Clean Air Act, which states: “The provisions of section 553 through 557 . . . of Title 5 shall not, except as expressly provided in this section, apply to actions to which this subsection applies.” Thus, section 553(d) of the APA does not apply to this rule. EPA is neve rtheless acting consistently with the policies underlying APA section 553(d) in making this rule e ffective [INSERT DATE OF PUBLICATION]. APA section 553(d) allows an effectiv e date less than 30 days after*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

3 of 87 publication for any action “that grants or recogniz es an exemption or relieves a restriction,” (5 U.S.C. 553(d)(1)). Since today's action relieves a restriction from the regulatory ban on the production and consumption of HCFC-22 and HCFC-142b in the U.S., EPA is making this action effective immediately upon publication to en sure the availability of these HCFCs for servicing air conditioning and refrigeration equipm ent. Acronyms and Abbreviations. The following acronyms and abbreviations are used in this document. CAA – Clean Air Act CAAA – Clean Air Act Amendments of 1990 CFC – Chlorofluorocarbon CDM – Clean Development Mechanism CFR – Code of Federal Regulations EPA – Environmental Protection Agency FR – Federal Register HCFC – Hydrochlorofluorocarbon HVAC – Heating, Ventilating, and Air Conditioning Montreal Protocol – Montreal Protocol on Substances that Deplete the Oz one Layer MOP – Meeting of the Parties MT – Metric Ton ODP – Ozone Depletion Potential ODS – Ozone-Depleting Substances Party – States and regional economic integration or ganizations that have consented to be bound by the Montreal Protocol on Substances that Deplete the Oz one Layer Organization of This Document. The following outline is provided to aid in locati ng information in this preamble.*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

4 of 87 I. Does This Action Apply to Me? II. Summary of This Final Action III. 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 Thi s Rulemaking? D. How Does This Action Relate to the Recent 2010 Court Decision? IV. How Is EPA Allocating HCFC-22 and HCFC-142b All owances for 2012-2014? A. What Baselines Is EPA Using for HCFC-22 and HCFC-14 2b Allowances? 1. What Baselines Is EPA Using for 2012-2014? 2. What Baselines Is EPA Considering for 2015-2019? B. What Factors Did EPA Consider in Determining Al location Amounts for HCFC22 and HCFC-142b? 1. How Is EPA Adjusting Estimated Servicing Need t o Account for Surplus Inventory from Past Years? 2. How Is EPA Adjusting Allowances to Encourage Rec overy, Reclamation and Reuse? 3. How Is EPA Accounting for Recovery and Reuse of HCFC-22 in the Supermarket Industry? 4. Did EPA Consider Providing Allowances to Small B usinesses in This Final Action? 5. Does the Installation of Dry-shipped HCFC-22 Equ ipment Affect the Phaseout of HCFC-22? 6. How Is EPA Addressing the Court’s Decision with Regard to 2010 HCFC Allowances? 7. Does EPA Have to Provide the Same Percentage of Baseline for Production Allowances as It Does for Consumption Al lowances? C. How Many HCFC-22 and HCFC-142b Allowances Is EPA Allocating in 2012- 2014?

1. How Many HCFC-22 Consumption Allowances Is EPA Allocating in 2012-2014? 2. How Many HCFC-22 Production Allowances Is EPA Al locating in 2012- 2014? 3. How Many HCFC-142b Consumption and Production Al lowances Is EPA Allocating in 2012-2014? 4. How Does the Aggregate Allocation for HCFC-22 an d HCFC-142b Translate Entity-by-Entity? V. How Is EPA Changing the Regulations Governing Tr ansfers of Class II Allowances? A. How Is EPA Changing the Regulations Governing Pe rmanent Transfers of Class II Allowances? B. How Is EPA Changing the Regulations Governing T ransfers of Article 5 Class II Allowances? VI. Statutory and Executive Order Reviews*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

5 of 87 A. Executive Order 12866: Regulatory Planning and Review and Executive Order

13563: Improving Regulation and Regulatory Review B. Paperwork Reduction Act C. Regulatory Flexibility Act D. Unfunded Mandates Reform Act E. Executive Order 13132: Federalism F. Executive Order 13175: Consultation and Coordi nation with Indian Tribal

Governments G. Executive Order 13045: Protection of Children from Environmental Health and

Safety Risks H. Executive Order 13211: Actions Concerning Regu lations That Significantly

Affect Energy Supply, Distribution, or Use I. National Technology Transfer and Advancement A ct J. Executive Order 12898: Federal Actions to Addre ss Environmental Justice in

Minority Populations and Low-Income Populations K. Congressional Review Act I. Does This Action Apply to Me? This rule may affect the following categories:

- Industrial Gas Manufacturing entities (NAICS code 3 25120), including fluorinated hydrocarbon gases manufacturers and rec laimers;

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

- Air-Conditioning and Warm Air Heating Equipment and Commercial and Industrial Refrigeration Equipment Manufacturing en tities (NAICS code 333415), including air-conditioning equipment and c ommercial and industrial refrigeration equipment manufacturers;

- Air-Conditioning Equipment and Supplies Merchant Wh olesalers (NAICS code 423730) , including air-conditioning (condensi ng unit, compressors) merchant wholesalers;*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

6 of 87 - Electrical and Electronic Appliance, Television, an d Radio Set Merchant Wholesalers (NAICS code 423620), including air-cond itioning (room units) merchant wholesalers; and

- Plumbing, Heating, and Air-Conditioning Contractors (NAICS code 238220), including central air-conditioning system and comme rcial refrigeration installation; HVAC contractors. This list is not intended to be exhaustive, but rat her provides a guide for readers regarding entities likely to be regulated by this action. Thi s table lists the types of entities that could potentially be regulated by this action. Other type s of entities not listed in this table could also b e affected. To determine whether your facility, compa ny, business organization, or other entity is regulated by this action, you should carefully exam ine these regulations. If you have questions regarding the applicability of this action to a par ticular entity, consult the person listed in the

“ FOR FURTHER INFORMATION CONTACT ” section. II. Summary of This Final Action In today’s final rule, EPA is issuing HCFC-22 and H CFC-142b allowances for the years 2012, 2013 and 2014 in the wake of the U.S. Court o f Appeals for the District of Columbia Circuit (Court) decision in Arkema v. EPA (618 F.3d 1, D.C. Cir. 2010). As discussed in this preamble and in the proposed rule (77 FR 237), the Court vacated HCFC-22 and HCFC-142b company-by-company baseline and calendar-year allow ances for 2012-2014. Baselines and calendar-year allowances for these two substances w ere originally finalized in a December 15, 2009, rule (“2009 Final Rule,” 74 FR 66412). EPA is finalizing HCFC-22 and HCFC-142b baseline al lowances that incorporate the inter-pollutant transfers made by Arkema, Inc., Sol vay Fluorides, LLC, and Solvay Solexis, Inc., (Arkema and Solvay) in 2008, and is setting calenda r-year allowances for the 2012-2014 control*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

7 of 87 periods. EPA is providing fewer calendar-year HCFC- 22 consumption allowances 1 and more calendar-year HCFC-22 production allowances 2 than in the 2009 Final Rule. The agency determined that the need for virgin HCFC-22 in the U.S. is lower than EPA anticipated in the 2009 Final Rule and is adjusting consumption allowa nces accordingly. EPA anticipates this adjustment will foster a smooth transition away fro m ozone-depleting HCFC-22. While EPA is reducing domestic consumption (i.e. production and import for U.S. use), under the recalculated baselines, the overall production allowances will i ncrease. the agency recognizes that Because other countries have different approaches to phasin g out HCFC-22 , EPA considers that this increase in

. As such, EPA is increasing the number of production allowances to will also ensure that U.S. companies can continue to meet demand for HCFCs in global markets. This supports the Montreal Protocol’s overall goal of limiting ne ed for new production capacity for controlled chemicals by allowing existing producers scope to b etter meet the needs of global markets. Additionally, EPA has determined that in the narrow circumstance of the Court’s vacatur of the baselines in the 2009 Final Rule, it must provide m eaningful compensation for 2010 calendaryear HCFC-22 and HCFC-142b allowances that companie s would have received under the adjusted baselines. EPA will issue recoupment allow ances for that purpose in 2013 and 2014. EPA is also updating HCFC-142b baselines and annua l allowances and is allocating approximately the same amount of calendar-year cons umption allowances as in the 2009 Final Rule. Due to the recalculation of HCFC-142b baselines, calendar-year HCFC-142b production allowances are higher than in the 2009 Final Rule, but a re have been calculated using the same methodology. Therefore, W w hile the percent age of baseline issued for HCFC-142b is the same for both consumption and production allowances , the recalculated production baseline is now significantly larger than the consumption baseline, which is why there are more resulting in an

1 Consumption allowances permit an entity to produce and/or import virgin HCFCs in a given control peri od (i.e., calendar year). 2 Production allowances permit an entity to produce virgin HCFCs in a given control period. Domestic pr oduction of HCFCs requires the use of both production and consu mption allowances.*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

8 of 87 overall increase in calendar-year production allowances than in compared with the 2009 Final Rule. Finally, EPA is modifying the transfer language at 40 CFR 82.23 to more explicitly reflect EPA’s policy on inter-pollutant HCFC allowa nce transfers; that is, that inter-pollutant HCFC transfers can occur only on an annual basis go ing forward. All other aspects of the 2009 Final Rule not addre ssed in this rulemaking are unaffected, including, but not limited to: HCFC-123, HCFC-124, HCFC-225ca and HCFC-225cb allowances, the formula for determining calendar-ye ar Article 5 allowances, and the use and introduction into interstate commerce restrictions on HCFC-22 and HCFC-142b. This preamble includes a summary of comments EPA received in resp onse to the proposed rule, as well as comments to the 2011 Interim Final Rule that are re levant to this current rulemaking. A full response to comments document (“Response to Comment s”) is available in the docket for this rulemaking. III. Background EPA is undertaking this rulemaking as a result of t he decision issued by the Court in Arkema v. EPA (618 F.3d 1, D.C. Cir. 2010) regarding the Decembe r 15, 2009, final rule titled “Protection of Stratospheric Ozone: Adjustments to the Allowance System for Controlling HCFC Production, Import, and Export,” (“2009 Final Rule,” 74 FR 66412). Certain allowance holders affected by the 2009 Final Rule filed petit ions for judicial review of the rule under section 307(b) of the Clean Air Act. Among other ar guments, the petitioners contended that the rule was impermissibly retroactive because in setti ng the baselines for the new regulatory period, EPA did not take into account certain inter-polluta nt baseline transfers that petitioners had performed during the prior regulatory period. The Court issued a decision on August 27, 2010, agr eeing with petitioners that “the [2009] Final Rule unacceptably alters transactions the EPA approved under the 2003 Rule,”*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

9 of 87 ( Arkema v. EPA , 618 F.3d at 3). The Court vacated the 2009 Final Rule in part, “insofar as it operates retroactively,” and remanded it to EPA “fo r prompt 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 EPA’s interpretation of the Court’s decision in section III.D. of this preamble. For 2011, EPA addressed the Court’s partial vacatur in an August 5, 2011, interim final rule, “Protection of Stratospheric Ozone: Adjustmen ts to the Allowance System for Controlling HCFC Production, Import, and Export,” (“2011 Interi m Final Rule,” 76 FR 47451). Today’s final rule follows that action, and establishes a p ath forward for the remainder of the regulatory period ending on December 31, 2014. A. How Does the Montreal Protocol Phase Out HCFCs? The Montreal Protocol on Substances that Deplete the Oz one Layer (Montreal Protocol) is the international agreement aimed at reducing an d eventually eliminating the production and consumption of stratospheric ozone-depleting substa nces (ODS). The U.S. was one of the original signatories to the 1987 Montreal Protocol and the U.S. ratified 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 Protection, 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 i ncludes restrictions on production, consumption, and use of ODS that are subject to acc eleration if “the Montreal Protocol is modified 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 Montreal Protocol and the Clean Air Act (CAA) define consump tion as production plus imports minus exports.*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

10 of 87 In 1990, as part of the London Amendment to the Mo ntreal Protocol, the Parties identified HCFCs as “transitional substances” to se rve as temporary, lower ozone depletion potential (ODP) substitutes for CFCs and other ODS. EPA similarly viewed HCFCs as “important interim substitutes that will allow for the earliest possible phaseout of CFCs and other Class I substances” 3 (58 FR 65026). In 1992, through the Copenhagen Ame ndment to the Montreal Protocol, the Parties created a detailed p haseout schedule for HCFCs beginning with a cap on consumption for industrialized countries not operating under Article 5 of the Montreal Protocol (non-Article 5 Parties), a schedule to whi ch the U.S. adheres. The consumption cap for each non-Article 5 Party was set at 3.1 percent (la ter 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 formula, the HCFC consumption cap for the U.S. was 15,240 ODPweighted metric tons (MT), effective January 1, 199 6. This became the U.S. consumption baseline for HCFCs. The 1992 Copenhagen Amendment created a schedule of graduated reductions and provided for the eventual phaseout of HCFC consumpt ion (Copenhagen, 23-25 November, 1992, Decision IV/4). Prior to a later adjustment in 2007 , the schedule initially allowed a non-Article 5 country to consume 65 percent of its consumption ca p in 2004, followed by 35 percent in 2010, 10 percent in 2015, 0.5 percent in 2020 for the ser vicing of existing refrigeration and airconditioning equipment, and a total phaseout in 203 0. The Copenhagen Amendment did not cap HCFC productio n. In 1999, the Parties created a cap on production for non-Article 5 Parties throu gh an amendment to the Montreal Protocol agreed by the Eleventh Meeting of the Parties (Beij ing, 29 November – 3 December, 1999, Decision XI/5). The cap on production was set at th e average of: (a) 1989 HCFC production plus 2.8 percent of 1989 CFC production, and (b) 1989 HC FC consumption plus 2.8 percent of 1989

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

11 of 87 CFC consumption. Based on this formula, the U.S. HC FC production cap was 15,537 ODPweighted MT, effective January 1, 2004. This became the U.S. production baseline for HCFCs. To further protect human health and the environment , the Parties to the Montreal Protocol adjusted the Montreal Protocol’s phaseout schedule for HCFCs at the 19 th Meeting 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, 2 008. 4 As a result of the 2007 Montreal Adjustment (refle cted in Decision XIX/6), the U.S. and other non-Article 5 countries may only consume 25 p ercent of their HCFC baseline beginning in 2010, rather than 35 percent. Other milestones rema in the same. The adjustment also resulted in a phaseout schedule for HCFC production that parall els the consumption phaseout schedule. All production and consumption for non-Article 5 Partie s is phased out by 2030. Decision XIX/6 also adjusted the provisions for Pa rties operating under paragraph 1 of Article 5 (developing countries): (1) to set HCFC p roduction and consumption baselines based on the average of 2009-2010 production and consumpt ion, respectively; (2) to freeze HCFC production and consumption at those baselines in 20 13; and (3) to add stepwise reductions to 90 percent of baseline by 2015, 65 percent by 2020, 32 .5 percent by 2025, and 2.5 percent by 2030 – allowing, between 2030 and 2040, an annual averag e of no more than 2.5 percent to be produced or imported solely for servicing existing air-conditioning and refrigeration equipment. All production and consumption for Article 5 Partie s will be phased out by 2040. Decision XIX/6, included in the Report of the Nineteenth Meeting of the Parties to the Montreal Protocol on Substances that Deplete the Ozone Layer , is available in the docket for this rulemaking.

