[Federal Register Volume 78, Number 64 (Wednesday, April 3, 2013)]
[Rules and Regulations]
[Pages 20004-20029]
[FR Doc No: 2013-07758]

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ENVIRONMENTAL PROTECTION AGENCY

40 CFR Part 82

[EPA-HQ-OAR-2011-0354; FRL-9797-5]
RIN 2060-AQ98

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

AGENCY: Environmental Protection Agency [EPA].

ACTION: Final rule.

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SUMMARY: EPA is adjusting the allowance system controlling U.S.
consumption and production of hydrochlorofluorocarbons (HCFCs) as a
result of a 2010 Court decision vacating a portion of the 2009 final
rule titled ``Protection of Stratospheric Ozone: Adjustments to the
Allowance System for Controlling HCFC Production, Import, and Export.''
EPA interprets the Court's vacatur as applying to the part of the rule
that establishes the company-by-company baselines and calendar year
allowances for HCFC-22 and HCFC-142b. On August 5, 2011, EPA published
an interim final rule allocating allowances for 2011. Today's action
relieves the regulatory ban on production and consumption of these two
chemicals following the Court's vacatur by establishing company-by-
company HCFC-22 and HCFC-142b baselines and allocating production and
consumption allowances for 2012-2014.

DATES: This final rule is effective April 3, 2013.

ADDRESSES: EPA has established a docket for this action under Docket ID
No. EPA-HQ-OAR-2011-0354. 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., 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 and
Information Center, 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<PHONE_NUMBER>, and the
telephone number for the Air and Radiation Docket is<PHONE_NUMBER>.

FOR FURTHER INFORMATION CONTACT: Luke H. Hall-Jordan by telephone at
(202) 343-9591, or by email at<EMAIL_ADDRESS>or by mail at
U.S. Environmental Protection Agency, Stratospheric Protection Division
(6205J), 1200 Pennsylvania Ave. NW., Washington, DC 20460. You may also
visit the 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:
    Effective Date. This rule concerns Clean Air Act (CAA) restrictions
on the consumption and production of hydrochlorofluorocarbon (HCFC)-22
and HCFC-142b during 2012-2014. 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 April 3, 2013. APA
section 553(d) allows an effective date less than 30 days after
publication for any action ``that grants or recognizes an exemption or
relieves a restriction,'' (5 U.S.C. 553(d)(1)). Since today's action
relieves a restriction from the regulatory ban on the production and
consumption of HCFC-22 and HCFC-142b in the U.S., EPA is making this
action effective immediately upon publication to ensure the
availability of these HCFCs for servicing air conditioning and
refrigeration equipment.
    Acronyms and Abbreviations. The following acronyms and
abbreviations are used in this document.

CAA--Clean Air Act
CAAA--Clean Air Act Amendments of 1990
CFC--Chlorofluorocarbon
CDM--Clean Development Mechanism
CFR--Code of Federal Regulations
EPA--Environmental Protection Agency
FR--Federal Register
HCFC--Hydrochlorofluorocarbon
HVAC--Heating, Ventilating, and Air Conditioning
Montreal Protocol--Montreal Protocol on Substances that Deplete the
Ozone Layer

MOP--Meeting of the Parties
MT--Metric Ton
ODP--Ozone Depletion Potential
ODS--Ozone-Depleting Substances
Party--States and regional economic integration organizations that
have consented to be bound by the Montreal Protocol on Substances
that Deplete the Ozone Layer

    Organization of This Document. The following outline is provided to
aid in locating information in this preamble.

