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: Nathan

_ J.

_ Frey 11/07/2011 10:12 AM

Hi Nathan,

Attached is the revised preamble and new guidance fact sheet per our most recent discussion, re:
comment one of two sent 9/27/2011.

Best,

Luke

Preamble Text for OMB comment 1_final.docx Preamble Text for OMB comment 1_final.docx flexibilities guidance_final_110711.docx flexibilities guidance_final_110711.docx

Luke Hall-Jordan 10/27/2011 10:20:22 AM Hi Nathan, Attached is our revised preamble text...

From: Luke Hall-Jordan/DC/USEPA/US

To: "Frey, Nathan J." <Nathan

_ J.

_ Frey@omb.eop.gov>

Date: 10/27/2011 10:20 AM 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,

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

[attachment "Preamble Text for OMB

_ final.docx" deleted by Luke Hall-Jordan/DC/USEPA/US]

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

# ATTACHMENT 1

Preamble Text for OMB comment 1_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 order 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 (74 FR 66422; Response to Comments document for the 2008 NPRM) , 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 th e 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 theClean Air Act as “the amount of that substan ce produced in the United States, plus the amount imported, 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. A guidance memo included in the docket and on EPA’s website describes this flexibility further. 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. EPA explored several options that would have expanded the number of allowance holders in the 2008 NPRM (73 FR 78867) and determined the current approach with adjustment for transfers of baseline allowances was appropriate (74 FR 66419; Response to Comments for the 2008 NPRM). Given EPA’s intent to phasedown, and u ltimately phaseout, the use of HCFCs, consistent with the requirements of the CAA and obligations under the Montreal Protocol, EPA believes it is justified in continuing to allocate only to those 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 es tablished practices. EPA does not believe that providing allowances to companies that were not importing or producing HCFCs prior to EPA regulation is appropriate at th is time given the disruption it would create to the existing regulatory framework. However, in light of the la rge number of HCFC allowances that were not used in 2010 and the difficulty at least one comp any is having in getting HCFCs, EPA welcomes

comments on whether an allocation to manufacturer s of HCFC blends who are having difficulty acquiring HCFCs or HCFC allowances would be appropriate. Commente rs supporting such an allocation should consider (1) how EPA might dete rmine the total amount of such an allocation, (2) how EPA might determine which companies should receive allowances, (3) how EPA would verify that allowance holders are refusing to sell HCFCs and HCFC a llowances, (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.

# ATTACHMENT 2

Flexibilities guidance_final_110711.docx

### Flexibility in the HCFC Allowance System

The EPA established the framework for the HCFC allowance system on January 21, 2003 (68 FR 2820). The rule (referred to as the 2003 Final Rule) establis hed an allowance transfer mechanism to provide flexibility to the regula ted community and laid the groundwork for the flexible mechanisms within the HCFC phaseout program today. In pr eparation for the 2003 Final Rule, EPA issued an advanced notice of proposed rulemaking (ANPRM) and a notice of pr oposed rulemaking (NPRM). The preambles to the ANPRM, NPRM and 2003 Final Rule pr ovide detailed insight into the development of the HCFC allowance system. While companies should always re fer to the most recent regulations for formal requirements and specific information, this fact sheet highlights the flexibilitie s incorporated into the HCFC allowance system.

Abbreviations

CAA – Clean Air Act ODS – Ozone-depleting substance ODP – Ozone depletion potential

Inter-pollutant Transfers Any allowance holder may transfer their current year allowances fo r one HCFC into allowances for another HCFC in that same year (40 CFR 82.23(b)). Every transfer is weighted by the ozone depletion potential (ODP) of the two chemical s involved in the transfer. As stat ed in the preamble to the 2003 Final Rule, “inter-pollutant transfers allow comp anies to respond to market forces and achieve economies of scale in production and import.”An offset of 0.1 percent is require d for any inter-pollutant transfer as a way to meet requirements in secti on 607 of the Clean Air Act (CAA), which says that transfers must result in less produc tion or consumption than would o ccur in the absence of such a

transfer.

Example of an inter-pollutant transfer : A company has 10,000 kilograms of HCFC-142b allowances,

and it wishes to transfer those allowances into HCFC -22 for a specific year. The result of the transfer would be 11,806 kilograms of HCFC-22, based on the ODPs of the two chemicals (0.065 and 0.055, respectively), and the 0.1 percent offset.

