Protection of Stratospheric Ozone: Allowance System for Controlling HCFC Production, Import and Export

ENVIRONMENTAL PROTECTION AGENCY

40 CFR Part 82

[FRL-6319-2]

RIN 2060-AH67

Protection of Stratospheric Ozone: Allowance System for

Controlling HCFC Production, Import and Export

AGENCY: Environmental Protection Agency (EPA).

ACTION: Advance Notice of Proposed Rulemaking.

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SUMMARY: EPA is seeking comments on a variety of options for

establishing an allowance allocation system to control the U.S.

consumption of class II controlled substances, the

hydrochlorofluorocarbons (HCFCs), in accordance with U.S. obligations

under the Montreal Protocol on Substances that Deplete the Ozone Layer

(Protocol). Under the Protocol, the United States is obligated to limit

HCFC consumption (defined by the Protocol and this notice as production

plus imports, minus exports) under a specific cap, which will be

reduced in a step-wise fashion over time. To ensure that the U.S. does

not exceed this internationally mandated cap, EPA is presenting many

options for establishing a future HCFC allowance allocation system. EPA

is considering, among other things, an option where the allowance

system would become effective only under certain conditions, i.e., once

a specified percentage of the current U.S. HCFC cap has been reached or

exceeded.

DATES: Comments on this advanced notice of proposed rulemaking must be

received on or before June 4, 1999.

ADDRESSES: Comments on this advance notice of proposed rulemaking

should be submitted in duplicate to: Air Docket No. A-98-33, U.S.

Environmental Protection Agency, 401 M Street, SW., Room M-1500,

Washington, DC 20460. The Docket is located in Room M-1500, First

Floor, Waterside Mall at the address above. The materials may be

inspected from 8 am until 4 p.m., Monday through Friday. A reasonable

fee may be charged by EPA for copying docket materials.

FOR FURTHER INFORMATION CONTACT: Vera Au, EPA, Stratospheric Protection

Division, Office of Atmospheric Programs, Office of Air and Radiation

(6205-J), 401 M Street, SW., Washington, DC 20460, (202) 564-2216 or

the Stratospheric Protection Hotline at (800) 296-1996.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background

A. Montreal Protocol on Substances that Deplete the Ozone Layer

B. Title VI of the Clean Air Act Amendments of 1990

II. Options for Establishing an HCFC Allowance System

A. Allowance Allocation System to Control U.S. HCFC Consumption

1. Type of Allowances

2. Unit of Measure of Allowances

B. Method for Distributing Allowances

C. Establishing an Equitable Baseline for Distributing

Allowances

D. Percentage of Allowances Distributed under U.S. HCFC

Consumption Cap

E. Transfers of Class II Allowances

1. Transfers Within Groups of Class II Substances

2. Inter-Pollutant Transfers

3. Inter-Company Transfers

4. Inter-pollutant Transfers Combined with Inter-Company

Transfers

5. Transfers of Current-Year Allowances

6. Permanent Transfers of Baseline Allowances

7. International Trades of Current-Year Allowances

8. Offset for a Transfer of Allowances

F. Conditions Under Which a Control System Would Become

Effective

III. Other Regulatory Options for Controlling HCFCs

A. Labeling

B. SNAP Approval and Restrictions

C. Non-Essential Product Ban under Section 610

IV. Administrative Requirements

A. Executive Order 12866

B. Regulatory Flexibility Act

C. Executive Order 13045: Children's Health Protection

D. National Technology Transfer and Advancement Act

Annex A: Ozone Depletion Potentials for Class II Substances as

Currently Listed Under the Montreal Protocol

I. Background

A. Montreal Protocol on Substances that Deplete the Ozone Layer

Signatory countries that are Parties to the international agreement

called the Montreal Protocol on Substances that Deplete the Ozone Layer

(Protocol), during their second meeting in London in 1990, identified

hydrochlorofluorocarbons (HCFCs) as transitional substitutes for

chlorofluorocarbons (CFCs) and other more destructive ozone-depleting

substances. At the Parties' fourth meeting in Copenhagen in 1992, a

detailed phaseout schedule for HCFCs (listed in Annex C, Group I of the

Protocol) was created. At this fourth meeting, the Parties to the

Protocol established a freeze level (a cap) on the consumption of HCFCs

for industrialized countries (Parties governed by Article 2 of the

Protocol). Consumption is defined by the Protocol as production plus

imports minus exports. The cap on HCFC consumption for industrialized

countries went into effect on January 1, 1996, and was derived from the

formula of 3.1 percent (reduced to 2.8 percent at the seventh meeting

of the Parties) of a Party's CFC consumption in 1989, plus the Party's

consumption of HCFCs in 1989. This formula puts the current U.S. cap

for HCFC consumption at 15,240 ODP-weighted metric tons. The Parties to

the Protocol then created a schedule for the gradual reduction and

eventual phaseout of the consumption of HCFCs by 2030. The Copenhagen

Amendments to the Protocol call for a 35 percent reduction of the cap

in 2004, followed by a 65 percent reduction in 2010, a 90 percent

reduction in 2015, a 99.5 percent reduction in 2020, and a total

phaseout in 2030. The U.S. must, at a minimum, comply with this

phaseout schedule under the Protocol.

EPA was petitioned to phase out the most ozone-depleting HCFCs

first. Upon

[[Page 16374]]

analyzing this approach, EPA determined that the U.S. could in fact

meet, if not exceed, the required Montreal Protocol reductions by the

specified dates. Therefore, the U.S., as authorized under the Clean Air

Act, is implementing a different phaseout schedule, carried out on a

chemical-by-chemical basis for HCFCs (58 FR 65018), which will meet or

exceed the Montreal Protocol reductions required. U.S. implementation

of the HCFC phaseout is described below in parts I.B and I.C of this

notice.

B. Title VI of the Clean Air Act Amendments of 1990

The Clean Air Act Amendments of 1990 (CAA or the Act), under

Section 605(c), originally required the Administrator to promulgate, by

December 31, 1999, regulations phasing out the production, and

restricting the use of, class II substances (HCFCs), subject to any

acceleration of the phaseout of production under Section 606. Section

605(c) further states that the Administrator shall promulgate

regulations to ensure that the consumption of class II substances is

phased out and terminated in accordance with the same schedule. The

original phaseout schedule established in the Act has since been

accelerated as authorized under Section 606 and is outlined below in

part I.C of this notice.

Section 605 of the Act established the original U.S. phaseout

schedule for class II substances. Section 605(a) states that,

``Effective January 1, 2015, it shall be unlawful for any person to

introduce into interstate commerce or use any class II substance unless

such substance: (1) Has been used, recovered and recycled; (2) is used

and entirely consumed (except for trace quantities) in the production

of other chemicals; or (3) is used as a refrigerant in appliances

manufactured prior to January 1, 2020.'' Section 605(b) states that,

``Effective January 1, 2015, it shall be unlawful for any person to

produce any class II substance in an annual quantity greater than the

quantity of such substance produced by such person during the baseline

year. Effective January 1, 2030, it shall be unlawful for any person to

produce any class II substance.'' This phaseout schedule has since been

accelerated under authority of Section 606.

Section 606(a) specifically requires the Administrator to

promulgate regulations, accelerating the phaseout of production and

consumption of ozone-depleting substances, ``if (1) based on an

assessment of credible current scientific information (including any

assessment under the Montreal Protocol) regarding harmful effects on

the stratospheric ozone layer associated with a class I or class II

substance, the Administrator determines that such more stringent

schedule may be necessary to protect human health and the environment

against such effects, (2) based on the availability of substitutes for

listed substances, the Administrator determines that such more

stringent schedule is practicable . . ., or (3) the Montreal Protocol

is modified to include a schedule to control or reduce production,

consumption, or use of any substance more rapidly than the applicable

schedule under this title.''

