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

ENVIRONMENTAL PROTECTION AGENCY

40 CFR Part 82

[EPA-HQ-OAR-2008-0496; FRL-9091-7]

RIN 2060-A076

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

AGENCY:

Environmental Protection Agency (EPA).

ACTION:

Final rule.

SUMMARY:

EPA is adjusting the allowance system controlling U.S. consumption and production of hydrochlorofluorocarbons (HCFCs). This action allocates production and consumption allowances for HCFC-22 and HCFC-142b, as well as other HCFCs for which allowances were not allocated previously, for the control periods 2010-2014. This action also establishes baselines for HCFCs for which EPA had not established baselines previously. The HCFC allowance system is part of EPA's Clean Air Act program to phase out ozone-depleting substances to protect the stratospheric ozone layer. Protection of the stratospheric ozone layer helps reduce rates of skin cancer and cataracts, as well as other health and ecological effects. The U.S. is obligated under the

Montreal Protocol on Substances that Deplete the Ozone Layer

(Montreal Protocol) to limit HCFC consumption and production to a specific level and, using stepwise reductions, to decrease the specific level culminating in a complete HCFC phaseout in 2030. The next major milestone, to occur on January 1, 2010, is a 75 percent reduction from the aggregate U.S. HCFC baseline for production and consumption. The allowances allocated in this action ensure compliance with the international stepwise reduction, consistent with the 1990 Clean Air Act Amendments. In addition, this action amends the regulatory provisions concerning allowances for HCFC production for developing countries' basic domestic needs to be consistent with the September 2007 adjustments to the Montreal Protocol. Also, this action provides the Agency's interpretation of a self-effectuating ban on introduction into interstate commerce and use of HCFCs contained in section 605(a) of the Clean Air Act and amends existing regulatory provisions to facilitate implementation of the statutory requirements.

DATES:

This rule is effective January 1, 2010.

ADDRESSES:

EPA has established a docket for this action under Docket ID No. EPA-HQ-OAR-2008-0496. All documents in the docket are listed on the

www.regulations.gov

Web site. Although listed in the index, some information is not publicly available,

e.g.,

confidential business information (CBI) or other information whose disclosure is restricted by statute. Certain other material, such as copyrighted material, is not placed on the Internet and will be publicly available only in hard copy form. Publicly available docket materials are available either electronically through

www.regulations.gov

or in hard copy at the Air and Radiation Docket, EPA/DC, EPA West, Room 3334, 1301 Constitution Ave., NW., Washington, DC. The Public Reading Room is open from 8:30 a.m. to 4:30 p.m., Monday through Friday, excluding legal holidays. The telephone number for the Public Reading Room is (202) 566-1744.

FOR FURTHER INFORMATION CONTACT:

Jeremy Arling by telephone at (202) 343-9055, or by e-mail at

arling.jeremy@epa.gov

or by mail at U.S. Environmental Protection Agency, Stratospheric Protection Division, Stratospheric Program Implementation Branch (6205J), 1200 Pennsylvania Avenue, NW., Washington, DC 20460. For technical information, contact Staci Gatica at (202) 343-9469, or by e-mail at

gatica.staci@epa.gov

or by mail at U.S. Environmental Protection Agency, Stratospheric Protection Division, Stratospheric Program Implementation Branch (6205J), 1200 Pennsylvania Avenue, NW., Washington, DC 20460. You may also visit the Ozone Depletion Web site of EPA's Stratospheric Protection Division at

www.epa.gov/ozone/strathome.html

for further information about EPA's Stratospheric Ozone Protection regulations, the science of ozone layer depletion, and related topics.

SUPPLEMENTARY INFORMATION:

Under the

Montreal Protocol on Substances that Deplete the Ozone Layer

(Montreal Protocol), as amended, the U.S. and other industrialized countries that are Parties to the Protocol have agreed to limit production and consumption of hydrochlorofluorocarbons (HCFCs), and to phase out production and consumption in a stepwise fashion over time, culminating in a general phaseout by 2020 while permitting a small amount of HCFC production and consumption to continue solely for servicing existing appliances until 2030. Title VI of the Clean Air Act Amendments of 1990 (CAAA of 1990) also mandates restrictions on HCFCs, culminating in a complete production and consumption phaseout in 2030. For purposes of both the Montreal Protocol and the Clean Air Act, “consumption” is defined as production plus imports minus exports. Sections 605 and 606 of the Clean Air Act authorize EPA to promulgate regulations to manage the consumption and production of HCFCs until the terminal phaseout. In 1993, EPA established a chemical-by-chemical, “worst-first,” approach to implement the Montreal Protocol's graduated phaseout in overall HCFC levels (58 FR 65018). Key concepts in the “worst-first” approach include “distinguishing among HCFCs based on their ODP [ozone depletion potential] and phasing out use in new equipment prior to use for servicing existing equipment” (58 FR 65026).

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The consumption cap became effective in 1996, and HCFC consumption in the U.S. remained about 15 percent below the cap for the first two years. In 1998 and 1999, consumption rose to levels that approached the cap. On January 21, 2003, EPA established an allowance system for HCFCs (68 FR 2820), noting at that time that it would again pursue a notice-and-comment rulemaking to implement a 2010 stepwise reduction. EPA promulgated minor amendments to these regulations on June 17, 2004 (69 FR 34024), and July 20, 2006 (71 FR 41163).

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The ozone depletion potential (ODP) is a number that refers to the amount of ozone depletion caused by a substance. It is the ratio of the impact on ozone of a chemical compared to the impact of a similar mass of CFC-11. Thus, the ODP of CFC-11 is defined to be 1.0. Other CFCs and HCFCs have ODPs ranging from 0.01 to 1.0.

This action implements the next step in the chemical-by-chemical phaseout the United States uses to meet its international obligations. Specifically, EPA is granting specified percentages of the consumption and production baselines for HCFC-141b, HCFC-22, and HCFC-142b for the control periods 2010-2014. This action also establishes company-by-company consumption and production baselines for other HCFCs and grants specified percentages of those baselines for the control periods 2010-2014. This action also amends the provisions for HCFC production allowances to meet the basic domestic needs of developing countries. In addition, EPA is providing its interpretation of a self-effectuating ban on introduction into interstate commerce and use of HCFCs, which is contained in section 605(a) of the Clean Air Act.

Section 553(d) of the Administrative Procedure Act (APA), 5 U.S.C. Chapter 5, generally provides that rules may not take effect earlier than 30 days after they are published in the

Federal Register.

EPA is issuing this final rule under section 307(d)(1) of the Clean Air Act, which states: “The provisions of section 553 through 557 * * * of Title 5 shall not, except as expressly provided in this section, apply to actions to which this subsection applies.” Thus, section 553(d) of the APA does not apply to this rule. EPA is nevertheless acting consistently with the policies underlying APA section 553(d) in making this rule effective on January 1, 2010. APA section 553(d) provides exceptions for any action that grants or recognizes an exemption or relieves a restriction or as otherwise provided by the agency for good cause found and published within the rule. This final rule relieves a restriction by authorizing the production and import of certain HCFCs in 2010 that would otherwise be prohibited under the existing regulations.

Abbreviations and Acronyms Used in This Document

AHRI—Air-Conditioning, Heating, and Refrigeration Institute

BDN—Basic Domestic Need

CAA—Clean Air Act

CAAA—Clean Air Act Amendments of 1990

CFC—Chlorofluorocarbon

EPA—Environmental Protection Agency

FDA—Food and Drug Administration

HCFC—Hydrochlorofluorocarbon

HFC—Hydrofluorocarbon

Montreal Protocol—

Montreal Protocol on Substances that Deplete the Ozone Layer

MOP—Meeting of the Parties

MT—Metric Ton

NPRM—Notice of Proposed Rulemaking

ODP—Ozone Depletion Potential

ODS—Ozone-Depleting Substance

OEM—Original Equipment Manufacturer

Party—States and regional economic integration organizations that have consented to be bound by the

Montreal Protocol on Substances that Deplete the Ozone Layer

SNAP—Significant New Alternatives Policy

TXV—Thermostatic Expansion Valve

UNEP—United Nations Environment Programme

Table of Contents

I. Regulated Entities

II. Background

A. How Does the Montreal Protocol Phase Out HCFCs?

B. How Does the Clean Air Act Phase Out HCFCs?

C. What Sections of the Clean Air Act Apply to This Rulemaking?

III. Summary of this Final Action

IV. Allocation of Allowances for the 2010-2014 Control Periods

A. Baselines for HCFC-22 and HCFC-142b Allowances

1. Adjusting the Baseline for Inter-company and Inter-pollutant Transfers

2. Meeting the Needs of Certified Reclaimers

B. Factors for Considering Allocation Amounts for HCFC-22 and HCFC-142b

1. The Importance of HCFC-22 Servicing Needs for Existing Equipment

2. Meeting Servicing Needs With Virgin and Reclaimed Material

3. Annual Reduction in Allocated Amounts

C. Allocations of HCFC-22 and HCFC-142b

1. HCFC-22 Allowances for 2010-2014

2. HCFC-142b Allowances for 2010-2014

3. How the Aggregate for HCFC-22 and HCFC-142b Translates Entity-by-Entity

D. HCFC-123, HCFC-124, HCFC-225ca, and HCFC-225cb Allowances

1. Baselines for HCFC-123, HCFC-124, HCFC-225ca, and HCFC-225cb

2. Allocation Levels for HCFC-123, HCFC-124, HCFC-225ca, and HCFC-225cb

E. Other HCFCs

V. Article 5 Allowances

VI. Accelerated Use Restrictions Under Section 605

A. Definition of “Introduction Into Interstate Commerce”

B. Interpretation of the Term “Use”

C. Interpretation of the Phrase “Appliances Manufactured Prior To”

D. Exceptions to the Accelerated Use Restrictions

1. Thermostatic Expansion Valves

2. Medical Equipment

VII. Statutory and Executive Order Reviews

A. Executive Order 12866: Regulatory Planning and Review

B. Paperwork Reduction Act

C. Regulatory Flexibility Act (RFA)

D. Unfunded Mandates Reform Act

E. Executive Order 13132: Federalism

F. Executive Order 13175: Consultation and Coordination With Indian Tribal Governments

G. Executive Order 13045: Protection of Children From Environmental Health and Safety Risks

H. Executive Order 13211: Actions That Significantly Affect Energy Supply, Distribution, or Use

I. National Technology Transfer Advancement Act

J. Executive Order 12898: Federal Actions To Address Environmental Justice in Minority Populations and Low-Income Populations

K. Congressional Review Act

I. Regulated Entities

This rule will affect the following categories:

Category

NAICS code

SIC code

Examples of regulated entities

Industrial Gas Manufacturing

325120

2869

Fluorinated hydrocarbon gases manufacturers and reclaimers.

Other Chemical and Allied Products Merchant Wholesalers

424690

5169

Chemical gases and compressed gases merchant wholesalers.

Air-Conditioning and Warm Air Heating Equipment and Commercial and Industrial Refrigeration Equipment Manufacturing

333415

3585

Air-Conditioning Equipment and Commercial and Industrial Refrigeration Equipment manufacturers.

Air-Conditioning Equipment and Supplies Merchant Wholesalers

423730

5075

Air-conditioning (condensing unit, compressors) merchant wholesalers.

Electrical and Electronic Appliance, Television, and Radio Set Merchant Wholesalers

423620

5064

Air-conditioning (room units) merchant wholesalers.

Plumbing, Heating, and Air-Conditioning Contractors

238220

1711, 7623

Central air-conditioning system and commercial refrigeration installation; HVAC contractors.

This table is not intended to be exhaustive, but rather provides a guide for readers regarding entities likely to be regulated by this action. This table lists the types of entities that EPA is now aware potentially could be regulated by this action. Other types of entities not listed in this table could also be affected. To determine whether your facility, company, business organization, or other entity is regulated by this action, you should carefully examine these regulations. If you have questions regarding the applicability of this action to a particular entity, consult the person listed in the

FOR FURTHER INFORMATION CONTACT

section.

II. Background

A. How Does the Montreal Protocol Phase Out HCFCs?

The

Montreal Protocol on Substances that Deplete the Ozone Layer

is the international agreement aimed at reducing and eventually eliminating the production and consumption of

stratospheric ozone-depleting substances. The U.S. was one of the original signatories to the 1987 Montreal Protocol and the U.S. ratified the Protocol on April 12, 1988. Congress then enacted, and President George H.W. Bush signed into law, the Clean Air Act Amendments of 1990 (CAAA of 1990), which included Title VI on Stratospheric Ozone Protection, codified as 42 U.S.C. Chapter 85, Subchapter VI, to ensure that the United States could satisfy its obligations under the Montreal Protocol. Title VI includes restrictions on production, consumption, and use of ozone-depleting substances that are subject to acceleration if “the Montreal Protocol is modified to include a schedule to control or reduce production, consumption, or use * * * more rapidly than the applicable schedule” prescribed by the statute. Both the Montreal Protocol and the Clean Air Act define consumption as production plus imports minus exports.

In 1990, as part of the London Amendment to the Montreal Protocol, the Parties identified HCFCs as “transitional substances” to serve as temporary, lower-ODP substitutes for CFCs and other ODS. EPA similarly viewed HCFCs as “important interim substitutes that will allow for the earliest possible phaseout of CFCs and other Class I substances

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” (58 FR 65026). In 1992, through the Copenhagen Amendment to the Montreal Protocol, the Parties created a detailed phaseout schedule for HCFCs beginning with a cap on consumption for industrialized (Article 2) Parties, a schedule to which the United States adheres. The consumption cap for each Article 2 Party was set at 3.1 percent (later tightened to 2.8 percent) of a Party's CFC consumption in 1989, plus a Party's consumption of HCFCs in 1989 (weighted on an ODP basis). Based on this formula, the HCFC consumption cap for the U.S. was 15,240 ODP-weighted metric tons, effective January 1, 1996. This became the U.S. consumption baseline for HCFCs.

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Class I refers to the controlled substances listed in appendix A to 40 CFR part 82 subpart A. Class II refers to the controlled substances listed in appendix B to 40 CFR part 82 subpart A.

The 1992 Copenhagen Amendment created a schedule with graduated reductions and the eventual phaseout of HCFC consumption (Copenhagen, 23-25 November, 1992, Decision IV/4). Prior to the 2007 adjustment, the schedule called for a 35 percent reduction of the consumption cap in 2004, followed by a 65 percent reduction in 2010, a 90 percent reduction in 2015, a 99.5 percent reduction in 2020 (restricting the remaining 0.5 percent of baseline to the servicing of existing refrigeration and air-conditioning equipment), with a total phaseout in 2030.

The Copenhagen Amendment did not cap HCFC production. In 1999, the Parties created a cap on production for Article 2 Parties through an amendment to the Montreal Protocol agreed by the Eleventh Meeting of the Parties (Beijing, 29 November-3 December 1999, Decision XI/5). The cap on production was set at the average of: (a) 1989 HCFC production plus 2.8 percent of 1989 CFC production, and (b) 1989 HCFC consumption plus 2.8 percent of 1989 CFC consumption. Based on this formula, the HCFC production cap for the U.S. was 15,537 ODP-weighted metric tons, effective January 1, 2004. This became the U.S. production baseline for HCFCs.

To further protect human health and the environment, the Parties to the Montreal Protocol adjusted the Montreal Protocol's phaseout schedule for HCFCs at the 19th Meeting of the Parties in September 2007. In accordance with Article 2(9)(d) of the Montreal Protocol, the adjustment to the phaseout schedule was effective on May 14, 2008.

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Under Article 2(9)(d) of the Montreal Protocol, an adjustment enters into force six months from the date the depositary (the Ozone Secretariat) circulates it to the Parties. The depositary accepts all notifications and documents related to the Protocol and examines whether all formal requirements are met. In accordance with the procedure in Article 2(9)(d), the depositary communicated the adjustment to all Parties on November 14, 2007. The adjustment entered into force and become binding for all Parties on May 14, 2008.

As a result of the 2007 Montreal Adjustment (reflected in Decision XIX/6), the United States and other industrialized countries are obligated to reduce HCFC production and consumption 75 percent below the established baseline by 2010, rather than 65 percent as was the previous requirement. The other milestones remain the same: 90 percent below the baseline by 2015, and 99.5 percent below the baseline by 2020—allowing, during 2020 to 2030, production and consumption at only 0.5 percent of baseline solely for servicing existing air-conditioning and refrigeration equipment. The adjustment also resulted in a phaseout schedule for HCFC production that parallels the consumption phaseout schedule. All production and consumption for Article 2 Parties is phased out by 2030.