4 Under Article 2(9)(d) of the Montreal Protocol, an adjustment enters into force six months from the d ate the depositary (the Ozone Secretariat) circulates it to the Parties. The depositary accepts all notificati ons and documents related to the Protocol and examines whether all fo rmal requirements are met. In accordance with the p rocedure in Article 2(9)(d), the depositary communicated the ad justment to all Parties on November 14, 2007. The a djustment entered into force and became binding for all Parti es on May 14, 2008.*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

12 of 87 In addition, in the Montreal Adjustments, Parties agreed to adjust Article 2F to allow non-Article 5 countries to produce “up to 10 percen t of baseline levels” for export to Article 5 countries “in order to satisfy basic domestic needs ” until 2020. Paragraph 14 of Decision XIX/6 notes that by no later than 2015, the Parties would consider “further reduction of production for basic domestic needs” in 2020 and beyond. Under par agraph 13 of Decision XIX/6, the Parties will review in 2015 and 2025, respectively, the nee d for the “servicing tails” for non-Article 5 and Article 5 countries. The term “servicing tail” refers to an amount of HCFCs needed to service existing equipment, such as certain types o f air-conditioning and refrigeration appliances. B. How Does the Clean Air Act Phase Out HCFCs? The U.S. has chosen to implement the Montreal Proto col phaseout schedule on a chemical-by-chemical basis. In 1992, environmental and industry groups petitioned EPA to implement the required phaseout by eliminating the 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 reductions through a che mical-by-chemical phaseout that employed a “worst-first” approach, which focuses on phasing ou t certain chemicals with higher ODP earlier than others. In 1993, as authorized by section 606 of the CAA, the U.S. established a phaseout schedule that eliminated HCFC-141b first and would greatly restrict HCFC-142b and HCFC-22 next, followed by restrictions on all other HCFCs a nd ultimately a complete phaseout (58 FR 15014, March 18, 1993; 58 FR 65018, December 10, 19 93). On January 21, 2003, EPA promulgated regulations ( “2003 Final Rule,” 68 FR 2820) to ensure compliance with the first reduction mileston e in the HCFC phaseout: the requirement that by January 1, 2004, the U.S. reduce HCFC consumptio n by 35 percent and freeze HCFC production. In the 2003 Final Rule, EPA established chemical-specific consumption and production baselines for HCFC-141b, HCFC-22, and HC FC-142b for the initial regulatory period ending December 31, 2009. Section 601(2) sta tes that EPA may select “a representative*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

13 of 87 calendar year” to serve as the company baseline for HCFCs. In the 2003 Final Rule, EPA concluded that because the entities eligible for al lowances had differing production and import histories, no single year was representative for al l companies. Therefore, EPA assigned an individual consumption baseline year to each compan y 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 provide d for new entrants that began importing 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 e nsure that small businesses that might not have been aware of the impending rulemaking would b e able to continue in the HCFC market. The 2003 Final Rule apportioned production and con sumption baselines to each company in amounts equal to the company’s highest “producti on year” or “consumption year,” as described above. It completely phased out the produ ction and import of HCFC-141b by granting zero percent of that substance’s baseline for produ ction and consumption in the table at 40 CFR 82.16. EPA did, however, create a petition process to allow applicants to request small amounts of HCFC-141b until 2015. The 2003 Final Rule also g ranted 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 allowances for HCFC- 22 and HCFC-142b at 100 percent of baseline because, in light of the concurrent comple te phaseout of HCFC-141b, the allocations for HCFC-22 and HCFC-142b, combined with projections fo r consumption of all other HCFCs, remained below the 2004 cap of 65 percent of the U. S. baseline. EPA allocates allowances for specific years; they are valid between January 1 and December 31 of a given control period (i.e., calend ar year). Prior to December 15, 2009, EPA had not allocated any HCFC allowances for 2010 or b eyond. 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. Absent the granting of calendar-year all owances, section 82.15 would have*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

14 of 87 prohibited the production and import of HCFC-22 and HCFC-142b after December 31, 2009. The 2009 Final Rule allowed for continued productio n and consumption, at specified amounts, of HCFC-142b, HCFC-22, and other HCFCs not previous ly included in the allowance system, for the 2010-2014 control periods. In the U.S., an allowance is the unit of measure t hat controls production and consumption of ODS. EPA establishes company-by-company baseline s (also known as “baseline allowances”) and allocates calendar-year allowances equal to a p ercentage of the baseline for specified control periods. A calendar-year allowance represents the p rivilege granted to a company to produce or import one kilogram (not ODP-weighted) of the speci fic substance. EPA allocates two types of calendar-year allowances – production allowances an d consumption allowances. “Production allowance” and “consumption allowance” are defined at section 82.3. To produce an HCFC for which allowances have been allocated, an allowance holder must expend both production and consumption allowances. To import an HCFC for which allowances have been allocated, an allowance holder must expend consumption allowances . An allowance holder exporting HCFCs for which it has expended consumption allowances ma y request a refund of those consumption allowances by submitting proper documentation and r eceiving approval from EPA. Since EPA is implementing the phaseout on a chemic al-by-chemical basis, it allocates and tracks production and consumption allowances on an absolute kilogram basis for each chemical. Upon EPA approval, an allowance holder ma y transfer calendar-year allowances of one type of HCFC for calendar-year allowances of an other type of HCFC, with transactions weighted according to the ODP of the chemicals invo lved. Pursuant to section 607 of the CAA, EPA applies an offset to each HCFC transfer by dedu cting 0.1 percent from the transferor’s allowance balance. The offset benefits the ozone la yer since it “results in greater total reductions in the production in each year of . . . class II su bstances than would occur in that year in the absence of such transactions” (42 U.S.C. 7671f).*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

15 of 87 The U.S. remained comfortably below the aggregate H CFC cap through 2009. The 2003 Final Rule announced that EPA would allocate allowa nces for 2010-2014 in a subsequent action and that those allowances would be lower in aggrega te than for 2003-2009, consistent with the next stepwise reduction for HCFCs under the Montrea l Protocol. EPA stated its intention to determine the number of allowances that would be ne eded for HCFC-22 and HCFC-142b, bearing in mind that other HCFCs would also contrib ute to total HCFC consumption. EPA noted that it would likely achieve the 2010 stepwise redu ction by applying a percentage reduction to the HCFC-22 and HCFC-142b baselines. EPA subsequent ly reviewed market conditions to estimate servicing needs and market adjustments in the use of HCFCs, including HCFCs for which EPA did not establish baselines in the 2003 F inal Rule. In the 2009 Final Rule, EPA estimated the need for HCFC-22 during the 2010-2014 regulatory period, and determined the percentage of that need for which it was appropriate to allocate allowances. As described in section IV.B.3 . of the proposed rule (77 FR 237), EPA determined that the percentage of the estimated nee d allocated in the form of allowances should not remain constant from year to year but rather sh ould decline on an annual basis. For 2010, EPA allocated allowances equal to 80 percent of the estimated need for HCFC-22, concluding that reused, recycled, and reclaimed material could meet the remaining 20 percent. Under the 2009 Final Rule, the percentage of estimated need f or which there was no allocation, and therefore would need to be met through recycling an d reclamation, rose from 20 percent in 2010 to 29 percent in 2014 to ensure the U.S. market wou ld have a viable reclamation industry and could meet the 2015 stepwise reduction under the Mo ntreal Protocol. As explained in the Background section, EPA is unde rtaking this rulemaking as a result of the decision issued by the Court in Arkema (618 F.3d 1, D.C. Cir. 2010), in which the Court vacated portions of the 2009 Final Rule. C. What Sections of the Clean Air Act Apply to This Rulemaking?*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

16 of 87 Several sections of the CAA apply to this rulemaki ng. 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 Fin al Rule (74 FR 66416), section 606 provides EPA authority to set a more stringent phaseout sche dule than the schedule in section 605 based on an EPA determination regarding current scientifi c information or the availability of substitutes, or to conform to any acceleration unde r the Montreal Protocol. EPA previously set a more stringent schedule than the section 605 schedu le through a rule published December 10, 1993 (58 FR 65018). Through the 2009 Final Rule, EP A accelerated the section 605 schedule to reflect the acceleration under the Montreal Protoco l as agreed to under the Montreal Protocol in September 2007. The more stringent schedule establi shed in that rule is unaffected by the

recent 2010 Court decision and is therefore still in effect. Section 606 provides EPA authority to promulgate re gulations that establish a schedule for production and consumption that is more stringe nt than what is set forth in section 605 if: “(1) based on an assessment of credible current sci entific information (including any assessment under the Montreal Protocol) regarding harmful effe cts on the stratospheric ozone layer associated with a class I or class II substance, th e Administrator determines that such more stringent schedule may be necessary to protect huma n health and the environment against such effects, (2) based on the availability of substitut es for listed substances, the Administrator determines that such more stringent schedule is pra cticable, taking into account technological achievability, safety, and other relevant factors, or (3) the Montreal Protocol is modified to include a schedule to control or reduce production, consumption, or use of any substance more rapidly than the applicable schedule under this tit le.” 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 cons umption of HCFC-22 and HCFC-142b.*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

17 of 87 As noted in the 2009 Final Rule, while section 606 is sufficient authority for establishing a more stringent schedule than the section 605 phas eout schedule, section 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. Thus, section 614 (b) requires the agency to establish phaseout schedules at least as stringent as the schedules co ntained in the Montreal Protocol. To meet the 2010 stepdown requirement, EPA is continuing to all ocate HCFC allowances at a level that will ensure the aggregate HCFC production and consumptio n will not exceed 25 percent of the U.S. baselines. For more discussion of this point, see 7 4 FR 66416. Finally, section 607 addresses transfers of allowan ces both between companies and chemicals. EPA is further clarifying the policy and procedures applicable to inter-pollutant transfers in this action, and is making a minor cha nge to the regulations governing inter-pollutant transfers to provide additional clarity to stakehol ders. D. How Does This Action Relate to the Recent 2010 Court Decision? Certain allowance holders affected by the 2009 Fin al 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, a nd Solvay Solexis, Inc., contended that the rule was impermissibly retroactive because in setti ng the baselines for the new regulatory period, EPA did not take into account certain inter-polluta nt baseline transfers that petitioners had performed during the prior regulatory period. The 2 011 Interim Final Rule contained a description of those transfers and the EPA approval s of those transfers. As explained in the 2011 Interim Final Rule, 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 production allowance transfers on A pril 18, 2008. Each company requested EPA’s approval to convert HCFC-142b allowances to H CFC-22 allowances, and checked a box*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

18 of 87 on the EPA transfer form indicating that “baseline” allowances would be transferred. EPA sent non-objection notices to Solvay Solexis, Inc. and S olvay Fluorides, LLC on February 21, 2008, and March 20, 2008, and to Arkema, Inc. in April 20 08. The transfer requests and EPA’s nonobjection notices were attached to petitioners’ cou rt filings and are available in the docket for this action. In the Notice of Proposed Rulemaking titled “Prote ction of Stratospheric Ozone: Adjustments to the Allowance System for Controlling 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 baseline inter-polluta nt 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 Propose d Rule resulted in a larger amount of HCFC-22 baseline allowances overall and therefore 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 other HCFC-22 allowance holders, and increases for the petitioners: Arkema and Solvay. In the 2009 Final Rule, after considering comments, EPA determined that allowing interpollutant transfers from one regulatory period to b ecome a part of the baseline in the next regulatory period could undermine the agency’s chem ical-by-chemical phaseout approach and encourage market manipulation. EPA also concluded t hat section 607 of the CAA was best read as limiting inter-pollutant transfers to those cond ucted on an annual basis. For these reasons, EPA did not take the 2008 inter-pollutant transfers into account in establishing the baselines for the 2009 Final Rule covering 2010-2014.*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

19 of 87 The Court issued a decision on August 27, 2010, agr eeing with petitioners that “the [2009] Final Rule unacceptably alters transactions the EPA approved under the 2003 Rule” ( Arkema v. EPA , 618 F.3d at 3). The Court vacated the rule in par t, “insofar as it operates retroactively,” and remanded to EPA “for prompt res olution,” (618 F.3d at 10). The Court withheld the mandate for the decision pending the d isposition of any petition for rehearing. On November 12, 2010, EPA filed a petition for reheari ng, which was denied on January 21, 2011. The mandate issued on February 4, 2011. EPA presented its interpretation of the Court’s dec ision with regard to baseline allowances and 2011-2014 calendar-year allowances i n the 2011 Interim Final Rule (76 FR 47456). EPA has not changed that interpretation but is repeating it here for ease of reference. Because the Court vacated the rule only in part, an d because various parts of the rule are intertwined, EPA relied on its expertise in adminis tering the HCFC phaseout regulations under Title VI of the CAA to determine how to apply the v acatur within the confines of the balance of the rule, which was not vacated. First, EPA noted t hat the rule contains elements that were not at issue in the litigation. EPA concluded that the vac atur had no effect on allowances for any substances other than HCFC-142b and HCFC-22, since the petitioners’ claims and the opinion itself discuss only those two substances. Similarly , EPA concluded that other discrete portions of the rule, such as the provisions on use and introdu ction into interstate commerce, were unaffected by the vacatur. The baselines for HCFC-142b and HCFC-22 were clearl y at issue in the litigation and indeed are the focus of the Court’s opinion. The Co urt found that “the agency’s refusal to account for the Petitioners’ baseline transfers of inter-pollutant allowances in the Final Rule is impermissibly retroactive,” (618 F.3d at 9). Becaus e baseline and calendar-year allowances are*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

20 of 87 inextricably linked, 5 EPA determined that the Court’s vacatur voided the HCFC-22 and HCFC142b baselines in 40 CFR 82.17 and 82.19 as well as the percentage of baseline allocated for those specific substances in 40 CFR 82.16 for all c ompanies listed in those sections. 6 This meant that in the absence of this rule, production and im port of these two substances in 2012 were prohibited under 40 CFR 82.15. Recognizing this sce nario, on January 2 0 , 201 2 , EPA sent letters in January 2012 and January 2013 to affected stakeholders informing them that the a gency would exercise enforcement discretion for a limited perio d provided their production and import did not exceed specified levels and provided that they adhe red to additional conditions. In determining the meaning of the Court’s vacatur, EPA considered whether this interpretation was consistent with what the Court i ntended and a good fit for the specific circumstances, which include the goals and design o f the HCFC allowance program and the basic structure of the 2009 Final Rule. While this interpretation is appropriate in this instance, it is possible that another interpretation would be mo re appropriate in a case involving a program with different goals, design, or structure. EPA’s initial response to the Court’s partial vacat ur was to issue the 2011 Interim Final Rule (76 FR 47451). That rule allocated allowances for 2011 only. Through today’s notice, EPA is addressing the Court’s decision as it relates to the remainder of the regulatory period ending December 31, 2014. IV. How Is EPA Allocating HCFC-22 and HCFC-142b All owances for 2012-2014? EPA is continuing the system established in previou s rulemakings (68 FR 2820, 74 FR 66412, 76 FR 47451) for HCFC production and import in the U.S. The process works as follows for each HCFC: First, all the company-specific base lines listed in the tables at 40 CFR 82.17 and

5 Baseline and calendar-year allocations are inextri cable because calendar-year allocations are express ed as a percentage of baseline, and the percentage of basel ine allocated for a specific substance varies depen ding on the sum of all company baselines for that substance. The pr ocess is described in greater detail in section IV. 6 The companies’ allocations are inter-related becau se, as noted in footnote 5, the percentage of basel ine allocated varies according to the sum of the company-specific baselines.*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

21 of 87 82.19 are added to determine the aggregate amount o f baseline production and consumption, respectively. Second, EPA determines how many consu mption allowances the market needs for a given year, taking into account sources other than new production and import, and then divides that amount by the aggregate amount of baseline all owances. The resulting percentage is listed in the table at section 82.16 and becomes what each co mpany is allowed to consume in a given control period. For example, a company with 100,000 kg of HCFC-22 baseline consumption allowances would multiply that number by the percen tage allowed for the year (for example, 17.7 percent in 2012) to determine its calendar-yea r consumption allowance is 17,700 kg. In this rulemaking EPA is (1) establishing 2012-201 4 company-by-company consumption and production baselines for HCFC-22 an d 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 (76 FR 47468); (2) allocating company-by-company productio n and consumption allowances for these substances for 2012-2014 by establishing allowed pe rcentages of production and consumption baselines in two tables at section 82.16; and (3) r evising the regulatory text at 40 CFR 82.23 to make the procedure for all future inter-pollutant t ransfers clear. EPA will address the baselines and allocations for the control periods beyond 2014 at a later date. All aspects of the 2009 Final Rule promulgated on December 15, 2009, (74 FR 66412 ) that are not addressed in this final rule are unchanged. EPA again notes that beginning January 1, 2015, sec tion 605 of the CAA prohibits the use and introduction into interstate commerce of an y HCFC listed as a class II substance unless it “(1) has been used, recovered and recycled; (2) is used and entirely consumed (except for trace quantities) in the production of other chemicals; ( 3) is used as a refrigerant in appliances manufactured prior to January 1, 2020; or (4) is li sted as acceptable for use as a fire suppression agent for nonresidential applications in accordance with section 612(c).” In addition, EPA’s*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

22 of 87 regulations at 40 CFR 82.15 restricted use and intr oduction into interstate commerce of HCFC141b, HCFC-142b, and HCFC-22 beginning in 2010, wit h limited exceptions. A. What Baselines Is EPA Using for HCFC-22 and HCFC -142b Allowances? In the January 4, 2012, notice, EPA proposed to es tablish 2012-2014 company-bycompany consumption and production baselines for HC FC-22 and HCFC-142b that were identical to the baselines established in the 2011 Interim Final Rule (see 40 CFR 82.17 and 82.19). EPA also provided advance notice that it wo uld consider updating baselines for the 2015- 2019 regulatory period, especially if there is an e nvironmental benefit to doing so. 1. What Baselines Is EPA Using for 2012-2014? Four companies commented on how EPA should proceed with establishing baselines for 2012-2014. Arkema and Solvay both support EPA’s inc lusion of past inter-pollutant transfers of baseline allowances, and believe that the proposed baselines are fully consistent with the Court Arkema decision. On the other hand, DuPont and Honeywell s tate that the C ourt’s decision
in Arkema does not require EPA to recognize the inter-pollut ant baseline transfers beyond 2009, nor does it address the validity of the 2008 transf ers. These commenters also state that recognizing these transfers beyond 2009 is contrary to section 607, EPA’s transfer regulations, and the agency’s interpretation of those regulation s for chemicals that are being phased down. In addition, they assert that if EPA does take those t ransfers into account in establishing baselines for 2012-2014, the agency should only allocate the percentage of the transferred baselines that would be allocated if the baselines had never been converted from HCFC-142b to HCFC-22. They state that recognizing the transfers has the e ffect of increasing the baseline share of the petitioners in Arkema and reducing the share of other companies in viola tion of their due process rights. Finally, they state that under the Arkema decision, their share of the baseline is vested. EPA cited several reasons why it would prefer to s et baselines without taking into account inter-pollutant transfers in the 2009 Final Rule (74 FR 66420), in the Response to Formatted: Font: Italic*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

23 of 87 Comments document included in the record for that r ulemaking and in the 2011 Interim Final Rule (76 FR 47451). These considerations remain imp ortant, and are the basis for EPA’s policy on future inter-pollutant transfers, which is discu ssed in section V of this notice. However, EPA must act in accordance with the Court’s holding reg arding the 2008 transfers. In Arkema , the Court concluded that EPA’s non-objection notices fo r the 2008 transfers created “vested rights” in the transferred baselines, which EPA must reflec t in rules governing the current regulatory period, at least to the extent such rules continue to use the historical production and consumption baselines. The Court explicitly held that “the Agen cy’s refusal to account for the Petitioners’ baseline transfers of interpollutant allowances in the Final Rule is impermissibly retroactive,” ( Arkema , 618 F.3d at 24). Given the Court’s Arkema decision, and after considering public

comment about given the scope and meaning of the recent decision , in Honeywell International,
Inc. v. EPA , D.C. Cir. No. 10-1347 (January 22, 2013) (“ Honeywell”) , EPA is recognizing the 2008 transfers in establishing the baselines throug h 2014. Thus, the baselines finalized for 2012- 2014 in today’s rule are identical to the HCFC-22 a nd HCFC-142b baselines established in the 2011 Interim Final Rule. The commenters assert that the Arkema decision did not determine the validity of the transfers. They further assert that EPA lacked auth ority to approve permanent inter-pollutant baseline transfers, that the 2008 transfers as char acterized by the Court are thus invalid, and that EPA should not recognize them in setting baselines. The validity of the 2008 transfer approvals is being was challenged in a case being brought before the U.S. Court of Appea ls for the D.C. Circuit ( Honeywell International v. EPA , Case No. 10

- 1347).

