Navigating the 2024 EPA Phasedown: Insights into the AIM Act and HFC Allocation Challenges.
Refrigerants are regulated substances, and starting January 1, 2024, the second phase of their phase-down begins.
In the HVAC/R industry, 2023 has been busy; Congress, under the AIM (American Innovation and Manufacturing) Act, has both defined the allowance allocation methodology and set a tight timeline for the EPA to adopt unmatched regulations to ensure the orderly phase-out of HFCs in the HVAC/R market. The AIM Act, integrated into the Consolidated Appropriations Act of 2021, mandates the Environmental Protection Agency (EPA) to gradually reduce HFC production and consumption in the United States by 85 percent over the next 15 years. This HFC phasedown is intended to ensure improved environmental impact and is anticipated to mitigate up to 0.5° Celsius of global warming by the year 2100. Congress has extended the EPA’s authority, and the EPA has, in turn, amending existing regulations under section 608 of the Clean Air Act to reduce HFC emissions and accomplish the HFC phasedown successfully.
2024 EPA Phasedown: Unveiling the Latest Insights and Updates on AIM Act and HFC Allocation Challenges
The new Spectrum of regulatory requirements has set a need to successfully transition to new equipment based on lower global warming potential refrigerants. We have published five articles on the topic over the past three months and hosted three webinars, with two more to be hosted next month. EPA’s focus has been on the future and meeting supporting next-generation technologies.
1. The Technology Transitions Program: HFC phasedown regulations represent a requirement that sectors and sub-sectors transition to lower-GWP technologies are available or will be available in the near term.
2. The proposed Subsection (h) changes address maintenance, handling, recordkeeping, and EPA HFC reporting requirements. We have been working through this section for nearly three months, with a 3 part series where we broke down the rule segments into subsections and shared the EPA’s proposed changes.
🔗 EPA’s Aim Act revolution: Sweeping changes in the HFC and refrigerant rules.
🔗 Extended EPA oversight: Mastering new skills to support the refrigerant lifecycle with new HFC regulations and supply chain management.
🔗 The AIM Act: Unveiling the EPAs subsection H proposed Changes, the role of HFCs in Fire suppression systems.
3. Today, we explore the Allocation Allowances – the methodology and process the EPA uses to ensure that the goals defined by Congress remain on track.
The 3 pillars addressed in the EPA rulemaking process, offer unmatched regulatory compliance. This phasedown rule represents a critical supply regulatory control step under the AIM Act to address HFCs, potent greenhouse gases commonly utilized in refrigeration, air conditioning, and various applications. The rule establishes baseline levels for HFC production and consumption, against which reductions will be measured. It also introduces an initial methodology for allocating and trading program for HFC allowances while concurrently establishing an adaptable and digital compliance monitoring and enforcement system.
The final rule will implement a 40% reduction starting in 2024 to advance U.S. manufacturing and innovation.
This headline is only part of the full story. The Phasedown process from this graph looks like a specific volume of refrigerants will be reduced, but the numbers are based on CO2e. Carbon dioxide equivalent or CO2e means the number of metric tons of CO2 emissions with the same global warming potential as one metric ton of another greenhouse gas and is calculated using Equation A-1 in 40 CFR Part 98[i]., here are five examples of the 18 refrigerants listed in the AIM Act:
Considering that 1 lb. of R-125 is 3500 GWP and 1 LB of R-134a is 1100 GWP, you can either import/produce 3 LBS of R-134a or 1 LB of R-125, so profits and HFC production will all be tied to specific allowable limits.
These values determine the maximum amount of CO2 related to all refrigerants’ total HFC production and imports. Allowances under the AIM Act represent the authorization granted to a company for the production or importation of regulated substances within a specific year. The production of HFCs necessitates using both ‘production allowances’ and ‘consumption allowances,’ while importing bulk HFCs only requires ‘consumption allowances.’ The EPA diligently issues allowances by October 1 for utilization in the subsequent year, and these allowances, commonly referred to as ‘calendar-year allowances,’ remain valid from January 1 to December 31 of the respective year. Importantly, allowances cannot be carried over or banked for future use.
In addition to the allowances mentioned, there is a third category, ‘application-specific allowances.’ These allowances are allocated as needed to facilitate the production or importation of HFCs for specific use within the six applications outlined in the AIM Act.