Decision XIX/6 also adjusted the provisions for Parties operating under paragraph 1 of Article 5 (developing countries): (1) To set HCFC production and consumption baselines based on the average 2009-2010 production and consumption, respectively; (2) to freeze HCFC production and consumption at those baselines in 2013; and (3) to add stepwise reductions of 10 percent below baselines by 2015, 35 percent by 2020, 67.5 percent by 2025, and 97.5 percent by 2030—allowing, between 2030 and 2040, an annual average of no more than 2.5 percent to be produced or imported solely for servicing existing air-conditioning and refrigeration equipment. All production and consumption for Article 5 Parties is phased out by 2040.

In addition, Decision XIX/6 adjusted Article 2F to allow industrialized countries to produce “up to 10 percent of baseline levels” for export to Article 5 countries “in order to satisfy basic domestic needs” until 2020.

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Paragraph

14 of Decision XIX/6 notes that no later than 2015 the Parties would consider “further reduction of production for basic domestic needs” in 2020 and beyond. Under paragraph 13 of Decision XIX/6, the Parties will review in 2015 and 2025, respectively, the need for the “servicing tails” for industrialized and developing countries. The term “servicing tail” refers to an amount of HCFCs used to service existing equipment, such as certain types of air-conditioning and refrigeration appliances.

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Paragraphs 4-6 of adjusted Article 2F read as follows:

4. Each Party shall ensure that for the twelve-month period commencing on 1 January 2010, and in each twelve-month period thereafter, its calculated level of consumption of the controlled substances in Group I of Annex C does not exceed, annually, twenty-five percent of the sum referred to in paragraph 1 of this Article. Each Party producing one or more of these substances shall, for the same periods, ensure that its calculated level of production of the controlled substances in Group I of Annex C does not exceed, annually, twenty-five percent of the calculated level referred to in paragraph 2 of this Article. However, in order to satisfy the basic domestic needs of the Parties operating under paragraph 1 of Article 5, its calculated level of production may exceed that limit by up to ten percent of its calculated level of production of the controlled substances in Group I of Annex C as referred to in paragraph 2.

5. Each Party shall ensure that for the twelve-month period commencing on 1 January 2015, and in each twelve-month period thereafter, its calculated level of consumption of the controlled substances in Group I of Annex C does not exceed, annually, ten percent of the sum referred to in paragraph 1 of this Article. Each Party producing one or more of these substances shall, for the same periods, ensure that its calculated level of production of the controlled substances in Group I of Annex C does not exceed, annually, ten percent of the calculated level referred to in paragraph 2 of this Article. However, in order to satisfy the basic domestic needs of the Parties operating under paragraph 1 of Article 5, its calculated level of production may exceed that limit by up to ten percent of its calculated level of production of the controlled substances in Group I of Annex C as referred to in paragraph 2.

6. Each Party shall ensure that for the twelve-month period commencing on 1 January 2020, and in each twelve-month period thereafter, its calculated level of consumption of the controlled substances in Group I of Annex C does not exceed zero. Each Party producing one or more of these substances shall, for the same periods, ensure that its calculated level of production of the controlled substances in Group I of Annex C does not exceed zero. However:

i. Each Party may exceed that limit on consumption by up to zero point five percent of the sum referred to in paragraph 1 of this Article in any such twelve-month period ending before 1 January 2030, provided that such consumption shall be restricted to the servicing of refrigeration and air conditioning equipment existing on 1 January 2020;

ii. Each Party may exceed that limit on production by up to zero point five percent of the average referred to in paragraph 2 of this Article in any such twelve-month period ending before 1 January 2030, provided that such production shall be restricted to the servicing of refrigeration and air conditioning equipment existing on 1 January 2020.

B. How Does the Clean Air Act Phase Out HCFCs?

The United States has chosen to implement the Montreal Protocol phaseout schedule on a chemical-by-chemical basis. In 1992, environmental and industry groups petitioned EPA to implement the required phaseout by eliminating the most ozone-depleting HCFCs first. Based on the available data at that time, EPA believed that the U.S. could meet, and possibly exceed, the required Montreal Protocol reductions through a chemical-by-chemical phaseout that employed a “worst-first” approach focusing on certain chemicals earlier than others. In 1993, as authorized by section 606 of the CAA, the U.S. established a phaseout schedule that eliminated HCFC-141b first and would greatly restrict HCFC-142b and HCFC-22 next, followed by restrictions on all other HCFCs and ultimately a complete phaseout (58 FR 15014, March 18, 1993; 58 FR 65018, December 10, 1993). EPA explained that its action modified the schedule contained in paragraphs (a) and (b) of section 605 (58 FR 65025). Paragraph (a) addresses use and introduction into interstate commerce, while paragraph (b) addresses production.

On January 21, 2003 (68 FR 2820), EPA promulgated regulations to ensure compliance with the first reduction milestone in the HCFC phaseout: the requirement that, by January 1, 2004, the U.S. reduce HCFC consumption by 35 percent and freeze HCFC production. In that rule EPA established chemical-specific consumption and production baselines for HCFC-141b, HCFC-22, and HCFC-142b. Section 601(2) states that EPA may select “a representative calendar year” to serve as the baseline for HCFCs. In the 2003 allocation rule, EPA concluded that because the entities eligible for allowances had differing production and import histories, no one year was representative for all companies. Therefore, EPA assigned an individual consumption baseline year to each company by selecting its highest ODP-weighted consumption year from among the years 1994 through 1997. EPA assigned individual production baseline years in the same manner. EPA also provided an exception allowing new entrants provided that they began importing after the end of 1997 but before April 5, 1999, the date the advanced notice of proposed rulemaking (ANPRM) was published. EPA believed that such small businesses might not have been aware of the impending rulemaking that would affect their ability to continue in the HCFC market.

The 2003 allocation rule apportioned production and consumption baselines to each company in amounts equal to the amounts in the company's highest “production year” or “consumption year,” as described above. It completely phased out the production and import of HCFC-141b by granting 0 percent of that substance's baseline for production and consumption in the table at § 82.16. EPA did, however, create a petition process to allow applicants to request very small amounts of HCFC-141b beyond the phaseout. The rule also granted 100 percent of the baselines for production and consumption of HCFC-22 and HCFC-142b. EPA was able to allocate allowances for HCFC-22 and HCFC-142b at 100 percent of baseline because, in light of the concurrent complete phaseout of HCFC-141b, the allocations for HCFC-22 and HCFC-142b, combined with projections for consumption of all other HCFCs, remained below the 2004 cap of 65 percent of the U.S. baseline.

EPA allocates allowances for specific years; they are valid between January 1 and December 31 of a given control period (

i.e.,

calendar year). Prior to this rulemaking, EPA had not allocated any HCFC allowances for year 2010 or beyond. The regulations at 40 CFR 82.15(a) and (b) only permitted the production and import of HCFC-22 and HCFC-142b for the years 2003-2009. Through this rulemaking, EPA is now allocating calendar-year allowances for HCFC-142b and HCFC-22 to allow production and import during the 2010-2014 control periods. Absent the grant of calendar-year allowances, § 82.15 would prohibit their production and import after December 31, 2009. This final rule allows for continued production and consumption, at specified amounts, of HCFC-142b, HCFC-22, and other HCFCs not previously granted allocations, for the 2010-2014 control periods.

In the United States, an allowance is the unit of measure that controls production and consumption of ozone-depleting substances. An allowance represents the privilege granted to a company to produce or import one kilogram (not ODP-weighted) of the specific substance. EPA establishes company-by-company baselines (also known as “baseline allowances”) and allocates calendar-year allowances equal to a percentage of the baseline for specified control periods. EPA has allocated two types of calendar-year allowances—production allowances and consumption allowances—for HCFC-22 and HCFC-142b. “Production allowance” and “consumption allowance” are defined at 40 CFR 82.3. To produce an HCFC for which allowances have been allocated, an allowance holder must expend both production and consumption allowances. To import an HCFC for which allowances have been allocated, an allowance holder must expend consumption allowances. An allowance holder exporting HCFCs for which it has expended consumption allowances may obtain a refund of those consumption allowances upon submittal of proper documentation to EPA.

Since EPA is implementing the phaseout on a chemical-by-chemical basis, it allocates and tracks production and consumption allowances on an absolute kilogram basis for each chemical. Upon EPA approval, an allowance holder may trade allowances of one type of HCFC for allowances of another type of HCFC, with transactions weighted according to the ozone depletion potential (ODP) of the chemicals involved. Pursuant to section 607 of the Clean Air Act, EPA applies an offset to each HCFC trade by deducting 0.1 percent from the transferor's allowance balance. The offset benefits the ozone layer since it “results in greater total reductions in the production in each year of * * * class II substances than would occur in that year in the absence of such transactions” (42 U.S.C. 7671f).

Because EPA has allocated the same amount of allowances every year from 2004 to 2009—with minor changes reflecting permanent trades of baseline allowances—and because EPA tracks the production and consumption of all HCFCs (including those for which baselines are not allocated), the Agency can ascertain that the U.S. will remain comfortably below the aggregate HCFC cap through 2009. The 2003 allocation rule announced that EPA would allocate allowances for 2010-2014 in a

subsequent action and that those allowances would be lower in aggregate than for 2003-2009, consistent with the next stepwise reduction for HCFCs under the Montreal Protocol. EPA stated its intention to determine the exact amount of allowances that would be needed for HCFC-22 and HCFC-142b, bearing in mind that other HCFCs would also contribute to total HCFC consumption. EPA stated that it would likely achieve the 2010 reduction step by applying a percentage reduction to the HCFC-22 and HCFC-142b baseline allowances. EPA has monitored the market to estimate servicing needs and market adjustments in the use of HCFCs, including HCFCs for which EPA did not establish baselines in the 2003 allocation rule.

C. What Sections of the Clean Air Act Apply to This Rulemaking?

Several sections of the Clean Air Act apply to this rulemaking. Section 605 of the Clean Air Act phases out production and consumption and restricts the use of HCFCs in accordance with the schedule set forth in that section. Section 606 provides for acceleration of the schedule in section 605 based on an EPA determination regarding current scientific information or the availability of substitutes, or to conform to any acceleration under the Montreal Protocol. EPA has previously accelerated the section 605 schedule through a rulemaking published December 10, 1993 (58 FR 65018). Through this action, EPA is further accelerating the HCFC production and consumption phaseouts in section 605(b)-(c).

Section 606 provides authority for EPA to promulgate regulations that establish a schedule for production and consumption that is more stringent than what is set forth in section 605 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, taking into account technological achievability, safety, and other relevant factors, 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.” It is only necessary to meet one of the three criteria. In this instance, all three criteria have been met with respect to the schedule for phasing out production and consumption of HCFC-22 and HCFC-142b.

The first criterion allows the Administrator, based on an assessment of credible current scientific information, to determine that a more stringent schedule may be necessary to protect human health. The recent scientific findings by the Montreal Protocol's Science Assessment Panel,

Science Assessment of Ozone Depletion: 2006,

available in the docket for this rulemaking, were initially presented to the Parties to the Montreal Protocol in October 2006 at the 18th Meeting of the Parties in New Delhi, India. The Assessment was published in March 2007, and hard copies were available to the Parties in advance of the 26th Open-Ended Working Group Meeting held in June 2007 in Nairobi, Kenya. The assessment report shows that notwithstanding the evidence of a healing of the ozone layer, there continue to be human health and environmental effects associated with ozone depletion and that recovery continues to rely on a successful total global phaseout of ODS. Specifically, the report concludes that the date when equivalent effective stratospheric chlorine (EESC) relevant to mid-latitude ozone depletion returns to pre-1980 levels is 2049, which is five years later than projected in the previous Scientific Assessment. The later return is primarily due to higher estimated future emissions of CFC-11, CFC-12, and HCFC-22. The report includes scenarios where additional actions taken by the Parties would result in a faster recovery. While these specific scenarios (including complete phaseout by the end of that calendar year) were not all necessarily deemed to be practical, they demonstrated to the Parties what could be achieved with additional actions. The percentage reduction in EESC attributed to HCFCs is larger than previously reported and the scenarios showed that reducing HCFCs could have a greater effect than reducing any of the other compounds or groups of compounds given their current production levels. These findings contributed in part to the willingness of many Parties, including the United States, to consider the adjustments to the Montreal Protocol's HCFC phaseout schedule that were successfully negotiated in September 2007. EPA published a notice of data availability (72 FR 35230) concerning the potential changes in HCFC consumption from proposed adjustments to the Montreal Protocol submitted by the United States for consideration at the 19th Meeting of the Parties held in Montreal September 2007. The data made available through that notice were specific to the United States' proposal but had general applicability to the other five proposals submitted by various Parties to the Protocol and to what was ultimately agreed to by the Parties at the 19th Meeting. EPA believes the recent scientific findings on stratospheric ozone depletion, together with the well-established relationship between ozone depletion and increased risk of human health effects, support a determination that a more stringent HCFC phaseout schedule may be necessary to protect against such effects.

The second criterion allows the Administrator to determine that a more stringent schedule is practicable based on the availability of substitutes for ODS, taking into account technological achievability, safety, and other relevant factors. Since the establishment of the domestic chemical-by-chemical phaseout in the United States, advances by industry have resulted in the availability of substitutes for a large variety of end-use applications. Under section 612 of the CAA, EPA's Significant New Alternatives Policy (SNAP) program evaluates alternatives for ODS and lists as acceptable those that do not pose a greater risk to human health than other substitutes that are currently or potentially available. Alternatives include chemical replacements, product substitutes, and alternative technologies. The SNAP program has reviewed approximately 400 alternatives to date. EPA makes information available concerning potential alternatives for various end-use applications. Suitable alternatives—in many cases, multiple suitable alternatives—are available for all end-use applications for the HCFCs considered in this action. However, as discussed later in this preamble, EPA has learned of three niche end use applications where substitutes exist but other factors may be affecting the timing of their implementation. Because sufficient quantities of HCFC have already been produced for these uses, EPA took this information into account in evaluating the schedule for phasing out use under section 605(a) rather than the schedule for phasing out production under section 605(b)-(c). The use phaseout is discussed below.

The SNAP program has reviewed substitutes to ODS for the following industrial sectors:

• Refrigeration & Air Conditioning

• Foam Blowing Agents

• Cleaning Solvents

• Fire Suppression and Explosion Protection

• Aerosols

• Sterilants

• Tobacco Expansion

• Adhesives, Coatings & Inks

HCFCs have been used in all of these industrial sectors except for tobacco expansion. Within the air conditioning and refrigeration industrial sector, end uses where HCFCs have been used include chillers, industrial process refrigeration systems, industrial process air conditioning, bus and passenger train AC, ice machines, very low temperature refrigeration, ice skating rinks, cold storage warehouses, refrigerated transport, retail food refrigeration, household appliances, and residential and light commercial air conditioning and heat pumps. The SNAP program lists substitutes for each of these end uses.

A wide range of alternative refrigerants found acceptable under EPA's SNAP program are available in the AC and refrigeration sector. Hydrofluorocarbons (HFCs) and HFC-based alternatives, including R-134a, R-410A (composed of HFC-32/HFC-125), R-407C (composed of HFC-32/HFC-125/HFC-134a), R-404A (composed of HFC-125/HFC-143a/HFC-134a), and R-507A (composed of HFC-125/HFC-143a), are currently used in a variety of refrigeration and AC equipment. In addition, other refrigerants such as CO

2

, ammonia, and hydrocarbons are available as alternatives. The pace of transition to equipment using these alternatives has varied by industry and type of equipment. Appendix A to the Servicing Tail report found in the docket to this rule presents EPA's estimates of the market penetration of alternatives for each end use within this sector.

Some mobile AC equipment has been using alternatives since the early 1990s, with some buses and trains using R-134a, and some heavy rail cars using R-407C. Stationary AC equipment using R-410A has been commercially available since 1996, and is expected to dominate the U.S. residential market in the near future. The projections in the Servicing Tail report are based on information regarding the transition to alternatives. New sales of residential AC systems are modeled such that only 10 percent of the market adopts alternatives by the end of 2008 and the remainder of the market for new equipment transitions completely by the end of 2009. Consumers naturally prefer equipment, services, and refrigerant that costs less. Previously, R-22 has been cheaper than alternatives. However, the economics are changing and R-410A pricing is beginning to match that of R-22. Most residential AC equipment purchasers now are buying equipment using R-410A.

