EPA Proposes Rule to Implement AIM Act’s HFC Phasedown

Pillsbury Winthrop Shaw Pittman LLP

Businesses are encouraged to provide input on EPA’s HFC allowance allocation process during the forthcoming public comment period.

TAKEAWAYS

  • To achieve the objectives of the American Innovation and Manufacturing Act (AIM), which calls for limits on the amount of HFCs introduced into U.S. commerce, EPA is proposing to issue a declining number of allowances to HFC producers and importers each year. EPA is seeking input on the methodology for allocating allowances to individual companies.
  • Companies that do not receive enough HFC allowances to cover their business needs will need to purchase additional allowances—at potentially significant costs—under a cap-and-trade program to be administered by EPA.
  • The proposal also analyzes anticipated social benefits and environmental justice impacts, consistent with the Biden administration’s priorities.

In the American Innovation and Manufacturing Act (AIM), signed into law on December 27, 2020, Congress directed the U.S. Environmental Protection Agency (EPA) to promulgate regulations to phase down the production and consumption of hydrofluorocarbons (HFCs) in the United States through an allowance allocation and trading program. The deadline for EPA’s final phasedown rule is September 23, 2021.

On April 30, 2021, EPA Administrator Michael Regan signed a proposal for regulations to implement the AIM Act’s mandates. As required by the Act, the rule will phase down HFCs to 15 percent of baseline levels by 2036 through the establishment of annual volumetric limits for both the production and consumption of HFCs. EPA proposes to set the baseline levels at 299 million metric tons of exchange value equivalent (MMTEVe) for HFC consumption and 375 MMTEVe for HFC production, based on EPA’s Greenhouse Gas Reporting Program (GHGRP) data from 2011-2013. From these baselines, EPA has calculated proposed production and consumption allowance caps to achieve reductions of 10 percent by 2023, 40 percent by 2028, 70 percent by 2033, 80 percent by 2035, and 85 percent by 2036 and for all years after.

HFCs are most commonly used as refrigerants, so industries that heavily rely on refrigeration, such as supermarkets, data centers, refrigerated shipping, and real estate, will likely be significantly impacted by the phasedown. To comply with EPA’s new regulations, companies in these industries and the manufacturers of the equipment used in those industries will be required to transition their facilities and equipment to non-HFC refrigerants (often at significant cost) or else purchase increasingly expensive allowances. During the phasedown period, individual companies will be allocated allowances based on a methodology that EPA is currently developing in conjunction with the proposed rulemaking. Impacted companies should strongly consider submitting comments to ensure that EPA’s proposed methodology allocates their company sufficient allowances to meet business needs and allow for a smooth transition to HFC replacements during the phasedown period.

More general detail on the AIM Act is available here.

I. Implementation of Allowance Caps

Under the proposed phasedown program, EPA will issue production and/or consumption allowances to companies that produce or import HFCs. EPA’s proposed allowance program draws upon the agency’s experience phasing out production and consumption of ozone-depleting substances (ODS) under Title VI of the Clean Air Act (CAA), and thus will likely be familiar to producers and importers of HFCs. Allowances represent a privilege to produce or import HFCs in a given calendar year. Importing HFCs will require a company to expend a consumption allowance, while producing HFCs will require expenditure of both a consumption and production allowance. Consumers of domestically produced HFCs that hold consumption allowances would be able to transfer those allowances to producers to cover the allowances needed for the production of HFCs.

EPA proposes a methodology for issuing the allowances and seeks comments on what data the agency should use to allocate allowances, but the proposal does not list the projected allowances that each company will receive. Companies that produce, import or otherwise distribute HFCs should therefore strongly consider providing comments to ensure they receive allowances that may be necessary for their businesses. EPA intends to issue allowances for the 2022 calendar year (and is considering issuing allowances for 2023 simultaneously and under the same allocation methodology) by October 1, 2021. The Agency also proposes to also reserve allowances for companies that are identified as late and new market entrants.

In addition to production and consumption allowances, EPA proposes providing “application-specific allowances” for six uses specified in the AIM Act (defense sprays, medical inhalers, polyurethane foam for marine and trailer use, semiconductor manufacturing, and mission-critical military end uses). These allowances will be provided to end-users of HFCs that fall within one of these six enumerated “essential uses,” and can be expended to either produce or import HFCs. The application-specific allowances are not exemptions from the overall cap, but rather, eligible end-users will receive priority access to allowances within the cap. Of importance to essential-use companies, EPA’s current proposal limits the issuances of application-specific allowances in 2022 to “those companies that EPA is aware of by the close of the comment period.” Companies with business lines which fall within these “essential use” categories should therefore ensure EPA is aware of their status.

EPA is also proposing that allowances should be in the form of an exchange value-weighted number, as opposed to allowances specific to each HFC. The exchange values are defined in the AIM Act and correspond to the global warming potential of the specific HFC compound. This allocation method may allow impacted markets to efficiently distribute allowances as needed and encourage businesses to transition to HFCs with lower exchange values (and thus lower global warming potentials) earlier than what is required under the AIM Act’s phasedown schedule, which would provide greater benefits to human health and the environment.

To enforce the program, EPA proposes to establish an electronic certification ID tracking system to trace the movement of HFCs through commerce. Companies that introduce HFCs into interstate commerce or otherwise sell HFCs will be required to register in the system. Such companies will also be subject to recordkeeping, reporting, third party auditing, and data transparency requirements. EPA also proposes administrative consequences for noncompliance, including forced retirement of allowances, in addition to EPA’s traditional civil and criminal enforcement mechanisms.

II. Social Costs and Benefits

EPA estimates that the proposed HFC phasedown process will generate annual net benefits of $2.6 billion in 2022, which reflects abatement costs of $200 million and social benefits of $2.8 billion. The draft Regulatory Impact Analysis also estimates annual net benefits of $17.9 billion by 2036—the year by which the AIM Act intends to reduce 15 percent of the HFC baseline.

Notably, the proposal also includes an entire section addressing how EPA is considering environmental justice in implementing the HFC phasedown. President Biden issued a pair of climate change executive orders in January, which, among other things, directed EPA and the U.S. Department of Justice to significantly elevate environmental justice enforcement efforts. The HFC phasedown proposal provides an early example of how EPA will incorporate environmental justice considerations into the rulemaking process. In the proposal, EPA discusses its preliminary analysis of environmental justice concerns and concludes that the rule “would reduce GHG emissions, which would benefit populations that may be especially vulnerable to damages associated with climate change.” EPA requests comments on the agency’s environmental justice analysis and whether there are any additional environmental justice impacts attributed to the proposed HFC phasedown program.

III. What’s Next

Impacted businesses are strongly encouraged to participate in the rulemaking process by submitting comments, including input regarding the methodology by which EPA should calculate the allocation of allowances to various sectors. The public comment period will end 45 days after the proposed rule is published in the Federal Register. Businesses that do not receive adequate allowances to meet business needs and provide for a smooth transition during the phasedown period may be forced to purchase additional allowances, which could leave them at an economic disadvantage to competitors who receive more allowances than they need and can generate revenue by selling those allowances. Impacted businesses should also take HFC reduction into account in their ESG programs and ESG-mandated efforts.

Pillsbury is well-suited to provide public policy and rulemaking support to ensure this emerging regulatory framework is implemented in a way that is favorable to long-term business interests, to assist clients in the sourcing and development work necessary to transition their facilities and operations to non-HFC alternatives, and to help clients develop the compliance programs necessary to comply with the AIM Act’s new regulatory framework.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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