What is the Baseline
The EPA calculated the production and consumption allowances based on baselines by applying an equation specified in the AIM Act, using data from the Greenhouse Gas Reporting Program and other outreach efforts. The resulting determination sets the production baseline at 273 million allowances and the consumption baseline at 310 million in a business-as-usual model. Notably, each allowance corresponds to the expenditure of one ‘exchange value-equivalent’ (EVe) ton of HFCs, which roughly equates to one CO2-equivalent ton. Furthermore, the AIM Act establishes specific exchange values for eighteen of the most used HFCs.
Understanding production and consumption baselines
The reference to production and consumption baselines refer to different aspects of regulating hydrofluorocarbons (HFCs) under the AIM Act (American Innovation and Manufacturing Act) and are used to manage the production and importation of these substances.
Production Baseline
This represents the allowable quantity of HFCs produced within a specific year. It limits the total amount of HFCs that domestic producers can manufacture. The production baseline is determined based on historical data, calculations, and considerations outlined in the AIM Act. It is expressed in terms of the number of allowances.
Consumption Baseline
The allowable quantity of HFCs imported or consumed within a specific year. It limits the number of HFCs that can be brought into the United States through imports or domestically. The consumption baseline is also determined based on historical data, calculations, and criteria specified in the AIM Act. Like the production baseline, it is expressed in the number of allowances.
In summary, the production baseline regulates the domestic production of HFCs, while the consumption baseline regulates the importation and domestic consumption of these substances. Both baselines are essential for controlling and reduce HFC emissions in line with environmental goals and regulations.
Administrative Consequences Under the HFC Allocation Rule
The EPA has outlined administrative consequences within the regulations codified at 40 CFR 84.35 to address specific activities and situations. These activities include submitting false, inaccurate, or misleading information or data, importing HFCs without expending the required number of allowances, and non-compliance with mandatory reporting obligations, among others. Additional details regarding the EPA’s administrative consequences provisions can be found in 86 FR 55168.
Under this authority, the EPA can take specific actions, including retiring, revoking, or withholding allowances and imposing bans on companies concerning receiving, transferring, or conferring allowances. These actions include:
- A ‘retired allowance’ must go unused and expires at the end of the year.
- A ‘revoked allowance’ is one that the EPA reclaims from an allowance holder and reallocates among all other allowance holders.
- The Agency retains a ‘withheld allowance’ until an allowance holder who has failed to meet a requirement returns to compliance. Subsequently, the EPA allocates it to the allowance holder. A withheld allowance may be converted into a revoked allowance if the allowance holder fails to regain compliance within the specified timeframe.
Furthermore, the EPA can apply a premium when revoking or retiring allowances. In the HFC Allocation Framework Rule, the EPA was set to impose a 50% premium for first-time offenses. On September 29, the EPA published the list of offenders and the administrative action taken.
Unraveling the EPA’s Vintaging Model: Key Insights into HFC Projections and AIM Act Compliance
The EPA uses the Vintaging Model to predict how much HFCs would be used and emitted if the AIM Act didn’t exist. Instead of calling this prediction a ‘baseline’ like other analyses do, they call it a ‘BAU forecast’ (Business as Usual) to set it apart from the baselines discussed elsewhere. This determines the maximum HFC levels allowed under the AIM Act. Table 2 shows the BAU value versus the consumption allowance of the BAU forecast for HFC consumption from the Vintaging Model. They use the data to determine the costs and benefits of reducing HFC consumption as the AIM Act requires, and all of this can be found in the 253-page Regulatory Impact Analysis for Phasing Down Production and Consumption of Hydrofluorocarbons (HFCs) published in June 20222 by the EPA.
The EPA took the 18 refrigerants listed in the AIM Act to determine the baseline and created a value-weighted basis. Those 18 refrigerants are sometimes used as pure compounds and often used in blends. The blends look like this:
In a few days, 2024 will kick off with a reduced availability. No one knows the exact pounds of refrigerant that will be produced since each company can produce/import whatever refrigerant they find the most valuable and useful to meet their needs for meeting their client’s demands. Some companies have already opted to stop supplying. some refrigerants like R-408A, since that would use important ingredients like R-22, R-143a and R-125, all in short supply. Parallel to the phase-down is the EPA technology transition, which reduces the market’s ability to use some of the refrigerants in many applications. So, as the potential market fluctuations vary based on access and usability BUT the dates are different, and 2024 will be a tough year to predict.
