Support for the American Innovation and Manufacturing Act of 2018

S.2448 (Sen. Kennedy)

A BILL to provide for the issuance of a rule to advance next-generation technologies to provide alternatives to hy­dro­fluo­ro­car­bons, and for other purposes.

The American Innovation and Manufacturing Act of 2018

THIS LEGISLATION IS SUPPORTED.

IN THE ALTERNATIVE, NEW YORK STATE LEGISLATION IS SUPPORTED

On February 15, 2018, Senator John Kennedy (R-LA) introduced and Senators Thomas Carper (D-DE), Bill Cassidy (R-LA), Christopher Coons (D-DE), Susan Collins (R-ME), and Jeff Merkley (D-OR) co-sponsored Senate bill S. 2448, the American Innovation and Manufacturing Act of 2018 (the “AIM Act”), which would require the Administrator of the United States Environmental Protection Agency (“EPA”) to promulgate a rule to phase down hy­dro­fluo­ro­car­bons (“HFCs”), consistent with the United States’ commitments under the Kigali Amendment to the Montreal Protocol on Substances That Deplete the Ozone Layer (the “Montreal Protocol”). Senator Lindsey Graham (R-SC) subsequently joined as co-sponsor. The AIM Act would codify a sensible, viable pathway to removing HFCs from our industrial economy. HFCs, which were introduced into various products in order to eliminate ozone-depleting substances, have proven to cause a different kind of harm in that they are greenhouse gases with a high global warming potential.

We write on behalf of the Committee on International Environmental Law of the New York City Bar Association (the “Committee”) to register our strong support for passage of the AIM Act. As an alternative, and in addition, we support New York State legislation that addresses the same issue in a similar, or identical, way. Our committee is comprised of lawyers and other professionals who practice in law firms, corporations, government agencies, non-governmental organizations, and academic institutions and who have a special interest in matters pertaining to international environmental law. Our committee’s interest is the protection of human health and welfare, the maintenance of high levels of environmental quality, and the conservation and preservation of natural resources. Because the proposed legislation would make a significant contribution to domestic efforts to combat climate change, we urge New York State’s congressional delegation to support S.2448 and passage of the AIM Act. While we hope the bill proceeds quickly, we recognize that federal action may not materialize. Accordingly, as an alternative, we urge Governor Cuomo and the New York State Legislature to support enactment of state-level legislation that provides for the phaseout of HFCs in New York.

International Law Background: The Montreal Protocol and the Kigali Amendment

The Montreal Protocol, which entered into force on January 1, 1989, is an international agreement that requires the phase out of production and consumption of substances that deplete the ozone layer, including chlorofluorocarbons (“CFCs”) and hydrochlorofluorocarbons (“HCFCs”).[2] One hundred and ninety-seven countries, including all members of the United Nations, have ratified the Montreal Protocol. The Protocol and its subsequent revisions and amendments have contributed to a significant decline in emissions from ozone-depleting substances.

On October 15, 2016, parties to the Protocol adopted the Kigali Amendment, which aims to phase down the production and consumption of HFCs.[3] HFCs are potent greenhouse gases that came into widespread use after the Montreal Protocol required countries to phase out CFCs and HCFCs. The Kigali Amendment will enter into force on January 1, 2019, provided that it is ratified by at least twenty parties to the Montreal Protocol, or 90 days after ratification by the twentieth party, whichever is later. The United States has not yet ratified the Amendment.

Domestic Law Background: EPA’s Regulation of HFCs under the Clean Air Act

In 1990, Congress implemented the United States’ obligations under the Montreal Protocol by amending the Clean Air Act to include Title VI.[4] Title VI requires EPA to develop and implement regulations for managing ozone-depleting substances. Title VI requires manufacturers to phase out use of some ozone-depleting substances by 2000, and others by 2015.

Section 602 of Title VI requires EPA to publish a list of ozone-depleting substances.[5] Section 612 requires manufacturers to replace those identified ozone-depleting substances with safer alternatives.[6] To identify safer alternatives, Section 612 directs EPA to evaluate the risks to human health and the environment of potential alternatives. EPA undertakes this review through the Significant New Alternatives Policy (“SNAP”) program. EPA then develops a list of approved and prohibited alternatives.  Manufacturers must replace the identified ozone-depleting substances with approved alternatives. EPA has the authority to revise the lists of acceptable and prohibited alternatives at any time.

