Questions and Answers About the HCFC Allowance Allocation System
Why is there a cap on production and import of HCFCs?
HCFCs are substances the deplete the ozone layer. In 1992, the Parties to the Montreal Protocol on Substances that Deplete the Ozone Layer (Protocol) established a limit (cap) on the combined production and import of hydrochlorofluorocarbons (HCFCs) for industrialized countries; this went into effect in 1996. A stepwise phaseout schedule was also agreed to: a 35% reduction from the cap in 2004; a 75% reduction in 2010 (adjusted in Sept 2007 from 65%); a 90% reduction in 2015; a 99.5% reduction in 2020; and a total phaseout in 2030. The Parties to the Protocol decided in 1999 to establish a separate cap on production to take effect in 2004 and follow the same schedule as the consumption phaseout.
Why are certain HCFCs singled out for accelerated phaseout in the U.S. and what is that schedule?
The U.S. has used a "worst first" approach to phaseout HCFCs with the highest ozone depletion potentials (ODPs) earliest. The HCFCs with the highest ODPs are HCFC-141b, HCFC-22, and HCFC-142b. Therefore, on January 1, 2003, the ban on the production and import of HCFC-141b, the highest ozone-depleter of the HCFCs, became effective. At the same time, EPA froze the level of production of HCFC-22 and HCFC-142b. The ban on production and import of HCFC-22 and HCFC-142b did not become effective until January 1, 2010, with extended production allowed for uses in existing equipment made before 2010. On January 1, 2015, all the other HCFCs may no longer be produced or imported unless as a refrigerant to be used in equipment manufactured before January 1, 2020. On January 1, 2020, no HCFC-22 or HCFC-142b may be produced or imported and on January 1, 2030, all other HCFCs may not be produced or imported. A table showing the Montreal Protocol requirements and the U.S. requirements is found here.
Why did EPA institute an HCFC allowance allocation system?
To ensure that the U.S. achieves the required reductions in production and consumption of HCFCs that were agreed to under the Protocol, EPA developed a marketable allowance system. Such a system was selected for the chlorofluorocarbon (CFC) phaseout and proved highly successful. It was the most economically efficient system of all the methods considered, being market-based and relatively simple to administer. The allowance system retains the flexibility for industry to continue to operate efficiently, while ensuring the U.S. does not violate the parameters agreed to as a Party to the Protocol.
How does the HCFC allowance system work?
Each producer or importer is allocated allowances (one allowance per each kilogram of HCFC), based on historical production and import activity. When a company then produces or imports each type of HCFC, it expends an allowance for each kilogram of the HCFC produced or imported. If a producer expends allowances to make HCFCs, then exports those HCFCs, the producer will receive allowances for the amount exported. The system is based on the need to ultimately balance the global output of HCFCs.
Are the allowances allocated on a chemical-specific basis? Why?
Yes. To ensure compliance, EPA needs to know which specific chemicals were produced and imported. Additionally, the U.S. must annually report production, imports, and exports to the Parties to the Protocol on a chemical-specific basis.
Why does EPA allocate both production AND consumption allowances?
Because the Montreal Protocol has instituted both a consumption and production cap, both types of allowances must be allocated and expended as appropriate. When we use the word "consumption", we are referring to the Montreal Protocol formula: consumption = production + imports - exports. When we look at the consumption numbers, then, we are looking at all of the activities combined what has been produced, what has been imported, and what has been exported. The production phaseout refers only to production. Therefore, allocations are based on historical production, import, and export activity, respectively, as explained below.
Then which kind of allowances does someone need to expend for each activity?
The expending of allowances follows the process used in the CFC allowance system. To produce an HCFC before that HCFC's phaseout date, you would expend one production and one consumption allowance for each kilogram produced. To import, you would expend one consumption allowance for each kilogram imported. For exports, you would receive back one consumption allowance per kilogram exported.
What is the baseline used by EPA to determine allocation of HCFC-22, HCFC-141b, and HCFC-142b production and consumption allowances?