Step 1: Convert based on ODP

10,000 kg HCFC– 142b x 0.065

0.055 ൌ 11,818 kg HCFC– 22

Step 2: Subtract the 0.1 percent offset

11,818 kg െ ሺ 0.001 ሻሺ 11,818 kg ሻ ൌ 11,806 kg HCFC– 22

EPA intends to approve inter-pollutant transfers, including those between co mpanies, only on a year-byyear basis. The EPA will process inter-pollutant tran sfers within three working days after receiving the complete request. EPA will send a reply showing the new balance of unexpended allowances. EPA’s decision to provide such a fast pr ocessing time was intended to ensure that transfers are easy and EPA’s role is not disruptive to market transactions.Inter-company Transfers Inter-company transfers are transfers of allowanc es from one company to another company (40 CFR 82.23(a)). For example, Company A would transfer it s allowances to Company B who wished to have more allowances. Production, consumption and Artic le 5 allowances all may be transferred on a calendar-year basis. Additionally, one company may permanently transf er its baseline allocation to another company. EPA processes all tr ansfer requests, with the requisite 0.1 percent offset, within three working days of receiving the complete request.

Inter-company and Inter-pollutant Transfers Companies can conduct both an inter-company and in ter-pollutant transfer simultaneously (40 CFR 82.23(c). For example, Company A, who holds HC FC-123 allowances, can transfer its HCFC-123 allowances to Company B, who then transfers the allowances to HCFC-22 ba sed on the relative ODPs. In this instance, if Company B wanted HCFC-22 (ODP=0.055), Compa ny A would have to transfer 2.75 kg of HCFC-123 (ODP=0.02) for each kg of HCFC-22, pl us a 0.1 percent offset. If Company B wanted 100,000 kg of HCFC-22, the resu ltant transfer would be:

Company A transfers 275,000 kg of HCFC-123, plus the 0.1 percent offset of 275 kg

Company B receives 100,000 kg of HCFC-22

EPA intends to approve inter-pollutant transfers, including those between co mpanies, only on a year-byyear basis. EPA processes all tran sfer requests, with th e requisite 0.1 percent offset, within three working days of receiving the complete request.

Refund of Consumption Allowances for Exported HCFCs The EPA requires a company to expend both consump tion and production allowanc es to be able to domestically produce HCFCs (40 CFR 82.15(a)(2)). To be able to import, the EPA requires a company to expend consumption allowances (40 CFR 82.15(b)). A company may submit the proper documentation to the agency to veri fy the export of an HCFC for wh ich consumption allowances were expended, and in turn receive a ref und of the consumption allowances associated with the quantity of HCFC exported. The exporter indi cates to whom the consumption allowances should be granted, whether it is the producer, importer or exporter. Th e exact information that must be submitted to the agency is described in 40 CFR 82.20. In the case of HCFC blends, allowances would be refunded for each HCFC in the blend, weighted by the percentage of that chemical within the blend. All refunds of consumption allowances for exported HCFCs are onl y valid for the year in which the HCFCs were exported.

Additional Flexibilities

• EPA decided in the 2003 Final Rule not to grou p Class II HCFCs in order to allow for maximum transfer flexibility within Class II substances. In contrast, Class I substa nces were grouped and transfers were only perm itted between substances in the same group.

• The offset required in accordance with section 60 7 of the CAA is only 0.1 percent for HCFCs, in contrast to one percent for Class I substances. Commenters to the proposed 2003 rule said that an offset ratio no higher than the proposed 0.1 percent would contribute to flexibility in the system.

• International transfers of pr oduction and consumption allowanc es are allowed, with certain specifications as laid out in 40 CFR 82.18(c) and 82.20(b).Reporting and Recordkeeping Requirements In addition to requesting permission for inter-polluta nt and/or inter-company transfers, companies must report to EPA on a quarterly basis. Quarterly and a nnual reports document the quantity (in kilograms) of HCFCs produced, imported, exported, transformed and/or destroyed. EPA encourages electronic reporting, which is utilized by many companies as a means of reducing repor ting and recordkeeping costs. The full recordkeeping and reporting requirements appear at 40 CFR 82.24. All relevant reporting forms, along with instructions for el ectronic reporti ng, can be found at http://www.epa.gov/ozone/record/classtwo.html

.

For More Information Please visit EPA’s website ( http://www.epa.gov/ozone/title6/ ) for more information, including the HCFC rulemaking notices referenced in this docume nt, as well as additional fact sheets and guidance. This document is provided solely for informationa l purposes. It does not provi de legal advice, have legally binding effect, or expressly or implicitly cr eate, expand, or limit any legal rights, obligations, responsibilities, expectations, or be nefits in regard to any person. It is intended to assist companies in understanding key provisions of the HCFC allowance system.