EPA had previously designated certain HFCs as acceptable alternatives to certain CFCs and HCFCs.[7] However, as scientific knowledge about the global warming potential of HFCs grew, EPA reevaluated that designation. In 2015, EPA issued a new SNAP rule, moving certain HFCs from the list of acceptable alternatives to the list of prohibited alternatives.[8] As a result, certain HFCs that had previously been approved by the EPA were now prohibited or restricted in certain end-uses.

Subsequently, two foreign manufacturers of HFCs filed a suit challenging EPA’s 2015 SNAP rule. EPA—along with New York and a number of other states, industry leaders Honeywell and Chemours, and environmental groups such as the Natural Resources Defense Council—defended the agency’s approach. In Mexichem Fluor, Inc. v. EPA, 866 F.3d 451 (D.C. Cir. 2017), the U.S. Court of Appeals for the D.C. Circuit vacated and remanded in part the rule, holding that Section 612 of the Clean Air Act does not grant EPA the authority to require manufacturers to replace HFCs with approved alternatives. The court acknowledged that EPA had the authority to move HFCs from the list of acceptable alternatives to the list of prohibited alternatives, but held that, because HFCs are not ozone-depleting substances, EPA could not require manufacturers to replace HFCs with approved alternatives. This decision constrains EPA’s ability to regulate HFCs through its existing Clean Air Act authority. Three intervener-respondents filed petitions for rehearing and rehearing en banc, but on January 26, 2018, the Court of Appeals for the D.C. Circuit denied those petitions.[9] On March 8, 2018, Chief Justice Roberts granted an application for an extension of time for filing a petition for writ of certiorari filed by Honeywell and Chemours.

Although the Mexichem Fluor decision constrains EPA’s ability to regulate HFCs through Title VI of the Clean Air Act, there are other provisions of the Clean Air Act that EPA could potentially invoke to restrict the use of HFCs:

• Section 614(b) of the Clean Air Act provides that “[i]n the case of conflict between any provision of this subchapter and any provision of the Montreal Protocol, the more stringent provision shall govern.”[10] If the United States ratifies the Kigali Amendment restricting the use of HFCs, EPA could potentially invoke section 614 to regulate the use of HFCs.
• EPA could regulate HFCs under section 115 of the Clean Air Act.[11]  Section 115 authorizes the United States to work with other countries to reduce transboundary air pollution.  To regulate HFCs under section 115, EPA must, first, find that U.S. emissions of HFCs endanger the public health or welfare of other countries, and second, determine that if the United States acts to reduce its HFC emissions, other countries will reciprocate.  EPA then must give notice to the governors of the states where the HFC emissions originate; the governors would be obligated to amend their State Implementation Plans to reduce HFC emissions.[12]
• EPA could designate HFCs as Class II substances under section 602 of Title VI of the Clean Air Act.  Section 602(b) identifies a Class II substance as one which “is known or may reasonably be anticipated to cause or contribute to harmful effects on the stratospheric ozone layer.”[13]  Although the D.C. Circuit in Mexichem Fluor noted that HFCs are not ozone-depleting substances, a 2015 NASA study found that HFCs do contribute to ozone depletion by a small but measurable amount.[14]  If EPA determines that HFCs may cause harmful effects on the ozone layer, and HFCs are designated as Class II substances, EPA could promulgate regulations to phase out their production and consumption.

The majority in Mexichem Fluor cited a number of other Clean Air Act provisions under which EPA could potentially regulate non-ozone depleting substances, but none of these provisions offer a clear path toward comprehensive regulation.  EPA could potentially regulate HFCs under Section 109 of the Clean Air Act; however, this would require EPA to implement a National Ambient Air Quality Standard for greenhouse gases, which may pose significant difficulties.[15]  EPA could also regulate HFCs under Section 202 of the Clean Air Act, but those regulations would only apply to HFCs used in moving vehicles.[16]  Finally, EPA could attempt to regulate HFCs under the Hazardous Air Pollutants Program, but that program is designed to regulate hazardous pollution from stationary sources, not products.