Who gets allowances under the New Regulations :
From 2024 to 2028, the EPA distributes allowances to entities that produce and/or import bulk HFCs in 2021 and/or 2022. These allowances are determined based on the three highest production and/or import years for each entity between 2011 and 2019. These three years do not have to be consecutive.
The number of allowances allocated to a company is calculated by comparing its high three-year average to the sum of all companies’ high three-year averages and the number of generally available allowances.
Entities that previously received allowances as “new market entrants” can also receive allowances during this period, but at a proportionally reduced level to account for the decrease in available allowances from 2024 to 2028.
76 Companies received allocations, ranging from 53 million tons of CO2e (MTEV) to 11 tons of CO2e (MTEV – and a lot of trading will likely occur where smaller entities will sell their allocation to larger entities = the EPA expects this and even has a program for registering and notifying them. This is a list of the top 10 consumption allocations:
Although 66 more companies received allocation, these 10 account for 87% of all the consumption allocations.
It is important to note that these are based on pounds of CO2e, and as a reference, If we apply that concept to just companies allocation numbers, then we assume they want to produce only R-125, Here is what that would look like:
22,115,322(Allocation)* 2000 = 44,230,6664,800
/3500 (LBS. of CO2 e per lb. of R-125) = 12,637,332 LBS
of R-125 that could be produced
We are not suggesting that any one company will devote their entire production to any one specific material type, this is just a sample to give you some perspective on how the allocations will work. If we apply the same concept to 134A then the available allocation would be 3x higher or 40,209,669. Each importer/producer will have to determine an adequate product mix to meet the goals they have set for profitability and market support.
What does all this Mean?
When we refer to the EPA, cost analysis, and just using the disposable cylinder market share values, we see that 404A is approximately 12% of total filled cylinders, and the largest volume of refrigerant is 410A, which represents over 50% of the market share from disposable cylinders. Most likely, this is because most 410A systems are under 50 LBS and don’t require bulk or larger packaging options.
Based on the feedback from the industry, the EPA estimates that 4.5 million cylinders are sold in the US, and based on the 2020 numbers this is what it turns out to be:
However, if we applied the 40% reduction that takes place in a few days, then we could see numbers like this: (we make a lot of assumptions here; for instance, we assume the same product mix, no use of bulk cylinders, and no change in buying or equipment supply, and all of these things will alter this landscape), but still, it’s worth seeing the impact.
These might not be the right numbers, but they will be closer to the Figures in Figure 4 than those in Figure 3.
Stability in Pricing for the last two years despite uncertainty in availability.
Pricing has fluctuated but remained largely stable or decreased over the past two years, regardless of the reduction in market CO2e. Although we don’t have great data on 410A, we do have month-to-month numbers of 404A and 134a. The numbers we are tracking reflect the transactions between the service provider and grocery store, and we use more than 1 data point per month per refrigerant; here are two examples through June of this year. Also note that we did a spot check this morning, and the prices in December are consistent with the pricing from June, indicating prices are stable and although we expect the 40% reduction to lead to increase operational costs, none has occurred yet, but likely the first quarters of 2024 could see price volatility and the market does anticipate potential fluctuations.
R-404A 2022 – 2023 (End user buying from a service provider)
134a pricing is averaged for disposable and larger cylinders: 2022-2023 (end user buying from a service provider)
Pricing seems to fluctuate based on market concerns about the future since neither 134a nor 404A increased in demand in the fall, where they both saw price increases in 2022 but have since returned to more normal pricing and even come down slightly. We are not suggesting that refrigerant pricing in the future will follow this trend, but we wanted to share the market response to 10% phasedown for two refrigerants, as an example of specific trends resulting from a change in market availability.
Social Cost of Carbon – and yes, you are probably using it on one aspect of your formula, so you cannot ignore it
It is also important to note that another value for the refrigerant is impacting some parts of the market: the carbon value. The carbon value for Federal Contractors’ refrigerant is $51/ton. This is often referred to as the lifecycle or social cost of impact; it is commonly used to help companies generate carbon offsets or insets to monitor end-of-life options. Since so many carbon-related projects occur annually, the social cost cannot be ignored, as they represent a significant part of the calculus for determining value.