Retail food refrigeration end-uses have been transitioning to alternatives more quickly than AC end-uses. EPA estimates that half of the refrigerant used in existing stores is R-22 but only 5% of new refrigeration systems installed in 2009 were charged with R-22. Advanced refrigeration technologies (

e.g.,

distributed systems and secondary loop systems) represent an estimated 40% of new equipment sales and such systems installed in the last ten years have been charged with HFC refrigerants.

As mentioned in the Servicing Tail report, several AC and refrigeration equipment manufacturers have indicated that they have discontinued production of new equipment that uses R-22. These actions are consistent with the actions taken in the mid-1990s, when the refrigeration and AC industries phased out CFC refrigerants from new production chillers, refrigerators, motor vehicle air conditioners, and other products two or more years before the 1996 CFC consumption phaseout.

Alternatives are available in the other sectors as well. For example, numerous alternatives exist for HCFC-22 and HCFC-142b for foam blowing agents, including water, Ecomate®, saturated light hydrocarbons (

e.g.,

cyclopentane), CO

2

, HFO-1234ze, and a number of HFCs or HFC blends. In place of HCFCs as propellants, most aerosol cans use saturate light hydrocarbons (

e.g.,

propane, n-butane, isobutane) or dimethyl ether where flammability is not a major concern or HFCs or compressed gases (

e.g.,

CO

2

, nitrogen) where flammability is a concern. (A complete list of substitutes is available at

http://www.epa.gov/ozone/snap/lists/index.html

.) EPA believes that given the availability of substitutes, a more stringent phaseout schedule for HCFC-22 and HCFC-142b is now practicable.

The last criterion is that the Montreal Protocol be modified to include a schedule to control or reduce production, consumption, or use of any substance more rapidly than section 605 would dictate. The United States submitted a proposal to adjust the Montreal Protocol in March 2007 to accelerate the phaseout of HCFCs. This was one of six proposals considered by the Parties at their 19th Meeting. Due to the efforts of the United States and others, the Parties agreed to adjustments that result in a more aggressive phaseout schedule for both developed and developing countries. Therefore, this third criterion has been met. Through this action, EPA is incorporating in its regulations a schedule that reflects the 2007 Montreal Adjustment. While section 606 is sufficient authority for this acceleration of the section 605 phaseout schedule, section 614(b) of the Clean Air Act provides that in the case of a conflict between the Act and the Protocol, the more stringent provision shall govern. Thus, section 614(b) requires the Agency to establish phaseout schedules at least as stringent as the schedules contained in the Protocol. To meet the 2010 stepdown requirement, EPA is allocating HCFC allowances for the years 2010 through 2014 at a level that will ensure the aggregate HCFC production and consumption will not exceed 25 percent of the U.S. baselines.

In addition to implementing the 2007 Montreal Adjustment, this rule also addresses provisions in section 605 of the Clean Air Act that relate to use and introduction into interstate commerce of class II substances. This action completes EPA's implementation (begun in 1993) of the section 605 provisions on use of class II substances. EPA is also promulgating regulatory language to reflect the section 605 provisions on introduction into interstate commerce of class II substances. EPA previously addressed the provisions concerning use of class II substances in a 1993 rulemaking that accelerated the phaseout schedule for HCFC-22 and HCFC-142b (58 FR 15014, 58 FR 65018). The intent of the 1993 rulemaking was to accelerate not only the production and consumption schedule, but also the use restrictions for those two substances under the authority of section 606(a)(1) and (2). In the March 18, 1993, notice of proposed rulemaking, EPA stated that the effect of this acceleration was “to prohibit the use of the chemicals (virgin material only) for any use except as a feedstock or as a refrigerant in existing equipment as of January 1, 2010” (58 FR 15028). EPA noted in the December 10, 1993, final rulemaking that “HCFC restrictions and the approach included in this final rule have not changed from those proposed by the Agency in March” (58 FR 65028). The regulatory provisions included with that notice, however, did not control use directly, but instead banned production and import for most uses. This action completes the prohibitions contemplated in the 1993 rule by adding to the regulatory text the restriction on use as well as the corresponding prohibitions on introduction into interstate commerce.

EPA is providing exceptions to this ban for medical equipment and thermal expansion valves, for which the practicability of substitutes remains an issue. EPA is also clarifying its interpretation of the section 605(a) restrictions on use and introduction into interstate commerce.

III. Summary of This Final Action

In this action, EPA is amending the existing regulations to implement the next major milestone in the HCFC phaseout. As a Party to the Montreal Protocol, and having ratified the Montreal Protocol and all of its amendments, the United States is required to decrease its amount of HCFC consumption and production to 25 percent of the U.S. baseline by 2010. Our domestic chemical-by-chemical approach results in differing schedules for the phaseout of individual HCFCs. EPA believes that the chemical-by-chemical allocation of HCFC allowances ensures that the United States continues to maintain an overall HCFC production and consumption level that is below the 2010 cap specified by the September 2007 Montreal Adjustment, while at the same time ensuring that servicing needs consistent with section 605(a) of the Clean Air Act and EPA's implementing regulations continue to be met. Thus, the aggregate allowances for all U.S. HCFC consumption in the years 2010-2014 do not exceed 3,810 ODP-weighted metric tons (25 percent of the aggregate U.S. consumption baseline) annually and the aggregate allowances for all U.S. HCFC production in the years 2010-2014 do not exceed 3,884.25 ODP-weighted metric tons (25 percent of the aggregate U.S. production baseline) annually.

To meet the 2010 cap for the 2010-2014 control periods, EPA is maintaining its past practice of apportioning company-specific production and consumption baselines for individual HCFCs, and allocating a certain percent of that baseline in an amount necessary to meet demand. For HCFC-22, that percentage decreases on an annual basis to reflect a projected decrease in demand as well as to promote recycling and reclamation, which in turn should prevent shortages that might otherwise occur upon the stepdown in 2015. This approach was discussed briefly in the proposal (73 FR 78691) and was supported in comments to the Agency. For HCFC-141b, HCFC-22, and HCFC-142b, EPA is adjusting the previously established company-specific baselines to reflect (1) permanent inter-company transfers of baseline allowances for a particular HCFC and (2) changes to the names of entities identified in the tables at § 82.17 and § 82.19. These adjustments do not reflect inter-pollutant transfers occurring on an annual basis. For 2010-2014, given the previous phaseout of HCFC-141b, EPA will continue to allocate zero percent of the HCFC-141b baseline, and allow only limited amounts of production via the existing EPA petition process.

5

EPA is allocating an annually declining percentage of baseline for HCFC-22 ranging from 41.9 percent in 2010 to 26.1 percent in 2014 and is allocating 0.47 percent of baseline for HCFC-142b in all years 2010-2014 to meet the U.S. obligations under the Montreal Protocol and to reflect the use restrictions under section 605(a) of the CAA while providing for servicing needs consistent with those restrictions.

5

EPA did not propose, and is not implementing in this action, any changes to the HCFC-141b petition process for the 2010-2014 control periods.

EPA is also implementing production and consumption controls for HCFC-123, HCFC-124, HCFC-225ca, and HCFC-225cb, which did not have baselines prior to this rulemaking. EPA is apportioning company-specific baselines for these HCFCs based on production and import data available to the Agency. For control periods 2010-2014, EPA is granting 125 percent of baseline for these HCFCs.

The allocations for HCFC-22, HCFC-142b, HCFC-123, HCFC-124, HCFC-225ca, and HCFC-225cb reflect EPA's analysis of market data for these chemicals. The allocation levels for these HCFCs meet the need for virgin material and avoid shortages during the affected control periods, as well as accommodate some market growth for the HCFCs for which EPA is allocating allowances for the first time in this action.

For the years 2010-2014, the Montreal Protocol allows a cap of 3,810 ODP tons for U.S. HCFC consumption (resulting in an aggregate of 19,050 ODP tons over the five control periods) and 3,884.25 ODP tons for U.S. HCFC production (resulting in 19,421.25 ODP tons over five control periods). Of that amount, EPA is allocating allowances totaling 12,355.5 ODP tons of consumption and 11,621.43 ODP tons of production over the five control periods. These allocations represent 65 percent of the consumption cap and 60 percent of the production cap established by the Montreal Protocol for 2010-2014. The difference between the cap and the total allocation reflects EPA's estimate of the need for HCFCs during these control periods. It also will accommodate minor adjustments in the market, particularly to allow potential market growth for HCFCs that have not been produced or imported since 2003 (and which are therefore not reflected here). As discussed in more detail in Section IV.B.3, it will also encourage greater reclamation of recovered refrigerant and will facilitate preparation for the 2015 phasedown in the consumption cap to 10% of baseline.

This action also changes two other components of the HCFC allowance allocation framework. First, to reflect the September 2007 Montreal Adjustments, EPA is adjusting the amount of Article 5 allowances for control periods 2010-2019. Second, EPA is completing its implementation of the provisions in section 605 of the Clean Air Act that relate to use and introduction into interstate commerce of class II substances. As discussed in Section VI.D. below, EPA is excepting the use of HCFC-22 in thermostatic expansion valves and in medical equipment from the accelerated restrictions on introduction into interstate commerce and use. EPA also is providing a limited grandfathering for use of HCFCs in refrigeration appliances that have not yet been “manufactured” under EPA's interpretation of that term but whose components have been specified for installation under a building permit or contract dated on or before January 1, 2010.

This final rule combined with the accompanying final rule titled “Protection of Stratospheric Ozone: Ban on the Sale or Distribution of Pre-Charged Appliances” (EPA Docket: EPA-HQ-OAR-2007-0163) (referred to in this preamble as the Pre-Charged Appliances rule) will have the following effects on the sale, distribution, and installation of air-conditioning and refrigeration products charged with HCFC-22, HCFC-142b, or blends containing one or both of these substances.

• Sale and distribution of

appliances

pre-charged with HCFC-22 or HCFC-142b is allowed for self-contained, factory-charged appliances such as pre-charged window units, packaged terminal air conditioners (PTACs), and some commercial refrigeration units, if manufactured

before

January 1, 2010. The pre-charged appliance rule does not prohibit sale and distribution of pre-2010 inventory (

i.e.,

stockpiled inventories).

• Sale and distribution of

appliances

pre-charged with HCFC-22 or HCFC-142b is not allowed for self-contained, factory-charged appliances such as pre-charged window units, PTACs, and some commercial refrigeration units, if manufactured

on or after

January 1,

2010. This prohibition which is contained in the pre-charged appliance rule, applies regardless of when the refrigerant was produced and whether it is virgin or reclaimed. Under the allocation rule, neither stockpiled HCFC-22 produced prior to January 1, 2010, nor new HCFC-22 produced after that date can be used to manufacture new appliances on or after January 1, 2010.

• Sale and distribution of appliance

components

pre-charged with HCFC-22 or HCFC-142b is allowed if the components (

e.g.

condensing units, line sets, and coils that are charged with refrigerant) were manufactured before January 1, 2010. The pre-charged appliance rule does not prohibit sale or distribution of pre-2010 inventory (

i.e.,

stockpiled inventories).

• Pre-charged

components

manufactured before January 1, 2010, may be used to service appliances manufactured before January 1, 2010, but may not be assembled to create new appliances unless there is

no

use of virgin HCFC-22 or HCFC-142b, in the components or otherwise. The allocation rule prohibits use of virgin HCFC-22 and HCFC-142b in manufacturing new appliances.

• There is

no

exemption from the pre-charged appliance rule for the sale or distribution of pre-charged appliances and pre-charged components that are charged with reclaimed HCFC-22 or HCFC-142b refrigerant. In other words, the provisions banning sale and distribution apply equally regardless of whether the appliances or components contain virgin or reclaimed refrigerant.

• Under the allocation rule,

virgin HCFC-22 or HCFC-142b may only be used to service existing appliances.

Virgin HCFC-22 and HCFC-142b may not be used to manufacture new pre-charged appliances and appliance components. Virgin HCFC-22 and HCFC-142b also may not be used to charge new appliances assembled onsite on or after January 1, 2010, though new appliances (not pre-charged) may be charged with reclaimed refrigerant.

• EPA is providing an

exception

to the allocation rule that allows virgin HCFC-22 to be used in the onsite “manufacture” of appliances for a particular project between January 1, 2010, and December 31, 2011, if the components have been specified for use at that project under a building permit or contract dated before January 1, 2010.

• Under the allocation rule, HCFC-22 produced prior to January 1, 2010, may be used until January 1, 2015, for the manufacture of thermostatic expansion valves (TXVs).

• The sale and distribution of

used appliances

is not affected by either rule.

IV. Allocation of Allowances for the 2010-2014 Control Periods

A.

Baselines for HCFC-22 and HCFC-142b Allowances

In the proposed rule, EPA presented five options for allocating HCFC-22 and HCFC-142b allowances for the control periods 2010-2014: (1) Allocating a percentage of the baseline production and consumption allowances (see 40 CFR 82.17 and 82.19 respectively), with or without considering any intra- and/or inter-pollutant transfers that resulted in a different amount of production or consumption for a specific HCFC; (2) allocating allowances based on evaluation of the most recent three years of production, import, and/or export data as reported to EPA; (3) allocating allowances based on an evaluation of past sales of HCFCs by allowance holders by considering how the HCFCs were ultimately used (

e.g.,

servicing refrigeration or air-conditioning vs. original manufacture of refrigeration or air-conditioning equipment and foam blowing); (4) allocating allowances based on aggregated ODP tons; or (5) allocating a total amount of allowances and allowing for purchase by establishing an auction system.

As discussed in the proposed rule, each of these five methods offers advantages and disadvantages for potential allowance holders that vary according to whether a particular entity is predominantly a producer or importer; whether it currently sells HCFC-22 and HCFC-142b to original equipment manufacturers, wholesalers, retailers, or companies that service appliances; whether the portion of its business that is ODS-based is expanding or contracting as the next major milestone in the phaseout approaches; its liquidity; whether it holds both HCFC-142b and HCFC-22 allowances and/or engages in inter-pollutant transfers; and whether it sold HCFCs for applications that do not lend themselves to servicing. Without regard to the practices of individual entities, each of the allocation schemes also offers advantages and disadvantages associated with the ease of implementation and other administrative burdens.

In this final action, EPA is finalizing option 1 by allocating a percentage of the baseline allowances (§§ 82.17 and 82.19) for HCFC-22 and HCFC-142b. As discussed in Section IV.A.2. of the preamble, EPA is modifying the baseline allowances through the consideration of permanent inter-company baseline transfers for the same HCFC but is not accounting for inter-pollutant transfers within a single company that resulted in a different amount of production or consumption for a specific HCFC on an annual basis.

Of all the options, applying a uniformly smaller percentage of the existing baseline as the method for allocating HCFC-22 and HCFC-142b allowances is the least disruptive to the current market and best ensures a continued smooth transition away from ozone-depleting substances. This system closely matches the current HCFC allocation method, with which producers and importers are familiar. EPA provided notice of this option in the preamble to the 2003 allocation rule by indicating that EPA “intends to achieve this reduction step through notice and comment prior to 2010 and will likely implement the reduction by simply listing a percent of baseline allowances to be granted in § 82.16 for the years after 2009” (68 FR 2823). Many commenters have informed EPA that, based in part on this statement, producers and importers have aligned their business activities around the baselines set forth in the 2003 allocation rule. Such planning includes not only ensuring capacity to produce or import these HCFCs but also the establishment and maintenance of relationships with distributors and contractors.

Second, on a related note, EPA agrees with a comment that this approach is the most consistent with the existing framework for recordkeeping and reporting. This option utilizes EPA's existing ODS tracking system and does not require additional one-time or periodic reporting obligations that may be necessary under the other options. EPA uses information from quarterly, annual, and other periodic reporting requirements to monitor consumption, production, imports, and exports of all HCFCs. EPA also uses this information to ensure companies' compliance with regulatory requirements and to develop reports that are requested by the Parties to the Montreal Protocol, including reports ascertaining U.S. compliance with the phaseout caps. The information enables EPA to monitor production and consumption for all HCFCs, including HCFCs for which baselines have not yet been established and for which allowances have not yet been allocated. Option 1 limits administrative burden for allowance holders, and additionally, can be implemented more quickly than other options.

Third, EPA prefers option 1 because it applies an established and well-vetted baseline. All of the other options would require the Agency to disregard the

existing baseline in its entirety and rely on another basis for allocating production and consumption allowances. This would minimize the value of establishing a baseline and lead to market uncertainty. EPA seeks instead to minimize unanticipated changes and prevent market disruptions. EPA, however is making minor changes to company baseline allowances to reflect inter-company baseline trades, as discussed below.

