                               Adjustment Memo 
Analysis of HCFC-22 Servicing Needs in the U.S. Air Conditioning and Refrigeration Sector
            Additional Considerations for Estimating Virgin Demand
Background
In December 2009, EPA published its final hydrochlorofluorocarbon (HCFC) allocation rule, "Protection of Stratospheric Ozone: Adjustments to the Allowance System for Controlling HCFC Production, Import, and Export," (2009 Final Rule). That rule contained consumption and production allocations for HCFC-22, HCFC-142b and other HCFCs for the regulatory period of 2010 to 2014. As a result of the decision in Arkema v. EPA, which vacated the HCFC-22 and HCFC-142b allocations for 2011-2014, EPA published an interim final rule allocating HCFC-22 and HCFC-142b allowances for 2011. The proposed rulemaking that this memo accompanies proposes various options for providing HCFC-22 and HCFC-142b allowances in 2012 through 2014. The HCFC allowance system is part of EPA's Clean Air Act program to phase out ozone-depleting substances (ODS) and also supports U.S. compliance with the Montreal Protocol on Substances that Deplete the Ozone Layer. The most recent milestone of EPA's HCFC phaseout schedule was on January 1, 2010, limiting the production and import of HCFC-142b and HCFC-22 to specified amounts significantly lower than limits set for 2003 through 2009. Between 2010 and 2020, the production and import of HCFC-22 is permitted to service existing refrigeration and air conditioning (AC) equipment.
The allocation levels in EPA's 2009 Final Rule and 2011 Interim Final Rule were based in part on projections of HCFC-22 servicing demand, as estimated in The U.S. Phaseout of HCFCS: Projected Servicing Needs in the U.S. Air-Conditioning and Refrigeration Sector (known as the Servicing Tail Report). The report (1) examined the primary sources of HCFC-22 for the service of the installed base of refrigeration and AC equipment after 2010, (2) estimated the amounts of HCFC-22 recovered from equipment that could be subsequently recycled or reclaimed for reuse, and (3) based on these projections, estimated servicing demand for virgin HCFC-22. 
Since the 2009 Final Rule was published, the Agency has heard from stakeholders that the market for HCFC-22 has evolved. Stakeholders cite a number of factors that indicate a change in the market, including low HCFC-22 prices, increased reuse in certain end uses, increased installation of dry-shipped condensing units for repair, un-expended consumption allocations for HCFC-22 in past years, and reports of a potential surplus inventory of HCFC-22. Some of these factors have been identified in public comments by industry members. In addition to this information, the U.S. economy is in a dramatically different position than when the Servicing Tail Report was developed.
This analysis summarizes industry feedback and suggests adjustments to the amount of modeled servicing demand for HCFC-22 in 2012 through 2014. In the proposed rule for 2012 through 2014, EPA is seeking comment on the assumptions EPA is making in this memo. 
Methodology Overview
The analysis uses EPA's Vintaging Model to form the basis of quantitative estimates of current and projected HCFC-22 servicing demand, including from virgin and used sources. The Vintaging Model estimates the annual chemical emissions from industry sectors that have historically used ODS, including AC, refrigeration, foams, solvents, aerosols, and fire protection. Within these industry sectors, there are 59 independently modeled end-uses. The model uses information on the market size and growth for each end-use, 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 retrofitted 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 and non-ODS substitutes in each end-use.
Estimates of HCFC-22 servicing demand from EPA's Vintaging Model were the starting point for this analysis. Targeted industry research -- through interviews and public submissions -- was conducted to identify factors affecting the current market for HCFC-22. Then, overall servicing demand was adjusted to account for surplus inventory from past years and supplies of recovered refrigerant (either reclaimed or directly reused in the owner's equipment). More detail is provided on these sources and adjustments in the sections that follow.
Projected HCFC-22 Servicing Needs
Refrigeration and AC equipment commonly requires servicing, which may include adding refrigerant to account for refrigerant losses that occur over time. While EPA banned the production and import of HCFC-22 for use in new appliances starting in 2010, the agency continues to allow limited production and import of virgin HCFC-22 to service appliances manufactured prior to January 1, 2010. 
Figure 1 presents projected HCFC-22 demand for servicing equipment in 2012, 2013, and 2014. These estimates were developed based on EPA's Vintaging Model. As shown, approximately 56,200 metric tons (MT) of HCFC-22 will be required to service AC and refrigeration equipment in 2012, 51,200 MT in 2013, and 45,900 MT in 2014. Residential AC represents the majority of HCFC-22 demand for 2012 to 2014. 
HCFC-22 servicing demand projected in this analysis differs slightly from the demand presented in the 2009 Servicing Tail Report and the 2009 Final Rule.  These differences result from updates to the Vintaging Model. EPA's Vintaging Model is periodically updated and peer-reviewed as new information is incorporated. Since the 2009 Final Rule, updates to unitary AC and water & ground-source heat pump growth rates, future growth rates, stock of refrigerated appliances, and residential unitary AC servicing emission rates were applied to produce these estimates.  