Thus, Section 606 (a)(3) requires EPA to accelerate the phaseout to

conform to any acceleration under the Protocol. In addition, Section

614(b) provides that in the case of a conflict between Title VI of the

Act and the Protocol, the more stringent provision shall govern. The

Parties to the Protocol, based on scientific evidence that losses of

stratospheric ozone were occurring more rapidly than earlier believed,

accelerated the phaseout of class I substances and established the

phaseout schedule for class II substances at the Fourth Meeting of the

Parties in Copenhagen in 1992. Pursuant to authorities provided by

Title VI, EPA amended its regulations on December 10, 1993 (58 FR

65018) to provide for these accelerations. Targeting the phaseout set

by the Protocol, EPA chose to phase out production and consumption of

HCFCs on a chemical-by-chemical basis, beginning with those with the

highest ozone depletion potential (ODP). EPA accelerated the phaseout

of production and import of HCFC-22, HCFC-141b and HCFC-142b, the three

HCFCs with the highest ODPs. Specifically, EPA's rule bans the

production and import of HCFC-141b as of January 1, 2003. The

production and import of HCFC-142b and HCFC-22 in excess of baseline

allowances are prohibited effective January 1, 2010, except for the use

in equipment manufactured prior to January 1, 2010. Beginning January

1, 2020, the production and import of HCFC-142b and HCFC-22 are banned.

Production and import of the remaining HCFCs, in excess of their

baseline production and consumption levels, will be prohibited

beginning January 1, 2015, except as a refrigerant in equipment

manufactured before January 1, 2020. All HCFCs will be completely

phased out by January 1, 2030. EPA did not establish an allocation

system for class II substances, as it did for class I substances.

Section 605(d) of the Act speaks to exceptions to the original

phaseout schedule for HCFCs. Beginning in 2030, EPA can authorize up to

10 percent of the baseline per year for production of class II

substances for medical devices considered essential by the U.S. Food

and Drug Administration (FDA) and for which no safe and effective

alternative has been developed and approved. EPA can authorize use of

these quantities beginning in 2015 as an exception to the use

restrictions contained in 605(a). EPA can authorize this limited amount

of production and use, to the extent consistent with the Protocol, if

FDA, in consultation with EPA, determines that it is necessary for use

in these medical devices. In addition, beginning in 2015, and

continuing up until 2030, EPA may authorize production of up to 110

percent of the baseline per year solely for export to and use in

developing countries (Article 5 countries) that are Parties to the

Protocol. This production is intended to be solely for the purpose of

satisfying basic domestic needs of the importing developing country.

Between 2030 and 2040, no more than 15 percent of the baseline can be

produced annually for export to Article 5 countries. Section 605(d)

does not permit any production for export to and use in Article 5

countries after January 1, 2040.

Per Section 602(b) of the Act, EPA published a list of class II

substances in 40 CFR Part 82, Subpart A, Appendix B. All HCFCs fall

into one grouping under class II ozone depleting substances, and, since

publication of the initial list, no new class II substances have been

added to the list.

Section 602(e) requires EPA to assign numerical values representing

the ozone depletion potential (ODP) of all class II substances; and

Section 602(e) further states that, ``Where the ozone depletion

potential of a substance is specified in the Montreal Protocol, the

ozone depletion potential specified for that substance under this

section shall be consistent with the Montreal Protocol.'' Annex A of

this notice lists the ODPs for all class II substances as currently

specified by the Protocol. Note that some of the ODPs listed under

Annex A vary slightly from those listed under Appendix B to 40 CFR Part

82, Subpart A due to revisions of those ODPs under the Protocol since

May 10, 1995. However, because this notice merely seeks comments and

presents options, the future final rulemaking for the class II

allowance allocation system will amend the list of ODPs currently

presented in 40 CFR Part 82. Unless there are future revisions of the

ODPs

[[Page 16375]]

for class II substances under the Protocol, entities involved in the

HCFC market can expect to use the ODPs listed in Annex A of this notice

for any ODP-weighted calculations that may be necessary as part of an

HCFC allowance system.

Section 607(b) of the Act requires EPA to permit the transfer of

any class I or class II allowances, within each group or class, on an

ozone depletion weighted basis. In allowing transfers, under Section

607(a) of the Act, EPA must ensure that ``the transactions under the

authority of this section will result in greater total reductions in

the production in each year of class I and class II substances than

would occur in that year in the absence of such transactions.'' In

other words, transfers cannot be made at a 1:1 ratio. In the class I

regulations, an offset of one percent was required in any transfer to

accomplish the environmental benefit required by Section 607. Those

transfer requirements are set forth in 40 CFR Part 82, Subpart A,

Section 82.12 (60 FR 24970, May 10, 1995). Transfer of class II

allowances between entities and interpollutant transfers on an ODP-

weighted basis, along with an appropriate offset, are addressed under

II.E of today's notice.

Section 616 of the Act states that the U.S. may transfer allowances

to another Party, under certain conditions. Few countries currently

have a system in place for allocating, trading and expending HCFC

allowances. As discussed in today's notice, differences exist between

the manners in which the Protocol and the U.S. have structured their

respective HCFC phaseout systems. Nevertheless, a trading regime

similar to that implemented by EPA for class I international trades (40

CFR 82.9, 82.10) (60 FR 24970, May 10, 1995) could work effectively for

class II trades. One possible such system is outlined in II.E.6 of this

notice.

Reporting requirements mandated in Section 603 relative to HCFCs

are currently in place in 40 CFR 82.13(n). Additional reporting

requirements will likely accompany the implementation of a class II

allowance allocation system.

II. Options for Establishing an HCFC Allowance System

Section 607 of the Act requires EPA to issue allowances for the

production and consumption of class II substances. With this notice,

EPA is putting forth options as to how such an allowance system could

be established. The allowance system must ensure that U.S. consumption

of class II substances does not exceed the cap agreed to under the

Protocol (currently at 15,240 metric tons but will be reduced over

time).

For the class I substances, EPA considered many methods for

achieving the required reductions that were agreed to under the

Protocol. The approaches distinguished between economic incentives and

engineering controls or bans. EPA concluded that the most equitable,

least costly and easiest system to administer for achieving the

Protocol's required reductions for class I ozone-depleting substances

was a marketable allowance system. EPA established such a system. The

system proved highly successful and by January 1, 1996, the production

and import of class I substances were completely phased out (but for

narrow exemptions granted by the Parties to the Protocol) with minimal

economic impact.

Unlike the class I allowance system, however, EPA is considering an

approach whereby an allowance system for class II substances would only

become effective if a certain threshold (i.e., a certain percentage of

the total U.S. cap for class II substances) were reached or exceeded.

A. Allowance Allocation System to Control HCFC Consumption in the

United States

1. Type of Allowances

a. Production Allowances and Consumption Allowances for Class I

Controlled Substances. Under the control system for class I substances,

EPA created a unit of measure called an allowance (see 40 CFR 82). An

allowance, for a class I substance, represents the marketable rights

and privileges granted to a company to produce or import a specific

quantity of that class I substance. Under the class I allowance

program, there were two types of allowances: production allowances and

consumption allowances. One allowance in the regulatory program for

class I substances was equal to one kilogram of either production or

consumption of a substance, depending on the type of allowance.

Under the class I phaseout regulations, a company was required to

expend both production and consumption allowances to be able to

produce. To be able to import a class I controlled substance, a company

was required to expend consumption allowances (See 40 CFR 82.4). After

proper documentation was presented to EPA reflecting an export of a

class I controlled substance, consumption allowances were refunded or

returned to the exporting company (See 40 CFR 82.10).

b. Options for Allowances for Class II Controlled Substances. EPA

is considering, and seeking comment on, the following options for class

II allowances. One option for a class II allowance system would be to

follow the structure established for the class I substances. To

produce, a company would expend both production allowances and

consumption allowances for a specific quantity of a class II controlled

substance. To import, a company would expend consumption allowances for

a specific quantity of a class II controlled substance. An exporter of

class II substances would be able to obtain consumption allowances by

providing documentation indicating the quantity of substance exported

abroad.