Most commenters preferred option 1 for the reasons described above. Some commenters, however, favored the alternative approaches. The second-most-favored allocation method was option 5, under which EPA would auction allowances. Commenters favoring this option preferred it because it could potentially allow for new entrants into an HCFC-22 market that those commenters say is dominated by a small number of large companies. These commenters typically disagreed with option 1 because it would favor the existing set of stakeholders. Option 1 does not automatically prohibit new entrants, as they could acquire allowances from existing allowance holders under the existing regulatory framework. While EPA acknowledges that not having allowances can be a barrier to entry into this market, EPA does not believe it is necessary or appropriate to adopt a particular regulatory approach specifically for the purpose of encouraging new entrants at this point in a phaseout.

In the July 20, 2001, proposed HCFC allocation rule, EPA expressed skepticism about promoting new entrants into the HCFC market: “Encouraging new companies to join the business after the ANPRM would counter the efforts of moving people out of HCFCs into more environmentally sound substitutes. EPA believes that any new entrants following the ANPRM publication would not be precluded from entering the market, because they could purchase allowances from existing allowance holders who may not intend to use their full amount of allowances. They also have the opportunity to import recovered HCFCs through EPA's petition system or deal in substitutes to HCFCs, which would benefit the ozone layer and provide longer-term business security. Accordingly, EPA believes that the market will sufficiently allow for any new entrants after April 5, 1999, as appropriate.” (66 FR 38073). In the 2003 final rule, EPA provided a limited exemption for companies that began importing HCFCs after the first stakeholder meeting in 1997 but before the ANPRM publication date, after which they would have had reason to know of an imminent rulemaking allocating allowances based on historical production and importation. EPA did not extend this exemption further because once public notice was given via the ANPRM, “businesses that desired an allocation of HCFC allowances would have known the risks of jumping into the business at this juncture.” (66 FR 38073). Since that time eight years ago, access to information and knowledge of the risks regarding entering the HCFC-22 market have only increased. There have been new entrants to the market, as evidenced by commenters seeking allocation rights who were not in operation in 2003. These entities have entered the market by purchasing consumption allowances, as EPA predicted they could back in 2003. These entities can continue to purchase consumption allowances or import substitutes for HCFCs. As the market continues to decrease, EPA does not believe that providing consumption allowances to these or other new entities is necessary to prevent disruption to the continued servicing of existing equipment. Given EPA's intent to phase down, and ultimately phase out, the use of HCFC-22, consistent with the requirements of the CAA and obligations under the Montreal Protocol, EPA believes it is justified in continuing to allocate only to those entities who participated in the market at the initial stages as well as those that have entered the market by purchasing HCFC-22 baseline allowances in accordance with the established practices. EPA therefore does not believe that choosing this option for the purpose of opening up the market to new entrants is appropriate at this time as it may create disruption to the existing regulatory framework.

EPA also suggested, in option 4, that it could allocate allowances on an ODP-ton-weighted basis, authorizing allowance holders to consume or produce any combination of HCFC up to that ODP limit. Only one commenter supported this option, saying it would be more closely aligned with the requirements of the Montreal Protocol, which established a total ODP cap, and would more closely approximate an unregulated market. Furthermore, EPA would not need to predict the supply and demand for individual HCFCs. The commenter recognized, though, that it would have been better to establish such a system in the 2003 allocation rule and that it would be more difficult to implement today. At this point in the phaseout, EPA does not believe that it would be appropriate to switch to an ODP-weighted allocation. EPA raised, and rejected, this option in 2003 when it initially established baselines and allocated production and consumption allowances for HCFCs. In 2003, EPA applied a “worst first” approach to the phaseout of HCFCs and set limits only on HCFC-141b, HCFC-22, and HCFC-142b. Moving to an ODP-weighted allocation system at this point would disrupt the market and not reflect the market decisions made between 2003 and 2009.

Finally, options 2 and 3 received limited support from commenters. EPA is not persuaded that changing the baseline allowances through any of the methods presented in those options would be more appropriate than the manner proposed under option 1. EPA discusses comments on these options in the response to comments document, available in the docket for this rulemaking.

After considering comments, EPA is allocating a percentage of the baseline allowances for HCFC-22 and HCFC-142b, per option 1, in this final rule. The specific percentages are discussed in Section IV.C. below.

1. Adjusting the Baseline for Inter-company and Inter-pollutant Transfers

Sections 607(b) and (c) of the Clean Air Act permit inter-pollutant and inter-company transfers of allowances, respectively. Inter-pollutant transfers are the transfer of an allowance of one substance to an allowance of another substance on an ODP-weighted basis. Inter-company transfers are transfers of allowances for the same ODS from one company to another company. Section 607(c) also authorizes inter-company transfers combined with inter-pollutant transfers, so long as the requirements of both are met. The corresponding regulatory provisions appear at 40 CFR 82.23.

EPA proposed in allocation option 1 to establish a percentage of baseline allowances for each HCFC “

with or without

considering any permanent baseline transfers

and/or

inter-pollutant transfers that resulted in a different amount of production or consumption for a specific HCFC included” (emphasis added). The company-specific baselines in the proposed regulatory text did, though, reflect adjustments resulting from approved inter-company transfers of baseline allowances (

i.e.,

permanent rather than calendar-year allowances) as well as intra-company, inter-pollutant transfers. EPA received multiple comments on how transfers of allowances should be reflected in company baselines. All comments on the issue supported

adjusting the baselines to reflect inter-company transfers. Most commenters were opposed, however, to adjusting a company's baseline to reflect inter-pollutant transfers occurring within that company. As discussed in this section, the final allocation reflects adjustments due to inter-company transfers but not inter-pollutant transfers.

In this final rule, EPA is updating the baselines for HCFC-22 and HCFC-142b to reflect name changes and permanent inter-company baseline transfers. Doing so reflects the changes in the marketplace that have occurred since the last time EPA addressed these baselines. As discussed above, permanent inter-company baseline transfers provide a mechanism for new entrants to join or expand in the HCFC-22 market and for other companies to expand their business. When EPA allocated allowances from 2004 to 2009, the Agency made minor changes to reflect such permanent trades of baseline allowances. EPA recognizes that in some cases entities are no longer actively involved in HCFC production, import, and/or export activities. EPA sought comment on whether it should retain the baselines for such entities or whether it should retire, auction, or redistribute the baselines among the active entities. EPA received only one comment on the issue, which favored EPA's preferred approach of retaining the baseline for those entities. The commenter noted that any allowances distributed to passive holders will find their way into circulation if needed. EPA agrees, as this has been a mechanism by which new entrants have entered the HCFC allocation system in the past.

Eight commenters opposed, and two commenters supported, the proposed adjustments to company baselines to reflect intra-company, inter-pollutant transfers. At issue is the fact that two companies have made inter-pollutant transfers with the apparent intent of reflecting them as permanent adjustments to their baseline allowances. Comments in opposition stated that adjusting the baselines to account for these permanent inter-pollutant transfers would inequitably redistribute allowances. Because allowance holders receive allocations based on a percentage of market share, increasing allowances to two companies has the effect of decreasing allowances to the other market participants. Thus, two companies would receive 38% and 912% more HCFC-22 allowances while the remaining companies would each receive 16% fewer HCFC-22 allowances. Commenters opposed to this redistribution requested that EPA utilize the 2003 baseline and claim it would be the most equitable way of reducing and allocating allowances among the entire community.

Three commenters also stated that allowing these transfers would unnecessarily disrupt the marketplace. They stated that stakeholders believed that EPA would allocate allowances in 2010-2014 by reducing allowances to all baseline allowance holders by an equal percentage and planned accordingly. They did not anticipate an increase in allowances to some companies resulting in a significant decrease for them. According to the commenters this shift in HCFC-22 allowances would require distributors to seek material from different suppliers than in the past and would thus disadvantage the allowance holders and their customers.

In the 2003 rule, both EPA and commenters to that rule recognized the flexibility that inter-pollutant and inter-company transfers provide. One company has utilized inter-pollutant transfers annually since 2006. Each year it has converted over 95% of its HCFC-142b allowances to HCFC-22 allowances to supply the servicing market. Allowing inter-pollutant transfers since 2006 has had little impact on the greater marketplace because it did not reduce the allocation levels for the other allowance holders. Commenters have demonstrated to EPA how treating inter-pollutant trades as permanent would negatively affect all other allowance holders. While the company that has historically relied on these transfers would be negatively affected by not treating its inter-pollutant transfers as permanent, EPA is concerned that reflecting such transfers in this rule would disrupt the entire market in 2010 and could encourage greater disruption in future control periods. Commenters pointed out that adjusting the baselines to reflect intra-company, inter-pollutant transfers could create incentives for future manipulation of the allocation system in anticipation of the future control periods. For example, in 2020 EPA will no longer be issuing HCFC-22 allowances. EPA has anticipated that companies with HCFC-22 allowances would no longer be in the HCFC market at that date if they did not hold allowances for other HCFCs that are still allowed after 2020. For example, if EPA were to establish an allocation framework based on inter-pollutant trades, in 2019 companies with HCFC-22 allowances could convert them all to allowances for HCFC-123 or some other compound for which allowances are available and thus remain in the market. As another example, in 2015 a producer or importer that previously had not participated in the HCFC-123 market could dominate that market by converting its HCFC-22 allowances in 2014 to HCFC-123 allowances. Given the different ODPs of HCFC-22 and HCFC-123, converting one allowance of HCFC-22 would result in 2.75 allowances of HCFC-123. Also, since companies hold many more HCFC-22 allowances than HCFC-123 allowances, converting those HCFC-22 allowances would have an overwhelming effect on the current HCFC-123 allowance holders. In effect, establishing allocations based on permanent inter-pollutant transfers would transform the U.S. HCFC phasedown from a chemical-by-chemical phaseout, as established under the “worst-first” approach in the 1993 rule, to an ODP-weighted phasedown. Under an ODP-weighted phasedown, allowance holders could permanently transfer their production and import of specific HCFCs so long as the total ODP cap is not affected. Companies that do not transfer their allowances, however, would remain holding a smaller percentage of the total ODP cap, and thus would be left with fewer allowances. The ODP-weighted method was rejected in both the 2003 rule and this rule, though EPA did take comment on it in the proposal, as discussed in the previous section.

Some commenters stated that modifying the baselines by taking into account intra-company, inter-pollutant transfers would be contrary to the Clean Air Act. One commenter argued that section 607 of the Clean Air Act allows EPA to approve inter-pollutant transfers of allowances only on a year-to-year basis. That commenter pointed to language in section 607(b) stating that EPA regulations are to permit “a production allowance for a substance for any year to be transferred for a production allowance for another substance for the same year on an ozone depletion weighted basis.” The commenter also discussed the legislative history of the 1990 Clean Air Act Amendments.

After considering the language of section 607 and the legislative history, EPA believes that section 607(b) is best read as permitting only year-by-year inter-pollutant transfers. Section 607(b) states that EPA's rules are to permit “a production allowance for a substance for any year to be transferred for a production allowance for another substance for the same year.” This language emphasizes the year-by-year nature of such transactions. No parallel language appears in section 607(c). That section does, however, provide that any

inter-pollutant transfers between two or more persons must meet the requirements of section 607(b). Hence, EPA interprets section 607 as requiring that all inter-pollutant transfers, whether occurring between companies or within a single company, be conducted on a yearly—and thus temporary—basis.

EPA has made past statements that are consistent with this interpretation. In the 2003 rule that established the allowance system for HCFCs (68 FR 2835), EPA stated: “The permanent transfer of baseline allowances is a lasting shift of some quantity of a company's allowances to another company.” EPA also indicated what would happen at the time of the next stepdown or phaseout date: “[A]t the time of a reduction step or a phaseout of the substance, the current holder of baseline allowances that were received in a permanent transfer would be the person who would have them deducted.” EPA decided in the 2003 rule to “allow permanent transfers of baseline allowances with those allowances disappearing at the phaseout date for the specific HCFC, regardless of what inter-pollutant transfers had taken place” (68 FR 2835). Further discussion of this issue appears in the response to comments document available from the docket.

In summary, this final rule reflects the changes in consumption and production baseline allowances from inter-company transfers but not inter-pollutant transfers. The resulting consumption baseline amounts for HCFC-22, HCFC-142b, and HCFC-141b are shown below in Table 3.

2. Meeting the Needs of Certified Reclaimers

Many commenters requested that EPA allocate allowances to certified reclaimers to ensure that they would be able to obtain the virgin HCFCs needed for mixing with recovered HCFCs during the reclamation process. Recovered refrigerant often contains contaminants, including air, water, particulates, acidity, chlorides, high boiling residues, and other impurities including other refrigerants. Reclamation is the re-processing and upgrading of a recovered controlled substance through such mechanisms as filtering, drying, distillation, and chemical treatment in order to restore the substance to the purity levels specified in Appendix A to 40 CFR part 82, subpart F (based on ARI Standard 700, “Specifications for Fluorocarbon and Other Refrigerants”). While most of the contaminants can be efficiently removed to bring the purity to ARI Standard 700, removing cross-contamination from other refrigerants poses additional challenges due to their chemistry. One method of separating out other refrigerants is to pass the material through a distillation tower, potentially several times. Some reclaimers blend virgin material with cross-contaminated recovered material to bring the material up to ARI Standard 700. Reclaimers do not currently have a consumption baseline per se; however, a limited number of reclaimers that also are HCFC importers do have a consumption baseline. Therefore, generally reclaimers purchase virgin HCFC-22 from allowance holders in a manner similar to other HCFC users such as air-conditioning and refrigeration appliance manufacturers.

Forty-five commenters encouraged EPA to allocate HCFC-22 consumption allowances to reclaimers so that they would have improved access to virgin HCFC-22 which they could then blend with recovered HCFC-22. The comments stated in various ways that having allocations would (1) improve the economics of reclamation, (2) foster greater recovery, (3) foster greater reclamation, and (4) provide environmental benefits. The primary mechanism suggested by commenters was that EPA provide to reclaimers an amount equal to 10% of the total annual HCFC-22 allocation. This method would reduce the amounts that the existing allowance holders would otherwise have received by 10% and redirect those allowances to certified reclaimers. EPA would allocate that 10% among reclaimers based on the amount of material each company reclaimed in some prior year, as reported to EPA under existing section 608 requirements.

First, commenters in support of allocating consumption allowances to reclaimers stated that it would improve the economics of the reclamation industry. Reclamation through separation and distillation requires costly distillation towers that are energy-intensive, and thus expensive, to operate. Alternatively, reclaimers who practice blending must purchase virgin HCFC-22, often at market prices. These commenters stated that having allocation rights would allow reclaimers to import HCFC-22 at a lower cost and thus be able to sell reclaimed HCFC-22 at a price that is competitive with domestically produced or imported virgin HCFC-22.

Second, these commenters stated that acquiring less expensive virgin material could help defray other costs associated with refrigerant reclamation, thereby allowing them to reclaim more contaminated (

i.e.,

more economically marginal) refrigerant. One commenter stated that reclaimers have many tons of material in inventory that could be reclaimed through blending but that it currently cannot reprocess without virgin material at competitive prices.

Third, these commenters stated that allocations to reclaimers would increase refrigerant recovery rates. Reclaimers would be more financially able to accept slightly cross contaminated HCFCs from contractors and wholesalers without needing to assess additional fees on them to pay for destruction or fractional distillation. Removing this disincentive for returning contaminated material would encourage more recovery and discourage an incentive to vent refrigerant. One commenter estimated that allocations for reclaimers would result in as much as a 15% increase in recovered refrigerant within the first two years of allocations.

Finally, these commenters claimed an environmental benefit from encouraging these less expensive blending practices. They stated that blending reduces the need for fractional distillation, a process that utilizes 300 times more energy than blending and they observed that increased recovery means less refrigerant is vented into the atmosphere.

In addition to comments supporting allocation of consumption allowances to certified reclaimers, EPA also received two comments stating that allocations to reclaimers are not necessary and will not encourage greater recycling/reclamation in the marketplace. These commenters stated that (1) current reclamation capacity is sufficient to meet greater future demand; (2) separation and distillation technology currently exists, precluding the need for virgin HCFC-22 to reclaim recovered HCFCs; and (3) allocating allowances to reclaimers creates numerous administrative and practical challenges that were not presented for notice and comment.