Figure 1: 2012-2014 Demand for Servicing Refrigeration and AC Equipment, by End Use*
                                       
*"Other" refers to window units, packaged terminal units, dehumidifiers, water & ground source heat pumps, motor vehicle AC, small & medium retail food and mobile AC.
Sources of HCFC-22 for Servicing
As of 2010, only existing sources of HCFC-22 and a controlled quantity of virgin HCFC-22 (limited through allowance allocations distributed by EPA) are available to the AC and refrigeration industry to meet servicing demand. Existing sources, which can offset the need for virgin HCFC-22, include (1) recycled HCFC-22, (2) reclaimed HCFC-22 and (3) imported, used HCFC-22. Previously-produced virgin material may have also been stored in inventory; this surplus inventory can also offset the need for additional virgin production and imports. HCFC-22 can also be obtained through inter-pollutant transfers of allowances. Of the five sources described below, this analysis will focus on recycled and reclaimed HCFC-22, as well as surplus inventory of virgin material.

   * Recycled: Recycled HCFC-22 refers to material that has been extracted from an appliance and cleaned for reuse without meeting all the requirements for reclamation. EPA regulations allow for recharge of recycled refrigerants into the same piece of equipment or another piece of equipment with the same owner. EPA does not collect data on the amount of HCFC-22 that is recycled.
   * Reclaimed: Refrigerants that are resold to be used in other equipment must be reclaimed to a standard level of purity based on the ARI Standard 700, to ensure sufficient purity of the reclaimed refrigerant. Certified reclaimers must report to EPA the total quantity of material sent to them each year for reclamation, the mass of refrigerant reclaimed that year and the mass of waste products generated that year. 
   * Surplus Inventory from Past Years: Refrigerants that are imported, produced or reclaimed in previous calendar years can be stored in inventory and sold in later years. This practice is possible at all levels of the refrigerant distribution chain (producers, distributors, technicians, etc.). 
   * Used imports: Used HCFC-22 can be imported via EPA's shipment-by-shipment petition process. The petition process ensures that HCFCs have been used (and were not newly produced) prior to import. Currently, the quantity of used HCFC-22 import is minimal and has not been included in this analysis.
   * Inter-pollutant transfers of allowances: Another source of HCFC-22 can result from allowance holders transferring their allowances from one HCFC to HCFC-22, which EPA permits on an annual and ODP-weighted basis with a 0.1 percent deduction. Industry sources have indicated that the number of inter-pollutant transfers is low, so this factor has not been included in this analysis.
Adjusting for Additional Considerations to Estimate Virgin HCFC-22 Demand
Based on new industry research, EPA could adjust servicing demand as modeled by the Vintaging Model to produce estimates that better reflect current and anticipated market conditions. These adjustments incorporate new information about (1) surplus inventory from past years, (2) the capacity of reclaimers to meet servicing demands, and (3) recovery and reuse of HCFC-22 in the large retail food sector (i.e., supermarkets), as described below. A list of companies consulted for this analysis is provided at the end of this report.
   * Exhibit 1: HCFC-22 Economics
Industry representatives report substantial reclamation capacity and access to recovered materials to meet a large proportion of servicing demand -- as long as the price for virgin HCFC-22 increases sufficiently to provide a market incentive for recovery and reclamation. The fact that 2010 HCFC-22 consumption allowances were not fully expended suggests that there is more than sufficient virgin HCFC-22 in the aftermarket, and that supply of virgin HCFC-22 would have to decrease sizably to cause the price for virgin HCFC-22 to increase. 
Currently virgin HCFC-22 is priced at around $4.50 per pound; some industry representatives suggest that this price would have to exceed $8.00 per pound for reclaimed HCFC-22 to become competitive, given reclamation costs associated with storage, handling, processing, and cross-contamination.
Surplus Inventory Drawdown: Because HCFC-22 inventory information is not officially reported to EPA, this analysis relies on estimates provided by industry. Feedback suggests approximately 100 million pounds (45,400 MT) of surplus HCFC-22 from past years was in inventory at the end of 2010. Half of that figure (22,700 MT, or about six months worth of demand) is comprised of packaged virgin HCFC-22 and the rest is bulk gas in large storage containers (e.g., ISO tanks). There is less certainty on the amount of bulk gas in inventory; various factors may have contributed. For example, industry contacts suggested that a cooler-than-anticipated summer in 2009 may have resulted in significant quantities going to inventory due to low servicing demands. Entities may also be holding virgin HCFC-22 produced prior to 2010 in anticipation of higher prices in future years or as preparation for the 2010 stepdown under the Montreal Protocol. 