. The brief filed by the agency on January 30, 2012, provides further discussi on of response to several of the arguments that Honeywell and DuPont make in their comments on the proposed rule and is included in the docket for this rulemaking. Formatted: Underline*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

24 of 87 The commenters do not assert that EPA lacked author ity to approve inter-pollutant transfers whose effects were limited to the regulat ory period ending in 2009. Rather, they assert that EPA lacked authority to approve inter-pollutan t transfers with effects lasting beyond 2009. They state that the Court

Arkema did not determine the validity of such transfers. Yet the Arkema Court itself found , contrary to the Agency’s position, that EPA had “a pproved permanent changes to the baseline as a result of inter-pollut ant transfers” and that the Agency could not “undo these completed transactions,” ( Arkema , 618 F.3d at 23). It is not plausible that the Cou rt would have reached this holding if it viewed EPA’s authority to approve inter-pollutant transfers with effects beyond the immediate regulatory period as open to debate. As the Court stated in Honeywell , “the Arkema Court necessarily concluded that permanent inter-p ollutant transfers were permissible under the statute” (slip op. at 7) . The Honeywell Court noted that it was bound by Arkema and denied commenters’ petition for review of the 2008 transfers. The Honeywell decision is available in the docket for this action

. Contrary to the commenters’ assertions, section 607 of the CAA is ambiguous with regard to whether inter-pollutant transfers may hav e permanent effects that carry forward to subsequent regulatory periods. EPA has discretion u nder section 607 to determine how to treat such transfers. While EPA did not intend its non-ob jection notices to confer permanence to the 2008 inter-pollutant transfers, EPA disagrees with commenters’ implication that under section 607, the agency could not have done so. That would be true only if section 607 exp ressly prohibited permanent inter-pollutant transfers, whi ch it does not. As discussed in more detail in section V.A. of this preamble, for policy reasons E PA will approve only annual inter-pollutant transfers in the future. EPA also believes that whi le section 607 is not clear on its face, it is best interpreted as precluding permanent inter-pollutant transfers, as explained in section V.A. of this preamble. As noted by the Court in Arkema , interpreting section 607 to preclude permanent*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

25 of 87 inter-pollutant transfers “may more accurately trac k the statutory mandate,” ( Arkema, 618 F.3d at 22). Commenters assert that EPA has departed from its o wn regulations in proposing to recognize the 2008 inter-pollutant transfers in the baselines for 2012-2014. Commenters ignore, however, the Court’s interpretation of those regula tions. EPA’s intent in the 2003 Rule, which established the transfer provisions, was to preclud e permanent inter-pollutant transfers of baseline allowances (see 68 FR 2835). EPA notes tha t until the rulemaking that resulted in the 2009 Final Rule, the agency did not specifically de velop a policy on whether inter-pollutant transfers could ever carry forward to a new regulat ory period following one of the intermediate phasedown steps. Nonetheless, the Arkema decision found that the agency’s conclusion in the 2009 Final Rule not to carry inter-pollutant transf ers forward to a new regulatory period “departed from the policy it had adopted in the 200 3 Rule,” ( Arkema , 618 F.3d at 6). EPA cannot disregard the Court’s holding on the ground that th e 2003 Rule prohibited permanent interpollutant transfers where the Court has found other wise. The commenters are also incorrect that EPA previou sly interpreted its regulations as creating a “phasedown follows the allowance” princi ple. Commenters assert that under this principle, EPA should only allocate the percentage of the transferred baselines allocated for HCFC-142b. However, EPA has never adopted such a pr inciple. Preamble statements leading up to and accompanying the 2003 Rule refer to the elim ination of HCFC-141b baseline upon the chemical’s complete phaseout, “regardless of what i nter-pollutant transfers had taken place,” (68 FR 2835). That is a different matter from a partial phasedown, like the phasedown of HCFC-22 and HCFC-142b in 2010. Additionally, the commenters ’ approach runs counter to the way EPA allocates allowances as described in section IV of this preamble. Finally, the commenters assert that EPA has violate d their due process rights by decreasing their market share, which they argue is a vested right under Arkema . From a*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

26 of 87 substantive perspective, what they assert is a vest ed right (i.e., a specific share of allowances) is not in fact a vested right, nor is it protected und er the due process clause. The Court held that EPA’s actions in approving the 2008 transfers creat ed vested rights in the transferred baselines. The Court placed particular emphasis on the fact th at the Agency took affirmative actions that appeared to ratify the transfers: “The Agency’s app roval and acknowledgement of Petitioners’ actions distinguishes this case from situations whe re a company’s unilateral business expectations are thwarted by a change in the regula tory framework,” ( Arkema , 618 F.3d at 20). The Court did not examine the issue of whether comp anies possessed vested rights in baseline or calendar-year allowances generally, or in a specifi c share of allowances. Nor did the Court hold that the transferred baselines, baseline allowances generally, or calendar-year allowances, are property rights protected under the Due Process Cla use. Furthermore, it did not state that companies had any right to a specific number of pro duction or consumption allowances. On the contrary, the Court noted that “the 2010 stepdown g ave the EPA occasion to adjust its distribution of allowances,” ( Arkema , 618 F.3d at 25). EPA’s regulatory definitions specify that productio n and consumption allowances are privileges, not rights ( see 40 CFR 82.3). As discussed in Section II, the U.S. is in the process of phasing out production and consumption of HCFCs, cu lminating in a complete phaseout in 2030. EPA’s regulations prohibit production and consumpti on of HCFCs without allowances (40 CFR 82.16(a), (b)). In the absence of this final rule, no allowances would exist for 2012 or beyond. In this regulatory environment, no company has an enti tlement to a specific number or share of HCFC allowances. In addition, under this final rule, commenters are receiving the same number of baseline allowances they received under previous HCFC alloca tion rules. Recognition of the 2008 transfers in the aggregate HCFC-22 consumption base line does not require EPA to extract baseline allowances from other companies.*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

27 of 87 From a procedural perspective, commenters were give n multiple opportunities to comment on or challenge the effects of the 2008 tra nsfers at issue in Arkema on baselines for the current regulatory period. As noted in Honeywell , they had “notice and an opportunity to present [their] views during EPA’s pre- Arkema regulatory proceedings, during the Arkema litigation, and during EPA’s subsequent post- Arkema proceedings” (slip op. at 7). They commented on the 2009 Final Rule, the 2011 Interim Final Rule and th e proposal for this final rule. They also had the opportunity to intervene in the Arkema lawsuit and the opportunity to challenge the 2011 Interim Final Rule, in which EPA actually reflected the 2008 transfers in establishing baselines. A more detailed summary of the comments on this iss ue, as well as the Agency’s response to issues not addressed in the preamble or the briefs, is included in the Response to Comments, found in the docket for this rulemaking. 2. What Baselines Is EPA Considering for 2015-2019? Looking ahead to the next regulatory period, the ag ency received four comments on whether it should use more recent production and im port data in establishing baselines for 2015- 2019. Two commenters recommend using data from 2005 -2007 because these years were used to establish baselines in the 2009 Final Rule for newl y-controlled HCFCs (74 FR 66412). In addition, using the highest production and import l evels from 2005-2007 would reflect current and stable market conditions. One commenter points out that production and consumption in 2008 and 2009 were likely affected by the economic downturn, while 2010 and 2011 fall under the stepdown established by the 2009 Final Rule. An other commenter believes that updating baselines would avoid rewarding companies for attem pting to manipulate their baselines by converting allowances from HCFCs with lower future market value (i.e., HCFC-142b) to HCFC allowances they knew would retain value in the next regulatory period (i.e., HCFC-22). Two other commenters do not support revised baselin es. One of the commenters believes that the current allocation method is the fairest m ethod because it is transparent and well*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

28 of 87 understood by all market participants. The other co mmenter sees no benefit to updating baselines, but says future reductions in allocation s will benefit the environment by promoting reclamation. Since EPA did not propose to establish baselines f or 2015-2019, the agency will continue to assess the merits of using a more recent set of years to establish baselines in a later rulemaking. The agency is still receptive to the id ea of updating baselines in 2015, but notes that it did not receive any evidence that there is an en vironmental benefit to doing so. B. What Factors Did EPA Consider in Determining All ocation Amounts for HCFC-22 and HCFC-142b? In the 2009 Final Rule, EPA decided to allocate HCF C-22 and HCFC-142b allowances based on the projected servicing needs for those su bstances, taking into account the portion of need that can be met through recycling and reclamat ion. EPA is not changing that general approach, and continues to believe it is necessary in order to promote the use of used, recycled, and reclaimed material in anticipation of the 2015 phasedown step. In accordance with the Court’s decision in Arkema , the agency proposed, and is now finalizing, basel ines that reflect 2008 inter-pollutant baseline transfers. This appro ach necessitates issuing a different percentage of company baselines in order for the aggregate num ber of calendar-year HCFC-22 consumption allowances to be less than or equal to the 2009 Fin al Rule. In fact, EPA proposed to allocate significantly fewer consumption allowances for HCFC -22 relative to the 2009 Final Rule based on an analysis of updated market conditions. Specifically, the agency considered to what extent servicing need can be met by (1) significant inventories of existing HCFC-22, (2) in creased reclamation capacity, and (3) re-use of HCFC-22 within supermarkets. See “Analysis of HCFC- 22 Servicing Needs in the U.S. Air Conditioning and Refrigeration Sector: Additional C onsiderations for Estimating Virgin Demand” (Adjustment Memo), included in the docket t o this rulemaking. In the Adjustment*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

29 of 87 Memo, EPA considers a higher and a lower HCFC-22 al location scenario for each year. In the larger allocation scenario: (1) surplus inventory f rom past years (hereinafter called “existing inventory”) meets 6,000 MT of estimated need each y ear; (2) recovery and reclamation meet 12,500 MT of need, the same amount as in the 2009 F inal Rule; and (3) 20 percent of total need in the large retail food sector is met by in-house recovery and reuse. In the smaller allocation scenario: (1) existing inventory also meets 6,000 M T of estimated need each year; (2) recovery and reclamation meet 19,700 MT of estimated servici ng need; and (3) 70 percent of total need in the large retail food sector is met by in-house rec overy and reuse. As shown in Table 4 of the Adjustment Memo, the age ncy proposed to issue HCFC-22 consumption allowances as follows: (1) between 25,1 00 and 36,200 MT in 2012 (a decrease of 11 to 38 percent relative to the 2009 Final Rule); (2) between 20,800 and 31,400 MT in 2013 (a decrease of 13 to 42 percent); and (3) between 16,4 00 and 26,300 MT in 2014 (a decrease of 15 to 47 percent). These proposed amounts correspond t o allocations of 17.7 to 25.5 percent of baseline in 2012, 14.7 to 22.1 percent in 2013, and 11.6 to 18.5 percent in 2014. The agency took comment on its analysis of market conditions, which specifically looked at existing inventory, reclamation capacity, and HCFC-22 reuse in the supe rmarket industry. EPA also asked for comment on potential difficulties faced by small bu sinesses and on whether or not the installation of dry-shipped HCFC-22 condensing unit s affects the phaseout. Between the 2011 Interim Final Rule and the propos ed rule, the agency received a total of 50 comments (some with multiple signatories) on the market conditions (see section 2 of the Response to Comments) considered in allocating HCFC -22 and HCFC-142b allowances. As discussed in the proposed rule, the need for HCFC-2 2 to service existing equipment is the primary factor affecting EPA’s overall allocation o f production and consumption allowances for the current regulatory period. Thus, the Adjustment Memo only discusses HCFC-22 and most comments, as well as the agency’s response, focus p rimarily on HCFC-22.*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

30 of 87 Additionally, EPA received 13 comments, four from t he Interim Final Rule and nine from the proposed rule, on whether or not to provid e more HCFC-22 and/or HCFC-142b consumption and/or production allowances as compens ation for lost opportunities during 2010 (“recoupment”). Lastly, the agency proposed to allo cate different annual percentages of baseline for consumption than for production (“decoupling”). Without decoupling the baselines, the percentage of baseline allocated for production wou ld be the same as that for consumption for a given HCFC. Nine comments specifically addressed de coupling of baseline percentages. 1. How Is EPA Adjusting Estimated Servicing Need to Account for Surplus Inventory from Past Years? The agency proposed to account for existing inven tory of HCFC-22 produced in previous years by making downward adjustments to the consump tion allocation of 6,000 MT each year. EPA’s analysis indicated the amount of existing inv entory was between 22,700 MT and 45,400 MT. Including relevant comments received on the 201 1 Interim Final Rule, EPA received eight comments on its assessment of existing inventory of HCFC-22. Seven comments state there are significant volumes of HCFC-22 in existing inventor y and that accounting for this inventory is essential for supporting recovery and reclamation. One of those commenters indicates the 6,000 MT proposed annual adjustment and the 45,400 MT sto ckpile estimate should be considered a minimum, not maximum amount. Another also supports EPA’s consideration of existing inventory, and believes the estimates used in the p roposed rule may be too low based on their own inventory and their own estimates of industry-w ide inventory. All comments on EPA’s analysis, including confiden tial comments, indicate EPA’s estimate of existing inventory is reasonable and th at an annual adjustment to the estimated servicing need of 6,000 MT is supportable. EPA cons idered a wide range of existing inventory (between 22,700 MT and 45,500 MT), but comments sup port the proposed 6,000 MT adjustment regardless of the total stock of existing inventory . Based on the information provided, the agency*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

31 of 87 does not believe the annual adjustment or the estim ate of existing inventory should be increased. Overestimating the amount in inventory could limit the ability of consumers to service their equipment, resulting in systems being prematurely d ecommissioned. EPA provides a full summary of comments and agency responses in the Res ponse to Comments, but notes here that all commenters who addressed the proposed 6,000 MT adjustment specifically were in support of an adjustment at least that large. EPA is finalizin g the consumption allocation with the proposed adjustment for existing inventory. 2. How Is EPA Adjusting Allowances to Encourage Rec overy, Reclamation and Reuse ? In the 2009 Final Rule, the agency recognized that servicing needs 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 recl aimed. The 2009 Servicing Tail Report analyzed various reclamation scenarios, and after s everal rounds of industry feedback, the agency decided to issue allowances 12,500 MT below estimated need in 2010-2014. For 2010, 12,500 MT was 20 percent of the estimated need. EPA continues to believe that reused, recycled, and reclaimed material can help meet HCFC-22 servic ing needs. The agency published new projections of reclaim capabilities in the Adjustme nt Memo, and took comment on those projections via this rulemaking. Out of the 15 comments EPA received on reclaim cap abilities, 14 comments (some signed by multiple organizations) supported EPA’s a nalysis that the reclamation industry has the capacity to reclaim more than 19,700 MT per year. O ne comment stated that the infrastructure to effectively and efficiently recover, recycle, redis tribute, and reuse HCFC-22 likely will take several years to develop. In addition, one company agreed that the industry has the capacity to meet reclaim needs, but disagreed with the base ass umption that this activity will automatically take place.*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

32 of 87 In the Adjustment Memo, EPA considered annual recl amation levels of 12,500 MT and 19,700 MT. Several organizations state that the 19, 700 MT figure should be a minimum, rather than a maximum, because established companies that reclaim refrigerants have the technical capacity to recover 19,700 MT or more in 2012 alone and could easily expand capacity to meet additional need. One company comments that reclamat ion companies will be able to expand to cover the need that will ultimately be driven by hi gher prices and a decrease in supply. However, companies will not expand until there is a need. An other company also states that it could easily triple its current capacity, and believes the same is true for many reclamation companies. Many companies support an allowance reduction to encoura ge an increase in reclamation capacity and volume. These commenters, including 20 EPA-certifie d reclaimers that submitted a single comment, all believe that the capacity exists to ha ndle increased reclamation volumes. Several commenters believe sufficient recovery and reclamation capacity exists, but that the supply chain of used refrigerant from equipment -in-use to reclamation facilities is fragmented and complex. The concern is not whether capacity exists, or whether reclaimers could quickly expand capacity, but whether material is actually being recovered and brought to reclaimers. A group of recovery companies believes that existing reclaimers have the capacity to process more than enough HCFC-22 to meet the indust ry needs, but are not convinced that given the present situation, there will be enough refrige rant recovered to meet the raw material needs of the reclaimers. However, a group of recovery compan ies that focuses exclusively in recovering used refrigerant from retiring equipment does belie ve reducing allowances will change the incentives for recovery. Finally, one company belie ves that EPA’s estimate of the potential for recovery and reuse is too optimistic during 2012-20 14, particularly because residential air conditioners use only small quantities of the gas. EPA’s assessment that the reclamation industry has the capacity to reclaim 19,700 MT of HCFC-22 per year, as presented in the Adjustment Me mo, is supported by most of the comments*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