EPA has previously detailed the importance of recovering and reusing HCFC-22 and the Agency strongly encourages increased recovery and either recycling or reclamation

6

of

HCFC-22. Section 608 of the CAA prohibits the intentional venting of HCFCs and EPA regulations require that they be recovered and then either recycled, reclaimed, or destroyed. The recovery and reuse of HCFCs prevents emissions to the atmosphere where they can deplete the stratospheric ozone layer and reduces the amount of virgin material that needs to be produced. Recovery becomes even more important in light of the 2015 Montreal Protocol phasedown step, when the U.S. HCFC consumption cap is reduced from 3,810 ODP-weighted metric tons to 1,524 ODP-weighted metric tons. In its report

The U.S. Phaseout of HCFCs: Projected Servicing Needs in the U.S. Air-Conditioning and Refrigeration Sector

(the “Servicing Tail” report), EPA estimates that to meet demand in 2015, recovered material will have to provide 29% of the total servicing demand for HCFC-22. A smooth transition for stakeholders—including continued availability of needed material for approved uses—has historically been an essential aspect of the U.S.'s success in implementing the Montreal Protocol and Clean Air Act requirements. EPA therefore has given much consideration to the suggestion raised by commenters. EPA does not believe, though, that allocating allowances to reclaimers in this rulemaking is necessary or the most appropriate action that EPA can take to foster greater recovery and reclamation of HCFC-22.

6

EPA has defined Recover, Recycle, and Reclaim at § 82.152 as follows: (1)

Recover

refrigerant means to remove refrigerant in any condition from an appliance and to store it in a external container without necessarily testing or reprocessing it in any way; (2)

recycle

refrigerant means to extract refrigerant from an appliance and clean refrigerant for reuse without meeting all of the requirements for reclamation. In general, recycled refrigerant is refrigerant that is cleaned using oil separation and singe or multiple passes through devices, such as replaceable core filter-driers, which reduce moisture, acidity, and particulate matter. These

procedures are usually implemented at the field job site; (3)

reclaim

refrigerant means to reprocess refrigerant to all of the specifications in appendix A to 40 CFR part 82, subpart F (based on ARI Standard 700-1995, Specification for Fluorocarbons and other Refrigerants) that are applicable to that refrigerant and to verify that the refrigerant meets these specifications using the analytical methodology prescribed in section 5 of appendix A of 40 CFR part 82, subpart F.

First, while commenters stated that providing allowances to reclaimers for HCFCs to be used in blending may foster increased recovery, EPA is concerned that it may foster unsustainable reclamation practices. Commenters stated that the blending ratios of virgin to recovered material range from 4:1 to as high as 10:1 (reflecting “blending up” recovered material from either 98.5% pure or 97.5% pure respectively, to 99.5%). The amount of virgin HCFC-22 produced or imported for all purposes, including for blending out impurities, will decrease significantly in 2015 when the overall HCFC cap declines from 25% of baseline to 10% of baseline. Production and import of virgin HCFC-22 for refrigerant uses will cease in 2020. Therefore, reclamation through separation and distillation will be more important in 2015 and absolutely necessary in 2020.

Second, allocating allowances to reclaimers would be a major change to the rule that would affect other stakeholders who have not had the opportunity to comment on the reclaimers' suggestion. Current allowance holders would have their allocations reduced 10% under this suggestion. If EPA were to finalize such a suggestion, EPA would want to provide other stakeholders an opportunity to comment. The suggestion raises several issues that would benefit from the notice and comment process. Specifically, issuing allowances to reclaimers raises questions of who would receive allowances, what the baselines would be, and how many allowances would be allocated. Other questions about how to implement this suggestion would include whether EPA should provide additional allowances to reclaimers that currently have baseline allocations, and whether EPA should set the baseline according to the amount reclaimed, as commenters suggested, or according to the amount recovered. Furthermore, some reclaimers currently manufacture and sell niche blend refrigerants that include HCFC-22 as a component, so EPA would need a mechanism to ensure that they would use the allocation for reclamation purposes, not for continued production of these blends. Different allocation methods offer advantages and disadvantages for potential allowance holders that vary according to the specific characteristics of the stakeholder. Thus, altering the final rule to accommodate the reclaimers' suggestion is not a simple matter. If EPA were to issue a supplemental proposal to provide an opportunity for all stakeholders to comment on these issues, the rule would likely be delayed beyond January 1, 2010. This would have a negative impact on all stakeholders who are depending on an allowance allocation for the production and import of HCFCs in 2010.

Third, EPA believes that it can take other actions in this rule that will foster recovery and reclamation while avoiding the complications raised by the commenters' suggestion. The same commenters that suggested allocations to reclaimers also noted that a constant allocation rate over the five control periods, as proposed, might discourage rather than foster reclamation. To avoid that, in this final rule EPA is allocating at 80% of the estimated demand in 2010 and is reducing the allocation over five years. EPA anticipates that the price of HCFC-22 will increase as allocations decrease and supply is reduced. Some of the economic constraints for recovery and reclamation will therefore loosen and more recovered material being held in inventory may be reclaimed. EPA believes that encouraging the market for recovered material in this way will be the most effective and appropriate mechanism that this current rulemaking can take to increase recovery and reclamation.

Overall, while EPA agrees that recovery practices should be improved and reclamation expanded, the Agency does not agree with commenters that EPA should provide allocations to reclaimers at this time as a way of doing so. Therefore, in this final rule, EPA is not adding new entrants based on their status as EPA-certified refrigerant reclaimers. EPA may consider such an approach when proposing future allocation rules.

B. Factors for Considering Allocation Amounts for HCFC-22 and HCFC-142b

EPA proposed to allocate HCFC-22 and HCFC-142b allowances based on the projected servicing needs for those compounds, taking into account the amount of those needs that can be met through recycling and reclamation. The proposed rule discussed and sought public comment on two alternate methods for determining how many allowances to allocate in 2010-2014 for these two compounds. One alternative that EPA rejected would have allocated the maximum amount of HCFC-22 and HCFC-142b that ensures compliance under the Montreal Protocol aggregate cap in 2010 without room for other HCFCs. The other alternative EPA rejected would have been to allocate a percentage of the aggregate HCFC consumption and production caps in 2010 for HCFC-22 and HCFC-142b equal to the same overall percentage of the aggregate HCFC consumption and production caps allocated for each substance in the 2003 allocation rule. Thus, in 2003, EPA allocated HCFC-22 allowances equal to 66 percent of 9,906 ODP tons and HCFC-142b allowances equal to 13 percent of 9,906 ODP tons. This second method would have applied the same percentages to the total allowable HCFC consumption level for 2010-2014 of 3,810 ODP-weighted metric tons (

i.e.

2,515 ODP tons of HCFC-22 and 495 ODP tons of HCFC-142b). EPA rejected these alternate methods because they do not consider servicing needs and thus could result in shortages or oversupply of HCFC-22. Additional discussion of these alternatives is found in the proposed rule. Neither of these approaches received favorable comment. EPA

therefore concludes that an approach based on the servicing need is most appropriate for allocating HCFC-22 and HCFC-142b allowances. Because it is important to promote greater use of recycled and reclaimed material in anticipation of the 2015 phasedown step, EPA does not intend to allocate the difference between the allocation authorized by the Parties of the Montreal Protocol and the allocation authorized by this rulemaking except under unforeseen extenuating circumstances.

1. The Importance of HCFC-22 Servicing Needs for Existing Equipment

HCFC-22 is the most widely used HCFC and the demand for its use in servicing existing equipment is the primary factor affecting EPA's estimate of production and consumption of HCFCs in the coming years. EPA has issued and sought comment on three versions of a draft report analyzing servicing demand for the HCFC appliances in the U.S. refrigeration and air-conditioning sector projected to be in service from 2010-2019. The Servicing Tail report focuses on air-conditioning and refrigeration appliances because such equipment will represent the bulk of the servicing need. In addition, the servicing exception to the use ban for HCFC-22 and HCFC-142b pertains only to use as a refrigerant in such equipment. Under section 605(a) of the Clean Air Act and EPA's implementing regulations, nearly all other uses of these two HCFCs are banned effective January 1, 2010. The projected servicing need for HCFC-22 in 2010 is approximately 62,500 metric tons (3,438 ODP-weighted metric tons), or approximately 90 percent of the consumption cap for all HCFCs in 2010, which is 3,810 ODP-weighted metric tons. HCFC-142b has primarily been used as a foam blowing agent, a use which will be phased out in 2010. The projected servicing need for existing refrigeration equipment containing HCFC-142b is extremely low: approximately 100 metric tons (7 ODP tons). EPA therefore has focused the analysis on HCFC-22 because that compound is the predominant HCFC in the installed base of air-conditioning and refrigerant equipment for which servicing in the U.S. will likely continue.

The Servicing Tail Report provides a classification of refrigeration and air conditioning equipment that continue to use HCFC-22. Refrigeration equipment can be categorized as: (1) Domestic refrigeration, (2) refrigerated transport, (3) industrial process refrigeration, and (4) commercial refrigeration. Domestic refrigeration includes household refrigerators, household freezers, combination refrigerator/freezer units, and water coolers. With the exception of certain older household freezers that use HCFC-22, this category typically does not use HCFCs or blends containing HCFCs. Refrigerated transport includes refrigeration used in equipment that moves products from one place to another and includes refrigerated ship holds, truck trailers (

i.e.,

reefer trucks), railway freight cars, and other shipping containers. Industrial process refrigeration systems are complex, customized systems used to cool process streams in the chemical, food processing, pharmaceutical, petrochemical, and manufacturing industries. This sector also includes industrial ice machines, equipment used directly in the generation of electricity, and ice rinks. Commercial refrigeration appliances that continue to use HCFC-22 can be further broken down into two end uses: cold storage warehouses and retail food refrigeration systems.

The majority of HCFC-22 equipment that is projected to be in use from 2010 onward will be air-conditioning applications, including window units, packaged terminal units, unitary air-conditioning, chillers, dehumidifiers, water and ground source heat pumps, and mobile air-conditioning in buses and trains. EPA projects that approximately 145.6 million units of all such types of HCFC-22 air-conditioning equipment will be in use in 2010, decreasing from 2010 levels by about 41 percent in 2015 and 86 percent in 2020. In addition, approximately 3.8 million units of HCFC-22 refrigeration equipment will be in use in 2010. The installed base of HCFC-22 refrigeration equipment is projected to decrease from 2010 levels by about 44 percent in 2015 and 75 percent in 2020.

EPA developed these estimates using its Vintaging Model. This model is the primary tool that EPA used to launch the analysis and form the basis for quantitative estimates of projected HCFC consumption. The Vintaging Model estimates the annual chemical emissions from industry sectors that have historically used ODS, including air conditioning, refrigeration, foams, solvents, aerosols, and fire protection. Within these industry sectors, there are over fifty independently modeled end uses. The model uses information on the market size and growth for each of the end uses, as well as a history and projections of the market transition from ODS to alternatives. As ODS are phased out, a percentage of the market share originally filled by the ODS is allocated to each of its substitutes. The model tracks emissions of annual “vintages” of new equipment that enter into operation by incorporating information on estimates of the quantity of equipment or products sold, serviced, and retired or converted each year, and the quantity of the compound required to manufacture, charge, and/or maintain the equipment. EPA's Vintaging Model uses this market information to build an annual inventory of in-use stocks of equipment and the ODS refrigerant and non-ODS substitutes in each of the end uses. Additional information on the Vintaging Model is available in the docket for this rulemaking.

On November 4, 2005, EPA published a Notice of Data Availability (70 FR 67172) making the first draft of the Servicing Tail report available for public review and comment. On September 29, 2006, EPA held a stakeholder meeting presenting the findings in the second draft of the Servicing Tail report along with other important information regarding the next major milestones in the HCFC phaseout. EPA solicited additional comments on the findings presented at the meeting. Representatives of air conditioning and refrigeration manufacturers, chemical producers, importers, reclaimers, industry associations, and environmental organizations commented on the projected amount of HCFCs needed to service the installed base of equipment and on the amounts expected to be available from reclamation. In June 2008, EPA prepared a third draft of the Servicing Tail report to: (1) Reflect the September 2007 Montreal Adjustment, in which the Parties agreed to adjust the stepwise reduction in 2010 from 65 percent of baseline to 75 percent of baseline for non-Article 5 Parties; (2) consider more recent production and consumption data in the United States; and (3) consider more recent trends in the air-conditioning and refrigeration sectors. EPA placed this revised draft report in the docket and accepted comments on it during the public comment period. These comments are discussed below.

The projections of past HCFC consumption, as presented in the Servicing Tail report, showed reasonable agreement with production, import, and export data reported to the Agency as required by 40 CFR 82.24 on a quarterly, annual, and transactional basis. EPA's analysis of the reported data confirms that the United States is satisfying its obligations as it phases out ODS and enables EPA to consider trends in the HCFC markets on a chemical-by-chemical basis. EPA also uses this information to submit an annual report

to the Ozone Secretariat as required by the Parties to the Montreal Protocol.

The projected servicing need for HCFC-22 in 2010 is 62,500 metric tons (3,438 ODP-weighted metric tons), or approximately 90 percent of the ODP-weighted consumption cap for all HCFCs in 2010, which is 3,810 ODP-weighted metric tons. EPA estimates that the servicing need for HCFC-22 will continue to decrease each year, and this final rule accounts for this by decreasing the allocation annually in each of the years 2011-2014. In contrast, the lead option in the proposed rule would have maintained a constant HCFC-22 allocation of 50,000 metric tons in 2010 through 2014. EPA recognizes that in 2013 and 2014 the proposed HCFC-22 allocation would surpass projected need. This is one reason why EPA is not allocating a constant amount of HCFC-22 allowances for the years 2010-2014. This final rule allocates at 20% below modeled need in 2010, decreasing to 26% below the modeled need in 2014, and relies on a consistent amount of reclaimed material to assist in meeting projected servicing needs. This approach is described in Section IV.B.3 below. Estimates of projected need are discussed in the Servicing Tail report found in the docket to this rule.

After review of comments and other data and estimates of HCFC servicing needs, EPA is not convinced that there is any reason to allocate above the need projected in the Servicing Tail report. In general, commenters supported the analysis presented in the Servicing Tail report. These repeated efforts to seek and incorporate comments on this analysis are important to the Agency, as the final rule bases the allocation amounts on the demand estimates it contains. While EPA received four additional comments on the Servicing Tail report in association with the proposed rule, the Agency is confident that this report accurately reflects the existing demand for HCFC-22 to support servicing of existing equipment.

Two commenters asked EPA to describe why it projects a decrease in post-2010 HCFC-22 demand of approximately 6,100 metric tons compared to the previous version of its Servicing Tail report. The decrease in projected HCFC-22 demand between the September 2006 and June 2008 reports is a direct result of updates made to EPA's Vintaging Model based on industry and stakeholder input as well as EPA's own research. EPA updated the Vintaging Model to reflect slight increases in HCFC-22 demand for chillers, cold storage, and industrial process refrigeration, and to reflect a decrease in HCFC-22 demand for dehumidifiers and a significant decrease in HCFC-22 demand for retail food end uses. These changes are part of EPA's ongoing effort to improve modeling assumptions. Model assumptions and results (such as consumption and emissions estimates) from major air-conditioning and refrigeration end-uses were presented at the April 2007 spring meeting of the Air-Conditioning, Heating, and Refrigeration Institute (AHRI). EPA revised the Vintaging Model based on research done in preparation for those meetings and based on comments received on those presentations. EPA subsequently used revised model output to update the June 2008 report.

One of the commenters also asked technical questions pertaining to the Vintaging Model and stated a belief that the change might be due to clerical errors in the 2008 report. Specifically, the commenter noted that (1) HCFC-22 chilling units expected to be in service in 2010 increase by 4,295% between the 2006 and 2008 reports; (2) 2010 unitary projections for HCFC-22 retail food refrigeration equipment increases 72% between the two most recent reports; and (3) there is a decrease of over two million dehumidifiers projected to be in service in 2010, which is the only significant projected equipment reduction. The increase in R-22 chiller units between the 2006 and 2008 reports is not a clerical error; it is the result of the addition of new chiller end-uses into the model and resulting analysis. Second, updates made to assumptions for the retail food end-uses in the model did result in an increase in equipment. However, despite the increase in the number of units, there was a decrease in stocks, growth rates, leak rates, and charge sizes which caused a decrease in R-22 demand post-2010. Finally, conversations with industry indicated that dehumidifier projections in the September 2006 report were too high. EPA discusses these questions raised by commenters in more detail in the response to comments document.