The majority in Mexichem also noted the possibility of regulating HFCs as toxic substances under the Toxic Substances Control Act (“TSCA”).  Under TSCA, EPA can regulate chemical substances and mixtures that pose an unreasonable risk of injury to human health or the environment.[17]  However, because of the evidentiary risk assessments required for EPA to initiate TSCA regulation, it has been historically difficult for EPA to regulate existing chemicals under TSCA.

As is evident from the above, EPA does have other options available to pursue a phaseout of HFCs; however, a clear directive from Congress would resolve any uncertainties around the agency’s legal authority to do so. Accordingly, in the absence of Senate ratification of the Kigali Amendment, enactment of new legislation would be the most efficient and effective way to pursue this important goal.

Federal and State Legislative Efforts to Implement the Kigali Amendment Should be Supported

But for the Mexichem Fluor, Inc. v. EPA decision, EPA’s SNAP Program would have required compliance with the Kigali Amendment’s phased reductions of HFC production and consumption.[18] In efforts to correct for the uncertainty around EPA’s proposed approach, several U.S. Senators and politicians and regulators in California are moving ahead with alternative approaches to implementing phasedowns consistent with the Kigali Amendment. The following discussion summarizes those initiatives, the processes required to give them effect, and key features of their political circumstances. Ultimately, this Committee supports federal legislation as the best overall solution. In the absence of federal legislation, New York State can join California in demonstrating leadership by enacting state legislation to phase out HFCs.

S. 2448 Takes a Common Sense Approach and Directly Addresses the Issue at the National Level

S. 2448, the American Innovation and Manufacturing (“AIM”) Act of 2018,[19] was introduced in February 2018. If enacted, it would instruct EPA to issue “one or more rules to phasedown hydrofluorocarbons” by the end of 2018 in conformity with the schedule embodied in the Kigali Amendment.[20] Those rules would, at a minimum, establish “an allowance allocation and trading program.”[21] The AIM Act would also authorize EPA to further support the “advancement of environmentally friendly technologies, including new compounds, blends, and other substances . . .” with programs additional to the trading program.[22] While the AIM Act would provide the legal authority for these rules, it would borrow procedures from Title VI of the Clean Air Act to govern their issuance, review, and enforcement[23]— an approach that would minimize regulatory novelty and complexity.

Notably, S. 2448 invites EPA to develop the phasedown rule or rules using the process described by the Negotiated Rulemaking Act of 1990 (the “Reg-Neg” Act).[24] This approach would engage stakeholders in the rulemaking process from the outset rather than just inviting their responses to a proposed rule drafted by EPA.[25] Including a provision expressly suggesting use of the “Reg-Neg” approach reflects the understanding of the bill’s bipartisan sponsors of the consensus view among U.S. industry leaders that HFC substitutes are commercially viable and regulations to restrict HFCs are welcome.

The language of S. 2448 focuses on the economic and health benefits of HFC substitution. It lists a suite of goals—“promote and support economic development,” “minimize costs” and “maximize flexibility for [HFC] producers, reclaimers, and user entities,” and “minimize any additional costs to consumers”—that balance its instruction to “maximize protections for human health and the environment.”[26] Similarly, the press release that accompanied introduction of the bill in the Senate noted the size (in terms of capitalization and employment) of the U.S. “hydrofluorocarbon industry” and explained that, “[b]ecause of changing global policy, countries are moving away from using hydrofluorocarbons.”[27] In short, the bill treats HFCs’ contribution to climate change and the related imperative to replace them as a background issue, and addresses itself to the foreground issues of how U.S. policy and businesses are positioned to respond. Thus the bill also does not mention the D.C. Circuit’s Mexichem Fluor, Inc. v. EPA decision.[28]

These tactical measures appear to be prudent, given the profound lack of overt federal political support for what implementing the Kigali Amendment would require, namely (i) federal regulatory intervention (ii) for the purpose of mitigating adverse impacts on the global climate (iii) informed by parameters prescribed by international agreement..[29]

As of this writing, S. 2448 has been read twice and referred to the Senate Committee on Environment and Public Works.[30] Its passage would require the support of that committee, of majorities of the full Senate and House, as well as signature by the President.[31] The New York State congressional delegation should fully support these measures.