33 of 87 received. The amount of used refrigerant that can b e recovered from retiring equipment is sufficient to allow for the reclamation of 19,700 M T per year, based on expected recovery rates used in the Vintaging Model 7 . Included in the docket for this rulemaking is a n ew supporting memo titled “Recovered HCFC-22 Available to Meet Se rvicing Needs” (Recovery Memo). In this memo EPA shows the amount of HCFC-22 that can be recovered from HCFC-22 equipment that reaches its end of life under two scenarios. I n the first scenario, EPA uses the end-of-life assumptions in the Vintaging Model to determine how much HCFC-22 is recovered from retiring equipment. The Vintaging Model uses a 35 percent re covery rate in retiring residential air conditioning systems. The Recovery Memo details all the recovery assumptions used, which are nearly identical to those used in the 2009 Servicing Tail Report . These numbers are similar to those presented in table 4-5, “Scenario 50: 50% Rec overy Rate,” which was also presented in the 2009 Servicing Tail Report . In the second scenario, EPA assumes all HCFC-22 i s recovered at the end-of-life. The intent of this memo is to show that it is technically feasible to recover and reclaim 19,700 MT of HCFC-22 per year between 2012- 2014, even when only 35 percent of the HCFC-22 is recovered from residential air condition ing systems—the largest use for HCFC-22. However, EPA agrees with some commenters that the a mount of refrigerant that is available to be recovered does not necessarily equa l the amount that is recovered in practice, and that it will take time for recovery practices to ch ange. The agency recognizes that assuming 19,700 MT of annual servicing need can be met by re covered and reclaimed material—instead of

7 The Vintaging Model is the primary tool that EPA u ses to estimate projected HCFC consumption. The Vin taging Model estimates the annual chemical emissions from industry sectors that have historically used ODS, i ncluding air conditioning, refrigeration, foams, solvents, aeros ols, and fire protection. Within these industry sec tors, there are over fifty independently-modeled end uses. The mode l uses information on the market size and growth fo r each of the end uses, as well as a history and projections of the market transition from ODS to alternatives. As ODS are phased out, a percentage of the market share origin ally filled by the ODS is allocated to each of its substitutes. The model tracks emissions of annual “vintages” of new equipment that enter into operation by incorporatin g information on estimates of the quantity of equipme nt or products sold, serviced, and retired or conve rted each year, and the quantity of the compound required to manufa cture, charge, and/or maintain the equipment. EPA’s Vintaging Model uses this market information to build an annu al inventory of in-use stocks of equipment and the ODS refrigerant and non-ODS substitutes in each of the end uses. This information is used to project the s ervicing needs of ODS-containing equipment. Additional information on the Vintaging Model is available in the 2009 Servicing Tail Report , which can be found in the docket for this rulemaking.*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

34 of 87 12,500 MT—does not mean that amount will actually b e reclaimed each year. EPA’s adjustment to encourage recovery and reclamation could also en courage transition to HCFC-22 alternatives and more recovery and reuse of HCFC-22 in systems t hat require a large refrigerant charge. Although both of these outcomes are difficult to me asure and predict, EPA expects that these outcomes will sufficiently deal with any gap betwee n the adjustment in allocation and realized reclamation levels. EPA adopted the same general ap proach in the 2009 Final Rule (using 12,500 MT instead of 19,700 MT) to foster recovery and rec lamation. In addition, EPA has received anecdotal information from stakeholders that reclai mers are already offering increased incentives to return recovered refrigerant and that this will continue as long as there is an economic incentive to do so. As the supply of virgin refrige rant shrinks, the incentive to recover and reclaim used refrigerant will likely increase. EPA provides a full summary of comments and agency response in the Response to Comments. EPA does not believe any of the concerns raised sho uld preclude the agency from increasing the adjustment for reclamation from 12,5 00 MT to 19,700 MT to foster reclamation, especially in light of the 2015 Montreal Protocol c ap and the 2020 phaseout of HCFC-22 production and import. EPA believes increased recov ery and reclamation is necessary to ensure a smooth transition between now and 2020 and is incre asing the difference (relative to the 2009 Final Rule) between estimated servicing need and th e allocation for virgin production and import. The agency is finalizing the proposed 19,70 0 MT adjustment to foster increased HCFC22 recovery and reclamation. 3. How Is EPA Accounting for Recovery and Reuse of HCFC-22 in the Supermarket Industry? In the proposed rule, EPA considered adjusting the allocation for virgin HCFC-22 production and import to account for current recove ry and reuse practices in the supermarket industry. Specifically, the agency estimated that b etween 20 percent and 70 percent of annual*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

35 of 87 servicing need in the large retail food sector coul d be met by HCFC-22 recovered and reused inhouse. In addition to the analysis conducted to dev elop the Adjustment Memo, EPA considered late comments that addressed recovery and reuse of HCFC-22 in supermarkets. The comments, combined with EPA’s findings presented in the Adjus tment Memo, indicate that supermarkets deal with recovered refrigerant in a variety of way s. Some appear to meet 10-20 percent of their annual servicing need with material they recovered from internal existing prior uses. Others have the material reclaimed and do not reuse or bank any of the material. A third group meets 80 to 100 percent of their annual need with reused materi al. EPA received an additional comment on reuse by larg e end users, but not specifically supermarkets. The commenter notes that large users retiring equipment can efficiently and effectively capture the majority of refrigerant fro m commercial refrigeration and air conditioning units. These users can recover refrigerant for futu re servicing of other equipment they own. These users do not require reclamation technology o r equipment, and can recover and reuse significant volumes of refrigerant. Such recovery a nd reuse should continue to be considered as a source of HCFC-22 service refrigerant. EPA agrees that large end users, including supermar kets and other large commercial applications, can be a source for recovered HCFC-22 . However, the agency only received information on how six companies reuse refrigerant in-house, and their reuse percentages are very different. Since the agency does not have suff icient data on in-house reuse, EPA is not accounting for supermarket reuse as its own categor y. However, the agency’s Vintaging Model has reasonable estimates for actual recoverable mat erial for various sectors, and EPA is using those modeled recovery rates for supermarkets to he lp support overall recovery and reuse estimates in this rule (see the Recovery Memo for s pecifics on modeled recovery rates). 4. Did EPA Consider Providing Allowances to Small B usinesses in This Final Action?*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

36 of 87 In response to the 2011 Interim Final Rule, one sma ll business informed EPA that it could not acquire either HCFC allowances or the HCF Cs it needs to manufacture its HCFC blend (see the letters from ICOR dated May 17, 2011 and S eptember 6, 2011, available in the docket for this action). To remedy this situation, the com menter requested that EPA provide unused allowances to companies that purchased either HCFCs or HCFC consumption allowances in 2008 and 2009. In the proposed rule, EPA noted that the inability to acquire allowances and/or HCFCs themselves does not appear to be a widespread problem, as numerous companies have made a significant number of transfers over the las t year alone, and no other company has commented that it cannot acquire HCFCs. However, EP A took comment on whether other companies were having difficulty acquiring HCFCs or HCFC allowances. In the proposed rule, the agency also provided some historical background on how EPA provided flexibility for small businesses when establishing the HCFC allocation sy stem. EPA received four comments on providing allowances to manufactures of HCFC blends, all of which were in opposition. Two companies poin t to the flexibility for companies without baselines to obtain HCFCs or HCFC allowances by pur chasing them from others. Another commenter notes that EPA provided for new entrants when it established the allocation system in
2003. Since EPA did not receive any additional comments i n support of providing HCFC allowances to manufacturers of HCFC blends, and bec ause the agency has previously stated its belief that the current allocation system provides significant flexibility for new entrants (as documented in the revised Flexibility Memo), EPA is not providing allowances for new entrants at this time. EPA also sought comment on the concept of providing HCFC-22 allowances to reclaimers, but expressed reservations. EPA receive d eight comments on this topic: four in opposition and four in support. Comments in opposit ion state that providing allowances to*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

37 of 87 reclaimers could encourage blending of refrigerant, instead of reclaiming refrigerant. They also cite administrative hurdles in establishing allowan ces for reclaimers and their skepticism that reclaimers would actually use the allowances to rec laim more material. All three commenters state that the proposed reduction in allowed produc tion and import will encourage recovery and reclamation (without providing allowances). One comment in support encouraged EPA to provide al lowances to reclaimers as a reward for reclamation activities. The commenter al so stated that manufacturers create a difficult working environment for reclaimers, claiming, for e xample:

• The manufacturers exert pressure on wholesalers and contractors not to return their used refrigerants to a reclaimer, using their supply of virgin refrigerants as leverage.

• The manufacturers have asked cylinder manufacturers not to sell pre-labeled DOT 39 cylinders for their blends to reclaimers.

• The manufacturers or their agents will buy an accou nt back by offering a higher price for the used refrigerants than justified. The commenter argues that the desire of manufacture rs to promote their own best self-interest results in a difficult environment for a refrigeran t reclaimer to prosper. EPA continues to have serious concerns about prov iding allowances to reclaimers that did not historically produce or import HCFC-22 and have not already acquired HCFC-22 allowances. As stated in the proposed rule, the age ncy’s primary concern is that providing allowances for reclaimers could foster unsustainabl e reclamation practices that rely on blending, instead of investment in the technology to fully re claim HCFCs. Reclamation through separation and distillation will be more important in 2015 whe n the HCFC-22 allocation must drop by at least 45 percent from 2010 levels, and it will be a bsolutely necessary by 2020, at which time production and import of HCFC-22 must be phased out entirely. In addition, many businesses*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

38 of 87 have either found a way to secure reliable access t o virgin HCFCs or have made investments to reclaim HCFCs in a sustainable way, without a direc t allocation of allowances. EPA continues to believe that allocating fewer allo wances—rather than providing allowances to reclaimers—is the best way to foster reclamation and recovery. In this final rule, EPA is taking significant steps to encourage recove ry and reclamation by providing fewer HCFC-22 consumption allowances. Fewer allowances fo r new production and import increases the value of existing HCFCs, which in turn increase s the incentives for recovery and reclamation. While the agency appreciates the concerns raised by reclaimers about the difficulties they encounter in the refrigerant reclamation business, these barriers have not stopped companies from becoming EPA-certified reclaimers—currently th ere are more than 50. Given the considerations above, the agency is not providing a llowances to reclaimers at this time. 5. Does the Installation of Dry-shipped HCFC-22 Equ ipment Affect the Phaseout of HCFC-22? In the proposed rule, EPA took comment on whether a llowing repairs using HCFC-22 dry-shipped condensing units affects the phaseout o f HCFC-22. Eight commenters believe the repairs of existing equipment that involve installa tion of dry-shipped HCFC-22 condensing units is affecting the phaseout and/or should be stopped. They claim that continued installation of dryshipped condensing units effectively allows the man ufacture of otherwise banned HCFC-22 airconditioning systems, increasing demand for HCFC-22 and undercutting the market for alternative refrigerants. One company does not beli eve dry-shipped condensing unit repairs can be properly addressed through a reduction in HCFC-2 2 allocation levels. Cost associated with the HCFC-22 refrigerant needed for the re-charging of the HCFC-22 system is quite small (<5% of the total servicing cost), so even a significant inflation of the cost of HCFC-22 will still have a minimal impact on the end-user’s decision. Two comm enters ask EPA to ban repairs using HCFC-22 dry-shipped condensing units, one explicitl y asking for this action in lieu of further*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

39 of 87 reducing HCFC-22 production. Another commenter is c oncerned about the negative effects of dry-shipped condensing units on equipment efficienc y. One joint comment from several environmental groups indicated that the market for dryshipped HCFC-22 units is expanding rapidly; however , no data were provided. The commenters express concern that because newly-produced HCFC-22 is so cheap, service technicians are venting HCFC-22 from broken units, installing dry-s hipped units in their place, and then charging the unit with virgin HCFC-22. EPA received seven comments saying installation of dry-shipped condensing units does not significantly affect the phaseout and/or that d ry-shipped HCFC-22 condensing unit repairs should not be banned. These commenters believe dry- shipped condensing units are providing consumers a legal, affordable repair option, and th us not actually increasing demand for HCFC22 or displacing the sale of new systems. They cont end that the primary application of the uncharged HCFC-22 replacement condensing units is a s a service option to major compressor and coil failures. While two of the equipment manufacturers who do not support a ban on dryshipped unit repairs also do not support reduced al locations of HCFC-22, another equipment manufacturer believes that addressing the availabil ity of the refrigerant is the appropriate driver for phasing out virgin HCFC-22, and that the instal lation of dry-shipped HCFC-22 condensing units does not have a negative effect on the phaseo ut. Another commenter suggests that if EPA has verifiable evidence that the servicing or repai r of HCFC-22 appliances is resulting in increased emissions of the refrigerant, then EPA sh ould consider extending the leak repair requirements to all appliances, not just appliances with a refrigerant charge greater than 50 lbs. Five additional comments discuss HCFC-22 condensin g units in more general terms. One organization suggests that EPA consider that most d ry-shipped condensing units are being sold and installed with multi-year warranties, which may require a revision to EPA’s servicing tail analyses if HCFC-22 replacement refrigerants are no t approved by the compressor and*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

40 of 87 equipment manufacturers for warranty servicing beyo nd 2015. Two other commenters state that the installation of HCFC-22 condensing units affect s the need for HCFC-22. One commenter states that contractors prefer selling new R-410a s ystems instead of repairing older systems, since it is much more profitable, but that American consumers are struggling to pay bills. One commenter states that further reductions in consump tion allowances might discourage installation and field charging of new condensing u nits with HCFC-22. The commenter also states that continued installation of such units wi ll only increase the challenge of meeting the 2015 stepdown and in turn increase emissions of HCF C-22 to the atmosphere. The issue of whether repairs involving the installa tion of dry-shipped HCFC-22 condensing units “affects the phaseout” can be brok en into several questions. First, do repairs involving installation of dry-shipped HCFC-22 conde nsing units increase demand for HCFC-22? Second, do such repairs slow transition from HCFC-2 2 equipment to equipment using non-ODS alternatives? And finally, does this practice affec t EPA’s ability to stop the production and importation of virgin HCFC-22 by January 1, 2020? Based on comments, there is no industry consensus o n each of these questions. Specific responses to each comment are included in the Respo nse to Comments found in the docket for this rulemaking. However, given the paucity of conc rete quantifiable information on this subject currently available to the Agency, EPA is not ready to determine whether the installation of dryshipped HCFC-22 condensing units will affect EPA’s ability to phase out HCFC-22 by 2020. The limited data received to date suggest that it w ill not. EPA did not propose to ban dry-shipped condensing units in the proposal and is not taking such action in this final rule. For purposes of future rulemakings, EPA is still interested in quan tifiable information on the number of dryshipped condensing units being shipped, whether the y are being used as a repair in lieu of a compressor or motor replacement, and whether and to what extent condensing unit replacements*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

41 of 87 extend the life of an existing system. EPA will con tinue to evaluate the issue as it develops future regulations. 6. How Is EPA Addressing the Court’s Decision with Regard to 2010 HCFC Allowances? As noted in the proposed rule, EPA interprets the Arkema decision as applying, at a minimum, to the baseline and calendar-year allowanc es for 2011-2014. The agency took comment on whether to interpret the decision as app lying to the 2010 allocation, and if so, how allowances in future control periods might be adjus ted to reflect this. EPA also took comment on (1) whether it should provide recoupment allowances for HCFC-22 and HCFC-142b, or just HCFC-22 allowances, and (2) whether it should provi de recoupment for production and consumption, or just consumption allowances. In thi s final action, EPA concludes that it has an obligation to consider 2010 allowances in respondin g to the Court’s remand and that recoupment for both HCFC-22 and HCFC-142b production and consu mption allowances is an appropriate response to the Court’s holding that the agency com mitted legal error in deciding not to carry the 2008 transfers forward when it established the base lines for the current regulatory period. EPA received 13 comments in opposition to recoupme nt. Four comments specifically state that it is too late to address 2010 allowance s, since the Court’s mandate did not issue until 2011, and allowances are only good for the calendar year in which they are issued. Two comments assert that providing recoupment allowance s would allow for banking or transferring of allowances to later years, which is at odds with the CAA and EPA regulations. Most of these comments point out that some allowances conferred i n 2010 actually went unused in that year, and that EPA’s current proposal to reduce allowance s in 2012-2014 is further rationale for not providing additional allowances to compensate for a ny perceived lost opportunity in 2010. They point to EPA’s statement in the proposal that not p roviding recoupment would have advantages for the environment, public health, and the goal of encouraging reclamation. They assert that there was an oversupply of HCFC-22 allowances in 20 10, that Arkema and Solvay were not*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

