LEGISLATION AND REGULATION RELATED TO HFCs CURRENTLY UNDER CONSIDERATION

Overview

This paper is intended to summarize some of the current proposals relating to HFCs. To help you with business planning, a more detailed understanding may be necessary. Current regulatory mechanisms being evaluated include proposals such as cap and trade, use restrictions, production reduction schedules, mitigation fees, fees associated with auctions, manufacturer allocations and other actions concerning HFCs. It is also important to keep in mind that regulations addressing HFCs as a broad category may or may not be relevant for HFCs used in fire protection.

Global warming, or climate change, is an environmental issue which our industry must face. Global warming is the increase in the average temperature of the Earth's near-surface air and oceans. It is said that man-made greenhouse gases are contributing to the earth's warming by reducing the amount of radiative heat that can escape the earth's atmosphere. Carbon dioxide, methane, nitrous oxide, sulfur hexafluoride and two groups of fluorinated gases (HFCs, and PFCs) are the primary materials considered greenhouse gases and the subject of the Kyoto Protocol, which came into force in 2005. The Kyoto Protocol was designed to set targets for greenhouse gas emissions by the countries that signed this international agreement. It does not prescribe the method or regulations countries should follow; it only details the goals for emission reductions (not elimination since it is not feasible to target no CO2 emissions from utilities, for example). Although the U.S. never ratified the Kyoto Protocol, it is in the process of becoming a global partner in the control of greenhouse gases. Proposed legislation has been developed in the U.S. House of Representatives which addresses emissions of greenhouse gases including HFCs.

Global Warming Potential (GWP) is a measure of how much a given mass of greenhouse gas is estimated to contribute to global warming compared to an equal mass of carbon dioxide over a defined period of time (typically 100 years). CO2 has a GWP of 1. For example, the release of one pound of HFC-227ea (GWP of 3,220) is equivalent to a release of 3,220 pounds of CO2, with respect to contribution to global warming. Here are the Global Warming Potentials of common fire suppression agents:

HFC-227ea, also known as "FM-200" has a GWP = 3,220

HFC-125, also known as "FE-25" has a GWP = 3,500

HFC-23, also known as "FE-13" has a GWP = 14,800

HFC-236fa, also known as trade name "FE-36" has a GWP = 9,810

Although there are numerous climate-related initiatives being discussed in the environmental community and within regulatory bodies on international, national and state levels, the exact form and impact of potential regulations is still unclear. A point to remember is that there are no laws currently regulating the use of HFCs and nothing has changed our ability to use HFCs for fire protection.

International Activities

On the international front, there has been discussion about controlling production and consumption of HFCs under the Montreal Protocol instead of leaving them in the basket of six gases covered by the Kyoto Protocol. Many HFCs are used as replacements for ozone depleting substances and therefore the Montreal Protocol framework is considered by some to be better equipped to control them than a revised Kyoto Protocol or other new treaties or new laws. The Federated States of Micronesia and Governments of Mauritius have submitted a proposal to amend the Montreal Protocol to provide for a phase down in HFC consumption and production. This proposal will be on the agenda of the Meeting of the Parties to the Montreal Protocol in November 2009. The U.S. State Department and EPA are considering what position the U.S. will take on this proposal.

A climate summit is scheduled in Copenhagen in December 2009 in an attempt to produce a new climate treaty to replace the Kyoto Protocol when it expires in 2012. Currently the United States is not a party to the Kyoto Protocol. The United States, however, has indicated that it may become a party in a revised version of the Kyoto Protocol if certain conditions are met.

U. S. Congress

On April 17th 2009 the EPA ruled that greenhouse gases (GHGs) are harmful to personal health and therefore opened the door to creating regulations to control GHGs. This may happen unless Congress enacts legislation designed to regulate greenhouse gases.

The "American Clean Energy and Security Act of 2009," commonly known as the Waxman-Markey bill (H.R. 2454), is comprehensive energy legislation that has been passed out of the House Energy and Commerce Committee on May 21 by a 33 – 25 vote. The 900+ page legislation includes a "global warming" title that places limits on the emissions of heat-trapping gases including HFCs. The legislation would create a special program to reduce production of HFCs by adding HFCs to the list of substances that EPA currently regulates under the Clean Air Act. Under this program, the EPA would be directed to phase down the total production of HFCs. The production of HFCs would be phased down in a series of steps beginning in 2012 and ending in 2032. After 2032 continued production at 15% of the 2004 – 2006 average baseline would be permitted. Please remember that the bill is a long way from passage and the above details may change when and if the bill is finally passed. For details, please see the HARC discussion of the bill which is attached to this paper.

The bill has been turned over to nine other House committees for mark up. June 19th 2009 is the deadline for mark-up; by these House committees. It is possible that the bill could be taken up by the House before the July 4. 2009 recess. The Senate is waiting to see what happens to this bill in the House and it is likely that the Senate will consider the bill later this year. Further information on H.R. 2454 and its status, please go to www.house.gov/house/Legproc.shtml; this bill is pending in the 111th Congress.

State of California

Although California is not the only state adopting legislation that regulates HFCs, most observers agree that it is the blueprint that other states look to for guidance. California AB 32's goal is to reduce State GHG emissions to 1990 levels by 2020. California AB32 has delegated to the California Air Resources Board (CARB) (like a state EPA) the task of filling in many of the details and CARB has a great deal of discretion on how this law is implemented.