One commenter suggested that the current economic climate may slow the transition to new equipment, as owners seek to repair rather than replace existing equipment, an effect which the 2008 Servicing Tail report does not reflect. While the Servicing Tail report does not consider effects from the recent economic downturn, the servicing estimate does account for the practice of replacing components rather than installing new equipment. EPA notes that while the economic downturn may extend the time existing HCFC-22 equipment is used, it has also reduced the amount of HCFC-based equipment installed and hence will reduce future demand for servicing. EPA understands that the actual transition will not perfectly synchronize with the model year-by-year, whether for economic conditions, weather, or other events. However, the combination of reclaimed and virgin HCFCs should be sufficient to meet demand.

One commenter stated that there are significant barriers to a rapid transition to equipment that uses ozone-safe hydrofluorocarbons (HFCs) before and after January 1, 2010. EPA responds that the transition to HFC or other SNAP-acceptable substitute refrigerants is only required for new equipment. Furthermore, EPA's discussion with manufacturers of equipment and foam formerly reliant on HCFC-22 and HCFC-142b indicate that the industry has been working for some time to implement such alternatives by January 1, 2010. The January 1, 2010, date for restricting the use of newly production or imported HCFC-22 and HCFC-142b was established and published in the

Federal Register

on December 10, 1993 (58 FR 65018).

Using reported data, the June 2008 version of the Servicing Tail report, and comments provided at the September 2006 stakeholder meeting, submitted in subsequent correspondence (available in the docket), and provided in response to the proposed rule, the Agency has sufficient information to allocate a percentage of baseline allowances for HCFC-22 and HCFC-142b for production and consumption in 2010-2014 for servicing needs. The specific percentage of baseline for each of the affected compounds is discussed below.

2. Meeting Servicing Needs With Virgin and Reclaimed Material

The Agency recognizes that servicing needs can be met with a combination of newly-manufactured HCFCs (virgin HCFCs) and HCFCs that have been recovered and either recycled or reclaimed. Therefore, EPA does not anticipate that virgin HCFC-22 will need to be produced or imported to meet the entire HCFC-22 servicing need (estimated to be 3,438 ODP tons in 2010). The Servicing Tail report analyzes various scenarios regarding reclamation. In addition, EPA's memo to the docket “Summary: EPA Analysis of U.S. Reclamation Practices and Trends” provides background on the reclamation industry, includes information concerning capacity to reclaim greater amounts of refrigerants, and for 2010 projects that more than 20 percent of the servicing need can be met by recovering HCFC-22 from existing equipment.

Recycled and reclaimed HCFCs offset the need for newly-manufactured HCFCs and after the terminal phaseout, as with the CFC phaseout, will become the only material available for servicing existing equipment. EPA regulations at 40 CFR part 82 subpart F, promulgated under section 608 of the CAA, are targeted to reduce the use and emission of certain substances including HCFCs by maximizing their recapture and recycling during the service, maintenance, repair, and disposal of appliances. These regulations, and section 608 of the CAA, prohibit the venting or knowing release into the environment of HCFCs. The regulations require that they be recovered and then either recycled, reclaimed, or destroyed. Therefore, it is reasonable to assume that some amount of recovered HCFCs will be available to meet servicing needs. In accordance with the chemical-by-chemical phaseout regime adopted by the United States, after 2020 only recycled, reclaimed, and stockpiled HCFC-22 and HCFC-142b will be available to service appliances that require those substances. EPA's existing regulations at § 82.16 terminate HCFC-22 and HCFC-142b production and consumption at the end of 2019. The very small amount of additional production and consumption of HCFCs allowed under Article 2F of the Montreal Protocol between 2020 and 2030 for servicing existing appliances (0.5 percent of baseline) will only be permitted for HCFCs other than HCFC-141b, HCFC-22, and HCFC-142b, per § 82.16(e), and will be restricted to servicing air-conditioning and refrigeration equipment manufactured prior to January 1, 2020, per § 82.16(d).

The Servicing Tail report uses EPA's Vintaging Model to determine the quantities of HCFC-22 from existing (recycled or reclaimed) sources that can meet post-2010 servicing needs with the remaining quantities required through virgin manufacture (expending allowances). For a given year, the Vintaging Model assumes that a certain percentage, which varies by end use, of refrigerants are recovered from discarded equipment. The model aggregates the quantities recovered but does not distinguish the “pool” of refrigerant between quantities that are reclaimed and those that are recycled.

For purposes of analysis, the Servicing Tail report considers scenarios for HCFC-22 where differing amounts of refrigerant from decommissioned or converted appliances were recycled or reclaimed and reused for servicing. For example, the report examines scenarios in which 10 percent, 15 percent, 20 percent, 50 percent, and 75 percent of the total amount of HCFC-22 in retired or converted equipment is recovered. These analyses depict the potential ratios of new and recovered HCFC-22 that could be available during the years 2010-2019 to meet the overall servicing needs, recognizing that the higher recovery rates are less likely for the earlier control periods.

Recovery of HCFC refrigerants, with subsequent recycling or reclamation, will continue to increase over time. During the past several years the price of newly manufactured HCFC refrigerants has increased, creating a greater incentive for refrigerant to be reused. Recently, EPA has learned that many reclaimers are beginning to work directly with contactors to provide education concerning the benefits of refrigerant recovery. Certain reclaimers have recently established programs to provide incentives for contractors to return used refrigerants, including avoiding unnecessary mixing of refrigerants and thereby increasing the amount of refrigerant that can meet AHRI Standard 700. Such programs should encourage the existing trends of increased amounts of recovered refrigerants available for reuse. Given its previous experience with the class I phaseout, EPA believes that over time an increasing percentage of HCFCs will be recovered for reuse. For example, after the 1996 CFC phaseout, motor vehicles with CFC-12 air-conditioning systems continued to be serviced with recovered CFC-12. Recovered CFC refrigerants are still in use today for servicing a range of older equipment.

Three commenters disagreed with EPA's assumption that 20% of the total amount of HCFC-22 in equipment retired or retrofitted beginning in 2010 can either be recovered or made available for reuse. Generally this concern centered on the fact that current recovery and reclamation rates are not 20%. One of these commenters stated that the current use of reclaimed HCFC-22 is closer to seven percent. Though not stated in the comment, EPA believes this is a reference to data reported to EPA under 40 CFR part 82 subpart F showing that 4,556 MT of HCFC-22 was reclaimed in 2008. This amounts to 7.3% of the modeled demand in 2010, up from 5.9% in 2007. This value, though, does not reflect the total recovery rate as it excludes the amount of recycled refrigerant. EPA does not track recycled refrigerants, since recycled refrigerant (unlike reclaimed refrigerant) must be charged back into equipment with the same ownership rather than re-enter the market. EPA therefore knows that the combined amount of recycled and reclaimed refrigerants is greater than 7.3%. Two commenters provided estimates for the combined reclamation and recycling rates. One commenter said it is currently less than 15% of the modeled demand while the other estimated approximately 24 million pounds, or 17%. As described in the proposed rule, EPA has both anecdotal and reported information concerning recovery rates for refrigerants, though it does not have figures for recycled refrigerants. Furthermore, EPA notes that the amount reclaimed in one year does not mean that it was recovered in that year. Many reclaimers collect more than they reclaim in any one year due to market shifts. One commenter said that reclaimers have many tons of material in inventory waiting to be reclaimed when the economics of reclamation improve, which EPA believes will occur through the allocation levels established in this rule. EPA is aware that 20% recovery and reclamation for 2010 is greater than current industry practice but has not received comments that convince us that the rate is unreasonable.

The third commenter opposed to EPA's 20% recovery assumption was not optimistic that reclamation facilities currently had sufficient capacity or could increase capacity during the next few years to meet the demand. However, the reclamation companies together provided a comment stating that they currently have sufficient capacity to reclaim 36 million pounds of refrigerants each year, which is equal to 16,329 MT, or 26% of the estimated demand in 2010. The main concern of the reclaim industry is not reclamation capacity but rather the economic disincentive to reclaim and poor recovery practices. One commenter pointed to an expansion in the number of distributors offering refrigerant recovery services in support of EPA's goal of achieving 20% recovery. Multiple commenters suggested methods to improve contractor participation in the recovery, and recycling or reclamation of refrigerant, such as certification programs, enforcement, educational outreach, and training. EPA agrees that such approaches could improve contractor participation although they are beyond the scope of this rulemaking and welcomes further discussion with stakeholders to improve recovery and recycling or reclamation rates in 2010 and beyond.

EPA is basing the HCFC-22 allocation amounts on the amount EPA has estimated is needed, recognizing that reclamation and recycling reduce the

amount of virgin HCFC-22 that needs to be produced to meet that servicing need. EPA also continues to believe that an allocation at 80% of the estimated servicing demand is appropriate for 2010. Ten commenters stated that EPA's proposal to meet 80% of servicing demand through HCFC-22 consumption allowances, with the remaining demand being met through recovered material, is an appropriate approach. Six of these commenters stated that reducing the available supply of new HCFC-22 will create a need, and therefore a market, for recovery and reclamation. Four commenters stated that EPA should issue allowances at more than 80% of servicing demand and shared the concern that there will be insufficient recovered and reclaimed HCFC-22 to meet the difference. Three other commenters encouraged EPA to issue consumption allowances equaling less than 80% of HCFC-22 servicing demand in 2010.

EPA believes that if the 2010 allocation is 80% of the modeled demand, the remaining servicing need can be met from recycled or reclaimed material. Given the regulatory requirements for recycling and reclamation (at 40 CFR part 82 subpart F), experience with the CFC phaseout, and industry practices, EPA believes that by January 1, 2010, the effective date of this rule, the remaining 2010 servicing need can be met with recycled or reclaimed material. The Agency believes that 20% of the HCFC-22 in equipment that is retired or retrofitted each year after 2010 can be recovered and reclaimed and that the availability of recycled or reclaimed material will increase through 2014 as recovery practices improve. In 2020, all HCFC-22 and HCFC-142b used to service air-conditioning and refrigerant equipment will be supplied by recycled or reclaimed refrigerant that has been recovered from existing appliances in light of the nearly-complete phasedown of production and import of virgin material in accordance with the CAA and the Montreal Protocol. Additionally, EPA regulations already prohibit the intentional venting of refrigerants and require refrigerant recovery, and the market for recycled and reclaimed refrigerant is predicted to grow as the phaseout progresses. As discussed below, EPA also believes that reducing the allocation each year from 2010 to 2014 to reflect declining demand will lead to higher rates of recovery and recycling/reclamation. Additional information concerning recovery, recycling, and reclamation is found in the Servicing Tail report and the “Summary: EPA Analysis of U.S. Reclamation Practices and Trends” report in the docket.

3. Annual Reduction in Allocated Amounts

EPA's proposal to allocate 80% of the 2010 servicing demand for HCFC-22 (50,000 metric tons) was based on its belief that the remaining need could be met with refrigerant that was recovered and either reclaimed or recycled. Thirty three commenters pointed out, though, that EPA's proposal to maintain a constant allocation for each control period over 2010-2014 did not reflect that demand will decrease over that time as equipment goes out of service and are replaced with appliances using alternative refrigerants. Therefore, while an allocation of 50,000 MT would equal 80% of estimated demand in 2010, an allocation of 50,000 MT in 2013 and 2014 would exceed the modeled demand for those years (by 1,600 MT in 2013 and 6,400 MT in 2014). The proposed rule took comment on the idea of increasing the expected contribution of recycled and reclaimed refrigerant for each control period by annually reducing the allocation of HCFC-22. EPA now believes that unless it were to reduce the allocations for virgin HCFC-22 between 2010 and 2014, there could be an oversupply of HCFC-22 and the contribution of recycled and reclaimed refrigerant would decrease, both in the total number of kilograms and as the proportion of overall need.

Commenters expressed the possibility that a constant allocation as proposed could harm the rates of recovery and reclamation. Reclaimers commented that they would not be able to compete with the less expensive virgin material that would exceed the market demand in 2013-2014. With no economic incentive to reclaim, they claim they could be driven to idle their reclamation facilities, restarting them in 2015 to meet the demand resulting from that stepdown. They argue that two years of inactivity would weaken their contacts with contractors and distributors and hamper efforts to instill proper recovery practices. EPA is unable to predict the precise effect of allowing production levels in excess of demand and does not believe that all reclaimers will be affected in the same way. However, EPA does agree that this could harm the recovery and reclaim industry at exactly the time when rates of recovery and reclamation need to be increasing.

EPA is particularly concerned with providing as smooth a transition to the 2015 stepdown as possible. At that date, the U.S. must meet a 90% reduction below the baseline for all HCFCs, which is equivalent to 1,524 ODP-weighted metric tons. EPA's Servicing Tail report shows that even a 20% recovery rate would be insufficient to meet the demand for HCFC-22 in 2015. As shown in Table 4-5 in the report, demand for HCFC-22 in 2015 is projected to be 38,800 MT while the cap for all HCFCs equates to 27,709 MT of HCFC-22 (assuming no allocation for any other HCFCs). A 20% recovery rate would allow for the additional use of 8,800 MT but would still leave a shortfall of 2,291 MT in 2015. EPA calculates that to meet the total demand in 2015, the recovery rate must increase to 26% (representing 29% of total servicing demand) by that year.

Based on the comments, EPA believes it is desirable to institute a year-by-year reduction for the period of 2010-2014. A smooth transition for stakeholders—including continued availability of needed material for approved uses—has historically been an essential aspect of the U.S.'s success in implementing the Montreal Protocol and Clean Air Act requirements. To ease the transition to 2015 and avoid disruptions to the market and shortages in HCFC-22 at that date, the Agency believes it is necessary to take steps now to foster further recovery.

EPA believes that the servicing demand over 2010-2014 can continue to be met under the new allocation levels in the final rule. Since EPA is not banning the use of existing HCFC-22 appliances that have been manufactured prior to January 1, 2010, recovered and reclaimed HCFC-22 will become more valuable as the phaseout progresses. The demand for HCFC-22 to service existing equipment will provide an economic incentive to increase the quantities of recovered HCFC-22 available for reclamation. As an indicator of the improved economics, several reclamation companies have recently started offering financial payments for recovered HCFC-22. The docket provides further information on EPA's assumptions regarding the availability of recovered and reclaimed HCFC-22 to meet servicing needs.

Finally, annual reductions to the allocation provides clear environmental benefits compared to the lead option in the proposed rule, assuming the same starting point. Over the five-year period 2010-2014, the proposed rule would have allocated 250,000 metric tons of HCFC-22. Over the same period, the final rule is allocating 203,100 MT of HCFC-22, a difference of 46,900 MT, or 2,574 ODP tons.

Commenters suggested various possible methods for allocating HCFC-22 allowances on a declining annual

basis. One commenter supported an annually declining allocation but did not support a total allocation over the five-year period less than what EPA proposed. EPA believes that such an approach would negate many of the benefits of annually reducing the allocations, including easing the transition to the 2015 control period and providing an environmental benefit. To implement the suggestion, the allocation would have to equal demand in 2010, which would not create any impetus for reclamation in that year, and be 84% of demand in 2014. EPA believes that meeting 20% of demand with used material in 2010 is feasible and that the Agency should not wait until 2014 to approach that goal. For the same reason, EPA also rejects another suggested method that would increase the 2010 allocation from 50,000 MT to 55,000 MT. The majority of commenters agree with EPA's approach of allocating at 80% of demand in 2010, with recovered and either recycled or reclaimed HCFC-22 meeting the remainder. Indeed, other commenters agreed with an allocation of 50,000 MT in 2010 and used that value as the starting point for a straight-line annual reduction to other 2014 endpoints. One suggestion was to set allocations that decline linearly from 2010-2014, where the allocation if extrapolated to 2015 would equal the 2015 cap. This results in a yearly reduction of 4,458 MT. Another similar suggestion rounded up the annual reduction to 5,000 MT, which results in a line that would be below the cap in 2015.