42 of 87 harmed in 2010, and that recoupment allowances woul d constitute a windfall. They refer to the Court’s denial of Arkema’s and Solvay’s motions for a stay of the 2009 Final Rule as evidence that these companies were not harmed. One commenter also asserts that if Arkema and Solvay believe they are entitled to compensation, they mus t file a claim for compensation under the Tucker Act, 28 U.S.C. 1491. Finally, four comments cite that providing recoupment distorts market share, in contradiction to past EPA policy a nd the Arkema decision as it relates to vested rights. On the other hand, the two companies that would ben efit most from recoupment, Solvay and Arkema, state that EPA should provide recoupmen t and that the agency must do so in order to comply with the Court’s decision in Arkema . Solvay states that EPA deprived it of its rightfu l allowances by failing to recognize its permanent in ter-pollutant trades in the 2009 Final Rule and that recoupment is necessary to remedy that error. Arkema asserts that its losses were significant because of its inability to compete effectively in the after-market, stockpile material for sale in later years, and sell other refrigerants to one-sto p shoppers. The primary rationale the commenters present in fav or of providing recoupment is that when an agency “...commits legal error, the proper remedy is one that puts the parties in the position they would have been in had errors not bee n made,” ( AT&T Corp. v. FCC , 448 F.3d 426, 433 (D.C. Cir. 2006) ( quoting Exxon Co. v. FERC , 182 F.3d 30, 48 (D.C. Cir. 1999)). The Court has further held that the proper remedy to an error is “to put the victim of the agency ‘error in the economic position it would have occupied but for the error,’” (Ethyl Corp. v. Browner, 67 F.3d 941, 945 (D.C. Cir. 1995) ( quoting Delta Data Sys. Corp. v. Webster , 744 F.2d 197, 206-07 (D.C. Cir. 1984)). Arkema contends that providing recoupment for losse s would not require improper retroactive action. It states that because there is a strong equitable presumption in favor of retroactivity that would make the injured party who le, EPA can make a correction that goes back*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

43 of 87 to the time the agency error occurred ( Exxon Co. v. FERC , 182 F.3d 30, 48 (D.C. Cir. 1999)). In addition, the commenter argues that in this circums tance EPA may go beyond its otherwise applicable statutory authority. The commenter state s that each agency has “general discretionary authority to correct its legal errors,” which exten ds to imposing retroactive changes, even when the statute does not expressly and affirmatively au thorize the agency to do so in the first instance ( Natural Gas Clearinghouse v. FERC , 965 F.2d 1066, 1073 (D.C. Cir. 1992)). As expressed in the proposed rule, EPA’s preferred approach to the 2010 allocation was not to provide recoupment. However, EPA reviewed co mments and considered the policy and legal aspects of providing or not providing recoupm ent. In particular, EPA considered the following questions: (1) does EPA have the obligati on to address 2010 allowances in light of the Court’s decision in Arkema , and (2) does EPA have the ability to provide some form of compensation that would remedy the retroactive aspe cts of the 2009 Final Rule with respect to 2010? EPA believes that the answer to both question s is “yes.” First, EPA believes it has an obligation to address 2010 allowances in light of the Court’s decision in Arkema , to the extent feasible given the design and struc ture of this program. The Court stated that the 2009 Final Rule was, in part, “impermissibly retroactive” because “it attempted to undo the Petitioners’ inter-pollutant baseline transfers” based on what the Court saw as a “new interpretation of section 607” of the Cle an Air Act. The Court vacated the rule “insofar as it operates retroactively” and remanded the case “for prompt resolution,” ( Arkema , 618 F.3d. at 25). EPA believes that on remand, it must put al lowance holders in the position they would have occupied had the agency reflected the Petition ers’ inter-pollutant baseline transfers in the 2009 Final Rule (

AT&T v. FCC , 448 F.3d 426 (D.C. Cir. 2006); Exxon Co. v. FERC , 182 F.3d 30 (D.C. Cir. 1999)). As noted in the proposal, it is appropriate for EPA to consider the 2010 allocation on remand whether or not the Court’s dec ision had the effect of vacating the 2010*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

44 of 87 allowances. The Court clearly held that the baselin es used in the 2009 Final Rule were invalid, and the 2010 allocation relied on those baselines. Second, EPA believes it is feasible to provide comp ensation for lost 2010 allowances in the form of recoupment allowances, even though the 2010 period has ended and all 2010 allowances have expired. As explained in the propos ed rule, EPA allocates HCFC production and consumption allowances for specific calendar ye ars: They are valid for that year only. Such allowances cannot be banked or borrowed. Therefore, EPA cannot provide meaningful compensation by issuing additional 2010 allowances since they would be void upon issuance. In the narrow circumstance of responding to the Court’ s decision, however, EPA finds it appropriate to issue a corresponding number of allo wances in later years to make up for the 2010 allowances that companies would have received if EP A had reflected the Petitioners’ interpollutant baseline transfers in the 2009 Final Rule . These recoupment allowances are designed to compensate for lost opportunities to produce or imp ort HCFCs during 2010 for sale in either 2010 or a later year. In responding to concerns that this is effectively allowing for banking or a transfer of allowances from 2010 to a later year, EPA disagrees . While EPA does not allow banking of allowances beyond the control period in which they are issued , nothing in the regulations bans companies from producing or importing HCFCs with al lowances and then storing the material over time. Companies receiving recoupment were depr ived of their ability to import and/or produce HCFCs in 2010 at a level consistent with th e Court’s decision in Arkema . Had they received the requisite level of allowances in 2010, they could have expended them during 2010 to produce or import HCFCs and banked those HCFCs u ntil at least the years covered by this rulemaking. EPA also disagrees with one commenter’s characterization of recoupment as an effective transfer of 2010 allowances to later year s. Contrary to the commenter’s assertion, EPA did not adopt this characterization in the proposal , but instead simply pointed out that the*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

45 of 87 regulations do not allow banking or borrowing of al lowances. The commenter quotes section 607(a), which states that EPA regulations must ensu re that transfers “will result in greater total reductions in the production in each year of . . . class II substances than would occur in that year in the absence of such transactions.” The commenter asserts that if recoupment is provided, the aggregate allowance total will be higher than it wo uld have been if no recoupment were provided. However, EPA disagrees that section 607(a ), which is titled “Transfers,” has any application to this situation. Section 607(a) refer s specifically to “transactions under the authority of this section.” An EPA rulemaking providing allow ances is not such a transaction. The transactions in question are the “transfers” and “t rades” within or between companies explicitly discussed in section 607. EPA has implemented secti on 607(a) by requiring an offset for all intra-company and inter-company transfers. See, e.g ., 40 CFR 82.23(a)(i)(G). Additionally, commenters assert that providing rec oupment allowances would mean taking allowances away from others or distorting ma rket share. One commenter said that providing recoupment is in violation of the Arkema decision, asserting that a company’s allowances, or its share of allowances, are a veste d right. EPA disagrees with this comment on both factual and legal grounds. First, as a result of the Arkema Court’s partial vacatur of the 2009 Final Rule, there are currently no production or co nsumption allowances for HCFC-22 in 2012- 2014. This final rule is filling a gap, rather than reshuffling existing allowances or existing market share. Second, even in the context of today’ s allocation, EPA is not allocating fewer allowances to one company for the purpose of alloca ting more to a different company. EPA is allocating a fixed percentage of baseline to each b aseline holder at a level that in the aggregate is expected to meet servicing demand, taking into acco unt the amount of such demand that can be met through other sources. EPA is then allocating r ecoupment allowances to certain companies on top of that fixed percentage allocation. Regardi ng market share, the allocation of recoupment allowances is limited to two years; thus, as a prac tical matter, it is unlikely to cause a permanent*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

46 of 87 shift in market share. In addition, market share is not a simple reflection of EPA’s allocation of allowances: for example, some companies buy or sell allowances and thus increase or decrease the volume of their business in a particular HCFC o r HCFCs generally. Furthermore, EPA takes issue with the commenter’s characterization of the Arkema decision. In Arkema, the Court held that the petitioners had a vested right in tra nsferred baselines where EPA had taken affirmative steps to approve th e transfers by issuing non-objection notices. The commenter attempts to broaden the decision to s tate that allowance holders have vested rights in any and all allowances issued under the s tratospheric ozone program, and in addition, to a specific market share or value attached to those allowances. EPA disagrees with this broad reading and believes the Court’s ruling is closely tied to its factual findings concerning the 2008 transfers. This issue is discussed further at secti on IV.A.1. Two commenters state that there was a significant oversupply of HCFC allowances in 2010, that the petitioners in Arkema were not harmed by the 2010 allocation in the 2009 Final Rule, and that they would receive a windfall if EPA were to provide recoupment allowances. However, the fact that not all HCFC allowances were used in 2010 does not mean that particular companies were not harmed. Companies’ individual si tuations and business plans may differ. Also, although the commenter cites the Court’s deni al of the motions to stay the 2009 Final Rule as evidence that petitioners were not harmed in 201 0, harm to the moving party is only one of the criteria considered by a court in reviewing a stay motion. Thus, it is erroneous to assume that the Court’s denial equates to a ruling that petitioners suffered no harm. Several commenters stated that providing recoupmen t allowances would harm human health or the environment; however, this action as a whole protects human health and the environment by allocating significantly fewer allow ances in 2012-2014 than the agency allocated in the 2009 Final Rule. Viewed in relation to that rule, EPA is reducing the total number of HCFC-22 consumption allowances (after providing for recoupment) by more than 31,100 MT*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

47 of 87 over those three years. As a result, providing reco upment does not increase the allowed amount of HCFC-22 production and importation for U.S. use relative to the 2009 Final Rule. Even with recoupment, total U.S. consumption will be at least 55 percent below the Montreal Protocol consumption cap. This overall decrease in consumpti on also increases the incentives for recovery and reclamation. In addition, as noted in the propo sal, the amount of recoupment being granted (329 ODP-weighted MT of allowed HCFC consumption an d 280 ODP-weighted MT of allowed HCFC production) is smaller than the number of allo wances that were not used by allowance holders in 2010 (approximately 425 ODP-weighted MT of HCFC consumption allowances and approximately 930 ODP-weighted MT of HCFC productio n allowances). EPA’s response to additional comments on whether to provide recoupmen t can be found in the Response to Comments. The agency presented four possible options with re gard to recoupment for 2010: (1) providing recoupment allowances in 2013 in addition to (i.e., on top of) the aggregate level of production and consumption; (2) allocating recoupme nt allowances over two years (2013-2014) in addition to (i.e., on top of) the aggregate level of produc tion and consumption; (3) allocating recoupment allowances from the aggregate level of production and consumption over two years (2013-2014); and (4) not issuing recoupment allowan ces. Five comments specifically support one or more of these options. One comment supports option 1, two comments support option 3, and two comments support option 4. Two additional c omments do not directly support an option, but raise concerns with options 1 and 2. EPA stated in the proposed rule that if it decided to issue recoupment, it would prefer option 1. However, after reviewing comment and cons idering the options further, the agency believes option 2 is the best approach for ensuring a smoother path towards 2015, when U.S. consumption and production of all HCFCs must be at or below 10% of baseline under the Montreal Protocol. In addition, it does not reduce the number of allowances available to*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

48 of 87 companies not receiving recoupment. Also, in light of EPA’s decision to reduce the overall HCFC-22 allocation significantly in relation to the 2009 Final Rule, EPA can adopt option 2 while still issuing fewer consumption allowances in 2013 and 2014 than it did under the 2009 Final Rule. Option 1 could flood the market in 2013, providing significantly more allowances in that one year than in either 2012 or 2014, creating an e ven more significant drop-off in the number of allowances between 2013 and 2014. EPA also has seri ous concerns about option 3. Commenters in support of option 3 state that companies were “o n notice” that 2010 allowances were in dispute before the Court, so EPA should reduce allo wances for companies not receiving recoupment to make Arkema and Solvay whole. However , the court rejected petitioners’ stay motion and stayed its own mandate, with the result that companies were operating under the 2009 Final Rule for all of 2010. Thus, companies th at produced or imported HCFCs during 2010 using consumption and production allowances receive d under the 2009 Final Rule were acting in accordance with the regulations in effect at that t ime. Commenters in support of option 3 also claim that since refrigerant customers prefer to purchase all refrigerants from one supplier, and th ey could not provide sufficient quantities of HCFC-22 to some of their customers, the 2009 Final Rule resulted in a loss of sales of other refrigerants during 2010. EPA strongly believes tha t if a company loses its ability to sell to onestop shoppers when it loses allowances, the inverse should also be true: Providing additional allowances in 2013 and 2014 equal to the amounts lo st in 2010 should provide approximately the same ability to compete for sales to one-stop shopp ers as was lost in 2010. Only two comments addressed whether EPA should pro vide recoupment for both HCFC22 and HCFC-142b, or just HCFC-22. One commenter su pported providing recoupment for both substances, as it ensures traceability and consiste ncy. The other commenter believes EPA should provide recoupment for HCFC-142b based on a total a llowance pool of 118 metric tons (the*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

49 of 87 amount allocated for 2010 in the 2009 Final Rule), instead of using a total allowance pool of 463 MT (the amount that results from the revised baseli nes, which are the same as the baselines proposed in 2008). According to the commenter, this means that the agency need only provide 69.8 metric tons of HCFC-142b production allowances in recoupment. EPA does not agree with the commenter that it shou ld scale HCFC-142b recoupment production allowances to match the exact amount all ocated in 2010. The agency is providing recoupment production allowances based on what it p roposed in 2008 (73 FR 78680). In 2008, the percent of baseline was the same for both consu mption and production. EPA is therefore using the baseline amount and percentage proposed i n 2008 to calculate recoupment for HCFC142b production. The HCFC-142b production baseline is much larger than the consumption baseline (when accounting for the 2008 transfers), so the resulting 2010 allocation would have been much larger, while the consumption allocation would have been approximately the same under either baseline scenario. Issuing recoupment based on the 2008 proposal results in approximately 397 MT of additional HCFC-142b produc tion allowances. Since manufacturing HCFC-142b in the U.S. for domestic use requires pro duction and consumption allowances, the agency anticipates that the only potential increase in HCFC-142b production as a result of recoupment would be for export. One commenter encouraged EPA to account for a comp any’s unused allowances from 2010 if EPA is providing that company with recoupme nt allowances. To do this, EPA would need to divulge information about how each company uses its allowances: such companyspecific information has never been disclosed in th e HCFC phaseout program, and EPA would need to consider claims of confidentiality before t aking such a step. Also, EPA does not believe it is necessary to account for a company’s unused a llowances because the agency is providing allowances to make up for the lost opportunity to produce or import HCFCs, not the specific*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

50 of 87 usage or lack thereof. As a result, EPA is not adju sting for a company’s unused allowances in
2010. To effectuate option 2, the agency is issuing half of the recoupment allowances for each company in 2013 and the other half in 2014 and is a mending the regulatory text at 40 CFR 82.16(a) accordingly. Recoupment allowances allocat ed for 2013 and 2014 will function in the same way as other calendar year allowances: They ca n be used only in the calendar year for which they are issued and will expire at the end of that calendar year. The agency believes the issuance of these recoupment allowances discharges its obligation to consider the 2010 control period in responding to the remand in Arkema . Table 1 lists the companies receiving recoupment, the substance, and the total number of recoupment a llowances: Table 1 – Final Recoupment Allowances Company Chemical Consumption (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

A full summary and response to all other comments are included in the Response to
Comments.
7. Does EPA Have to Provide the Same Percentage of Bas eline for Production Allowances as It Does for Consumption Allowances? In considering how to allocate HCFC-22 production a llowances for 2012-2014, the agency proposed to decouple production and consumpt ion baseline percentages. Historically, there has only been one table at 40 CFR 82.16, whic h lists the percentage of baseline (both*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

51 of 87 production and consumption) that every baseline all owance holder is issued each year. EPA proposed to create two tables, and to allocate a di fferent percentage of baseline for production than for consumption. Decoupling would allow the ag ency to reduce consumption allowances in relation to the 2009 Final Rule without having to reduce make the same reductions to production allowances. EPA stated its interpretation that sect ion 605(c) of the CAA does not preclude EPA from decoupling baseline percentages and requested comment on this issue. EPA received two comments specifically addressing whether the statut e precludes decoupling. Section 605(c) states that EPA must “promulgate reg ulations phasing out the production...of class II substances in accordance wit h [section 605],” subject to any acceleration under section 606. It further states that EPA must “promulgate regulations to insure that the consumption of class II substances in the United St ates is phased out and terminated in accordance with the same schedule (emphasis added)...as is applicable to the phase-out and termination of production of class II substances un der [Title VI].” Because the phrase “same schedule” is not clear on its face, the agency cons idered three possible interpretations of the phrase “same schedule,” as explained in the proposa l and in the 2011 Interim Final Rule. The agency stated that interpreting “same schedule” as referring to the phaseout schedule that appears in section 605, as accelerated under section 606, w ould be most consistent with the statutory language and purpose. Examples of milestones in the phaseout schedule are the 2010 and 2015 phasedown steps. The agency clarified that it was n ot proposing to allow production in an amount that would be inconsistent with those phased own steps, but simply proposing to allow a greater amount of production than consumption, with both amounts below the Montreal Protocol and CAA caps. The one company that provided comment on this matter agreed with the agency, and said that it does not believe that production a nd consumption allowances are somehow tied to the same regulatory schedule (requiring the same number of allowances or percentages of baseline for production and consumption). Rather, t he commenter states that production and*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