California Has Provided a Useful, Replicable Model for State-Level Action

California and New York were both among the 11 states that supported EPA’s 2015 regulation before the D.C. Circuit in the Mexichem Fluor case with an amicus brief.[32] California, however, has moved to regulate HFCs ahead of federal action. In 2016, it enacted legislation to address HFCs and other “short-term climate pollutants.”[33] That legislation set a statewide 40% HFC emissions reduction target by 2030 from a 2013 baseline and authorized the California Air Resources Board (“CARB”) to issue regulations to meet that target.[34] Analysis of compliance pathways conducted for CARB in 2017 found that this would mean adopting a more ambitious program than the one required of developed countries by the Kigali Amendment.

CARB was planning to pursue much of this HFC phasedown by following Rules 20 and 21 of EPA’s SNAP Program—until Rule 20 was suspended and Rule 21’s legal foundation incidentally called into question by the Mexichem Fluor decision.[35]  Now, to fill the gap created by that decision, CARB has adopted a rule that largely copies Rule 20 and other aspects of SNAP.[36] Backed by a rule grounded in California law rather than the federal Clean Air Act,[37] California will impose incrementally tightening restrictions—and eventually prohibitions—on the production, import, sales, distribution, or entry into commerce of HFCs with high global warming potential (“GWP”) ratings.[38] CARB’s pre-existing Refrigerant Management Program, which was initially established to deal with CFCs, will facilitate administration of and compliance with the phasedown.

Unlike some other aspects of California’s climate policy, the HFC phasedown is not especially controversial. Use of HFCs is highly concentrated in particular sectors and products,[39] and CARB expects that their replacement with effective substitutes is economically feasible and will not be exceedingly burdensome to stakeholders, particularly if regulatory approaches provide certainty and opportunities for longer-term planning.[40] Furthermore, because the EU’s HFC phasedown schedule is even more ambitious than California’s,[41] stakeholders affected by California regulations will be able to “free ride” somewhat on investments in new HFC alternatives prompted by the need to comply with European standards.[42]

It is possible to imagine a legal challenge alleging that the federal Clean Air Act preempts California’s approach, and/or that it violates the U.S. Constitution’s Dormant Commerce Clause, but neither of these presents a significant legal risk to California’s plans. Because the Clean Air Act—as interpreted by the Mexichem Fluor decision—does not address HFCs directly, it neither crowds out nor conflicts with California’s program. And because the program in no way discriminates in favor of California businesses or against out-of-state ones, it steers well clear of what the Dormant Commerce Clause prohibits.

In short, California’s approach presents a useful, and replicable, model for New York and other states.

New York and Other States Should Support S.2448 and Pursue State-Level Action Until Congress Takes Action

To date, other states, including New York, have tracked HFC emissions in their greenhouse gas emissions inventories pursuant to domestic or federal law, and generally using federal guidance.[43] (Some cities do so as well, including New York City, pursuant to local laws.[44]) Given the Mexichem Fluor decision, the Trump Administration’s general aversions to climate policy and international agreements, and burgeoning efforts by states and others to fill the gap left by dormant or rescinded federal efforts, New York (and other states) should follow California’s lead. New York’s Governor Cuomo indicated in his 2018 State of the State speech that he would direct state agencies to implement the Kigali Amendment in New York through a suite of regulations and programs.[45]

We fully support Governor Cuomo’s directive. What is more, we encourage the New York State legislature to initiate consideration of legislation that would expressly authorize the phaseout of HFCs. In pursuing state-level action, New York should also seek to coordinate with California—and perhaps the other nine states that also joined the amicus brief in Mexichem Fluor. A coordinated, multi-state approach would provide greater regulatory certainty and coherence, and ultimately prove more effective.

The Economic Case for an HFC Phasedown and Regulation to Support It

Firms based in the United States have led their industry in the development and manufacture of HFC replacements that neither deplete the ozone layer nor contribute to global warming as much as HFCs do. It is in the U.S. national interest that those firms succeed in continuing to lead the way toward a robust national and global market for HFC replacements, both because of what success would mean for American workers and prosperity as well as what it would mean for the global climate. However, the economic success of those firms’ strategic investments in HFC replacements depends on regulations barring HFCs—which are currently cheaper than environmentally friendly replacements—from the marketplace in the foreseeable future.

