RE: Summary of Interagency Comments under EO 12866/13563 -- Protection of Stratospheric Ozone : Adjustments to the Allowance System for Controlling HCFC Production, Import, and Export Luke Hall-Jordan to: Frey, Nathan J. 10/27/2011 10:20 AM

Hi Nathan,

Attached is our revised preamble text. I've pulled the text out of the full preamble and reg. text to make it easier to review. If you'd like me to place it back in with the rest of the rule, let me know.

Also - Do we have a follow-up call scheduled?

Best, Luke

Luke Hall-Jordan U.S. Environmental Protection Agency 1200 Pennsylvania Ave, NW (MC-6205J) Washington, DC 20460 Office: 202-343-9591 Cell: 202-230-7589

Preamble Text for OMB_final.docx

"Frey, Nathan J." 10/20/2011 05:07:36 PM Luke. Holding Thursday from 1-2 here. Waiting...

From: "Frey, Nathan J." <Nathan

_ J.

_ Frey@omb.eop.gov> To: Luke Hall-Jordan/DC/USEPA/US@EPA Date: 10/20/2011 05:07 PM Subject: RE: Summary of Interagency Comments under EO 12866/13563 -- Protection of Stratospheric Ozone: Adjustments to the Allowance System for Controlling HCFC Production, Import, and Export

Luke. Holding Thursday from 1-2 here. Waiting to hear back from David to confirm.

-----Original Message----- From: Hall-Jordan.Luke@epamail.epa.gov [ mailto:Hall-Jordan.Luke@epamail.epa.gov] Sent: Wednesday, October 19, 2011 5:54 PM To: Frey, Nathan J. Subject: RE: Summary of Interagency Comments under EO 12866/13563 -- Protection of Stratospheric Ozone: Adjustments to the Allowance System for Controlling HCFC Production, Import, and Export

Hi Nathan,

I've looked at calendars for a follow-up call on Tuesday. Schedules are crazy that day. Would Wednesday between 9:30-11 or 12- 1 work? Thursday from 1-2 or 3-4:30 is also open. Please let me know what works best.

Luke

# ATTACHMENT 1

Preamble Text for OMB_final.docxProposed New Section II.E. to be added starti ng on Page 21/22 of the preamble submitted for OMB review

E. Comments Relevant to Recovery and Reclamation Issues in this Rulemaking that were Submitted in Response to the 2011 IFR Allocating HCFC Allowances

The EPA received 15 submissions from 13 commen ters in response to the 2011 interim final rule. Three comments were received late. Spec ifically, the agency had asked for comment on several issues relevant to HCFC -22 supply and the status of rec overy and reclamation, including: (1) previous estimates of HCFC-22 demand; (2 ) the amount of virgin HCFC-22 currently in inventory, available for reuse and/ or waiting for import from abroad; and (3) if there is an overall surplus of the gas. The agency received commen ts directly answering th ese questions, along with other comments that are of relevanc e to this proposed rulemaking.

EPA is acknowledging the most relevant comments he re in order to highli ght certain stakeholder concerns regarding the future im plementation of the HCFC phaseout program. It is the agency’s responsibility to implement Title VI of the Clean Air Act, and its policy objective to do so in a way that smoothly transitions the U.S. away fr om HCFCs to non-ODS alternatives. Therefore, EPA is particularly interested in stakeholder input rega rding the status of HCFC-22 recovery and reclamation, because this inform ation applies directly to prev iously-stated policy goals. This section notes the following three issues di scussed in comments to the 2011 IFR.

1. Supply of HCFC-22

a. Economic feasibility of reclamation b. Economic incentives for recovery and emissions prevention

c. Effect of virgin gas supplies on dry-shipped condensing units 2. Providing Allowances to Reclaimers 3. Providing Allowances to Manuf acturers of HCFC Blends

1. Supply of HCFC-22

Analysis being conducted. Text will be provided shortly.

2. Providing Allowances to Reclaimers

Two commenters requested that EPA provide HCFC allowances to certified reclaimers. As explained in the report titled “A nalysis of Equipment and Practices in the Reclamation Industry,” which is included in the docket for this rulemaking, “refrigerant reclamation refers to the reprocessing and upgrading of recovered refri gerant through such mechanisms as filtering, drying distillation and chemical treatment in orde r to restore the substance to specifications outlined in the Air-Conditioning, Heating, and Re frigeration Institute (AHRI)’s Standard 700- 1995.” The commenters argue increasing allocations to reclaimers would increase the amount of reclaimed HCFCs available for purchase. The co mments are similar to those submitted prior to the finalization of the 2009 Final Rule, whic h allocated HCFC allowances for 2010-2014. EPA responded to this request at the time, but discusses the issue further here.The agency’s primary concern is that providi ng reclaimers with allowances could foster unsustainable reclamation practices that rely on blending instead of i nvesting in the technology to fully reclaim HCFCs. Based on the phaseout schedule and the decrease in annual allocations, reclamation through separation a nd distillation will be more important in 2015 when the HCFC22 allocation must drop by at least 45 percent from 2010 levels and absolutely necessary by 2020, by which time import and production of HCFC-22 must be phased out entirely. In addition, many businesses have either found a way to secure reliable access to virgin HCFCs or have made investments to reclaim HCFCs in a sustainable way, without a direct allocation of allowances.