52 of 87 consumption are tied to the same statutory and trea ty schedule, and that the agency should provide for increased production. The other comment on decoupling was from a group of environmental organizations, none of which who supported an increase a decrease in production allowances relative to the 2009 Final Rule . They believe that the language in section 605(c) equates the quantity of consumption and production allowances and cannot be interpreted to allow more production than consumption in a given year. EPA disagrees that the language in 605(c) equates t he quantity of consumption and production allowances. EPA has never allocated the same quantity of production and consumption allowances, only the same percentage of baseline. The agency would have to provide different percentages of baseline for calen dar-year consumption and production allowances to keep the allowance quantities the sam e since the number of aggregate baseline production allowances is not equal to the number of aggregate baseline consumption allowances. Additionally, EPA does not believe there is a singl e “natural reading” of section 605(c), as the comment suggests. Rather, the language is ambiguous . As explained in the proposed rule, there are at least three possible interpretations. EPA’s interpretation that the word “schedule” in section 605(c) refers to the schedule that appears in section 605, as accelerated under section 606, is reasonable. In section 606, Congress used t he word “schedule” to refer to a morestringent schedule than the schedule set forth in section 605 : “The Administrator shall promulgate regulations . . . which establish a sche dule for phasing out the production and consumption of . . . class II substances . . . that is more stringent than set forth in section 7671d [section 605].” The original section 605 schedule l imited production and consumption to baseline quantities in 2015 and required a complete phaseout (with some exceptions) in 2030. It is logical that Congress would have intended the mo re-stringent schedule established under section 606 to have a similar structure: That is, t o cap or eliminate production and consumption*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

53 of 87 on certain milestone dates. EPA in fact established just this type of schedule at 40 CFR 82. 16(b)-(g). EPA has discretion in managing the allow ance system to achieve this schedule. Therefore, the agency believes it can issue calenda r-year consumption and production allowances using different percentages of baseline, as long as it complies with the overall schedule set by Congress, as accelerated under sect ion 606. Discussion of EPA’s policy decision to decouple bas eline percentages is found in section
IV.C.2. C. How Many HCFC-22 and HCFC-142b Allowances Is EPA Al locating in 2012-2014? The agency is revising the tables in 40 CFR 82 tha t together specify the production and consumption allowances available during specified c ontrol periods. The tables at sections 82.17 and 82.19 apportion baseline production allowances and baseline consumption allowances, respectively, to individual companies for specific HCFCs during a particular regulatory period. Complementing these tables, the table at section 82 .16 lists the percentage of baseline allocated to allowance holders for specific control periods. In this rulemaking, EPA is (1) retaining this framework of complementary tables, (2) establishing baselines for 2012-2014 identical to those established in the 2011 Interim Final Rule (76 FR 4 7451), (3) granting 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) providing recoupment allowances. In the 2009 Final Rule, 34.1 percent, 30.1 percen t, and 26.1 percent of each company’s HCFC-22 baselines were allocated for 2012, 2013, an d 2014, respectively. The allocation for HCFC-142b was 0.47 percent of baseline. As discusse d in section III.D. of this final rule, EPA interpreted the Court’s vacatur as applying to the HCFC-22 and HCFC-142b allocations for each of these years as well as the baselines. EPA is put ting in place new allocations through this rulemaking, and proposed various allocation amounts for consumption and production allowances during the remainder of this regulatory period.*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

54 of 87 1. How Many HCFC-22 Consumption Allowances Is EPA A llocating in 2012-2014? The 2009 Final Rule allocated 40,700 MT of HCFC-22 consumption allowances in 2012, which was 76.5 percent of estimated servicing need, and 59 percent of the total 2012 HCFC consumption cap. EPA arrived at this amount by esti mating the amount of servicing need, taking recovery and reclamation into consideration. EPA th en finalized an allocation that was 12,500 MT below estimated need. Using a similar approach, EPA proposed to allocate 11 to 38 percent less in 2012 relative to the 2009 Final Rule (see t he Adjustment Memo in the docket for the rationale behind the proposed reduction). In the 20 09 Final Rule, 2013 and 2014 consumption allocations were 35,900 MT and 31,100 MT, respectiv ely. The agency proposed to allocate 13 to 42 percent less in 2013 and 15 to 47 percent less i n 2014. As discussed in sections IV.B.1. and IV.B.2., comme nts directly addressing reclamation, recovery, and reuse, and the availability of existi ng inventory from past years generally support EPA’s estimates of the inventory and recoverable ma terial that are available each year to meet HCFC-22 servicing need. The agency also received 54 comments (some signed by multiple organizations) that address the overall consumption allocation in more general terms. Forty-two comments support the decrease in allowances relativ e to the 2009 Final Rule and 13 comments oppose the decrease. In addition to these comments, EPA received 47 additional comments that oppose a decrease in HCFC-22 production, but use th e word “production” in a general sense. Upon reading, EPA believes the intent was to oppose a decrease in consumption, or “production for U.S. use.” Generally, comments in support of the reduction sta te that a lower allocation will increase the value of HCFC-22, resulting in more reclamation and increased incentives to recover HCFC22 from existing systems. A lower allocation encour ages an orderly phaseout and still provides enough allowances to meet servicing needs. Supporte rs of a lower allocation state that a reduction is justified because of lower-than-expect ed need for HCFC-22 and the availability of*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

55 of 87 existing inventory from past years. Three environme ntal organizations state that a reduction is (1) necessary to protect human health and the envir onment, and (2) practicable in terms of technology, safety, and availability of alternative s. Comments supporting a higher HCFC-22 consumption al location cite concerns about higher price, limited access to refrigerant and une xpected costs, all of which could lead to premature system retirements. Others point to U.S. compliance with the Montreal Protocol under the 2009 Final Rule, and are against any reductions to those allocation levels. EPA responds to individual comments in the Response to Comments, but generally agrees that the amount of HCFC-22 provided in the 2 009 Final Rule was too high to foster an orderly transition. In 2015, the U.S. must reduce i ts production and consumption of all HCFCs to below 10 percent of its historic HCFC baseline unde r the Montreal Protocol. By 2020, HCFC production and consumption must be below 0.5 percen t of the historic baseline and under EPA regulations HCFC-22 may not be produced or imported at all. Rather than create a drastic change in 2015, the agency’s goal is to finalize an alloca tion for 2012-2014 that fosters the market transition necessary to prevent future disruptions. Considering that objective, EPA is providing allowa nces in this final rule based on its assessment of market conditions. For 2012, the timi ng of this rule means that EPA is looking back at actual events during 2012 rather than proje cting future needs. The agency is issuing 2012 HCFC-22 consumption allowances at the lowest propos ed amount, because that amount is consistent with the industry’s actual operation in 2012. The appropriateness of this level is supported by the fact that EPA has not received any reports of HCFC shortages during the 2012 air-conditioning season. At the same time, this lev el is commensurate with the amount of consumption authorized in the January 20, 2012, No Action Assurance provided by Cynthia Giles, Assistant Administrator for Enforcement and Compliance Assurance. EPA selected this amount as reasonable for purposes of the No Action Assurance, recognizing that it was within*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

56 of 87 the proposed range. Issuing allowances at the No Ac tion Assurance level enables companies to account for consumption that occurred in 2012 in ac cordance with the No Action Assurance. As stated in the No Action Assurance, any HCFCs produc ed and imported in 2012 pursuant to the No Action Assurance count towards a company’s alloc ation and require the expenditure of 2012 allowances. In 2013-2014, EPA is making reductions for existing inventory and for reclamation and reuse, given the support of comments on the agency’ s analysis and additional data provided during the comment period. EPA is not reducing allo wances to account for recovery and reuse in the large retail food sector because there were not sufficient comments or data, and the agency already accounts for supermarket recovery (but not in-house reuse) in its Vintaging Model. With these adjustments, the amount of allowed consumptio n in 2012-2014 is 29 percent below amounts in the 2009 Final Rule for the same period. The agency believes that the amounts in this rulemaking will increase market incentives to prope rly manage and recover HCFC-22 while still allowing for servicing of existing HCFC-22 systems. EPA is finalizing the following HCFC-22 consumption allocations for 2012-2014: 2012: 17.7 percent of baseline, totaling approximat ely 25,100 MT 2013: 18.0 percent of baseline, plus 2,954 MT of re coupment, totaling approximately 28,500 MT 2014: 14.2 percent of baseline, plus 2,954 MT of re coupment, totaling approximately 23,100 MT With this amount, EPA’s total HCFC consumption allo cation in 2012-2014, including recoupment, is at least 55 percent below the Montre al Protocol cap each year, and is below servicing need as estimated in the Servicing Tail Report

. 2. How Many HCFC-22 Production Allowances Is EPA Al locating in 2012-2014?*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

57 of 87 In the proposed rule, EPA considered described three options for providing production allowances. In considering each of these options, EPA recogniz ed that taking the 2008 transfers into account in accordance with the Arkema decision affects not only the HCFC-22 consumption baseline, but the HCFC-22 production baseline as we ll. Two options would have decoupled baseline percentage allocated for production and co nsumption. These options provided (1) approximately the same amount of production allowan ces as the 2009 Final Rule or (2) the same percentage of baseline as the 2009 Final Rule. The third option would have kept production and consumption allowances at the same percentage of ba seline, so the resulting production allocation would be dependent on the final consumpt ion baseline percentage. Option 3 is reflected in the January 20, 2012 and January 2013 8 , No Action Assurance Assurances sent to allowance holders by the Assistant Administrator fo r Enforcement and Compliance Assurance. EPA took comment on providing the following percent ages of baseline production in 40 CFR 82.16: Option 1: 28.7% in 2012, 25.3% in 2013, 21.9% in 20 14 Option 2: 34.1% in 2012, 30.1% in 2013, 26.1% in 20 14 Option 3: 17.7% to 25.5% in 2012, 14.7% to 22.1% in 2013, 11.6% to 18.5% in 2014 Under option 1, the aggregate allocation in 2012 wo uld be about two percent lower than in the 2009 Final Rule (37,050 MT in the proposed r ule vs. 37,721 MT in the 2009 Final Rule). The intent was would be to keep production the aggregate number of allowances at about the same level as the amount finalized in the 2009 Final Rul e. The memo to the docket for this rulemaking titled “Effects of HCFC-22 and HCFC-142b Baseline C hanges: 2009 Final Rule vs. 2011 Proposed Rule,” (Baseline Memo) explains these slig ht differences. While this option would keep the aggregate number of allowances at about th e same level, U.S. production could actually

8 The January 2013 No Action Assurance also preserve d all recoupment options.*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

58 of 87 fall under this option, because under Arkema a greater share of the allowances would go to a company that does not produce in the U.S. 9 Under option 2, the production baseline percentage would be the same as in the 2009 Final Rule. The petitioners in Arkema would receive the benefit of their 2008 baseline tr ansfers; other companies with production baselines would get the same number of production allowances as they received in the 2009 Final Rule, since thei r baselines did not change. Compared to While the percentage is the same as the 2009 Final Rule, this option would increase allowed since the aggregate production baseline is higher, the number of production allowa nces increases by 6,299 MT in 2012, 5,560 MT in 2013, and 4,821 MT in 2014. However, as noted above, this would not necessarily translate to an increase in production. In addition to asking for comment on the two propos ed decoupling options, the agency also asked for comment on several related matters. EPA asked for comment on whether, relative to the 2009 Final Rule, an increase in allocating the total number same percentage of baseline for production allowances, as proposed under option 2, would result in (1) an increase in U.S. consumption, (2) an increase in U.S. production, ei ther for domestic use or for export, and/or (3) an increase in worldwide production and/or consumpt ion of HCFCs. EPA also invited comment on the implications of any such an increase for the U.S. economy and the global envir onment, particularly as it relates to the smooth U.S. phase out of HCFC-22. EPA received nine comments on EPA’s proposed produc tion allocation. Six comments support a higher level of production allowances than consumption allowances (options 1 and 2) and three comments oppose a higher number level of production allowances. EPA provides a

9 Data submitted to the Greenhouse Gas Reporting pro gram on byproducts of the HCFC-22 production proces s indicates that only three of the four companies hol ding production allowances produced HCFC-22 in 2010 and 2011 (see http://ghgdata.epa.gov/ghgp/main.do and the me mo in the docket titled “2010-2011 Greenhouse Gas R eporting Program Data on HCFC-22 Production Byproducts”). Wh ile this company can transfer its allowances to ano ther producer, the fact that they do not produce in the U.S. makes it unlikely that all calendar-year produ ction allowances will be used.*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

59 of 87 complete summary of and response to all comments in the Response to Comments, but highlights and responds to most of the comments in this preamble. Very few comments voiced a preference for a specifi c production option. However, two commenters specifically support option 2, which pro vides for an increas e the same percentage of baseline as provided

in production allowa nces . the 2009 Final Rule. Five commenters are in support of higher production allowances options 1 and 2 so that domestic companies can remain competitive in the global market. One commenter ind icates U.S. companies could lose global market share if production allowances were not deco upled. Four commenters point out that increasing allocating more production allowances will than consumption allowances could allow for the possibility of more export, but will not le ad to increased domestic consumption since consumption allowances limit the amount of newly-pr oduced HCFC-22 entering the U.S. market. Comments also indicate allowing production in the U.S. could be environmentally beneficial if it displaces production at facilities that do not control byproduct emissions of hydrofluorocarbon (HFC)-23, which has a global warm ing potential of 14,800 10 . The comment cites the growth of HFC-23 emissions globally and i ndicates that facilities in Article 5 countries do not control HFC-23 emissions to the same degree as companies operating in the U.S. Since U.S. producers of HCFC-22 largely control their HFC -23 byproduct emissions, the comment states that production in the U.S., as opposed to o ther countries, could actually result in lower greenhouse gas emissions. Comments opposing an increase in production allowances options 1 and 2 note that the Protocol and domestic regulations already allow for additional production in order to serve basic domestic needs of developing countries in the form of Article 5 allowances. They argue that allowing more production than consumption may increase the global surplus of HCFC-22 and decrease price, thus discouraging appropriate handl ing of the gas. They argue this could lead to

10 Source for the GWP of HFC-23: Intergovernmental Pa nel on Climate Change (IPCC) Fourth Assessment Repo rt: Climate Change 2007 (AR4)*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

60 of 87 an increase in global use and emissions of HCFC-22. One commenter also states that if a reduction in consumption allowances is justified, s o is a decrease in production allowances for the same reason. EPA does not agree that increasing production a llowances increases options 1 and 2 increase environmental harm relative to the 2009 final rule

. Final Rule. First, EPA would only be providing the same number of overall production all owances or the same percentage of baseline for production as in the 2009 Final Rule. In the proposal, EPA also noted that production of 1

one kilogram of an HCFC requires both a production allo wance and a consumption allowance (82.15(a)(1), (2)). Thus, an increase in leaving production allowances at the same percentage or at the same overall amount without a corresponding increase in consumption all owances does not automatically cannot result in greater production. A U.S. consumption. Also, in order to produce for export, a company must submit documentation to verify the ex port of an HCFC for which consumption allowances were expended in order to re quest a reimbursement of spent consumption allowances. The agency reviews the docu mentation and issues a notice to either deny or grant the request. Therefore, a company wou ld not be able to produce more HCFC-22 unless it had exported an equal amount of material and been granted a refund of spent consumption allowances. Additionally, since HCFC consumption is capped glo bally under the Montreal Protocol, companies exporting HCFCs are co nstrained by the consumption caps established in the country receiving the material. With regard to HFC-23, EPA has worked with industr y through its HFC-23 Emission Reduction Partnership to encourage companies to red uce HFC-23 byproduct emissions from the manufacture of HCFC-22. In the 2010 U.S. Climate Ac tion Report, the agency noted that “despite a four percent increase in the production of HCFC-22 compared to 1990, EPA estimates that total HFC emissions in 2007 were significantly below 1990 levels. Compared to business as usual, EPA estimates the partnership reduced emissi ons by 17.8 Tg CO2 Eq. in 2007,” (see page*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

61 of 87 55 of the U.S. Climate Action Report 2010 , available in the docket). Currently, some HFC-23 emissions in Article 5 countries are mitigated thro ugh Clean Development Mechanism (CDM) projects using destruction technologies, namely the rmal oxidation or plasma arc. However, not all HCFC-22 facilities are eligible to earn credits under CDM; therefore, a number of facilities may not have emission reduction technology installe d. There are about 26 plants producing HCFC-22 in Article 5 countries. Approximately 17 pl ants have CDM projects that control HFC23 byproduct emissions. The remaining nine plants m ay not have emissions control technologies installed. HCFC-22 production in the United States may provide environmental benefits in reduced HFC-23 emissions to the extent U.S. product ion supplants the Article 5 production in those specific plants that do not have HFC-23 bypro duct destruction technologies installed. Some commenters argue that EPA will increase the g lobal supply of HCFC-22 through

an increase in production allowances . EPA disagrees. First, the process for request ing additional consumption allowances, as described above, does no t give a company additional consumption allowances until after an export has taken place. A dditionally by allocating more production than consumption allowances. EPA disagrees. First , by decreasing consumption allowances relative to the 2009 Final Rule, EPA is decreasing potential U. S. consumption of virgin material by more than 31,100 MT over 2012-2014. Even if every single additional production allowance was used for export, global consumption would still be at le ast 9,800 MT less than the allocations provided in the 2009 Final Rule if all other factors are con stant. Since Because at least one company holding production allowances does not produce HCFC -22 in the United States, it is unlikely that every production allowance will be used . As a result , the net reduction in global consumption of HCFC-22 may be even greater. Finally, starting in 2 013, Article 5 countries’ consumption of HCFCs is capped, which further limits global HCFC-2 2 demand ( see Montreal Protocol Art. 5, para. 8 ter .). As noted below, EPA is issuing additional production allowances using the same percentages as in the 2009 Final Rule only for the 2013 and 2014 control periods.*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