Each company was allocated both production and consumption allowances reflecting their year of highest reported HCFC consumption (on an ODP-weighted basis) among the years 1994-1997. EPA determined that all reported HCFC consumption, using the highest of these five years for each company, would keep the U.S. under its Protocol cap for the 2004-2009 reduction. EPA is continuing to use this baseline for 2010-2014 but allows each person only a percent of that baseline.
Why did EPA start issuing allowances for HCFC-123, HCFC-124, HCFC-225ca, and HCFC-225cb? What baseline does EPA use for these chemicals?
Considering the evolution in the HCFC market and the September 2007 Montreal Adjustment of the cap from a 65 percent to a 75 percent reduction, EPA established and apportioned baselines for the 2010-2014 control periods for HCFC-123, HCFC-124, HCFC-225ca, and HCFC-225cb. These four HCFCs are the only remaining HCFCs commonly used in the United States. To establish the baseline, EPA used each company’s highest reported consumption and production data reported for the 2005-2007 control periods.
What if I began producing or importing HCFCs after the baseline years?
Under this allowance system, it is still possible for a company to transfer its production and consumption allowances to another company after EPA approval. As explained below, it is possible to import used HCFCs without using consumption allowances.
How could I trade allowances with other companies or between types of HCFCs?
This marketable allowance system lets a person trade one kilogram of an HCFC to another company, who would receive one kilogram of that same type of HCFC. It also permits a trade within a company or between companies, from one type of HCFC to another type. Each type of HCFC has a different ozone depleting potential. When trades occur between chemicals, they must be weighted by ODP. Thus, if a company wants to trade 100 kilograms of HCFC-22 (with an ODP weight of 0.055) to another company that wants to use the allowances as HCFC-123 (with an ODP weight of 0.02), the 100 kilograms of HCFC-22 would equal 275 kilograms of HCFC-123. You would begin by multiplying the kilograms of the HCFC you want to trade by the ODP of that HCFC. Then you would divide that number by the ODP of the HCFC that you want to receive. That would give you the number of kilograms that the trade represents on an ODP-weighted basis.
The Clean Air Act requires that a trade of allowances result in a benefit to the environment. When it processes an inter-company transfer, EPA deducts an offset (0.1 percent of the trade) from the transferor's allowance balance. For inter-pollutant transfers, when EPA determines that the convertor has sufficient unexpended allowances to cover the transfer, EPA also deducts an additional 0.1 percent of the quantity for the transfer.
Using my allowances, would I be able to import HCFCs from and export HCFCs to any country?
In its November 1999 Meeting, the Parties to the Montreal Protocol agreed to ban trade in HCFCs with Parties that have not ratified the Copenhagen Amendments of 1992, beginning in 2004. The list of Parties that have ratified the Copenhagen Amendments is available at the UNEP site.
You must first hold allowances to import virgin HCFC-22, HCFC-142b, HCFC-123, HCFC-124, HCFC-225ca. Second, the virgin HCFC-22 or HCFC-142b may only be used for the purpose of servicing existing refrigeration and air conditioning equipment, with a few limited exceptions. Third, you must comply with all recordkeeping and reporting provisions. Reporting forms for Class II substances are here.
Unlike importers, exporters do not need allowances to export HCFC-22 or HCFC-142b in bulk, at least to developed countries. However, starting January 1, 2010, HCFC-22 and HCFC-142b (and blends containing those compounds) may only be exported to developed countries if the HCFCs 1) are used, recovered, and recycled, 2) will be used for transformation, or 3) will be used as a refrigerant in appliances manufactured before January 1, 2010.
Companies holding baseline production allowances may also produce for export to developing countries to meet that country's basic developing need. This amount is limited to 15 percent of that company's production baseline. A list of these countries (called "Article 5" countries under the Montreal Protocol) is found here.
How do the phaseout and the allowance system affect the import of used HCFCs?
Unlike virgin HCFCs, there are no Montreal Protocol restrictions on the quantity of used HCFCs that may be imported. However, the U.S. has established a rigorous petition process, where a person must receive EPA approval before used HCFCs may be imported. While allowing trade in quantities of already existing used material can offset the need for new global production and help ease the transition to alternatives, the U.S. petition system ensures that the HCFCs were in fact used before being allowed as an import. More information is on the Class II used ODS imports page.