A second option for a class II allowance system would be to operate

the system using only one kind of allowance, which could be applied

equally for production, imports and exports. This means that such an

allowance (hereafter referred to as ``class II allowance'') could be

applied to any element of the formula for consumption (consumption =

production + imports-exports). Producers and importers alike would be

allocated class II allowances according to baseline calculations. To

produce, a company would expend class II allowances for a class II

substance. To import, a company would expend class II allowances for a

class II substance. Upon export, a company would receive class II

allowances for the quantity of a class II substance exported.

Essentially, allocation and expenditure of allowances under this system

would differ from the class I system in that only one allowance would

be allocated and expended for production. For example:

------------------------------------------------------------------------

Class I allocated/ Class II allocated/

Activity expended expended

------------------------------------------------------------------------

Production...................... production & class II

consumption. allowance.

Import.......................... consumption....... class II

allowance.

Export.......................... consumption class II allowance

returned. returned.

------------------------------------------------------------------------

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2. Unit of Measure for Allowances

Allowances can be accounted for in a variety of ways. They can

equal any quantity one assigns to them, calculated by any workable

measure. In the class I allowance system, EPA assigned each allowance a

value of one kilogram of a class I substance. To produce or import,

allowances were expended similarly, by kilograms. Since each chemical

has its own ODP, any trades that took place between class I chemicals

took into account the difference in ODPs, weighting the resulting

allowances accordingly.

Due to the aforementioned differences in ODPs among chemicals,

another possible measure for an allowance is an ODP-weighted unit (ODP

x kilogram), tied to no specific chemical. EPA is considering, and

seeking comment on, both an absolute allowance allocation by kilogram

(which is chemical-specific) and an ODP-weighted allocation system

(which is also allocated in kilograms but not chemical-specific). With

this notice, EPA is exploring both options but attempts below to

illustrate what the advantages and disadvantages of each system may

entail.

a. Absolute Kilogram Allowances on a Chemical-by-Chemical Basis.

One option for assigning a value to class II allowances would be to

allocate them on an absolute quantity (kilogram) basis, as was done in

the class I allocation system. In such a system, one kilogram of an

HCFC would correspond to one allowance. In this absolute system, one

would track the production, import or export of a specific chemical on

a kilogram basis.

If trades were to occur between different class II substances in a

system where one allowance equals one kilogram, any difference in ODP

between the substances would have to be factored into the exchange, as

was done with transfers and trades among class I substances (See

Section 607(b)(1) of the Act). A brief example of such transfers is

described below, but further options related to, and a more thorough

explanation of, transfers are discussed in part II.E of today's notice.

To better illustrate how an absolute allowance system would

function, take for example, Company A, which produced 1000 kilograms of

HCFC-141b and 550 kilograms of HCFC-22 in its baseline year. Under an

absolute allowance system, Company A would be allocated 1000 allowances

for HCFC-141b and 550 allowances for HCFC-22. To produce 70 kilograms

of HCFC-141b, 70 allowances would be subtracted from 1000, leaving

Company A with 930 kilograms or allowances of HCFC-141b. If Company A

wanted to produce more than 1000 kilograms of HCFC-141b, it could trade

with another holder of HCFC-141b allowances or transfer its own HCFC-22

allowances to HCFC-141b allowances, taking into account the difference

in ODP between the two substances. In this case, if Company A wanted to

produce 200 additional kilograms of HCFC-141b, it could, through an

intra-company transfer, shift the appropriate number of HCFC-22

allowances that, accounting for ODP differences, would represent the

equivalent of 200 HCFC-141b allowances. Therefore, Company A would

exchange 400 HCFC-22 allowances to add 200 HCFC-141b allowances, since

the ODP of HCFC-22 is 0.055 and the ODP of HCFC-141b is 0.110.

Similarly, Company A could have purchased 200 allowances of HCFC-141b

or 400 allowances of HCFC-22 from some other allowance holder.

It is important to note what would occur under an absolute

allowance system when various phaseout dates become effective. In 2003,

for example, when the ban on production and importation of HCFC-141b

takes effect (See 40 CFR section 82.4), entities with HCFC-141b

baseline allowances, measured in kilograms, would no longer be

authorized to produce or import HCFC-141b. Essentially, these entities

would receive zero percent of their baseline allowances on January 1,

2003. The same would occur when other individual phaseout dates (e.g.,

for HCFC-22 and HCFC-142b in 2010) become effective.

In 2004, under the Protocol, the U.S. is required to reduce its

current HCFC consumption cap (15,240 ODP-weighted metric tons) by 35

percent. At this time, every entity still holding HCFC baseline

allowances may receive 65 percent (or 35 percent less) of their

remaining HCFC baseline allowances.

Administratively, an absolute allocation system based on kilograms

may be advantageous for its simplicity. Both for the regulated entities

and EPA, an absolute system would afford greater ease, clarity, and

predictability. Holders of absolute allowances would report their

transactions in kilograms of each chemical. To determine future

regulatory actions, EPA needs to keep a running tab on market supply

and demand of the various chemicals. EPA is much better able to track

which companies are expending which allowances for which chemicals if

EPA carries out the calculations involving trades and expenditures, and

then tracks the absolute quantities of each chemical. EPA is also

obligated to report to the United Nations Environment Programme (UNEP)

annually on U.S. production and importation on an absolute basis for

each individual substance. Producers and importers have been operating

and reporting under the class I absolute allocation system for many

years, and are familiar with the necessary calculations, reporting

forms, and tracking requirements. Therefore, any additional

administrative burden of adopting a similar system for class II

substances may be minimal for the regulated community. Consistency

between the class I and potential class II systems would present a

significant advantage. Under an absolute system, flexibility would not

be compromised, due to the trading opportunities that can be

established. EPA requests comment on the advantages or disadvantages of

an absolute allocation system.

b. ODP-Weighted Allocation. Another means of allocating allowances

is through an ODP-weighted system, whereby each allowance holder's

allocation would be calculated according to the numerical value of the

ODP associated with each chemical in the allowance holder's baseline

year(s). In this case, the ODP weight of each HCFC becomes the

meaningful variable and companies would be allocated an aggregate

number of ODP-weighted (ODP x kilogram) units. For example, a company

that produced 1000 kilograms of HCFC-142b in the baseline year(s) would

be allocated 65 ODP-weighted allowances because HCFC-142b has an ODP of

0.065. Likewise, if this same company imported 1000 kilograms of HCFC-

22 during the baseline year(s), they would also be allocated 55 ODP-

weighted allowances (HCFC-22 has an ODP of 0.055). Thus, the company

would have a total of 120 ODP-weighted allowances. The company would be

able to expend the 120 ODP-weighted allowances by producing or

importing any class II controlled substance or combination of class II

controlled substances that it chooses, as long as the weighted total

(kilogram x ODP) does not exceed the number of allowances. For example,

the company could expend all of the 120 ODP-weighted allowances to

produce 2,181 kilograms of HCFC-22. Alternatively, the company might

expend the 120 ODP-weighted allowances to produce 6,000 kilograms of

HCFC-123 (ODP = 0.02), or 1,091 kilograms of HCFC-141b (ODP=0.11).

Under this system, intra-company transfers would not be necessary;

inter-company trades would be in increments of ODP-weighted units.

[[Page 16377]]

The ODP-weighted allowance system may be viewed as more

advantageous to regulated entities. Altering patterns of production and

importation in response to market changes could be done more easily,

and the offset required for intra-company transfers under an absolute

kilogram allowance system would not apply, simply because there would

be no actual transfer of allowances within a company where ODP units

are concerned. The offset would still apply to inter-company trades

because allowances would in fact be trading hands.