62 of 87 EPA is also concerned that decreasing production al lowances for the remainder of the current regulatory period could deprive certain U.S . manufacturers of existing global business. Article 5 allowances already allow the export of HC FC-22; but only to Article 5 countries. Providing more production than consumption allowanc es could allow companies to export continue exporting to non-Article 5 countries, which have the same ov erall Montreal Protocol phaseout schedule as the United States but may use a basket approach rather than a chemical-by-chemical approach to phasing out HCFCs. Also, using the additional production allowances could assist same percentage of baseline as the 2009 Final Rule should allow companies with to continue their exports to Article 5 countries, which are ju st beginning to phase out HCFCs. Since consumption allowances already lim it production for U.S. use, EPA is providing more the same percentage of baseline for HCFC-22 production than consumption allowances as in the 2009 Final Rule beginning in 2013 to allow avoid a scenario in which U.S. manufacturers might have to compete globally, and potentially reduce the need f or less efficient decrease their production abroad

. for global markets relative to the amount allowed u nder the 2009 Final Rule. As noted previously, U.S. prod uction may provide environmental benefits when compared to production in plants that lack HFC -23 byproduct destruction technologies. Recognizing the timing of this rule’s signature, an d the fact that Article 5 countries’ HCFC consumption is not capped until 2013, the agen cy is adopting a different approach for 2012 than for 2013 and 2014. The agency is issuing 2012 HCFC-22 production allowances at the lowest proposed amount, because that amount is cons istent with the industry’s actual operation in 2012. The appropriateness of this level is suppo rted by the fact that EPA has not received any reports of HCFC shortages during the 2012 air-condi tioning season. At the same time, this level is commensurate with the amount of production autho rized in the January 20, 2012, No Action Assurance provided by Cynthia Giles, Assistant Admi nistrator for Enforcement and Compliance Assurance. EPA selected this amount as reasonable f or purposes of the No Action Assurance,*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

63 of 87 recognizing that it was within the proposed range. Issuing allowances at the No Action Assurance level enables companies to account for pr oduction that occurred in 2012 in accordance with the No Action Assurance. As stated in the No Action Assurance, any HCFCs produced in 2012 pursuant to the No Action Assuranc e count towards a company’s allocation and require the expenditure of 2012 allowances. EPA is finalizing production option 2 for 2013 and 2014. In summary, EPA believes an increase in providing the same percentage of baseline as used in the 2009 Final Rule for production allowances in 2013-2014 (1) cannot lead to an increase in U.S. consumption, (2) could result in more U.S. production, particularly for export allows U.S. producers to produce the same amount as under the 2009 Final Rule , with economic benefits for the U.S. and potentially potential environmental benefits to the extent U.S. producers are more efficient that production might otherwise occur in plants tha t lack HFC-23 byproduct destruction technologies , and (3) would not result in a global increase in production or consumption of HCFC-22 beyond the limits agreed to under the Montreal Pro tocol . In addition, the environmental benefits achieved by the reductio n in consumption allowances outweigh any potential increase in U.S. production for export . As such, EPA is providing allocating the following amounts of HCFC-22 production allowances in 2012-2014:

- 2012: 17.7% of baseline, resulting in approximately 22,800 MT of HCFC-22 production

- 2013: 30.1% of baseline, plus 2,306 MT of recoupmen t, resulting in approximately 41,200 MT of HCFC-22 production

- 2014: 26.1% of baseline, plus 2,306 MT of recoupmen t, resulting in approximately 36,000 MT of HCFC-22 production Combined with allowed production for other HCFCs, t hese finalized amounts are at least 36 percent below the Montreal Protocol production cap of 3,884.25 ODP-weighted MT.*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

64 of 87 3. How Many HCFC-142b Consumption and Production Al lowances Is EPA Allocating
in 2012-2014? Establishing HCFC-142b baseline allowances that ta ke into account the 2008 interpollutant transfers results in 2,047 MT of aggregat e baseline consumption allowances and 9,444 MT of aggregate baseline production allowances. Con sistent with the 2009 Final Rule, EPA proposed to allocate 100 MT of consumption allowanc es. To get to that level, EPA would allocate 4.9 percent of the aggregate consumption b aseline, as reflected in the table at section 82.16. Using the same percentage (4.9 percent) of the agg regate production baseline, EPA proposed to allocate 463 MT of HCFC-142b production allowances for each control period between 2012 and 2014. The aggregate allocation for production is higher than the amount allocated in the 2009 Final Rule (463 MT in this ru le vs. 118 MT in the 2009 Final Rule). This is because the 2008 transfers out of HCFC-142b involve d significantly more consumption allowances than production allowances. Taking those transfers into account decreases the HCFC142b consumption baseline substantially but has a l esser impact on the HCFC-142b production baseline. The agency received only four comments on HCFC-142 b allocations. Two comments strongly support reducing HCFC-142b consumption and production allowances; one of these commenters states that HCFC-142b is only used in bl ends to service old CFC equipment. Of the other two comments, one supports the consumption al location of 100 MT, noting that HCFC142b is a critical component of a refrigerant blend , but that production allowances need not increase. The other commenter asks that EPA not low er the HCFC-142b production allocation to compensate for any increase in HCFC-22 production. EPA did not propose to decrease HCFC-142b allowanc es in the proposed rule. The agency assessed the need for the chemical in the 20 09 Final Rule and will revisit the need for*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

65 of 87 HCFC-142b for servicing during the rulemaking for t he next regulatory period. Furthermore , as with HCFC

- 22, increased production allowances for HCFC

- 142b could result in more HCFC

142b for export

. Increased exports could benefit the U.S. economy without increasing U.S. use of HCFC

- 142b. For th is e se reason s , the agency is finalizing its proposed consumption and production allocations for HCFC-142b. There will be 100 MT of HCFC-142b consumption allowances and 463 MT of production allowances issu ed in the years 2012, 2013, and 2014. These allowance amounts are 4.9 percent of the HCFC -142b baselines, and keep the HCFC-142b consumption allocation approximately the same as in the 2009 Final Rule. To provide recoupment to companies for lost opport unities in 2010, EPA is allocating a total of 61 MT of HCFC-142b consumption allowances and 397 MT of HCFC-142b production allowances in addition to the percentage of baselin e issued. Since the agency is providing recoupment over two years, there will be an additio nal 30 MT of consumption allowances and 198 MT of production allowances in 2013 and 2014. S ee section IV.B.6. of this preamble for more discussion on recoupment allowances. 4. How Does the Aggregate Allocation for HCFC-22 an d HCFC-142b Translate Entity-byEntity? For 2012-2014, EPA is setting production and consu mption baselines for HCFC-22 and HCFC-142b on the same basis as in the 2009 Final Ru le, except that EPA is making adjustments to reflect (1) the 2008 inter-pollutant transfers o f baseline allowances deemed permanent by the Court, (2) inter-company, single-pollutant transfer s of baseline allowances that occurred in 2010, and (3) changes in company names that occurred afte r the 2009 Final Rule was signed. All of these changes were made in the 2011 Interim Final R ule (76 FR 47451), and EPA proposed to do the same for 2012-2014. Applying the approach descr ibed above, EPA is apportioning production and consumption baselines for HCFC-22 an d HCFC-142b to the following entities in the following amounts:*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

66 of 87 Table 2: 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 Solvay Solexis HCFC-142b 6,541,764

Table 3: 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*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

67 of 87 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 National 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 finalized baselines listed above are identical to the tables presented in the 2011 Interim Final Rule (76 FR 47451). V. How Is EPA Changing the Regulations Governing Tr ansfers of Class II Allowances? The agency is concerned about the possibility of co mpanies undermining the HCFC chemical-by-chemical phaseout by performing inter-p ollutant transfers in advance of future phaseout steps. EPA interprets the 2003 Final Rule, which established the transfer provisions at 40 CFR 82.23, as allowing only single-pollutant, in ter-company transfers to be made on a permanent basis. Nevertheless, EPA recognizes that in Arkema , the Court found that “EPA’s practice under the 2003 Rule was to allow petitione rs’ baseline transfers of inter-pollutant allowances” (618 F.3d at 8). Therefore, EPA clarifi ed its current policy on inter-pollutant*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

68 of 87 transfers in the 2011 Interim Final Rule (76 FR 474 59). In January 2012, EPA proposed to modify the regulatory text to dispel any possibilit y of confusion in the future. Through this final action, the agency is modifying 40 CFR 82.23 to address the duration of inter-pollutant transfers, and to reflect prior agency statements pertaining to inter-pollutant transfers of Article 5 allowances. A. How Is EPA Changing the Regulations Governing P ermanent Transfers of Class II Allowances? Sections 607(b) and (c) of the CAA address inter-po llutant and inter-company transfers of allowances, respectively. Inter-pollutant transf ers are the transfer (or conversion) of an allowance of one substance to an allowance of anoth er 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 int er-company transfers combined with interpollutant transfers, so long as the requirements of both are met. The corresponding regulatory provisions for HCFCs appear at 40 CFR 82.23. EPA proposed to modify section 82.23 to clarify tha t the agency will not approve future inter-pollutant transfers of baseline production al lowances or baseline consumption allowances. EPA received two comments directly referring to thi s proposal. One comment supports EPA’s proposed changes because it will prevent future man ipulation of the allowance program. The commenter also believes the CAA prohibits permanent inter-pollutant transfers. Another commenter encourages EPA to reconsider its proposed changes and to allow for inter-pollutant baseline transfers if an allowance holder has histo rically made the transfers. EPA also received two comments on the 2012-2014 baselines that are re levant. Both commenters state that section 607 of the CAA prohibits baseline inter-pollutant t ransfers. As discussed in the proposed rule, EPA remains con cerned about the potential for future manipulation of the allocation system if inter-poll utant baseline transfers are allowed to affect a*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

69 of 87 company’s baseline in future regulatory periods. Fo r example, a HCFC-22 producer or importer could dominate the HCFC-123 market in 2015 by conve rting its HCFC-22 baseline to HCFC123 baseline in 2014. Given the different ODPs of H CFC-22 and HCFC-123 (0.055 and 0.02, respectively), converting one baseline allowance of HCFC-22 would result in 2.75 baseline allowances of HCFC-123. Also, since companies hold many more HCFC-22 baseline allowances than HCFC-123 baseline allowances, converting those HCFC-22 baseline allowances would have an overwhelming effect on the current HCFC-123 baseline allowance holders and on the overall market. As another example, in 2020 EPA will no longer be issuing HCFC-22 production or consumption allowances (see section 82.16(e)). EPA expects that companies with only HCFC-22 or HCFC-142b allowances would no longer be producin g or importing HCFCs at that date. If EPA were to allow inter-pollutant baseline transfer s that carried forward into the new regulatory period, companies with HCFC-22 baselines could conv ert them all to baselines for HCFC-123 in 2019. Perpetuating the HCFC-22 baselines in a new f orm would be counter to the design of the chemical-by-chemical phaseout, under which the base line allowances for a particular chemical are intended to drop out of the system upon the pha se-out of that chemical. Thus, there are important policy reasons for not taking inter-pollu tant transfers from prior regulatory periods into account in establishing baselines for new regulator y periods. EPA has been clear in its past statements about it s policy on what happens to allowances when a chemical is phased out. In the 1999 Advanced Notice of Proposed Rulemaking (“1999 ANPRM”, 64 FR 16373), EPA discussed options for est ablishing the HCFC allocation system. Referring to HCFC-141b, which was phased out in 200 3. EPA stated at 64 FR 16378: It is important to note that, under any scenario, w hen the phaseout date for HCFC141b is reached in 2003, all HCFC-141b consumption (production + importsexports) will cease. Those who did not participate in the HCFC-141b market will not be affected in 2003. However, those who did par ticipate in the HCFC-141b market— through, for example, producing or importin g HCFC-141b—would no*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

70 of 87 longer receive any allowances associated with their historic HCFC-141b activity, and thus any authorization to produce or import HCF C-141b. Likewise, any company that, through a baseline trade, received al lowances associated with historic HCFC-141b would no longer receive any allo wances associated with the baseline trade in 2003 (emphasis added). In the 2001 Notice of Proposed Rulemaking for the HCFC allocation system (“2001 NPRM,” 66 FR 38064), EPA elaborated further on what happens when a chemical is phased out under a chemical-by-chemical phaseout at 66 FR 3806 8-69: On the first HCFC phaseout date of 2003, those comp anies that received baseline consumption allocations (or received a permanent ba seline transfer)...of HCFC141b would subtract that portion from their total c onsumption allocation. If permanent inter-pollutant trades had been made, an amount equal to the ODPweighted kilograms of baseline HCFC–141b allowances that had been received in the transfer would be deducted from the baseline al location... The same would occur in [later years] for the relevant chemicals b eing phased out (emphasis added). Finally, in the 2003 Final Rule establishing the H CFC phaseout, EPA stated its position at 68 FR 2835: “EPA will allow permanent transfers of baseline allowances with those allowances disappearing at the phaseout date for th e specific HCFC, regardless of what interpollutant transfers had taken place.” Because EPA h as been clear on this point that baseline allowances associated with a specific HCFC—regardle ss of their current owner or current status—disappear when that HCFC is phased out, the agency continues to believe allowing interpollutant baseline transfers only on an annual basi s is appropriate. The commenter objecting to the proposed changes to the transfer regulations cited several issues that EPA should consider. The commenter cite s its past practice of annually transferring its HCFC-142b allowances to HCFC-22 and the need to consider the precedent this proposed change might have. The agency notes that prohibitin g inter-pollutant baseline transfers in no way precludes the commenter, or any allowance holder, from continuing to make annual interpollutant transfers. However, when EPA established the “worst-first” HCFC phaseout, the goal*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

71 of 87 was to encourage companies to move out of HCFCs, no t to continually produce or import HCFCs by switching from one chemical to another. Additionally, the commenter envisions a scenario w here an allowance holder could change the focus of its business to produce and sel l a substance that does less harm to the environment. While an allowance holder could move t o an HCFC that is less harmful to the ozone layer, the switch results in no environmental benefit (excepting the 0.1 percent transfer offset) if all of the transferred allowances are us ed. Since transfers are weighted based on their ODP, moving from a higher ODP chemical to a lower O DP chemical would result in more allowances for the lower ODP chemical and an equal environmental footprint. Further, if EPA were to allocate allowances for th e next regulatory period taking interpollutant transfers into account, those transfers w ould only affect aggregate company baselines in specific chemicals, not the total amount allocat ed. In the case of the 2011 Interim Final Rule, when EPA updated baselines to include past inter-po llutant transfers, there was no environmental benefit to doing so. The way EPA allocates allowanc es relies on the estimate of market servicing need for a chemical and then divides that amount up proportionally based on a company’s baseline allowances for that particular chemical (s ee section IV

. of this preamble for the detailed description). While taking baseline inter-pollutant transfers into account may have tremendous benefits for the company making the transfers, it d oes nothing for the environment. As described above, EPA sees this use of inter-pollutant transfe rs as manipulating the system, and is clarifying that baseline inter-pollutant transfers will not be allowed in the future. Two commenters state that modifying the baselines by taking into account inter-pollutant transfers is contrary to the CAA. They argue that s ection 607 of the CAA allows EPA to approve inter-pollutant transfers of allowances only on a y ear-to-year basis, and point to language in section 607(b) stating that EPA regulations are to permit “a production allowance for a substance for any year to be transferred for a production all owance for another substance for the same year*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

72 of 87 on an ozone depletion weighted basis.” Similar argu ments were made in comments submitted on the 2008 Proposed Rule and on the 2011 Interim Fina l Rule. EPA does not agree with the comment that the langu age of section 607(b) is clear on its face. The statutory language is ambiguous, and EPA has discretion to choose a reasonable interpretation of that language. EPA determined in the 2009 Final Rule that section 607(b) is best read as permitting only year-by-year inter-pollutan t transfers. EPA continues to believe that this is the best interpretation of the statutory languag e. Section 607(b) states that EPA’s rules are to permit “a production allowance for 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 a ppears in section 607(c). That section does, however, provide that any inter-pollutant transfers between two or more persons must meet the requirements of section 607(b). As the Court noted, “the agency is certainly entit led 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 transf ers to be conducted on a yearly – and thus temporary – basis going forward is the approach mos t consistent with the wording of section 607(b). Further discussion of the reasons for limit ing inter-pollutant transfers to those conducted on a calendar-year basis is available in the Respon se to Comments for the 2009 Final Rule (included in the docket for this rulemaking). Consistent with the Court’s decision regarding past inter-pollutant transfers (those conducted during the prior regulatory period), the baselines established in this action for 2012- 2014 take into account the 2008 inter-pollutant bas eline transfers. EPA is clarifying, however, that it has not approved any inter-pollutant transf ers of baseline allowances in the current regulatory period, and for the reasons given in the 2009 Final Rule, the 2011 Interim Final Rule, and in this action, in the future, EPA will approve inter-pollutant transfers only on a year-by-year*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

73 of 87 basis. Thus, in the context of the allowance system for protection of stratospheric ozone, companies should not expect that any future inter-p ollutant transfers they conduct will affect their baselines either in the current regulatory pe riod or any future regulatory period. EPA is revising the regulations to avoid any furth er dispute about the agency’s position on this issue. The new language clarifies that perm anent inter-pollutant transfers of baseline allowances will not be approved. In addition, EPA i s clarifying that the procedures in section 82.23(a) apply to permanent, single-pollutant trans fers. B. How Is EPA Changing the Regulations Governing Tr ansfers of Article 5 Class II Allowances? Article 5 allowances for Class II substances are t he privileges granted under 40 CFR 82.18(a) to produce the specified HCFC for export o nly to countries listed in 40 CFR Subpart A, Appendix C, Annex 4. The countries listed in that a nnex are developing countries whose control obligations under the Montreal Protocol are address ed in Article 5 of the treaty and hence are referred to as “Article 5 Parties.” EPA proposed 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. EPA promulgated section 82.23 as part of the 2003 F inal Rule (68 FR 2820). EPA specifically discussed the inter-pollutant 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 transf ers [because no other HCFC Article 5 allowances would be available during that period]. In 2010, when...Article 5 allowances for HCFC-22 and HCFC-142b become available, these allow ances will be transferable 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 allo wances. The omission of Article 5 allowances from section 82.23(b) appears to have been an overs ight. Therefore, EPA proposed to revise the*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