Because the primary benefit of annually reducing the allocation is to ensure demand in 2015 is met through greater recovery and reclamation, EPA believes that it is more appropriate to base the allocation more directly on that goal. In 2015, EPA estimates demand of HCFC-22 at 38,800 MT. Were the allocations to consist entirely of HCFC-22, the cap would limit the 2015 HCFC-22 allocation to only 27,709 MT, a difference of 11,091 MT that would have to be made up with recovered material. Furthermore, it is likely that the allocation in 2015 will not consist entirely of HCFC-22 as EPA will need to reserve room under the cap for other HCFCs, similar to the approach EPA is taking in this rule for the 2010-2014 control periods. EPA believes it is appropriate to establish an annual step-down such that the amount of total demand to be met from recovered HCFC-22 will equal 12,500 MT each year, as that is the amount EPA proposed to be met in 2010 and it is approximately the amount that will be needed to meet the servicing demand in 2015. Under this approach, the allocations would equal 50,000 MT in 2010, 45,400 MT in 2011, 40,700 MT in 2012, 35,900 MT in 2013, and 31,100 MT in 2014. These values, shown in the table below, are derived by subtracting 12,500 MT from the estimated demand each year. EPA will not issue allowances for 2015 and beyond until a future rulemaking but extends the table to 2015 to show the estimated demand for that year and the amount of recovered material that must be used to meet the demand at that date, assuming the allocation in 2015 consists entirely of HCFC-22 and does not include other HCFCs.

2010

2011

2012

2013

2014

2015

Estimated Demand (MT)

62,500

57,900

53,200

48,400

43,600

38,800

Total Allocation (MT)

50,000

45,400

40,700

35,900

31,100

27,709

Reclaimed Amount (MT)

12,500

12,500

12,500

12,500

12,500

11,091

This annual stepdown lies between the two rates suggested by commenters. As the total demand decreases, maintaining the supply of recovered HCFCs at a constant level results in recovered material comprising a greater proportion of the total demand each year. Under this approach, the percentage of the total need to be met with reclaimed material will rise from 20% to 29% of total demand in 2014, though the total amount of reclaimed material supplied remains at 12,500 MT for all five years. EPA believes this is appropriate as it facilitates meeting the demand in 2015, of which at least 29% must be met with recovered material.

Commenters who requested annual reductions in the amount of HCFC-22 allocations did not suggest that EPA annually reduce the allocations of HCFC-142b. EPA is not reducing the allocation of HCFC-142b on an annual basis because the Agency does not believe that the same rationale would apply to HCFC-142b. Most recovered HCFC-22 comes from refrigeration and air-conditioning appliances. The largest single use of HCFC-142b prior to 2010 was to blow foam and recovery is not required from discarded foam. The need for recovery is also less, given the small amounts of HCFC-142b needed to service existing refrigeration equipment post-2010. Finally, it is difficult to reclaim HCFC-142b from refrigerant blends and such recovery is not widely practiced. Therefore, EPA is finalizing annual reductions only for HCFC-22 and maintaining the allocations of HCFC-142b as proposed.

C. Allocations of HCFC-22 and HCFC-142b

EPA is revising the two types of tables in 40 CFR part 82 that together specify the production and consumption allowances available to allowance holders during specified control periods. Tables at § 82.17 and § 82.19 apportion baseline production allowances and baseline consumption allowances, respectively, to individual companies for individual HCFCs. Complementing these tables, the table at § 82.16 lists the percentage of baseline allocated to allowance holders for specific control periods. By selecting option 1, discussed in Section IV.A. of the preamble above, EPA is retaining this framework of complementary tables, revising them to reflect adjustments to baselines, and granting percentages of baselines in a manner that achieves the 2010 phasedown goal.

The percentages for HCFC-22 and HCFC-142b in the table at § 82.16 (Table 1 below) have changed from the proposed rule. In the proposal, the allocation for HCFC-22 for 2010 was 35.2% of baseline. In the final rule, the value is 41.9%. Similarly, the percent allocation for HCFC-142b for 2010 was 4.9% of baseline in the proposed rule and is 0.47% in the final rule. These changes do not reflect a change in the allocation amounts, as the total allocation for HCFC-22 in 2010 remains 50,000 MT (the same as the proposal), and the total allocation for HCFC-142b 2010 remains at 100 metric tons (the same as the proposal). Instead, these changes are due to not changing the baselines to reflect inter-pollutant transfers occurring on an annual basis within a single company. The proposal, which treated the intracompany transfer of HCFC-142b to HCFC-22 as permanent, had a total consumption baseline of 141,865 MT. By not accounting for those transfers, the baseline in the final rule decreased to 119,285 MT. With a smaller total

baseline, the factor that each baseline allowance holder must multiply to reach the same amount of allowances is greater. Thus, 50,000 is equal to 35.2% of 141,865 and 41.9% of 119,285. The opposite is true for HCFC-142b, which had a proportionately smaller baseline in the proposed rule but now has a larger baseline since EPA is not accounting for inter-pollutant transfers.

EPA is amending the table at § 82.16 by including control periods 2010-2014, by continuing to allocate zero percent to HCFC-141b, and by allocating specified percentages (in separate columns) to HCFC-22, HCFC-142b, and—as will be discussed later—other HCFCs. The allocations for HCFC-22 decrease on an annual basis, rather than remaining constant for each of the 2010-2014 control periods as was proposed.

Table 1—Phaseout Schedule for Class II Controlled Substances in 40 CFR 82.16

Control period

Percent of HCFC-141b

Percent of HCFC-22

Percent of HCFC-142b

Percent of HCFC-123

Percent of HCFC-124

Percent of HCFC-225ca

Percent of HCFC-225cb

2003

0

100

100

2004

0

100

100

2005

0

100

100

2006

0

100

100

2007

0

100

100

2008

0

100

100

2009

0

100

100

2010

0

41.9

0.47

125

125

125

125

2011

0

38.0

0.47

125

125

125

125

2012

0

34.1

0.47

125

125

125

125

2013

0

30.1

0.47

125

125

125

125

2014

0

26.1

0.47

125

125

125

125

EPA is allocating different baseline percentages for HCFC-22 and HCFC-142b because EPA projects that the needs will differ for servicing air-conditioning and refrigeration appliances during the 2010-2014 control periods. As discussed in Section IV.B.1. of the preamble above, EPA's analysis shows that there will be a significantly greater need for HCFC-22 than for HCFC-142b during the control periods 2010-2014. Based on the Servicing Tail report and reporting information already required by EPA regulations, the needs for individual HCFCs are not uniform. Allocating the same percentage of baseline for HCFC-22 and HCFC-142b would result in too few allowances for HCFC-22 and too many allowances for HCFC-142b. While inter-pollutant transfers in accordance with § 82.23(b) could be used to trade allowances of one HCFC for another, EPA does not believe it is appropriate to rely on such transfers as a mechanism for large-scale corrections. Instead, EPA anticipates that the continued availability of inter-pollutant transfers will permit the market to self-correct for unforeseen changes in demand and allow individuals to consider a range of options for their allowances. EPA seeks to avoid unnecessary disruptions in the marketplace and to promote a smooth transition for industry.

1. HCFC-22 Allowances for 2010-2014

For 2010, EPA is allocating HCFC-22 consumption allowances to meet 80 percent of the servicing need, assuming that the remainder will be met by recovered HCFC-22 that is either recycled or reclaimed. This translates into 50,000 metric tons (2,750 ODP-weighted metric tons), or approximately 72 percent of the total HCFC consumption cap for the 2010 control period. For the 2011-2014 control periods, EPA is annually reducing the allocation amount in a linear fashion, reflecting the declining servicing demand over that time.

As it did in the 2003 allocation rule, EPA is allocating production allowances among different chemicals using the same percentage breakdown as for consumption allowances. This rule allocates 46,368 metric tons (2,550 ODP tons of the 3,884.25-ODP-ton production cap) to HCFC-22 production in 2010, with the amount declining in each of the control periods from 2010 through 2014. This is consistent with section 605(c) of the Clean Air Act, which requires that the phaseout schedule for HCFC consumption be the same as that for HCFC production. EPA recognizes that there is a difference between the amount of imported and produced HCFCs and that the degree of difference may vary over time. However, EPA does not believe it is necessary to use two different chemical-by-chemical percentage breakdowns (

i.e.

, one for consumption allowances and another for production allowances) to ensure compliance with the production and consumption caps. Therefore, for simplicity and for consistency with section 605(c), EPA is using the same percentages for production and consumption allocations—deriving the percentages based on estimated need for each individual HCFC.

2. HCFC-142b Allowances for 2010-2014

As discussed in the Servicing Tail report, the projected servicing need for HCFC-142b is extremely low: Approximately 100 metric tons (6.5 ODP tons) in 2010 and decreasing to zero by 2015. Prior to 2010, the primary use of HCFC-142b has been to blow foam, a use no longer allowed after 2010. In estimating the need for 2010-2014, EPA has considered the amount of HCFC-142b produced and imported into the United States as reported to EPA in recent years under the existing requirements. Unlike with HCFC-22, EPA has not considered the reclamation and recovery rates of HCFC-142b in setting the allocation amounts. HCFC-142b has primarily been used in foams, which is not recovered. The small amount of HCFC-142b used in refrigeration and air conditioning applications is typically used as a component of a blend which is more difficult to reclaim. Furthermore, these blends have not gained any significant market share, unlike blends containing HCFC-22. Given these factors, the limited amount of data available to EPA indicates that less than 1 percent of HCFC-142b is recycled or reclaimed. EPA did not receive any additional data in the public comment process that would suggest otherwise.

In light of the limited data available, and the extremely low estimate of recycling and reclamation, EPA is allocating 100 percent of the projected HCFC-142b servicing need. Because of the lack of data and the small amounts being allocated, EPA is maintaining the

same allocation level for each of the 2010-2014 control periods, rather than allocating declining amounts as EPA is doing for HCFC-22. Therefore, EPA is issuing consumption allowances for HCFC-142b of 100 metric tons (6.5 ODP tons) in 2010-2014. EPA is also allocating production allowances for HCFC-142b at the same proportion of the production cap as was used to allocate consumption allowances as a proportion of the consumption cap. Thus, EPA is allocating production allowances for HCFC-142b at 118 metric tons (7.7 ODP tons).

3. How the Aggregate for HCFC-22 and HCFC-142b Translates Entity-by-Entity

EPA is allocating 50,000 metric tons of HCFC-22 consumption allowances in 2010 with declining amounts in 2011-2014, 46,329 metric tons of HCFC-22 production allowances in 2010 with declining amounts in 2011-2014, 100 metric tons of HCFC-142b consumption allowances, and 118 metric tons of HCFC-142b production allowances for years 2010-2014. However, EPA actually allocates allowances to individual persons (

i.e.

, legal entities). As discussed in Section IV.A.1 of this preamble, EPA is apportioning baselines and allocating allowances on a pro-rata basis to the entities that received baseline allowances in the 2003 allocation rule.

Company-specific production and consumption baselines (also referred to as “baseline allowances”) for HCFC-141b, HCFC-22, and HCFC-142b are listed at §§ 82.17 and 82.19, respectively. The percentage of baseline each entity receives in each control period from 2003 through 2014 appears at § 82.16(a), as shown in Table 1 above.

Allowances allocated for individual control periods are called “calendar-year allowances” to distinguish them from the baseline production or consumption allowances (§ 82.17 and § 82.19). For 2010-2014, EPA is apportioning production and consumption baselines for HCFC-22, HCFC-141b, and HCFC-142b to the same entities that were apportioned HCFC-22, HCFC-141b, and HCFC-142b baselines in the 2003 allocation rule. EPA is amending that list of entities and their baselines to reflect changes in entities' names as well as mergers and acquisitions, but only where EPA has been notified of changes in writing before or during the comment period for this rulemaking.

Consistent with past practice, EPA is publishing baseline allowance information in this rule, having first notified the affected companies of its intention to do so. Applying the approach described above, EPA is apportioning production and consumption baselines for HCFC-141b, HCFC-22, and HCFC-142b to the following entities in the following amounts:

Table 2—Baseline Production Allowances of HCFC-22, HCFC-141b, and HCFC-142b in 40 CFR 82.17

Person

Controlled substance

Allowances (kg)

Arkema

HCFC-22

28,219,223

HCFC-141b

24,647,925

HCFC-142b

16,131,096

DuPont

HCFC-22

42,638,049

Honeywell

HCFC-22

37,378,252

HCFC-141b

28,705,200

HCFC-142b

2,417,534

MDA Manufacturing

HCFC-22

2,383,835

Solvay Solexis

HCFC-142b

6,541,764

Table 3—Baseline Consumption Allowances of HCFC-22, HCFC-141b, and HCFC-142b in 40 CFR 82.19

Person

Controlled substance

Allowances (kg)

ABCO Refrigeration Supply

HCFC-22

279,366

Altair Partners

HCFC-22

302,011

Arkema

HCFC-22

29,524,481

HCFC-141b

25,405,570

HCFC-142b

16,672,675

Carrier Corporation

HCFC-22

54,088

Condor Products

HCFC-22

74,843

Continental Industrial Group

HCFC-141b

20,315

Coolgas, Inc

HCFC-141b

16,097,869

Coolgas Investment Property

HCFC-22

590,737

Discount Refrigerants

HCFC-22

375,328

HCFC-141b

994

DuPont

HCFC-22

38,814,862

HCFC-141b

9,049

HCFC-142b

52,797

H.G. Refrigeration Supply

HCFC-22

40,068

Honeywell

HCFC-22

35,392,492

HCFC-141b

20,749,489

HCFC-142b

1,315,819

ICC Chemical Corp

HCFC-141b

81,225

Ineos Fluor Americas

HCFC-22

2,546,305

Kivlan & Company

HCFC-22

2,081,018

MDA Manufacturing

HCFC-22

2,541,545

Mondy Global

HCFC-22

281,824

National Refrigerants

HCFC-22

5,528,316

Refricenter of Miami

HCFC-22

381,293

Refricentro

HCFC-22

45,979

R-Lines

HCFC-22

63,172

Saez Distributors

HCFC-22

37,936

Solvay Fluorides

HCFC-22

413,509

HCFC-141b

3,940,115

Solvay Solexis

HCFC-142b

3,047,386

Tulstar Products

HCFC-141b

89,913

USA Refrigerants

HCFC-22

14,865

D. HCFC-123, HCFC-124, HCFC-225ca, and HCFC-225cb Allowances

EPA is establishing and apportioning baselines for other HCFCs that have been produced or imported in recent years by using information on production, import, export, and other transactions that has been reported to the Agency under existing regulations. Under the Montreal Protocol, all HCFCs are subject to the phaseout cap and EPA must report production, import, and export data for all HCFCs under Article 7 of the Protocol. EPA therefore requires recordkeeping and reporting for production, import, export, and trade of all HCFCs, including those for which baseline allowances have not yet been established. The recordkeeping and reporting requirements implement section 603 of the Clean Air Act and ensure that companies are in compliance with regulatory and Clean Air Act requirements and that the United States is able to document compliance with international obligations.

EPA reviewed HCFC production, import, and export data for the years leading up to the 2003 allocation rule, and chose to establish baselines and allocate allowances for the highest-ODP HCFCs (the “worst-first” approach) in a manner that ensured U.S. compliance with the 2004 cap (35 percent below the U.S. baseline). Prior to the tightening of the 2010 HCFC cap at the 19th Meeting of the Parties to the Montreal Protocol in September 2007 from a 65 percent reduction to a 75 percent reduction, EPA anticipated that limiting production and consumption of HCFC-22 and HCFC-142b for the 2010-2014 control periods would ensure sufficient room under the then-effective 65 percent reduction cap without the need to restrict production and consumption of other HCFCs. In preparing for the 19th Meeting of the Parties, EPA conducted an analysis, which was shared with stakeholders, to ensure that the U.S. could consider changes to our obligations that were both meaningful for ozone layer protection and achievable, allowing servicing needs to continue to be met. Considering that the September 2007 Montreal Adjustment provides for adjustment of the cap from a 65 percent to a 75 percent reduction, EPA is taking additional precautions to ensure that the more stringent cap will not be exceeded. These precautions include establishing and apportioning baselines for the 2010-2014 control periods for other HCFCs that were produced or imported during the 2003-2007 control periods.

1. Baselines for HCFC-123, HCFC-124, HCFC-225ca, and HCFC-225cb

EPA is amending §§ 82.17 and 82.19 to include company-specific production and consumption baselines for HCFC-123, HCFC-124, HCFC-225ca, and HCFC-225cb. EPA data indicate that those four HCFCs were produced, imported, or exported during the 2003-2007 control periods.

In the 2003 allocation rule, EPA did not issue allowances for all HCFCs, noting in part “that the continuously developing HCFC market would be hampered by such distribution” and that the market proportions at that time “of these lower-ODP HCFCs do not reflect the rapidly expanding market and that distributing allowances for these HCFCs at [that] time would unnecessarily restrict their supply and impede transition to less ozone-depleting substances” (68 FR 2823). Considering the recent adjustments to the Montreal Protocol and the evolution in the HCFC market, EPA believes it is now appropriate to establish a baseline and apportion baseline allowances for HCFC-123, HCFC-124, HCFC-225ca, and HCFC-225cb.