Under an ODP-weighted allowance system, however, complex

calculations would be necessary by the reporting companies to arrive at

the total quantity of class II substances produced or imported during

the reporting period. For each chemical, the number of kilograms would

have to be multiplied by its ODP and compared to the number of ODP-

weighted allowances. Blends would present an additional complication by

requiring a calculation of the percentage of each HCFC in a substance

(e.g., R-401A), at each applicable ODP, and including that in the total

reported ODP produced or imported for a quarter.

When the first phaseout date becomes effective in 2003 for HCFC-

141b, under an ODP-weighted system, an entity participating in the

HCFC-141b market would no longer receive the amount of ODP-weighted

allowances associated with that entity's ODP units of HCFC-141b

produced and/or imported in the baseline year(s). The same would be

true for subsequent phaseouts. Complications come into play, however,

when ODP-weighted allowances have been transferred on a permanent

basis; that is, when a company actually trades baseline allowances.

Where baseline trades (discussed more in part II.E.4 of this notice)

have been made, adequately tracking ODP-weighted class II substances

from one holder to another becomes very difficult. This is extremely

important at each phaseout, to determine who holds the baseline

allocation of the chemical being phased out.

EPA seeks comments on the viability of an ODP-weighted allowance

system as presented above. Though presented as a possible option, EPA

recognizes the many difficulties that could emerge with an ODP-weighted

system (e.g., monitoring chemicals that have been produced or imported

with traded allowances; reporting to UNEP the absolute quantities of

all class II substances in kilograms). An ODP-weighted allowance system

would also possibly be in conflict with Section 605(b)(1) of the Act,

which states that, ``Effective January 1, 2015, it shall be unlawful

for any person to produce any class II substance in an annual quantity

greater than the quantity of such substance produced by such person

during the baseline year.'' This is because ODP-weighted allowances

could be shifted within a company and thus allow that company to

produce a greater quantity of a class II substance than in its

baseline. (Such an intra-company transfer of allowances is discussed

below in part E of this notice.)

B. Method for Distributing Allowances

EPA is required, under Section 607 of the Act, to issue allowances

for the production and consumption of class II substances. There are a

variety of methods for allocating allowances and EPA seeks comments on

these options. First, EPA is considering allocating allowances for the

full time period until the complete production and importation phaseout

for all class II substances (currently 2030), taking into account both

accelerated phaseouts for individual chemicals (e.g., those for HCFC-

141b, HCFC-22 and HCFC-142b) and the step-wise reduction of the

consumption cap as mandated under the Protocol. This allocation of

allowances was the method followed in the regulatory program for class

I substances. For class I substances, a quantity of allowances was

allocated to listed companies as a baseline in the Federal Register.

Allocating allowances for the full time period until a particular

phaseout date provides certainty and stability for the market. Assuming

the regulatory program includes smooth procedures for trading

allowances, the full-term allocation of allowances establishes the

basis for a ``marketable permit'' system.

The second option being considered is a system for re-calculating

and re-allocating allowances on a ``rolling basis.'' This would

essentially move the baseline forward in time so that the baseline

would always be the most accurate reflection of the current HCFC

market. Under this option, EPA would review data on the production,

import and export of HCFCs on some periodic basis, establish a new

baseline for each entity, and re-allocate the allowances accordingly. A

re-allocation of allowances may require an amendment to the original

list in the regulation of entities with their respective baseline

allowances. Alternatively, an administrative mechanism could be

established to re-allocate allowances automatically at regular

intervals.

However, if the regulatory system includes smooth procedures for

trading allowances, shifts in demand and changes in market share could

be addressed by individual companies, thus obviating the need to re-

allocate allowances. Identifying the appropriate length of time for

periodic review and re-allocation of allowances would be important,

especially given both the existing phaseout schedule for specific HCFCs

and the step-wise reduction of the HCFC consumption cap over time.

Likewise, the length of time for periodic re-allocation of allowances

may depend on the definition of a trigger mechanism for making the

final rule effective, which is discussed in II.H of this notice. For

example, instead of establishing specific years for the re-allocation

of allowances (e.g., 2000 and 2002), the re-allocation could be linked

with the trigger mechanism, so that re-allocation of allowances would

occur, say, 2 years and 4 years after the allowance system becomes

effective.

A final option would involve allocating allowances on a year-by-

year basis. However, this would generate a large administrative burden

for both EPA and those who produce, import and export HCFCs. The

ability of those producers, importers and exporters to plan for the

longer term would also be hampered.

EPA is seeking comments on all of the aforementioned options for

distributing allowances.

C. Establishing an Equitable Baseline for Distributing Allowances

In developing the regulatory program for class I controlled

substances, EPA collected information on the amounts of each class I

substance produced, imported and exported during a given calendar year.

EPA collected the data by publishing two notices in the Federal

Register under authority of Section 114 of the Act (52 FR 47489

(December 14, 1987) and 55 FR 49116 (November 26, 1990)). The data

requested from U.S. companies included reports on production runs,

quantities of feedstock chemicals used in production, bills of lading,

invoices, and other documents for a specific calendar year. The data

submitted to EPA was used to assign company-specific production and

import rights (allowances) to companies.

EPA is considering, and seeking comment on, many options for

establishing a baseline for HCFC allowances. Consistent with the

procedures associated with class I controlled substances, EPA will

likely use historical information regarding a

[[Page 16378]]

company's activities to establish the baseline for class II allowances.

EPA is considering following the same procedures used for establishing

the baseline for class I controlled substances, including the

publication of a Section 114 notice requesting specific information.

Options for establishing the actual baseline allowances for class

II controlled substances are represented by a spectrum of choices,

including using historical information from one year, from an average

of multiple years, or using a formula for combining multiple years. At

the extremes, EPA is considering historical information from 1989 or

1997, and many variations in between. EPA believes that the process of

establishing the baseline should take into account, inter alia, the

agreements by the Parties to the Protocol to control and phase out

class II substances, the signing of the Clean Air Act Amendments of

1990 into law, the publication of regulations under Title VI of the Act

governing the phaseout of class II substances, and the development of

the current HCFC market in the U.S. EPA is seeking comments on the

various options discussed below, as well as any other ideas for

establishing an allocation baseline.

One option EPA is considering for establishing the baseline for

class II controlled substances is historical information from one year.

Collecting documents and information from companies for one year of

activity would be less of an administrative burden for both EPA and the

companies than if EPA were to collect information for more than one

year. Another option EPA is considering is using data from multiple

years to establish the baseline for class II substances. EPA is

considering using historical information from consecutive years and

averaging the data. EPA is also considering averaging historical data

from non-consecutive years to establish the class II baseline.

Calculating baseline allowances for class II substances by using a

weighted average of multiple years is also being considered. For

example, using a number of either consecutive or non-consecutive years

within the time frame 1989-97, EPA would first calculate the production

and importation for each. Then, after deciding upon the relative

importance of each of those years regarding production and importation

quantities, EPA would weight each year accordingly and make the

baseline calculation to reflect the weighted average of those years.

Once the option for determining the baseline is chosen, EPA believes

that steps to ensure accuracy of historical data will be of utmost

importance. Any baseline calculation involving multiple years will have

to be reconciled with the definition of ``baseline'' in Section 601(2)

of the Act, which states that the term ``baseline year'' means ``a

representative calendar year * * * in the case of any class II

substance.''

Another option EPA is considering for establishing a baseline is to

use different years for establishing each HCFC's individual baseline.

As an example, EPA might consider using one particular year (or years)

to establish the baseline for HCFC-141b and a completely different year

(or years) for establishing the baseline for HCFC-22 and HCFC-142b. In

this example, EPA might consider using yet another year (or years) for

establishing the baseline for all remaining HCFCs. Using this type of

approach, and linking it with the options discussed above, EPA might

choose the average of multiple years for one HCFC and a formula for

establishing the baseline for another HCFC.