74 of 87 regulations to specifically provide for the inter-p ollutant transfers of Article 5 allowances through this rulemaking. As with other types of int er-pollutant transfers, these transfers would be limited in duration to a single year. The agency re ceived two comments on its proposal to revise the text at section 82.23(b), which EPA responds to in the Response to Comments. EPA also proposed to change the text at 82.23(a)(i i) for consistency with its previously stated policy on offsets for transfers of Article 5 allowances. Section 607(a) requires that transfers of production allowances “will result in greater total reductions in the production in each year of...class II substances than would occur i n that year in the absence of such transactions.” In a November 10, 1994, Federal Regi ster notice, EPA stated its interpretation that the section 607 offset requirement applies to Artic le 5 allowance transfers (59 FR 56287): “Interpollutant transfers of Article 5 allowances will co ntinue to require a one percent offset, as required by section 607 of the CAA...” In the May 10, 1995, final rule at 60 FR 24980, EPA stated that “[w]ith today's action, EPA permits int er-pollutant and inter-company transfers of Article 5 allowances as proposed...” meaning, EPA int ended to require an offset for transfers of Article 5 allowances in the class I allowance syste m. This intent to require an offset is also reflected in certain provisions of the class II allowance system in 40 CFR part 82. Section 82.23(a )(i)(G) specifically requires an offset for Article 5 allowance inter-company transfers, statin g that the transfer claim must set forth: “For trades of consumption allowances, production allowa nces, export production allowances, or Article 5 allowances, the quantity of the 0.1 perce nt 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 allow ances 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, “E PA will reduce the transferor’s balance of*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

75 of 87 unexpended allowances...by the quantity to be transfe rred,” with no mention of an offset. In addition, in the introductory text for 82.23(a)(ii) , Article 5 allowances are not mentioned: “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 o f that quantity;” EPA proposed to amend 82.23(a)(ii) and 82.23(a)(ii)(A) to require an offs et for transfers of Article 5 allowances. EPA did not receive comments on this proposed clarification to the regulatory text, and is finalizing the clarification as proposed. Section 82.23(a) is now consistent throughout. Section 82.23(b) requires an offset of 0.1 percent for all inter-pol lutant transfers and since EPA is adding Article 5 allowances to section 82.23(b), an offset will auto matically apply. To reflect EPA’s intent to allow inter-pollutant tr ansfers of Article 5 allowances, and the requirement that an offset be deducted when an enti ty is transferring Article 5 allowances, the agency is finalizing the proposed modifications to the regulatory text at 40 CFR 82.23(a)(ii), 82.23(a)(ii)(A), and 82.23(b). VI. 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 regulatory action” since it raises “no vel legal or policy issues.” Accordingly, EPA submitted this action to the Office of Management a nd Budget (OMB) for review under Executive Orders 12866 and 13563 (76 FR 3821, Janua ry 21, 2011) and any changes made in response to OMB recommendations have been documente d in the docket for this action. EPA did not conduct a specific analysis of the ben efits 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 Regulatory Impact Ana lysis: Accelerating the*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

76 of 87 Phaseout of CFCs, Halons, Methyl Chloroform, 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 Allo cation System

.

• The 2005 Memorandum Recommended Scenarios for HCFC Phaseout Costs Esti mation

.

• The 2006 ICR

Reporting and Recordkeeping Requirements of the HC FC Allowance System

.

• The 2007 Memorandum Preliminary Estimates of the Incremental Cost of th e HCFC Phaseout in Article 5 Countries

.

• The 2007 Memorandum Revised Ozone and Climate Benefits Associated with the 2010 HCFC Production and Consumption Stepwise Reductions and a Ban on HCFC Precharged Imports

.

• The 2009 ICR

Reporting and Recordkeeping Requirements of the HC FC Allowance System

. A memorandum summarizing these analyses is availabl e in the docket. B. Paperwork Reduction Act This action does not impose any new information co llection burden. EPA already requires recordkeeping and reporting for HCFCs, and this action does not amend those provisions. The Office of Management and Budget (OM B) has previously approved the information collection requirements contained in th e existing regulations at 40 CFR part 82, subpart A under the provisions of the Paperwork Red uction Act, 44 U.S.C. 3501 et seq . and has assigned OMB control number 2060-0498. The OMB cont rol numbers for EPA's regulations in 40 CFR are listed in 40 CFR part 9. C. Regulatory Flexibility Act*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

77 of 87 The Regulatory Flexibility Act (RFA) generally requ ires 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 significant economic impact on a substantial number of small entities. Small entities include small busine sses, small organizations, and small governmental jurisdictions. We have considered the economic impacts of this final rule on small entities. For purposes of assessing the impacts of this rule on small entities, a small entity is defined as: (1) a small business as defined by the Small Business Administration’s (SBA) regulations at 13 CFR 121.201; (2) a small governme ntal jurisdiction that is a government of a city, county, town, school district or special dist rict with a population of less than 50,000; and (3) a small organization that is any not-for-profit ent erprise which is independently owned and operated and is not dominant in its field. This action may affect the following categories:

- Industrial Gas Manufacturing entities (NAICS code 3 25120), including fluorinated hydrocarbon gases manufacturers and rec laimers;

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

- Air-Conditioning and Warm Air Heating Equipment and Commercial and Industrial Refrigeration Equipment Manufacturing en tities (NAICS code 333415), including air-conditioning equipment and c ommercial and industrial refrigeration equipment manufacturers;

- Air-Conditioning Equipment and Supplies Merchant Wh olesalers (NAICS code 423730) , including air-conditioning (condensi ng unit, compressors) merchant wholesalers;*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

78 of 87 - Electrical and Electronic Appliance, Television, an d Radio Set Merchant Wholesalers (NAICS code 423620), including air-cond itioning (room units) merchant wholesalers; and

- Plumbing, Heating, and Air-Conditioning Contractors (NAICS code 238220), including central air-conditioning system and comme rcial refrigeration installation; HVAC contractors. After considering the economic impacts of this fin al rule on small entities, I certify that this action will not have a significant economic im pact on a substantial number of small entities. In determining whether a rule has a significant eco nomic impact on a substantial number of small entities, the impact of concern is any signif icant adverse economic impact on small entities, since the primary purpose of the regulato ry flexibility analyses is to identify and address regulatory alternatives “which minimize any signifi cant economic impact of the rule on small entities.” 5 USC 603 and 604. Thus, an agency may c ertify that a rule will not have a significant economic impact on a substantial number of small en tities if the rule relieves regulatory burden, or otherwise has a positive economic effect on all of the small entities subject to the rule. This rule relieves a regulatory ban on production a nd consumption that would otherwise apply in the wake of the Court’s vacatur. Additiona lly, EPA is continuing to allocate production and consumption allowances using the same approach described in the 2009 Final Rule with adjustments to reflect (1) 2008 inter-pollutant tra nsfers of baseline allowances deemed permanent by the Court, (2) inter-company, single-p ollutant transfers of baseline allowances that occurred in 2010, (3) changes in company names that occurred after the 2009 Final Rule was signed and (4) an updated picture on the need for v irgin HCFC-22 as assessed in the Adjustment Memo and sections IV.B.1-3 of this preamble. EPA is not modifying the recordkeeping or reporting provisions and thus is not increasing the burden to small businesses. EPA’s HCFC*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

79 of 87 Phaseout Benefits and Costs Memo, included in this docket, provides a summary of previous small business analyses, as well as the cost and be nefit data used for the 2009 Final Rule. We have therefore concluded that today's final rule will relieve regulatory burden for all affected small entities. 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. 1531-1 538 for State, local, or tribal governments or the private sector. UMRA does not ap ply to rules that are necessary for the ratification or implementation of international tre aty obligations. This rule implements the 2010 milestone for the phase-out of HCFCs under the Mont real Protocol. Therefore, this action is not subject to the requirements of sections 202 or 205 of UMRA. This action is also not subject to the requirement s of section 203 of UMRA because it contains no regulatory requirements that might sign ificantly or uniquely affect small governments. This action apportions production and consumption allowances and establishes baselines for private entities, not small governmen ts. E. Executive Order 13132: Federalism This action does not have federalism implications. It will 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 amon g the various levels of government, as specified in Executive Order 13132. This action is expected to primarily affect producers, importers, and exporters of HCFCs. Thus, the requir ements of section 6 of the Executive Order do not apply. F. Executive Order 13175: Consultation and Coordin ation with Indian Tribal Governments This action does not have tribal implications, as specified in Executive Order 13175 (65 FR 67249, November 9, 2000). This action does not s ignificantly or uniquely affect the*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

80 of 87 communities of Indian tribal governments. It does n ot impose any enforceable duties on communities of Indian tribal governments. Thus, Exe cutive Order 13175 does not apply to this action. G. Executive Order 13045: Protection of Children f rom Environmental Health and Safety Risks This action is not subject to EO 13045 (62 F.R. 19 885, April 23, 1997) because it is not economically significant as defined in EO 12866. Th e agency nonetheless has reason to believe that the environmental health or safety risk addres sed by this action may have a disproportionate effect on children. Depletion of stratospheric ozon e results in greater transmission of the sun’s ultraviolet (UV) radiation to the earth’s surface. The following studies describe the effects of excessive exposure to UV radiation 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 Cancer 1994: 30A: 1647-54; (2) Elwood JM Japson J. “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 diseas es,” 1 st ed. London, England: Blackwell Science, 1997: 63-6; (4) Whiteman D., Green A. “Mel anoma and Sunburn,” Cancer Causes Control, 1994: 5:564-72; (5) Heenan, PJ. “Does inte rmittent sun exposure cause basal cell carcinoma? A case control study in Western Australi a,” 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 Dermatol 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. commitment to redu ce the total basket of HCFCs produced and imported to 25 percent of the respecti ve baselines. While on an ODP-weighted*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

81 of 87 basis, this is not as large a step as previous acti ons, such as the 1996 Class I phaseout, it is one o f the most significant remaining actions the U.S. can take to complete the overall phaseout of ODS and further decrease impacts on children’s health f rom stratospheric ozone depletion. H. Executive Order 13211: Actions Concerning Regul ations That Significantly Affect Energy Supply, Distribution, or Use This action is not a “significant energy action” a s 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 rule is sues allowances for the production and consumption of HCFCs. I. National Technology Transfer and Advancement Ac t Section 12(d) of the National 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 regulatory activities un less to do so would be inconsistent with applicable law or otherwise impractical. Voluntary consensus standards are technical standards (e.g., materials specifications, test methods, samp ling procedures, and business practices) that are developed or adopted by voluntary consensus standar ds bodies. NTTAA directs EPA to provide Congress, through OMB, explanations when the agency decides not to use available and applicable voluntary consensus standards. This acti on does not involve technical standards. Therefore, EPA did not consider the use of any volu ntary consensus standards. J. Executive Order 12898: Federal Actions to Addre ss Environmental Justice in Minority Populations and Low-Income Populations Executive Order (EO) 12898 (59 FR 7629 (Feb. 16, 19 94)) establishes federal executive policy on environmental justice. Its main provision directs federal agencies, to the greatest extent practicable and permitted by law, to make environme ntal justice part of their mission by identifying and addressing, as appropriate, disprop ortionately high and adverse human health or*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

82 of 87 environmental effects of their programs, policies, and activities on minority populations and lowincome populations in the United States. EPA has determined that this action will not have disproportionately high and adverse human health or environmental effects on minority o r low-income populations because it increases the level of environmental protection for all affected populations without having any disproportionately high 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 reduce the total basket of H CFCs produced and imported to a level that is more than 75 percent below the respective baseli nes. While on an ODP-weighted basis, this is not as large a step as previous actions, such as th e 1996 Class I phaseout, it is one of the most significant remaining actions the U.S. can take to complete the overall phaseout of ODS and further lessen the adverse human health effects for the entire population. K. The Congressional Review Act The Congressional Review Act, 5 U.S.C. 801 et seq., as added by the Small Business Regulatory Enforcement Fairness Act of 1996, genera lly provides that before a rule may take effect, the agency promulgating the rule must submi t a rule report, which includes a copy of the rule, to each House of the Congress and to the Comp troller General of the U.S. EPA will submit a report containing this rule and other required in formation to the U.S. Senate, the U.S. House of Representatives, and the Comptroller General of the U.S. prior to publication of the rule in the Federal Register. A major rule cannot take effect u ntil 60 days after it is published in the Federal Register. This action is not a “major rule” as defi ned by 5 U.S.C. 804(2). This rule will be effective [INSERT DATE OF PUBLICATION IN THE FEDERAL REGISTER ]

. List of Subjects in 40 CFR Part 82 Environmental protection, Administrative practice a nd procedure, Air pollution control, Chemicals, Exports, Hydrochlorofluorocarbons, Impor ts*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

83 of 87 DATED: ___________________________

___________________________________ Lisa P. Jackson Bob Perciasepe , Acting Administrator.

40 CFR part 82 is to be 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 paragraph (a) to read as follows: §82.16 Phaseout schedule of class II controlled sub stances. (a) Calendar-year Allowances. (1) In each control period as indicated in the fol lowing tables, each person is granted the specified percentage of baseline production allowances and baseline consumption allowances for the specified class II c ontrolled substances apportioned under §§82.17 and 82.19: Calendar-year HCFC Production Allowances
Control Period Percent ofHCFC141b Percent of

HCFC-22 Percent of

HCFC142b Percent of

HCFC-123 Percent of

HCFC-124 Percent of

HCFC225ca Percent of

HCFC225cb
2003 0 100 100 -- -- -- -- 2004 0 100 100 -- -- -- -- 2005 0 100 100 -- -- -- --

Protection of Stratospheric Ozone: Adjustments to t he Allowance System for Controlling HCFC Production, Import, and Export (Pa ge 8 1 2 of 8 5 6 )*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

84 of 87 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 17.7 4.9 125 125 125 125
2013 0 30.1 4.9 125 125 125 125
2014 0 26.1 4.9 125 125 125 125

Calendar-year HCFC Consumption Allowances
Control Period Percent ofHCFC141b Percent of

HCFC-22 Percent of

HCFC142b Percent of

HCFC-123 Percent of

HCFC-124 Percent of

HCFC225ca Percent of

HCFC225cb
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 17.7 4.9 125 125 125 125*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

85 of 87 2013 0 18.0 4.9 125 125 125 125
2014 0 14.2 4.9 125 125 125 125

* * * * * 3. Amend §82.16(a) by inserting the following parag raph: §82.16 Phaseout schedule of class II controlled sub stances. (a) * * * (2) Recoupment allowances. In the control period beginning January 1, 2013 an d ending December 31, 2013, and again in the control period beginning January 1, 2014 and ending December 31, 2014, certain companies are gra nted HCFC consumption and production allowances in addition to the percentage of baselin e listed in the table at paragraph (a)(1) of this section. The following companies will receive the a mounts listed below in both 2013 and 2014: 2,374,846 kg of HCFC-22 consumption allowances and 2,305,924 kg of HCFC-22 production allowances to Arkema; 1,170 kg of HCFC-142b consump tion allowances to DuPont; 29,146 kg of HCFC-142b consumption allowances and 53,549 kg o f HCFC-142b production allowances to Honeywell; 578,948 kg of HCFC-22 consumption allowa nces to Solvay Fluorides; and 144,900 kg of HCFC-142b production allowances to Solvay Sol exis.
* * * * *

4. Amend §82.23 by revising paragraphs (a)(ii)(A), (b) , and (d) to read as follows: §82.23 Transfers of allowances of class II controll ed substances. (a) * * * (ii) The Administrator will determine whe ther the records maintained by EPA indicate that the transferor possesses unexpended allowances sufficient 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 i mports and exports of class II controlled*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

86 of 87 substances reported by the transferor. Within three 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 indicati ng that EPA does not object to the transfer if EPA's records show that the transferor has sufficie nt unexpended allowances to cover the transfer claim. In the case of transfers of product ion or consumption allowances, EPA will reduce the transferor's balance of unexpended allow ances by the quantity to be transferred plus 0.1 percent of that quantity. In the case of transf ers of export production or Article 5 allowances, EPA will reduce the transferor's balance of unexpen ded allowances, respectively, by the quantity to be transferred plus 0.1 percent of that quantity . The transferor and the transferee may proceed with the transfer when EPA issues a no objection no tice. However, if EPA ultimately finds that the transferor did not have sufficient unexpended a llowances to cover the claim, the transferor and transferee, where applicable, will be held liab le for any knowing violations of the regulations of this subpart that occur as a result of, or in co njunction with, the improper transfer.
* * * * * (b) Inter-pollutant transfers. (1) Effective January 1, 2003, a person (transfero r) may convert consumption allowances, production allowances or Ar ticle 5 allowances for one class II controlled substance to the same type of allowance for another class II controlled substance listed in Appendix B of this subpart, following the proced ures described in paragraph (b)(3) of this section.
* * * * * (d) Permanent transfers. The procedures in paragra ph (a) of this section 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 speci fic class II controlled substance will be the person who has their baseline allowances adjusted i n accordance with phaseout schedules in this*** E.O. 12866 Review – Draft – Do Not Cite, Quote, or Release During Review***

87 of 87 subpart. No person may conduct permanent inter-poll utant transfers of baseline production allowances or baseline consumption allowances.
* * * * *