All HCFCs are covered under the Montreal Protocol stepwise reductions, and EPA must consider all HCFC production and import in ensuring that the United States continues to meet its international obligations. The four HCFCs addressed in this section are the only remaining HCFCs commonly used in the United States that do not currently have established baselines. Establishing baseline allowances for these four HCFCs will not trigger additional recordkeeping or reporting obligations, since companies that produce, import, or export any HCFC already report production and consumption data to EPA. The impacts on future production and consumption of these chemicals by individual entities stem from the years chosen for establishing a baseline, the apportionment of the baseline among companies, and the percentage of baseline allocated for the control years 2010-2014. EPA discusses these issues more specifically below.

EPA recognizes that many different methods and data sources can be used to establish baseline allowances. EPA proposed to use data reported to the Agency under § 82.24 and EPA is using that method in this final rule. EPA did not receive any comments opposed to using existing reported data. EPA also said in the proposed rule that it could augment the data for completeness or to verify accuracy by issuing requests for information under section 114 of the CAA. EPA did not receive comment relating to this process specifically, but believes that seeking additional information could delay the publication of the final rule without providing significant additional benefit.

EPA is making three changes to Table 5, which are found at 40 CFR 82.17 and 82.19, as compared to the proposed rule. First, EPA is adding Perfect Technology Center, LP (doing business as Perfect Cycle) to the list of companies being allocated baselines for the other HCFCs. Perfect Technology Center, LP had imported HCFC-123 during the time period used to set the baseline but its reporting forms—although submitted in compliance with EPA regulations—were misdirected and the information was not included in EPA's baseline calculations. Second, DuPont corrected previously reported data, which has the effect of adjusting DuPont's HCFC-123 baseline from 2,933,906 kg to 1,877,042 kg. Third, Honeywell had corrected previous HCFC-124 production data but EPA did not reflect that change in the proposed rule. EPA is reflecting that correction now by changing Honeywell's HCFC-124 production baseline from 1,804,121 kg to 1,759,681

kg. These changes do not affect the baselines or the allocation amounts for the other companies receiving HCFC-123 or HCFC-124 allowances.

In the 2003 allocation rule, EPA calculated each entity's HCFC-141b, HCFC-22, and HCFC-142b baselines from that entity's highest reported consumption and production over the years 1994-1997. EPA chose that particular range of years because beginning in 1998, some entities were aware of the impending rulemaking and could have increased production or import in an effort to secure higher baseline allowances. EPA stated in the 2003 allocation rulemaking that “by not selecting a year after 1997 it will avoid creating an uneven playing field that skews allocations to those companies with ample resources and good access to information” (68 FR 2832). EPA did propose and finalize an exception to the general approach by allowing new entrants that began importing after the end of 1997 but before April 5, 1999, the date of the ANPRM publication. EPA believed that such new entrants, typically small businesses, might not have been aware of the impending rulemaking that would affect their ability to continue in the HCFC market.

EPA is using the same general approach for these four HCFCs as in the 2003 allocation rule by considering the highest reported data from a range of years rather than selecting a single baseline year. However, EPA is not providing an exemption for new entrants. EPA did not receive any comments requesting a new entrant provision for these four HCFCs and does not believe that one is necessary as these baseline years reflect participants in the market in 2005-2007 and thus take into account relatively new entrants. As in the 2003 allocation rule, EPA is choosing a range of years because the entities receiving allowances have very different production and import histories and no one year is representative for all companies. EPA believes that selecting the year of highest activity for individual companies over a range of years creates less of a disadvantage to the industry and the HCFC market as a whole than selecting a single year. Therefore, in this final rule, EPA is using an entity's highest reported consumption and production data reported for the 2005-2007 control periods. By using past years, EPA avoids any ramp-up in the level of production and consumption resulting from a desire to maximize individual baselines in anticipation of the final rule. By using recent data, EPA ensures that the baseline reflects the current market as closely as possible, and addresses issues raised when EPA decided to postpone allocating baseline allowances for these HCFCs in 2003.

Four commenters generally agreed with the proposal to establish baselines for HCFC-123, HCFC-124, HCFC-225ca, and HCFC-225cb, acknowledging that a baseline for these chemicals will help ensure the United States meets its Montreal Protocol obligations and that the method used to establish a baseline was successfully utilized for HCFC-141b, HCFC-142b and HCFC-22. EPA did not receive any comments in opposition to establishing baselines for these HCFCs.

Two commenters disagree with EPA's proposal to establish the HCFC-123 baseline as a company's highest-year production and consumption between 2005 and 2007. One of those commenters stated a belief that the market for chillers using HCFC-123 has been steadily declining over the last several years and suggested that EPA instead select the lowest reported data from 2005-2007 to set the HCFC-123 baseline. The other commenter urged EPA to calculate the baseline using calendar year 2008 data, which it said better reflects the market. EPA disagrees with these alternative methods for establishing the baseline for HCFC-123. EPA does not support choosing the lowest year's reported data because EPA is not seeking to actively restrict the market for HCFC-123 in this rule. EPA does not wish to prejudge the market for HCFC-123, be it increasing or decreasing. EPA also does not believe that selecting the 2008 year is appropriate because EPA's experience has been that a single year's data may actually not be reflective of the market, even if the date is closer to the present. For example, the economic conditions in 2008 may have affected production for that year in a way that is not reflective of the market in 2010 and beyond. Also, as mentioned above, the entities receiving allowances have very different production and import histories and no one year is representative for all companies. For these reasons, EPA is establishing the HCFC-123 production and consumption baselines based on an entity's highest reported consumption and production for the 2005-2007 control periods.

EPA is apportioning production and consumption baselines for HCFC-123, HCFC-124, HCFC-225ca, and HCFC-225cb to the following entities for the following amounts, which are found in 40 CFR 82.17 and 82.19:

Table 4—Baseline Production Allowances of HCFC-123, HCFC-124, HCFC-225ca, and HCFC-225cb in 40 CFR 82.17

Person

Controlled substance

Allowances (kg)

AGC Chemicals Americas

HCFC-225ca

266,608

HCFC-225cb

373,952

DuPont

HCFC-124

2,269,210

Honeywell

HCFC-124

1,759,681

Table 5—Baseline Consumption Allowances of HCFC-123, HCFC-124, HCFC-225ca, and HCFC-225cb in 40 CFR 82.19

Person

Controlled substance

Allowances (kg)

AGC Chemicals Americas

HCFC-225ca

285,328

HCFC-225cb

286,832

Arkema

HCFC-124

3,719

Condor Products

HCFC-124

3,746

Coolgas, Inc.

HCFC-123

20,000

DuPont

HCFC-123

1,877,042

HCFC-124

743,312

Honeywell

HCFC-124

1,284,265

ICOR

HCFC-124

81,220

National Refrigerants

HCFC-123

72,600

HCFC-124

50,380

Perfect Technology Center, LP

HCFC-123

9,100

Tulstar Products

HCFC-123

34,800

HCFC-124

229,582

2. Allocation Levels for HCFC-123, HCFC-124, HCFC-225ca, and HCFC-225cb

As proposed, EPA is allocating 125 percent of the baseline production and consumption allowances for HCFC-123, HCFC-124, HCFC-225ca, and HCFC-225cb for the 2010-2014 control periods. These allocations appear as additions to the table at § 82.16, shown in Table 1 above. EPA's intent in establishing baseline production and consumption allowances for these HCFCs is to create a mechanism for limiting growth in the production and consumption of these HCFCs during those control periods. EPA has heard from stakeholders that some amount of market expansion for these low-ODP HCFCs is possible during the 2010-2014 control periods. Unlike HCFC-22 and HCFC-142b, which are subject to use restrictions beginning January 1, 2010, these four low-ODP HCFCs are not subject to use restrictions until a later date. Given the low ODPs for these HCFCs, allocating 125 percent of the baseline for 2010-2014 allows for growth but still ensures that the United States meets the overall HCFC cap of 75 percent below the baseline during these control periods.

Any growth in the non-prohibited use of these HCFCs will be balanced to some extent by the 605(a) self-effectuating restrictions on most uses of HCFCs. Regardless of any action by EPA, usage of these HCFCs will be constrained, and in some instances prohibited, in 2015. For example, HCFC-225ca and HCFC-225cb are generally used as solvents but as of January 1, 2015, under section 605(a), HCFCs may not be used in solvents. Refrigerant uses for other HCFCs may continue until 2020. For example, while newly manufactured HCFC-22 cannot be produced or imported for charging into new air-conditioning and refrigeration appliances as of January 1, 2010 (40 CFR 82.16(c)), HCFC-123 can be produced or imported for new appliances until 2020 (40 CFR 82.16(d)). However, HCFC-123 is a transitional alternative for CFC-11 and is still scheduled for phaseout in 2015 except in equipment manufactured before 2020. Because of the section 605(a) use ban, EPA anticipates that any continued growth for these HCFCs will be considerably affected as of January 1, 2015. The section 605(a) use provisions are discussed in more detail below at Section VI of the preamble.

Through this action, EPA is allocating allowances equaling 125 percent of the baseline for HCFC-123, HCFC-124, HCFC-225ca, and HCFC-225cb for the 2010-2014 control periods. If rapid growth were to occur, creating the need for additional amounts of one or more of these HCFCs, EPA believes that inter-pollutant transfers could be used to make adjustments. EPA has calculated that 125 percent of the highest year's consumption of HCFC-123, HCFC-124, HCFC-225ca, and HCFC-225cb for all the companies combined equals 137 ODP-weighted metric tons, which is less than 4 percent of the total HCFC consumption cap of 3,810 ODP tons. EPA data also show that 125 percent of the highest year's production of HCFC-123, HCFC-124, HCFC-225ca, and HCFC-225cb for all the companies combined equals 135 ODP-weighted metric tons, which is less than 4 percent of the total HCFC production cap of 3,884.25 ODP tons.

In general, commenters, including those who use these other HCFCs, supported the proposed allocation amounts. The only comments disagreeing with the proposed allocation amounts were with respect to HCFC-123. Two commenters objected to an allocation of 125% of baseline for HCFC-123, claiming that this would artificially increase demand. These commenters proposed that EPA use a lower allocation amount, such as 80% of baseline. Another commenter stated that EPA should encourage the transition to non-ozone-depleting substances by accelerating the phaseout of HCFC-123 and reducing the allocation amounts on an annual basis. First, EPA disagrees that allocating more than 100% of baseline for HCFC-123 will artificially increase demand for this compound. Currently, there is no limit on HCFC-123 production or consumption. EPA does not believe that placing such a limit in this rule would artificially increase demand for this compound. As discussed above, EPA chose more than 100% to allow for normal growth in the market, not to impose any constraints or confer any benefits on the market. If the full amount of allowances is not needed, then EPA expects that the excess allowances may go unused or be transferred for other HCFCs. Second, under current domestic regulations, HCFC-123 can be produced or imported for new appliances until 2020 (40 CFR 82.16(d)). Third, EPA does not believe that the continued use of HCFC-123 at this point will threaten U.S. compliance with the overall HCFC cap. Therefore, the Agency disagrees that it is necessary to accelerate that schedule in this rule.

Some commenters also questioned EPA's analysis of the HCFC-123 market in the Servicing Tail report. They stated that the 3 million kilogram allocation to HCFC-123 surpasses their own estimate of needs. While EPA did not use a straight needs-based analysis for allocating HCFC-123, EPA did review the HCFC-123 needs analysis in the June 2008 Servicing Tail report and found that the source data used to project needs were not the same as those used to establish the allocation of HCFC-123. EPA has issued a final version of the Servicing Tail report (accessible in the docket to this action and at

http://www.epa.gov/ozone

). In any case, EPA has not chosen to allocate HCFC-123, HCFC-124, HCFC-225ca, or HCFC-225cb at the estimated need as shown in the Servicing Tail report. Instead, to allow for market growth as previously discussed, EPA is setting allocation baselines in the same manner for all four of these low-ODP HCFCs. Namely, EPA is setting each company's baseline at the highest consumption or production in the years 2005-2007, and allocating 125% of those baselines to avoid interfering with the existing market.

In accordance with the Montreal Protocol, EPA will issue a rule prior to the 2015 HCFC milestone to limit aggregate production and consumption

of all HCFCs to no more than 10 percent of the U.S. baselines for production and consumption. At that time, EPA plans to consider the appropriate level of allowances for 2015 and beyond based on market demand and the section 605(a) restrictions on introduction into interstate commerce and use discussed later in this preamble. Examples of uses that will be prohibited by section 605(a) beginning in 2015 are solvents, sterilants, and fire suppression uses. EPA anticipates other changes as well. For example, EPA's allowance level for HCFC-123, HCFC-124, HCFC-225ca, and HCFC-225cb does not assume a specified level of recycling and reclamation. For HCFCs used in non-refrigeration applications, such as solvents (

e.g.,

HCFC-225ca and HCFC-225cb), the section 608 prohibition on venting is not applicable. EPA received comment that it should consider recovery and recycling or reclamation of HCFC-123 in this rule when establishing production and consumption allowances. HCFC-123 is used in chillers that in some cases are replacing CFC chillers. Given that in many cases these appliances have expected lifespans of more than 20 years, it will be some time before significant amounts of HCFC-123 are recovered and recycled or reclaimed. In future rulemakings, however, EPA may estimate the amount of the total need for HCFC-123 that can be met through recycling and reclamation. As the HCFC-123 market matures, the refrigerant recovery, recycling, and reclamation requirements in 40 CFR part 82 subpart F will result in a greater amount of reusable HCFC-123.

E. Other HCFCs

As a result of EPA's allocation process, which is largely based on projected 2010-2014 need for HCFC-22 and HCFC-142b, minus an amount of HCFC-22 that is assumed to be recycled or reclaimed, the total allocation is lower than the aggregate HCFC cap. EPA recognizes that there could be some additional need for HCFCs not specifically included in this rule. While some niche applications in the U.S. use other HCFCs, such as HCFC-21, EPA is not aware of additional need for production or import of these substances at this time, as adequate amounts appear to be in inventory. However, EPA is not foreclosing the possibility of additional production or import for these niche uses. Also, some amount of HCFC-141b will likely continue to be produced or imported via the petition process during the 2010-2014 control periods. EPA believes that there is sufficient room under the cap for such continued production and import. The current regulations at 40 CFR 82.15 ban the production and import of class II substances for which EPA has apportioned baseline production and consumption allowances in excess of allowances held by the producer or importer, but do not ban the production and import of class II substances for which EPA has not apportioned baseline production and consumption allowances. This rule does not alter the current regulations in that respect. The producer or importer of an HCFC that is not subject to the allowance system would be required to report to EPA consistent with the existing recordkeeping and reporting requirements. If necessary, EPA could amend the regulations to set and apportion baselines and issue allowances for these HCFCs. Therefore, retaining room under the cap provides the benefit of accounting for unanticipated growth in HCFCs that do not have allocations or other unforeseen events. However, those reasons are not why EPA is reserving room under the cap. Instead, it is the result of EPA's bottom-up approach of allocating allowances for HCFC-22 and HCFC-142b according to the modeled demand for virgin and reclaimed material.

EPA received two comments that reserving 22% of the total HCFC cap for “other” HCFCs is too excessive, given that HCFC-22 will have the greatest servicing needs and projected shortages. EPA agrees that the greatest need for all HCFC in the future will be for servicing existing HCFC-22 equipment. However, as discussed in Section VI.B.1., EPA carefully analyzed such needs through multiple iterations of its Servicing Tail report to determine an allocation of HCFC-22 necessary to avoid shortages. EPA believes that it is appropriate to allocate HCFC-22 based on demand (and considering the role of reclamation) because this will help the transition to the 2015 phase-down step, when the cap is reduced from 25% to 10% of baseline. While EPA is not “reserving” room under the cap for these other HCFCs, the effect of allocating allowances based on need is additional room under the aggregate HCFC cap for any HCFCs that EPA has not specifically included in §§ 82.16, 82.18, and 82.19.

One commenter encouraged EPA to retire the remaining allowances that have not been allocated under this rulemaking. This commenter was concerned that if EPA maintained a reserve, the market will look to the Agency to allocate additional HCFC-22 allowances in the future instead of seriously pursuing recovery and reclamation. EPA disagrees that the unallocated room under that cap constitutes a set of allowances that can be “retired”; it simply represents the differential between the cap and the amount of allowances allocated. As stated earlier, room under the cap pro

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