It is important to note that, under any scenario, when the phaseout

date for HCFC-141b is reached in 2003, all HCFC-141b consumption

(production + imports-exports) will cease. Those who did not

participate in the HCFC-141b market will not be affected in 2003.

However, those who did participate in the HCFC-141b market--through,

for example, producing or importing HCFC-141b--would no longer receive

any allowances associated with their historic HCFC-141b activity, and

thus any authorization to produce or import HCFC-141b. Likewise, any

company that, through a baseline trade, received allowances associated

with historic HCFC-141b would no longer receive any allowances

associated with the baseline trade in 2003.

In 2004, when the Protocol requires that the HCFC consumption cap

be reduced from its current level by 35 percent, all remaining

allowance holders may be affected. At that time, all allowance holders

may receive up to 35 percent less of their remaining HCFC baseline

allowances (all HCFC allowances minus HCFC-141b allowances).

D. Percentage of Allowances Distributed Under U.S. HCFC Consumption Cap

EPA is considering, and seeking comment on, whether to allocate the

total number of allowances (the total quantity of ODP-weighted HCFC

consumption) available to the U.S. under the cap as established by the

Montreal Protocol. As discussed in part I.A of this notice, the current

U.S. cap for HCFC consumption is 15,240 ODP-weighted metric tons, based

on the formula of 2.8 percent of CFC consumption in 1989 plus the

consumption of HCFCs in 1989. Today's notice considers an allocation of

allowances equal to 100 percent of the 15,240 metric tons. This would,

however, in the event of some violation of the allowance system,

provide no cushion for error, thus risking violation of the U.S. cap.

This risk could demand that EPA request information and monitor more

often and in greater detail.

EPA is also considering, and seeking comment on, an allocation of

some percentage less than the full quantity of the cap. In this

scenario, consideration is given to potential violations of the

allocation system by leaving enough unallocated class II allowances to

cover any overage. In this case, the U.S. would not violate the cap as

a consequence of a violation of its allocation system. EPA is seeking

comment on the necessity of providing a safe buffer below the HCFC cap;

the percentage to be allocated if less than 100 percent is warranted;

and on the possible size of errors in the reporting of production and

import data that could occur in a control period.

Related to the discussion above is the issue of how to allocate the

remaining class II allowances falling between the U.S. cap (potentially

allowing for some margin of error) and the selected baseline (discussed

in II.C of this notice). For example, if the year 1996 were chosen as

the baseline, this would represent about 82 percent of the U.S. cap,

thus leaving open the question of how to allocate the remaining 18

percent, and if all of the remaining 18 percent should be allocated.

This remaining percentage, or a lower percentage that would provide for

a margin of error, could simply be added to the allocated baseline

allowances, to be distributed on a pro rata basis. The entire amount,

then, would be allocated in the form of allowances to those companies

that participated in the HCFC market in the baseline year(s). Such a

system would provide certainty in how the allowances would be

allocated.

Depending on the baseline year(s), another possible option would be

to allocate some portion of the remaining percentage (in our example

some portion of the 18 percent) to those companies whose historic HCFC

activity is not well represented by the baseline year(s), such as new

companies that may have entered the HCFC market after the baseline

year(s).

[[Page 16379]]

E. Transfers of Class II Allowances

In establishing the regulatory allowance program for class I

controlled substances, EPA included provisions that permitted the

transfer of allowances. The provisions for trades and transfers of

class I allowances are in Sec. 82.9, Sec. 82.10, Sec. 82.11 and

Sec. 82.12 of the final rule published in the Federal Register on May

10, 1995 (60 FR 24970). Today's notice describes the many different

types of transfers permitted for class I allowances, as well as other

variations. EPA is seeking comment on how these variations and options

could apply to the transfer of class II allowances.

Under the current class I regulatory program, EPA is required to

process the transfer of allowances within three working days from when

EPA receives the request for an inter-pollutant or inter-company trade.

Companies fax the request for a trade to EPA and within three working

days EPA faxes a reply showing the new balance of unexpended allowances

(See 40 CFR 82.12(a)(1), (b)(4)).

1. Transfers Within Groups of Class II Substances

To facilitate transfers among class II substances, EPA is

permitted, under Section 607(b)(3) of the Act, to establish groups of

class II substances. Under such a framework, inter-pollutant transfers

of allowances would be limited to chemicals within an assigned group.

Class I controlled substances are listed in the Act in groups, and

inter-pollutant transfers of class I allowances are restricted to the

specific groups. For example, CFC-11 and CFC-114 are listed in the Act

as being in class I, Group I and all the halons are listed in class I,

Group II. Inter-pollutant transfers of allowances can occur among CFCs

in Group I and among halons in Group II, but transfers of allowances

cannot occur between the two groups. One option for class II substances

might be to establish class II groups based on each chemical's ODP.

Another option might be to establish class II groups based on the U.S.

phaseout dates for class II substances. EPA requests comment on the

concept of grouping class II substances and the possible groupings

themselves.

2. Inter-Pollutant Transfers

Section 607(b) of the Act states that inter-pollutant transfers

shall be permitted. An inter-pollutant transfer is the transfer of an

allowance of one substance to an allowance of another substance on an

ODP-weighted basis. As an example, under the class I system, a company

would transfer allowances for CFC-12 to allowances for CFC-115, taking

into account ODP differences between the two chemicals. If a company

wanted to transfer 1000 kilograms of their CFC-12 production allowances

to CFC-115 production allowances, paperwork would be submitted with the

following calculation: the 1000 kilograms of CFC-12 allowances are

multiplied by the ODP of CFC-12 (1.0) and then divided by the ODP of

CFC-115 (0.6), yielding 1667 kilograms of new CFC-115 production

allowances. Inter-pollutant transfers are sometimes called intra-

company trades because a company might shift allowances internally from

one substance to another to react to shifts in demand. Inter-pollutant

transfers of allowances were fairly common for class I controlled

substances. There were more than 40 inter-pollutant transfers for class

I substances each year from 1992 through 1995.

For class II substances, an example of an inter-pollutant transfer

would be a transfer of 10,000 kilograms of HCFC-142b allowances to

HCFC-141b allowances, which would result in 5,909 kilograms of HCFC-

141b allowances because of the adjustment for the ODPs of the two

chemicals (which does not take into account the required offset for

transfers as discussed in II.E.7 of this notice). If the class II

allowance system were to distribute allowances on an ODP-weighted

basis, however, there would be no need to include provisions for inter-

pollutant transfers.

3. Inter-Company Transfers

Another example of trades of class II allowances that EPA must

permit under Section 607(c) of the Act are inter-company transfers.

Inter-company transfers are trades of allowances, for the same

substance, from one company to another company. Under such a system,

Company A would simply transfer its allowances of a class II substance

to Company B who wishes to have more allowances of that particular

class II substance.

4. Inter-Pollutant Transfers Combined With Inter-Company Transfers

Both inter-company and inter-pollutant transfers could be combined

in the same transaction for class I controlled substances, and EPA is

considering allowing the same combined system for class II substances.

As an example of how this worked under the class I system, Company A

would trade 35,000 kilograms of CFC-11 allowances to Company B who

needed allowances to produce CFC-115. In the information submitted to

EPA, the two companies would agree that Company A would deduct 35,000

allowances for CFC-11 from its balance and Company B would receive

58,333 kilograms of CFC-115, due to the ODP difference between the two

chemicals. (An additional one percent offset would also be required in

this calculation as discussed in II.E.7).

Under this combined system for class II substances, a company that

wishes, say, to increase its production of HCFC-141b before the 2003

phaseout could (1) re-distribute its own allowances that have been

allocated for another class II substance to HCFC-141b (an intra-

company/inter-pollutant transfer); (2) purchase more HCFC-141b

allowances from another company (an inter-company transfer); or (3)

purchase more allowances from another company of a substance other than

HCFC-141b (an inter-company/inter-pollutant transfer). Any inter-

pollutant transfer would account for differences in ODP.