What HFC Phasedown Would Involve, in Brief

As the term is used in relation to HFCs, “phasing down” means excising HFCs from the markets for refrigerants, aerosols, foams, solvents, and flame retardants in a way that provides adequate time to change the designs of affected machinery and systems; to update safety codes that will govern the transport, use, and disposal of HFC replacements; and, of course, to physically replace HFCs currently in use.[46] Replacements include carbon dioxide, hydrocarbons (such as propane), ammonia, hydrofluoroolefins (“HFOs”), and HFC-HFO blends.[47] These chemicals behave more or less like HFCs and CFCs: in some instances but not in others replacement can occur with little or no redesign.[48] In general, HFC replacements do not persist for as long in the atmosphere because they are less stable.[49] While this instability gives them a lower GWP rating, it can also cause them to require different forms of containment and/or makes them more flammable.[50]

In economic terms, phasedown will involve transitioning from markets dominated by relatively cheap HFCs to markets in which the currently high costs of manufacturing and distributing HFC replacements have fallen far enough to make those replacements price-competitive.[51] Notably, although the cost of HFCs generally accounts for only a small percentage of the total costs of the devices and processes that employ them,[52] price differentials still matter greatly to sales.[53] This pattern of transition is well understood thanks to experience with the global phasedown of CFCs that followed adoption of the 1987 Montreal Protocol. Many firms initially balked at the capital and R&D costs involved in CFC replacement,[54] but that phasedown ultimately proceeded faster and more cheaply than firms and regulators alike had anticipated.[55] As was the case with the replacement of CFCs, current cost differentials between HFCs and their replacements owe to some or all of the following factors: the 20-year life of patents on all HFCs have run, but not yet those of replacements, raising both costs and barriers to entry; replacements’ production processes continue to be refined, adding costs relative to well-established processes of HFC production; replacement production runs are currently small relative to those of HFCs, which enjoy economies of scale in distribution as well as production; and some equipment must be redesigned to use HFC replacements instead of HFCs.[56] Accomplishing this transition will likely be aided by the fact that HFC manufacturers, such as Arkema, Chemours, Daikin Chemical, Honeywell, and Mexichem, are well-positioned to also manufacture HFC replacements.[57]

HFC Phasedown Would Yield Net Benefits for U.S. Stakeholders

U.S. compliance with the timetable prescribed for developed countries by the Kigali Amendment would mean cutting HFC use 85% by 2036 from a 2019 baseline. Given that HFC manufacturers—to say nothing of end-users or companies whose equipment currently relies on HFCs to operate—employ almost 600,000 workers in the U.S. and make annual sales in excess of $2 billion,[58] phasedown at this pace would be a monumental task. Nonetheless, because coordinated international efforts to phase down HFCs are well underway and show no signs of slowing or reversal, U.S. stakeholders have much more to gain than lose from continuing to keep up with the leads in this segment of the chemical industry.

Due partly to the challenges of accessing and/or publishing proprietary information about particular companies’ operations and production costs, no comprehensive, publicly available study describes with precision the expected costs and benefits of phasedown in the U.S.[59] However, several national governments, including the U.S. federal government, have published estimates showing that they expect stakeholders in their respective countries to glean net benefits from compliance with the Kigali timetable.[60] The EPA examined the question in its decision to apply SNAP to HFCs—the action that the Mexichem Fluor decision struck down. Building on several earlier analyses,[61] EPA found that the benefits of applying SNAP to HFCs in compliance with the Kigali timetable would yield annual net social savings of between $19.3 million and $25.1 million.[62] While the costs and benefits would fall unevenly, the overall impact would not be significantly negative even for small businesses that would have a harder time absorbing the necessary up-front capital costs.[63] Importantly, EPA’s discussion of HFC phasedown highlighted the energy efficiency gains that are expected to accompany a transition away from HFCs.[64] As happened with the transition away from CFCs in the 1990s and 2000s, redesign and accelerated replacement can again yield significant improvements in the energy efficiency—and thus also cost-effectiveness—of systems and devices.[65]