California AB32 gives open-ended authority to CARB to "achieve the maximum technologically feasible and cost effective greenhouse gas emission reductions from sources or categories of sources." It also allows but does not require "cap and trade." The current version of the Waxman-Markey bill under consideration by the U.S. House, however, forbids states from initiating cap and trade with respect to GHGs.

In 2008, CARB adopted regulations for mandatory reporting of GHG emissions, and in 2009 is scheduled to adopt a plan to meet the 2020 emissions goal. Workshops and informational meetings are scheduled this year and next year throughout California. FSSA Members plan to participate in the workshop related to the fire protection industry currently planned for summer 2010.

Over the coming months the legislative activity related to environmental issues will continue to evolve. The FSSA will provide updates to its membership on this important issue as significant actions occur.

*Attachment:

May 18, 2009

HALON ALTERNATIVES RESEARCH CORPORATION

TO: MEMBERS

FROM: TOM CORTINA

SUBJECT: HOUSE CLIMATE BILL

On Friday, May 15, Reps. Henry Waxman (D-CA) and Edward Markey (D-MA) introduced energy and climate legislation (HR 2454) entitled the "American Clean Energy and Security Act of 2009." The legislation would amend the Clean Air Act (CAA) to establish an economy-wide cap-and-trade program covering 85% of US greenhouse gas (GHG) emissions. It would reduce covered emissions by 3% below 2005 levels in 2012, 17% below 2005 levels in 2020, 42% below 2005 levels in 2030, and 83% below 2005 levels in 2050. Covered entities would include large industrial sources that emit more than 25,000 metric tons of GHGs in a year.

Below is a summary of the HFC section of the legislation. It is similar to the discussion draft (see HARC memo of March 31), but has some important changes including a faster phase down, specified allowance costs in the initial years, and transition assistance for equipment manufacturers.

Hydrofluorocarbons (HFCs) are covered separately from other GHGs by amending Title VI of the CAA, which currently regulates ozone depleting substances (ODS) that are covered under the Montreal Protocol. Class II substances under Title VI would be split into two groups, with group I containing the hydrochlorofluorocarbons (HCFCs) and group II containing the HFCs. The production of HFCs would be phased down in a series of steps beginning in 2012 and ending in 2032. The reduction percentages contained in the bill are measured against a 2004-2006 average baseline that includes both HFC and HCFC production (on a GWP-weighted basis). The bigger baseline means that the required reductions in HFC production should actually be less than the percentages shown below.

HFC Reduction Schedule

Because HFCs are added to Title Vi of the existing CAA, the essential use, labeling, nonessential product, safe alternatives, and other provisions of Title VI that currently cover class II ODS would be extended to HFCs (the wording of the HFC label would be "contributing to global warming"). Offset credits would be provided at a 20% discount on a GWP-weighted basis for destruction of CFCs after 2011. EPA could add other class I or class II ODS to the list of substances that could be destroyed for offsets credits.

As noted above exceptions from the production phase down are provided for essential uses in metered dose inhalers, aviation safety, developing countries, national security, and fire suppression/explosion protection. There seems to be some confusion within the fire protection industry that the bill provides a blanket exemption from the production phase down for fire protection. This is not true. It includes an essential use exemption that would only apply if you were unable to purchase any new or recycled HFC for use in a very small number of applications like aviation, military, and oil and gas.

Although the bill does not include an HFC excise tax, it does require HFC producers to buy production allowances either at auction or directly from EPA. 80% of the allowances are set aside for purchase by HFC producers/importers and 20% of the allowances are set aside for purchase by manufacturers/importers of equipment containing HFCs and HFC reclaimers. The minimum auction price and non-auction sales price for allowances are set in the early years of the program as follows: $1.00 per metric ton in 2012, $1.20 in 2013, and $1.40 in 2014. The minimum auction price rises to $1.60 in 2015, $1.80 in 2016, $2.00 in 2017, and then increases with inflation for the rest of the program. After 2017 the non-auction sales price is equal to the auction clearing price.

In order to get an idea of the impact of requiring HFC producers to buy allowances, the cost of allowances to manufacture HFCs used in fire protection would be the following:

At $1.00 per metric ton, cost of HFC-227ea allowance = $1.46 per pound, HFC-125 = $1.59, and HFC-236fa = $4.46.

At $2.00 per metric ton, cost of HFC-227ea allowance = $2.93 per pound, HFC-125 = $3.18, and HFC-236fa = $8.92.

The proceeds from the sale of HFC production allowances are to be deposited in the "Stratospheric Ozone and Climate Protection Fund" that is created by the bill. The funds are designated for specific uses including recycling and reclamation, Montreal Protocol Multilateral Fund, and low global warming product transition assistance. The transition assistance program would allow EPA to distribute funds to manufacturers of products containing HFCs to facilitate the transition to low-carbon alternatives. Fire protection systems are included in the list of products for which assistance would be available.

The House Energy and Commerce Committee is scheduled to markup the legislation starting today, with a goal of passing it out of committee by the end of the week. Please remember that the bill is a long way from becoming law.

Note: Since this May 18th communication from HARC, the "American Clean Energy and Security Act of 2009" has been passed out of the House Energy and Commerce Committee and forwarded to nine other House committees for consideration.

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