5. Transfers of Current-Year Allowances

EPA is considering approaches for permitting transfers of current-

year allowances for class II controlled substances. A transfer of

current-year allowances means the allowances being traded can only be

expended for production or import in that specific control period, or

calendar year. Transfers of current-year allowances do not change the

quantity of actual baseline allowances assigned to a company. A trade

of current-year allowances is a one-time trade, only reflected in a

company's balance of allowances for that control period in which the

trade occurs. Trades of current-year allowances were permitted in the

class I regulatory program. From 1992 to 1995, many companies took

advantage of the opportunity to trade current-year allowances for class

I controlled substances. As an example, a company might make an inter-

pollutant trade from their unexpended CFC-11 allowances to their CFC-

114 allowances in order to respond to greater market demand for CFC-114

in that particular year. Another example would be Company A purchasing

allowances from Company B, because Company A wants to import CFC-113

sometime during that control period. EPA seeks comment on current-year

allowance transfers.

6. Permanent Transfers of Baseline Allowances

EPA is considering the merits of permitting transfers of baseline

allowances for class II substances. A

[[Page 16380]]

transfer of baseline allowances is a permanent shift of some quantity

of a company's baseline allowances to another company. The permanent

nature of the transfer of baseline allowances makes the trade different

from the transfer of current-year allowances. For example, Company A

could have produced 1,000 kilograms of HCFC-22 in the baseline year(s),

and would therefore receive either 1,000 baseline allowances (for the

kilogram-based system) or 55 ODP-weighted baseline allowances (for the

ODP-weighted system). Company A could in turn permanently trade away

these baseline allowances to Company B. In all subsequent years,

Company A's quantity of baseline allowances would permanently be

reduced, while Company B's quantity of baseline allowances would

permanently be increased.

To implement the current U.S. phaseout schedule for class II

controlled substances, it may not be possible to allow permanent

transfers of baseline allowances if the type of allowance chosen is an

ODP-weighted unit, as described in part II.A.2.b of this notice. Under

the U.S. phaseout schedule for class II substances, the consumption of

chemicals with the highest ODP is eliminated first. To efficiently

eliminate the consumption of a specific chemical, such as HCFC-141b,

under a possible program using ODP-weighted allowances, a company would

no longer receive, in 2003, the portion of its allowances attributable

to its historic consumption of HCFC-141b. Under this scenario, a

company would not be able to make a permanent trade of a quantity of

ODP-weighted allowances because the permanent transfer of ODP-weighted

allowances would not be linked to a specific chemical, unless there

were groupings of HCFCs according to their phaseout dates or unless

historical consumption would determine deduction of allowances at a

particular phaseout. Alternatively, regardless of whether or not

baseline trades with ODP-weighted units are made, the historic baseline

ODP-weighted amount for a given chemical could be deducted in the

relevant phaseout year (e.g. 2003 for HCFC-141b). EPA seeks comment on

the merits of baseline trades in general, and on the compatibility of

baseline trades with kilogram-based allowances versus ODP-weighted

allowances.

7. International Trades of Current-Year Allowances

Under the Protocol, international trades are recognized as a part

of a process called ``industrial rationalization.'' In Article 1 of the

Protocol, industrial rationalization is defined as ``the transfer of

all or a portion of the calculated level of production of one Party to

another, for the purpose of achieving economic efficiencies or

responding to anticipated shortfalls in supply as a result of plant

closures.'' International trades of production are permitted under the

Protocol so companies can consolidate the manufacturing of a chemical

in order to be able to achieve economies of scale as demand shrinks.

The Protocol includes the following language in Article 2,

paragraph 5 bis: ``Any Party not operating under paragraph 1 of Article

5 may, for one or more control periods, transfer to another such Party

any portion of its calculated level of consumption set out in Article

2F [pertaining to HCFCs], provided that the calculated level of

consumption of controlled substances in Group I of Annex A [CFCs] of

the Party transferring the portion of its calculated level of

consumption did not exceed 0.25 kilograms per capita in 1989 and that

the total combined calculated levels of consumption of the Parties

concerned do not exceed the consumption limits set out in Article 2F.

Such transfer of consumption shall be notified to the Secretariat by

each of the Parties concerned, stating the terms of such transfer and

the period for which it is to apply.''

International trades of production allowances are permitted under

EPA's current regulations for class I controlled substances (40 CFR

82.9(c)). The procedures for international trades involve more review

than the procedures for inter-pollutant and inter-company trades.

For class II substances, the implementation challenge of paragraph

5 bis of Article 2 in the Protocol is that ``consumption'' is a formula

(production + imports - exports). Pursuant to a decision by the

Parties, the Protocol language in paragraph 5 bis of Article 2 clearly

restricts the U.S. from trading away HCFC consumption to another Party.

The U.S. per capita consumption of CFCs in 1989 was 1.28 kilograms,

well above the 0.25 kilogram per capita limit for transferring HCFC

consumption. However, the Protocol language allows the U.S. to

potentially receive a transfer of HCFC consumption from another Party.

Only two non-Article 5 Parties, Norway and Poland, had a per capita

consumption of CFCs in 1989 less than 0.25 kilograms. Thus, these are

the only non-Article 5 Parties from whom the U.S. could potentially

receive a transfer of HCFC consumption. We must therefore consider the

likelihood of such international trades, and whether or not the

establishment of provisions for class II international trades is

warranted.

If EPA were to create provisions for class II international

transfers, the options for such trades would be intimately linked to

the type of allowance chosen for the final program, as discussed in

part II.A.1 of this notice. If EPA were to choose a program with both

production and consumption allowances (as in the class I system), it

would be easier to limit international trades to just production by

following the model already established for class I substances. If, on

the other hand, EPA were to choose a program with class II allowances

(which could apply to production, imports and exports), EPA would have

to ensure that such allowances are used for production only and not for

import.

Alternatively, EPA may choose to establish a special type of

allowance to represent production rights received from an international

trade. EPA seeks comment on allowing international trades of HCFC

allowances and how they should be administered.

8. Offset for a Transfer of Allowances

The final aspect of trades of class II allowances considered in

today's notice is the manner of achieving greater total reductions than

would occur in the absence of a trade, as required in Section 607(a) of

the Act. EPA believes that the offset required by Section 607 of the

Act is only for inter-pollutant and inter-company transfers. In the

allowance program for class I substances, an offset was not included in

international trades.

Section 607(a) states that, ``transactions under the authority of

this section will result in greater total reductions in the production

in each year of class I and class II substances than would occur in

that year in the absence of such transactions.'' For the class I

allowance program, EPA adopted a one percent offset, deducted from the

transferor's allowance balance, for all inter-pollutant trades and all

inter-company trades (40 CFR 82.12(a)(1)(i)(H), 82.12(b)(4)(i)(F)).

However, for inter-pollutant trades combined with inter-company trades,

only one offset is applied to the transfer of allowances. For class II

controlled substances, EPA is considering re-examining the quantity of

offset assessed in a transfer of allowances. Because the class II

substances are less ozone-depleting than class I substances, EPA may

consider a smaller offset for

[[Page 16381]]

trades of HCFC allowances. EPA requests comment on the degree of offset

to apply to domestic trades of class II substances.

F. Conditions Under Which a Control System Would Become Effective

As mentioned in the background section of this notice (part I.B),

EPA is mandated under the Act to promulgate regulations by December 31,

1999, to administer the phaseout of class II controlled substances. By

this time, EPA intends to have in place an allowance system based on

the options, or some slight variation thereof, discussed throughout

this notice. However, EPA is considering an approach, whereby the

allowance system would not go into effect unless a certain percentage

of the U.S. cap for class II controlled substances were to be reached

or exceeded.