1 LB of R404A = $81 of CO2e
1 LB of 410A = 48 of CO2e
Strategic Allocations and Competing Giants: The Battle for HFC Allowances in the Semiconductor, Pharmaceutical & HVAC/R Industries
The Aim Act directs EPA, the Environmental Protection Agency to fully distribute allowances, considering projected, current, and historical trends. These allowances are specifically designated for six industries, with a defined allocation period of five years post-enactment. These industries include:
- Propellants in Metered-Dose Inhalers
- Defense Sprays (e.g., Bear Spray)
- Structural Composite Preformed Polyurethane Foam Intended for Marine and Trailer Use.
- Etching of Semiconductor Material or Wafers and Cleaning of Chemical Vapor Deposition Chambers within the Semiconductor Manufacturing Sector
- Mission-Critical Military End-Uses
- On-Board Aerospace Fire Suppression Systems
However, it’s essential to highlight that these industries, while allocated allowances, face stringent limitations. Even within sectors such as bear spray and structural composites, where allocations have been made, the allowances are carefully controlled to ensure they remain within predefined boundaries.
Two industries stand out amongst the group, pharmaceutical and Semiconductor companies. Although Bear spray is important to anyone hiking, hunting, or living in an area where bears habituate, the industry does not have the financial strength and impact that the Pharmaceutical and Semiconductor industries have. Everyone will be competing for allocations and inventory. which will likely lead to market consolidation. Knowing the significance of these industries, the EPA has set aside special allocations to ensure these industries can thrive, and in return, the industries have adopted aggressive voluntary measures to reduce emissions and verify production. These are the top 10 companies in the Semi-Conductor and Pharma space competing for allocation, and here are their numbers:
The semiconductor industry is poised for substantial growth, driven by increased digitalization, electric vehicles, and connected technologies. With projections indicating a doubling of industry revenues by 2030, reaching over $1 trillion, the U.S. is expected to play a significant role in this expansion. The recent enactment of the CHIPS and Science Act, with $52 billion in incentives for semiconductor manufacturing and research, has already spurred numerous projects and investments, creating thousands of jobs.
This growth is expected to increase manufacturing capacity and, consequently, higher usage of materials like HFCs in semiconductor production. Despite HFCs’ critical role in semiconductor manufacturing, their usage and emissions remain relatively small, with the industry actively reducing greenhouse gas emissions through established best practices.
Considering this projected growth and the increasing complexity of semiconductor manufacturing, the Semiconductor Industry Association (SIA) asked the EPA to set allocations that account for these trends. This approach aligns with the goals of both the CHIPS Act and the AIM Act, ensuring that the semiconductor industry receives the necessary HFC allowances to meet its evolving needs.
SIA further suggested expanding the range of years used for baseline allocation values, including data from 2020 and 2021, to accurately reflect the industry’s growth, and the EPA seems to have accepted this adjustment in their recent allocation.
It is important to pay close attention to these industries since they have the means to buy gas at higher prices than the maintenance industry. There are 41 projects worth more than $200 Billion in development right now across more than 20 states that will lead to more than 35,000 manufacturing jobs here in the US; some say it’s the greatest manufacturing boom in the US since World War II.
Pressure Mounts on the Industry to Transition: Navigating Refrigerant Allocation Changes and GWP Impact in 2024 and Beyond
No two years are the same; the market adjusts, regulatory boundaries, and even competition for raw materials will bring in new elements that we have not experienced. The EPA allocation forces us all to pay closer attention to the GWP of the materials we are using, even understanding that the GWP of every cylinder will impact this market’s access to enough material to service equipment.
Already, I have heard from some companies that if a system leaks too much, they will no longer service it since it will deplete their access to needed refrigerants. At Trakref, we have embedded the GWP of every refrigerant into the calculus that we display on the asset and the transaction and even developed a set of balance sheets that can be used to track GWP activity rather than just paying attention to the weight.
Gas Manufacturers, equipment producers, and importers are all strategizing about their 2024 ambitions, and most likely, they will pay close attention to profitability. Pricing might be the least of everyone’s concerns, but rather tracking, GWP usage, and even reporting. Architects and engineers have a lot of work to do to ramp up their transition programs to meet market supplies and also meet a myriad of other EPA requirements that include the Technology Transition to lower GWP materials that starts in 12 months and service and maintenance requirements that will soon be finalized under subsection (h).
We will gather in Chicago in a few weeks to explore the latest technological advancements addressing our challenges. At Trakref, we’ve dedicated decades to staying prepared and actively engaging with the evolving landscape wiht the intent of a successful transition. Our commitment to developing cutting-edge solutions has established us as industry leaders, and we’re excited to share our insights and innovations with you during this event.
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