      This analysis assumes surplus inventory between 22,700 and 45,400 MT existed at the beginning of 2012. Given expectations about the transition away from HCFCs, as well as the 2015 and 2020 HCFC phase-out milestones, it is estimated that the complete drawdown could take somewhere between four to eight years. This analysis also assumes that surplus inventory of virgin HCFC-22 will be drawn down at an annual rate of approximately 6,000 MT. This quantity is an average estimate given the ranges in amounts and potential drawdown periods. EPA is seeking comment on this assumption in the proposed rule for 2012 through 2014.
   * Reclaimer Capacity Adjustment: In its 2009 Final Rule, EPA estimated that 12,500 MT of HCFC-22 would be provided annually by recovery and reclamation through 2014. To date, reported reclaimed amounts have been lower, purportedly because of weak economic incentives. Specifically, the relatively low price of virgin HCFC-22 has challenged the economic viability of reclamation practices. However, recent interviews with reclaimers suggest that reclamation facilities have the technical capacity to meet a greater proportion of servicing demand, if the price is right (see Exhibit 1). A number of those interviewed stated that reclaimers were currently operating significantly below capacity. Interviews suggest that anywhere from 25% to 80% of servicing demands could be met by increasing the utilization of existing machinery and increasing the number of operational shifts in a week. This analysis uses 12,500 MT as a low bound for reclamation (consistent with the 2009 Final Rule), and 35% of total servicing demand in 2012 (19,700 MT) as the higher bound. EPA is seeking comment on this assumption in the proposed rule for 2012 through 2014.
   * Large Retail Food Recovery and Reuse Adjustment: Industry sources suggest that recovery and direct reuse is a widespread practice amongst supermarkets; however, the extent of recovery and reuse can vary significantly between chains, depending largely on the extent to which supermarkets are converting their HCFC-22 equipment to alternatives. For example, some supermarkets that have converted a substantial proportion of their HCFC-22 equipment indicated that they have sufficient recovered HCFC-22 in stock for servicing such that they do not anticipate a need to purchase any more virgin material in the future. Other supermarkets that have not converted from HCFC-22 equipment as aggressively indicated that as low as 10% to 20% of their servicing needs are met by material recovered from retrofitted stores they own. This analysis assumes that recovery and reuse can meet a range of 20% to 70% of the servicing needs of the large retail food sector. EPA is seeking comment on this assumption in the proposed rule for 2012 through 2014. Specifically, EPA is interested in learning if the percentage used in the final rule should be closer to 20% or 70%.
Table 1 summarizes the assumptions and adjustments that could be applied to the original HCFC-22 servicing demand. Two scenarios are considered: a Larger Allocation Scenario and a Smaller Allocation Scenario. Under both scenarios, EPA would allocate fewer consumption allowances relative to the 2009 Final Rule.
Table 1: Annual Adjustments to Total Servicing Demand
Adjustment
                          Larger Allocation Scenario
                          Smaller Allocation Scenario
Assumed annual drawdown of surplus HCFC-22 inventory 
                                   6,000 MT 
                    (13% to 26% of total surplus per year)
Market-wide servicing demand met by reclaimed HCFC-22
                                  12,500 MT 
                                 (22% in 2012)
                                   19,700 MT
                                 (35% in 2012)
Servicing demand met by recovered HCFC-22 in the large retail food sector
                                1,100 - 1,600 MT
                                (20% per year)
                               3,800 - 5,500 MT
                                (70% per year)

Applying the adjustments shown in Table 1 results in a range of changes in servicing demand, which account for the portion of total demand that can be met through recovery and reuse, reclamation, and surplus drawdown. 
Table 2 shows how these adjustments yield new overall estimates of demand for virgin HCFC-22 from 2012 through 2014. 