It is possible that U.S. HCFC consumption levels will remain within

a safe buffer of the current cap as agreed to under the Protocol, and

thus never activate the allowance system. In 2003, under the U.S.

accelerated phaseout for individual class II substances, HCFC-141b will

be phased out. An allowance allocation system may not be necessary to

phase out HCFC-141b. In 2004, however, at which time the U.S. is

required under the Protocol to reduce its current HCFC consumption cap

by 35 percent, an allowance system will likely be necessary to ensure

U.S. compliance with the Protocol. Consequently, EPA should select a

default date before 2004 when the allowance allocation system would

become effective, in the event that the allowance system is not in

place before that default date. EPA is seeking comments on the most

appropriate timing of a default date for the system to become

effective.

The rationale for an approach that would condition the onset of an

allowance system upon reaching an established percentage of the U. S.

cap set by the Montreal Protocol would be to avoid premature government

intervention in the HCFC industry. Therefore, the threshold must be set

at a level where the implementation of EPA's allowance system would be

deemed necessary to ensure that the U.S. complies with its cap for

class II substances. Furthermore, having the allowance system in place

with a set threshold for implementation will provide the regulated

community with a relatively predictable regulatory structure.

EPA is considering, and seeking comment on, the appropriateness of

such an approach, the percentage of the U.S. cap for class II

controlled substances that would trigger the onset of the allowance

system, the time span and type of data used to calculate whether or not

the percentage has been reached or exceeded, and the amount of time

deemed appropriate for implementation of EPA's allowance system once

the threshold has been reached or exceeded.

EPA is considering a range of percentage options that would trigger

the onset of the allowance system. A low percentage would possibly mean

that EPA's implementation of its allowance system occurs with a

relatively long lag time (e.g., more than one year), whereas a higher

percentage may require swift implementation (e.g., within one year or

less). EPA is concerned that a percentage threshold set too high could

threaten U.S. compliance with its cap for class II controlled

substances, given the delays inherent in data collection and the need

for some transition time between reaching the percentage and

implementing the allowance system.

The trends that the data on class II consumption (discussed below)

reveal, combined with the percentage threshold, may also influence the

speed with which EPA implements its allowance system. For example, if

class II reporting data reveal that the threshold has been, or will be,

surpassed by an amount considered ``too close'' to the cap, then EPA

may implement its allowance system within a shorter time frame;

likewise, if the threshold were surpassed by an amount considered to be

within a secure buffer of the cap, EPA could implement its allowance

system with a longer delay.

EPA must decide on the time span and type of class II data used to

determine U.S. class II consumption levels relative to the selected

percentage. EPA currently receives quarterly data on production,

importation and exportation of class II substances as required under

Section 603 of the Act. In order to assess meaningful trends and levels

of class II consumption relative to the selected percentage, EPA is

considering, and seeking comment on, a variety of ways of using this

quarterly data for that purpose.

Under the Protocol and the Act, compliance for class II substances

(i.e., consumption relative to the cap) is measured against the

calendar year. Therefore, aggregating four quarters of quarterly data

(an annual sum) serves as a convenient method to determine class II

consumption levels relative to the cap, and thus the selected criteria

for initiating the allowance system. This would represent one possible

option for calculating class II consumption levels relative to the

selected criteria. Another option would be to use a rolling sum in

determining compliance with an established threshold, based on

submitted data for four or possibly more consecutive quarters, which

could include quarters from two calender years. The rationale for using

four or more consecutive quarters is to avoid seasonality effects, or

trend biases, which individual quarterly data could bring. If a number

other than four quarters were used, the appropriate weighting would

have to be given to each quarter so that their sum would be the

equivalent of a 12-month period. If five consecutive quarters were

used, for example, each quarter would be scaled to represent one fifth

of the 12-month period.

III. Other Regulatory Options for Controlling HCFCs

To ensure that the U.S. adheres to its phaseout schedule for class

II controlled substances, EPA has options of pursuing, if necessary,

other means to contribute to the control HCFC of consumption of class

II substances. The discussion below pertains to current labeling

program, SNAP program and the non-essential products ban, and potential

amendments to those regulations. These options address the use of HCFCs

rather than their production, import and export, which an allowance

system would directly control. EPA is seeking comment on using any of

these options discussed below in controlling HCFC consumption, either

in combination with an allowance system, each other, or on its own.

A. Labeling

As an additional means of discouraging use of class II substances,

so as to ensure that the U.S. does not exceed its cap for class II

substances under the Protocol, EPA is considering and seeking comment

on the required use of labels on products containing or manufactured

with class II substances. According to Section 611 of the Act, such

labels would read as follows: ``Warning: Contains/manufactured with

[insert name of substance], a substance which harms public health and

environment by destroying ozone in the upper atmosphere.''

According to Section 611(c) of the Act, ``After 30 months after the

enactment of the Clean Air Act Amendments of 1990, and before January

1, 2015, no product containing

[[Page 16382]]

a class II substance shall be introduced into interstate commerce

unless it bears the label [referred to above] if the Administrator

determines, after notice and opportunity for public comment, that there

are substitute products or manufacturing processes (A) that do not rely

on the use of such class II substance, (B) that reduce the overall risk

to human health and the environment, and (C) that are currently or

potentially available.'' Section 611(d) of the Act contains the same

requirements for products manufactured with class II substances.

Beginning January 1, 2015, all products containing or manufactured with

a class II substance must bear the specified label regardless of

whether the Administrator has made a determination regarding the

availability of substitutes (Secs. 611(c)(2) and 611(e)(5)). Therefore,

the issue upon which EPA is requesting comment is whether EPA should,

prior to January 1, 2015, require labels on certain products containing

or manufactured with class II substances.

B. SNAP Approval and Restrictions

Section 612 of the Act requires EPA to promulgate rules making it

unlawful to replace any class I or class II substance with any

substitute substance that may present adverse effects to human health

or the environment, where EPA has identified an alternative to such

replacement that ``(1) reduces the overall risk to human health and the

environment; and (2) is currently or potentially available.'' In

accordance with Section 612 of the Act, and under the Significant New

Alternatives Policy (SNAP) program, EPA publishes lists of acceptable

and unacceptable substitutes for class I and class II substances. In

some SNAP sector end-uses, class II substances have been listed as

acceptable substitutes. Class II substances are viewed by the Agency as

transition chemicals that facilitate the transition out of more harmful

class I chemicals. Since 1994, availability of zero-ODP alternatives

has increased in a number of end-uses. It is therefore possible that

existing SNAP determinations allowing HCFC end-uses could be revised to

make them unacceptable for use. This could happen through three

mechanisms.

First, EPA could receive a petition from a company to add a

substance to or delete a substance from the SNAP list of acceptable and

unacceptable alternatives (See Section 612(d)). Second, EPA could

receive notification from a company before introduction of a substitute

into interstate commerce for significant new use as an alternative to a

class II substance (See Section 612(e)). Finally, EPA can initiate

changes to the SNAP determinations independent of any petitions or

notifications received. Such changes could be based on new data either

on additional substitutes or on characteristics of substitutes

previously reviewed.

EPA solicits comments on the possibility of controlling HCFCs

through SNAP determinations.

C. Nonessential Product Ban under Section 610

Section 610(d) of the Act prohibits the sale, distribution, or

offer for sale or distribution in interstate commerce, of certain

nonessential products that contain or are made with class II

substances. EPA is authorized to grant exceptions to the ban under

certain conditions. Since the issuance of the final rule providing

exemptions from the statutory Class II nonessential products ban, EPA

has received information, including information on new substitutes for

making certain products, indicating that it may be necessary to

reconsider the continued appropriateness of those exemptions. The

Agency also is aware that since the issuance of that initial final

rulemaking, there has been further substitution away from ozone-

depleting substances in aerosols and pressurized dispensers. EPA is

currently reviewing information concerning the aerosol products and

pressurized dispensers that were given exemptions in the December 1993

rulemaking. In particular, the Agency is evaluating whether there are

technologically available substitutes for the HCFCs used in these

products. When EPA completes its evaluation of the existing exemptions

for HCFCs, if appropriate, the Agency will issue a notice of proposed

rulemaking. Potentially removing some of these products from the

current exemptions to the nonessential product ban could provide some

further assurance that the U.S. would not exceed its cap for class II

substances under the Protocol.