These benefits are less likely to materialize for U.S. stakeholders if U.S. regulators break ranks with those of Canada, the EU, Japan, and elsewhere. The reason is simple and easily grasped: capturing these benefits is contingent on stakeholders’ investments in new chemicals, processes, equipment, and standards not being undercut by the possibility of ongoing sales of HFCs.[66]

Snapshot of the HFC Phasedown in the U.S. and Globall

HFC phasedown has already begun and proceeds apace, in the U.S. and elsewhere. The Air Conditioning Heating & Refrigeration Institute (“AHRI”), which represents about 90% of U.S. air conditioning manufacturers and 70% of manufacturers globally, launched its Low-GWP Alternative Refrigerants Evaluation Program in 2011 to consolidate and coordinate the tasks of evaluating HFC replacements.[67] In September 2014, the Obama White House was able to collate a long list of phasedown initiatives being undertaken by U.S. companies and trade associations: examples include Coca-Cola, which committed to purchasing only HFC-free refrigeration equipment; several air conditioning unit manufacturers, which set aggressive targets for production of HFC-free equipment lines; and retailers like Kroger and Target, which announced investments in non-HFC refrigeration equipment and facilities.[68] By 2016, Honeywell had already spent over $500 million in R&D and capital spending for the development HFC-replacements,[69] and in February 2017 Chemours broke ground on a HFO production facility in Corpus Christi, Texas.[70]

The EU adopted its “F-Gas Regulation” (which included a mobile air conditioning or “MAC” Directive) in 2006, and tightened it in 2014;[71] one survey of stakeholders credits those ambitious and stringent measures with EU companies’ unrivaled progress toward phasedown.[72] Japan enacted enforceable HFC phasedown legislation in 2015.[73]  Australia,[74] New Zealand,[75] and Canada[76] all took concrete regulatory steps toward phasedown in 2017. And China, which issued the First Catalogue of Recommended Substitutes for HCFCs in February 2016, is now implementing Stage 2 HCFC Phase-out Management Plan (HPMP).[77] One assessment of phasedown measures taken in China’s light-duty motor vehicle sector makes the notable point that, owing to EU and US leadership, “this transition cannot be avoided regardless of China’s decision-making if Chinese manufacturers wish to compete globally.” [78]

Nations that ratify the Kigali Amendment will begin reporting their progress in 2019, but for now there is no comprehensive, centralized means of tracking how successfully HFCs are being displaced by low-GWP alternatives. The International Energy Agency has launched a tracking tool, but it represents a nascent effort rather than a mature one.[79] Mobile air conditioning systems provide a useful illustration of current phasedown efforts. Spurred by the EU’s 2006 MAC Directive, which banned use of HFC-134a in newly marketed vehicles starting in 2011,[80] carmakers and their suppliers identified two likely options for replacing HFC-134a: HFO-1234yf, and concentrated CO2. Various firms in the MAC supply chain, led by those in the EU, have since pursued research towards making one or the other commercially competitive,[81] and have in the past few years begun to scale-up HFO-1234yf production and distribution capacity in particular.[82] Those research and capital investments assume that HFC-134a will eventually be banned in all jurisdictions, not just the EU, and would be undermined by a decision in one or more sizeable jurisdictions not to do so.

Conclusion

For the reasons discussed above, the Committee supports passage of S.2448, the AIM Act, and encourages the New York State congressional delegation to actively support the bill. Recognizing the critical need to reduce emissions of HFCs in order to effectively combat climate change, and that passage of federal legislation is uncertain, the Committee also supports parallel efforts to enact legislation at the state level, in New York and elsewhere, to phase out HFCs. Governor Cuomo has already demonstrated his commitment to pursuing a regulatory approach. State legislation would provide even greater regulatory certainty.

We would welcome the opportunity to discuss these matters further at your convenience.

Committee on International Environmental Law
Michael Burger, Chair
mburger@law.columbia.edu

Contributing Committee Members
Justin Gundlach
Margaret Holden
Jullee Kim

Co-Sponsored by:

Committee on Environmental Law
J. Kevin Healy, Co-Chair
Amy Turner, Co-Chair

May 2018