EPA is also concerned that providing allowa nces to reclaimers doe s not address the key structural issue that the industr y and the HCFC transition are faci ng: the price of HCFC-22 is too low to foster reclamation and is not sending the necessary signal to move consumers to non-ODS alternatives. While providing allowa nces to reclaimers would likely decrease the cost to recover and reclaim HCFCs, EPA is concerned about what effect providing allowances to reclaimers would have on the market price of HCFC-22. EPA is seeking comment on whether providing allowances to reclaimers would affect the market price of R-22, and what effect that price change would have on the transition away from ODS and the sustainability of the reclamation industry.

EPA continues to believe that reducing the supply of available allowances is the best way to foster reclamation and recovery. Thus, this proposal does not include an allocation for reclaimers. However, the agency has included the relevant comments on the IFR in the docket for this rulemaking and welcomes further comment on this issue from all interested parties.

3. Providing Allowances to Manufacturers of HCFC Blends

One small business has informed EPA that it can not acquire either HCFC allowances or the HCFCs it needs to manufacture its HCFC blend (see the letters from ICOR dated May 17, 2011 and September 6, 2011). The company asserts that th e cap and trade system is in practice “cap and no trade,” where companies hold onto their allo wances, even if they have no intention of using them. The commenter argues that this le ads to artificially high prices for HCFCs and HCFC allowances. To remedy this situation, the commenter requests that EPA take unused allowances and provide those allowances to co mpanies that either purchased HCFCs or HCFC consumption allowances in 2008 and 2009. EPA notes 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 last year alone, and no other company has indicated it cannot acquire HCFCs. However, EPA is taking comment on whether other companies are having difficulty acquiring HCFCs or HCFC allowances.

Some historical background may help to provide context on how EPA provided flexibility for small businesses when establishi ng the HCFC allocation system. In a January 21, 2003 rule titled “Allowance System for Controlling HCFC Produc tion, Import, and Export ” (2003 final rule) the EPA assigned individual company baselines by considering the highest production and consumption years for every company between the years 1994-1997—a four year period preceding regulation of the production and import of HCFCs. “Consumption” is defined by the Clean Air Act as “the amount of that substan ce produced in the United States, plus the amountimported, minus the amount exported,” (42 US C § 7671). A company had to be manufacturing or importing HCFCs at that time in order to be assigned a baseline. In addition, the EPA provided an exception allowing new entrants provid ed that they began importing after the end of 1997, but before April 5, 1999, the date the EPA published the advanced notice of proposed rulemaking for the regulatory period 2003-2009. The agency believed that such small businesses might not have been aware of the impending rulemaking that would affect their ability to continue in the HCFC market.

In addition to the exception for late entrants ma de in the 2003 final rule, there is significant flexibility in the types of transfers companies can conduct. Companies can transfer allowances between companies and, on a temporary basis, between chemicals. Companies can also purchase HCFCs at the wholesale price, which, acco rding to comments on the 2011 IFR, has been decreasing. The allocation system in part was es tablished to discourage the use of HCFCs and companies’ continuation in the HCFC market. As stated in the 2003 Final Rule, “businesses that desired an allocation of HCFC allowances w ould have known the risks of jumping into the business at this juncture” (66 FR 38073). Since th at statement more than nine years ago, access to information and knowledge of the risks regardi ng entering or continuing in the HCFC market have only increased. Furthermore, new entran ts have entered the market by purchasing consumption allowances, as EPA predicted they could back in 2003. All en tities wishing to enter the HCFC import or production market can co ntinue to purchase allowances for HCFCs.

As the market continues to decrease, EPA does not believe that expanding the pool of allowance holders is necessary to preven t disruption of the continued servicing of existing equipment. Given EPA’s intent to phasedown, and ultimately phaseout, the use of HCFCs, consistent with the requirements of the CAA and obligations und er the Montreal Protocol, EPA believes it is justified in continuing to allocate only to thos e entities who participated in the market at the initial stages, as well as those that have entered the market by purchasing HCFC baseline allowances in accordance with the established practices. EPA does not believe that providing allowances to companies that were not importin g or producing HCFCs prior to EPA regulation is appropriate at this time given the disruption it would create to the existing regulatory framework. However, in light of the large number of HCFC allowances that were no t used in 2010 and the difficulty at least one company is having in getting HCFCs, EPA welcomes comments on whether an allocation to manu facturers of HCFC blends w ho are having difficulty acquiring HCFCs or HCFC allowances would be appropria te. Commenters supporting such an allocation should consider (1) how EPA might determine the total amount of such an allocation, (2) how EPA might determine which companies should r eceive allowances, (3) how EPA would verify that allowance holders are refu sing to sell HCFCs and HCFC allo wances, (4) how EPA might set baselines for these companies, (5) whether EPA should provide allowances in addition to the amount proposed in this rule, or as part of the amount proposed in this rule, and (6) how providing allowances to an additional set of co mpanies would affect the U.S. transition away from HCFCs.