IV. Administrative Requirements

A. Executive Order 12866

Under Executive Order (E.O.) 12866 (58 FR 51735, October 4, 1993),

the Agency must determine whether this regulatory action is

``significant'' and therefore subject to Office of Management and

Budget (OMB) review and the requirements of the Executive Order. The

E.O. defines ``significant regulatory action'' as any regulatory action

(including an advanced notice of proposed rulemaking) that is likely to

result in a rule that may:

(1) Have an annual effect on the economy of $100 million or more or

adversely affect in a material way the economy, a sector of the

economy, productivity, competition, jobs, the environment, public

health or safety, or State, local, or tribal governments or

communities;

(2) Create a serious inconsistency or otherwise interfere with an

action taken or planned by another agency;

(3) Materially alter the budgetary impact of entitlements, grants,

user fees, or loan programs or the rights and obligations of recipients

thereof; or,

(4) Raise novel legal or policy issues arising out of legal

mandates, the President's priorities, or the principles set forth in

the Executive Order.

It has been determined by OMB and EPA that this action is a

``significant regulatory action'' under the terms of Executive Order

12866 and is therefore subject to OMB review under the Executive Order.

This notice was reviewed by OMB and changes recommended by OMB have

been made and documented for the public record.

B. Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA) generally requires an agency

to conduct a regulatory flexibility analysis of any rule subject to

notice and comment rulemaking requirements unless the agency certifies

that the rule will not have a significant economic impact on a

substantial number of small entities. Small entities include small

businesses, small not-for-profit enterprises, and small governmental

jurisdictions.

EPA determined that the members of the regulated community that may

be directly affected by this rulemaking are generally not small

businesses. Small governments and small not-for-profit organizations

would not be subject to the options in today's notice. The options

discussed in today's notice are directed to large, multinational

corporations that either produce, import, export, transform or destroy

ozone-depleting chemicals covered by this notice. The options discussed

in this notice, therefore, will not have a significant economic impact

on a substantial number of small entities.

C. Applicability of Executive Order 13045: Children's Health Protection

Executive Order 13045: ``Protection of Children from Environmental

Health Risks and Safety Risks'' (62 FR 19885, April 23, 1997) applies

to any rule that: (1) is determined to be ``economically significant''

as defined under E.O. 12866, and (2) concerns an

[[Page 16383]]

environmental health or safety risk that EPA has reason to believe may

have a disproportionate effect on children. If the regulatory action

meets both criteria, the Agency must evaluate the environmental health

or safety effects of the planned rule on children, and explain why the

planned regulation is preferable to other potentially effective and

reasonably feasible alternatives considered by the Agency.

EPA interprets E.O. 13045 as applying only to those regulatory

actions that are based on health or safety risks, such that the

analysis required under section 5-501 of the Order has the potential to

influence the regulation. This notice is not subject to E.O. 13045

because it presents options to implement a previously promulgated

health or safety-based Federal standard, which in this case would be

the accelerated phaseout schedule for HCFCs (58 FR 65018).

D. National Technology Transfer and Advancement Act

The National Technology Transfer and Advancement Act of 1995

(NTTAA), Sec. 12(d), Pub. L. 104-113, requires federal agencies and

departments to use technical standards that are developed or adopted by

voluntary consensus standards bodies, using such technical standards as

a means to carry out policy objectives or activities determined by the

agencies and departments. If use of such technical standards is

inconsistent with applicable law or otherwise impractical, a federal

agency or department may elect to use technical standards that are not

developed or adopted by voluntary consensus standards bodies if the

head of the agency or department transmits to the Office of Management

and Budget an explanation of the reasons for using such standards.

This advance notice does not mandate the use of any technical

standards; accordingly, the NTTAA does not apply to this advance

notice.

Annex A: Ozone Depletion Potentials for Class II Substances as Currently

Listed under the Montreal Protocol*

Dichlorofluoromethane (HCFC-21)................ 0.04

Monochlorodifluoromethane (HCFC-22)............ 0.055

Monochlorofluoromethane (HCFC-31).............. 0.02

Tetrachlorofluoroethane (HCFC-121)............. 0.01-0.04

Trichlorodifluoroethane (HCFC-122)............. 0.02-0.08

Dichlorotrifluoroethane (HCFC-123)............. 0.02

Monochlorotetrafluoroethane (HCFC-124)......... 0.022

Trichlorofluoroethane (HCFC-131)............... 0.007-0.05

Dichlorodifluoroethane (HCFC-132b)............. [reserved]

Monochlorotrifluoroethane (HCFC-133a).......... 0.02-0.06

Dichlorofluoroethane (HCFC-141b)............... 0.11

Monochlorodifluoroethane (HCFC-142b)........... 0.065

Hexachlorofluoropropane (HCFC-221)............. 0.015-0.07

Pentachlorodifluoropropane (HCFC-222).......... 0.01-0.09

Tetrachlorotrifluoropropane (HCFC-223)......... 0.01-0.08

Trichlorotrifluoropropane (HCFC-224)........... 0.01-0.09

Dichloropentafluoropropane (HCFC-225ca)........ 0.025

Dichloropentafluoropropane (HCFC-225cb)........ 0.033

Monochlorohexafluoropropane (HCFC-226)......... 0.02-0.10

Pentachlorofluoropropane (HCFC-231)............ 0.05-0.09

Tetrachlorodifluoropropane (HCFC-232).......... 0.008-0.10

Trichlorotrifluoropropane (HCFC-233)........... 0.007-0.23

Dichlorotetrafluoropropane (HCFC-234).......... 0.01-0.28

Monochloropentafluoropropane (HCFC-235)........ 0.03-0.52

Tetrachlorofluoropropane (HCFC-241)............ 0.004-0.09

Trichlorodifluoropropane (HCFC-242)............ 0.005-0.13

Dichlorotrifluoropropane (HCFC-243)............ 0.007-0.12

Monochlorotetrafluoropropane (HCFC-244)........ 0.009-0.14

Trichlorofluoropropane (HCFC-251).............. 0.001-0.01

Dichlorodifluoropropane (HCFC-252)............. 0.005-0.04

Monochlorotrifluoropentane (HCFC-253).......... 0.003-0.03

Dichlorofluoropropane (HCFC-261)............... 0.002-0.02

Monochlorodifluoropropane (HCFC-262)........... 0.002-0.02

Monochlorofluoropropane (HCFC-271)............. 0.001-0.03

*According to Annex C of the Protocol, ``Where a range of ODPs is

indicated, the highest value in that range shall be used for the

purposes of the Protocol. The ODPs listed as a single value have been

determined from calculations based on laboratory measurements. Those

listed as a range are based on estimates and are less certain. The

range pertains to an isomeric group. The upper value is the estimate

of the ODP of the isomer with the highest ODP, and the lower value is

the estimate of the ODP of the isomer with the lowest ODP.''

List of Subjects in 40 CFR Part 82

Environmental protection, Allowances, Administration practice and

procedure, Air pollution control, Chemicals, Chlorofluorocarbons,

Exports, Hydrochlorofluorocarbons, Imports, Montreal Protocol,

Production, Reporting and recordkeeping requirements, Stratospheric

ozone layer.

Dated: March 29, 1999.

Carol M. Browner,

Administrator.

[FR Doc. 99-8258 Filed 4-2-99; 8:45 am]

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