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

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

Preamble Text for OMB comment 1_final.docx
Proposed New Section II.E. to be added starting 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 commenters in response to the 2011 interim final 

rule. Three comments were received late. Specifically, the agency had asked for comment on 

several issues relevant to HCFC-22 supply and the status of recovery 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 comments directly answering these questions, along with 

other comments that are of relevance to this proposed rulemaking. 

EPA is acknowledging the most relevant comments here in order to highlight certain stakeholder 

concerns regarding the future implementation 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 from HCFCs to non-ODS alternatives. Therefore, 

EPA is particularly interested in stakeholder input regarding the status of HCFC-22 recovery and 

reclamation, because this information applies directly to previously-stated policy goals. This 

section notes the following three issues discussed 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 Manufacturers 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 “Analysis 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 refrigerant 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 Refrigeration Institute (AHRI)’s Standard 700-

1995.” The commenters argue increasing allocations to reclaimers would increase the amount of 

reclaimed HCFCs available for purchase. The comments are similar to those submitted prior to 

the finalization of the 2009 Final Rule, which 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 providing reclaimers with allowances could foster 

unsustainable reclamation practices that rely on blending instead of investing in the technology 

to fully reclaim HCFCs. Based on the phaseout schedule and the decrease in annual allocations, 

reclamation through separation and 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 allowances to reclaimers does not address the key 

structural issue that the industry and the HCFC transition are facing: 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 allowances 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 cannot 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 the cap and trade system is in practice “cap 

and no trade,” where companies hold onto their allowances, even if they have no intention of 

using them. The commenter argues that this leads 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 companies 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 establishing the HCFC allocation system. In a January 21, 2003 rule titled 

“Allowance System for Controlling HCFC Production, 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 substance produced in the United States, plus the amount 

imported, minus the amount exported,” (42 USC § 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 provided 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 made 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, according to comments on the 2011 IFR, has been 

decreasing. The allocation system in part was established 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 would have known the risks of jumping into the 

business at this juncture” (66 FR 38073). Since that statement more than nine years ago, access 

to information and knowledge of the risks regarding entering or continuing in the HCFC market 

have only increased. Furthermore, new entrants have entered the market by purchasing 

consumption allowances, as EPA predicted they could back in 2003. All entities wishing to enter 

the HCFC import or production market can continue 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 prevent 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 ultimately 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 established practices. EPA does not believe that 

providing allowances to companies that were not importing 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 not 

used in 2010 and the difficulty at least one company is having in getting HCFCs, EPA welcomes 

comments on whether an allocation to manufacturers of HCFC blends who are having difficulty 

acquiring HCFCs or HCFC allowances would be appropriate. 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 receive allowances, (3) how EPA would 

verify that allowance holders are refusing to sell HCFCs and HCFC allowances, (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 companies 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) established an allowance transfer mechanism to provide 

flexibility to the regulated community and laid the groundwork for the flexible mechanisms within the 

HCFC phaseout program today. In preparation for the 2003 Final Rule, EPA issued an advanced notice 

of proposed rulemaking (ANPRM) and a notice of proposed rulemaking (NPRM). The preambles to the 

ANPRM, NPRM and 2003 Final Rule provide detailed insight into the development of the HCFC 

allowance system. While companies should always refer to the most recent regulations for formal 

requirements and specific information, this fact sheet highlights the flexibilities 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 for 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 chemicals involved in the transfer. As stated in the preamble to the 2003 

Final Rule, “inter-pollutant transfers allow companies to respond to market forces and achieve 

economies of scale in production and import.”An offset of 0.1 percent is required for any inter-pollutant 

transfer as a way to meet requirements in section 607 of the Clean Air Act (CAA), which says that 

transfers must result in less production or consumption than would occur 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 െ ሺ0.001ሻሺ11,818 kgሻ ൌ 11,806 kg HCFC– 22

EPA intends to approve inter-pollutant transfers, including those between companies, only on a year-byyear basis. The EPA will process inter-pollutant transfers 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 processing 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 allowances from one company to another company (40 CFR 

82.23(a)). For example, Company A would transfer its allowances to Company B who wished to have 

more allowances. Production, consumption and Article 5 allowances all may be transferred on a 

calendar-year basis. Additionally, one company may permanently transfer its baseline allocation to 

another company. EPA processes all transfer 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 inter-pollutant transfer simultaneously (40 CFR 

82.23(c). For example, Company A, who holds HCFC-123 allowances, can transfer its HCFC-123 

allowances to Company B, who then transfers the allowances to HCFC-22 based on the relative ODPs. 

In this instance, if Company B wanted HCFC-22 (ODP=0.055), Company A would have to transfer 2.75 

kg of HCFC-123 (ODP=0.02) for each kg of HCFC-22, plus a 0.1 percent offset. If Company B wanted 

100,000 kg of HCFC-22, the resultant 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 companies, only on a year-byyear basis. EPA processes all transfer requests, with the 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 consumption and production allowances 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 verify the export of an HCFC for which consumption allowances were 

expended, and in turn receive a refund of the consumption allowances associated with the quantity of 

HCFC exported. The exporter indicates to whom the consumption allowances should be granted, 

whether it is the producer, importer or exporter. The 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 only valid for the year in which the HCFCs were 

exported. 

Additional Flexibilities

• EPA decided in the 2003 Final Rule not to group Class II HCFCs in order to allow for maximum 

transfer flexibility within Class II substances. In contrast, Class I substances were grouped and 

transfers were only permitted between substances in the same group. 

• The offset required in accordance with section 607 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 production and consumption allowances 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-pollutant and/or inter-company transfers, companies must 

report to EPA on a quarterly basis. Quarterly and annual 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 reporting and recordkeeping 

costs. The full recordkeeping and reporting requirements appear at 40 CFR 82.24. All relevant reporting 

forms, along with instructions for electronic reporting, 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 document, as well as additional fact sheets and guidance. 

This document is provided solely for informational purposes. It does not provide legal advice, have 

legally binding effect, or expressly or implicitly create, expand, or limit any legal rights, obligations, 

responsibilities, expectations, or benefits in regard to any person. It is intended to assist companies in 

understanding key provisions of the HCFC allowance system.