Table 2: Results of Adjustments to HCFC-22 Servicing Demand (Metric Tons)

                                     2012
                                     2013
                                     2014

                          Larger Allocation Scenario
                          Smaller Allocation Scenario
                          Larger Allocation Scenario
                          Smaller Allocation Scenario
                          Larger Allocation Scenario
                          Smaller Allocation Scenario
Total Servicing Demand (Vintaging Model)
                                    56,200
                                    51,200
                                    45,900
 Surplus Inventory Drawdown
                                    -6,000
                                    -6,000
                                    -6,000
 Market-wide Servicing Demand Met by Reclaimed HCFC-22
                                    -12,500
                                    -19,700
                                    -12,500
                                    -19,700
                                    -12,500
                                    -19,700
 Servicing Demand Met by Reused HCFC-22 in Large Retail Food Equipment
                                    -1,600
                                    -5,500
                                    -1,300
                                    -4,600
                                    -1,100
                                    -3,800
Total Adjustment
                                    -20,100
                                    -31,200
                                    -19,800
                                    -30,300
                                    -19,600
                                    -29,500
Revised Allocation 
                                    36,200
                                    25,100
                                    31,400
                                    20,800
                                    26,300
                                    16,400
Totals may not sum due to independent rounding.
Allocations for HCFC-22 from 2012 to 2014
Adjusting total servicing demand based on the above factors provides a new estimate of HCFC-22 virgin demand in 2012, 2013 and 2014. These new virgin demand estimates suggest that EPA should allocate fewer allowances for 2012 through 2014 than were provided in the 2009 Final Rule. 
Table 3 presents revised demand, the allowance levels in the 2009 Final Rule, and the percentage change in overall consumption allocations based on these values. As shown, a consumption allowance reduction of 11% to 38% is possible for 2012, 13% to 42% for 2013, and 15% to 47% for 2014.
Table 3: Allocation Adjustment Relative to the 2009 Final Rule (Metric Tons)

                                     2012
                                     2013
                                     2014

                          Larger Allocation Scenario
                          Smaller Allocation Scenario
                          Larger Allocation Scenario
                          Smaller Allocation Scenario
                          Larger Allocation Scenario
                          Smaller Allocation Scenario
HCFC-22 Consumption Allowances in the 2009 Final Rule
                                    40,700
                                    35,900
                                    31,100
Revised Allocation
                                    36,200
                                    25,100
                                    31,400
                                    20,800
                                    26,300
                                    16,400
Percentage Allocation Change Relative to the 2009 Final Rule
                                     -11%
                                     -38%
                                     -13%
                                     -42%
                                     -15%
                                     -47%
Totals may not sum due to independent rounding.
Table 4 shows the possible allocation amounts for 2012 through 2014 as both an aggregate amount and percentage of baseline. The proposed HCFC-22 consumption baseline for 2012 through 2014 is 141,864,931 kg. 
Table 4: Summary of Proposed Allocation Adjustments (Metric Tons)

                                     2012
                                     2013
                                     2014

                          Larger Allocation Scenario
                          Smaller Allocation Scenario
                          Larger Allocation Scenario
                          Smaller Allocation Scenario
                          Larger Allocation Scenario
                          Smaller Allocation Scenario
Revised Allocation
                                    36,200
                                    25,100
                                    31,400
                                    20,800
                                    26,300
                                    16,400
Percentage  of Baseline Allocated
                                     25.5%
                                     17.7%
                                     22.1%
                                     14.7%
                                     18.5%
                                     11.6%
Totals may not sum due to independent rounding.


List of Companies Consulted
Airgas Specialty Products Inc. Personal communication with ICF International. October 7, 2011.
Coolgas. Personal communication with ICF International. October 6, 2011.
Food Lion. Personal communication with ICF International. October 3, 2011.
Hudson Technologies Company. Personal communication with ICF International. October 7, 2011.
National Refrigerants, Inc. Personal communication with ICF International. October 12, 2011.
RemTec International. Personal communication with ICF International. October 4 and 17, 2011.
Supervalu. Personal communication with ICF International. October 5, 2011.
Weis Markets. Personal communication with ICF International. October 3, 2011.