I. Does this action apply to me?
II. Summary of This Final Action
    III. 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?
    D. How does this action relate to the 2010 court decision?
IV. How is EPA allocating HCFC-22 and HCFC-142b allowances for 2012-
2014?
    A. What baselines is EPA using for HCFC-22 and HCFC-142b
allowances?
    1. What baselines is EPA using for 2012-2014?
    2. What baselines is EPA considering for 2015-2019?
    B. What factors did EPA consider in determining allocation
amounts for HCFC-22 and HCFC-142b?
    1. How is EPA adjusting estimated servicing need to account for
surplus inventory from past years?
    2. How is EPA adjusting allowances to encourage recovery,
reclamation and reuse?
    3. How is EPA accounting for recovery and reuse of HCFC-22 in
the supermarket industry?
    4. Did EPA consider providing allowances to small businesses in
this final action?
    5. Does the installation of dry-shipped HCFC-22 equipment affect
the phaseout of HCFC-22?
    6. How is EPA addressing the court's decision with regard to
2010 HCFC allowances?
    7. Does EPA have to provide the same percentage of baseline for
production allowances as it does for consumption allowances?
    C. How many HCFC-22 and HCFC-142b allowances is EPA allocating
in 2012-2014?
    1. How many HCFC-22 consumption allowances is EPA allocating in
2012-2014?
    2. How many HCFC-22 production allowances is EPA allocating in
2012-2014?
    3. How many HCFC-142b consumption and production allowances is
EPA allocating in 2012-2014?
    4. How does the aggregate allocation for HCFC-22 and HCFC-142b
translate entity-by-entity?
V. How is EPA changing the regulations governing transfers of Class
II allowances?
    A. How is EPA changing the regulations governing permanent
transfers of Class II allowances?
    B. How is EPA changing the regulations governing transfers of
Article 5 Class II allowances?
VI. Statutory and Executive Order Reviews
    A. Executive Order 12866: Regulatory Planning and Review and
Executive Order 13563: Improving Regulation and Regulatory Review
    B. Paperwork Reduction Act
    C. Regulatory Flexibility Act
    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 Concerning Regulations That
Significantly Affect Energy Supply, Distribution, or Use
    I. National Technology Transfer and Advancement Act
    J. Executive Order 12898: Federal Actions To Address
Environmental Justice in Minority Populations and Low-Income
Populations
    K. Congressional Review Act

I. Does this action apply to me?

    This rule may affect the following categories:

--Industrial Gas Manufacturing entities (NAICS code 325120), including
fluorinated hydrocarbon gases manufacturers and reclaimers;
--Other Chemical and Allied Products Merchant Wholesalers (NAICS code
422690), including chemical gases and compressed gases merchant
wholesalers;
--Air-Conditioning and Warm Air Heating Equipment and Commercial and
Industrial Refrigeration Equipment Manufacturing entities (NAICS code
333415), including air-conditioning equipment and commercial and
industrial refrigeration equipment manufacturers;
--Air-Conditioning Equipment and Supplies Merchant Wholesalers (NAICS
code 423730), including air-conditioning (condensing unit, compressors)
merchant wholesalers;
--Electrical and Electronic Appliance, Television, and Radio Set
Merchant Wholesalers (NAICS code 423620), including air-conditioning
(room units) merchant wholesalers; and
--Plumbing, Heating, and Air-Conditioning Contractors (NAICS code
238220), including central air-conditioning system and commercial
refrigeration installation; HVAC contractors.

This list 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 could potentially 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. Summary of This Final Action

    In today's final rule, EPA is issuing HCFC-22 and HCFC-142b
allowances for the years 2012, 2013 and 2014 in the wake of the U.S.
Court of Appeals for the District of Columbia Circuit (Court) decision
in Arkema v. EPA (618 F.3d 1, D.C. Cir. 2010). As discussed in this
preamble and in the proposed rule (77 FR 237), the Court vacated HCFC-
22 and HCFC-142b company-by-company baseline and calendar-year
allowances for 2012-2014. Baselines and calendar-year allowances for
these two substances were originally finalized in a December 15, 2009,
rule (``2009 Final Rule,'' 74 FR 66412).
    EPA is finalizing HCFC-22 and HCFC-142b baseline allowances that
incorporate the inter-pollutant transfers made by Arkema, Inc., Solvay
Fluorides, LLC, and Solvay Solexis, Inc., (Arkema and Solvay) in 2008,
and is setting calendar-year allowances for the 2012-2014 control
periods. EPA is providing fewer calendar-year HCFC-22 consumption
allowances \1\ and more calendar-year HCFC-22 production allowances \2\
than in the 2009 Final Rule. The agency determined that the need for
virgin HCFC-22 in the U.S. is lower than EPA anticipated in the 2009
Final Rule and is adjusting consumption allowances accordingly. EPA
anticipates this adjustment will foster a smooth transition away from
ozone-depleting HCFC-22. While EPA is reducing domestic consumption
(i.e. production and import for U.S. use), under the recalculated
baselines, the overall production allowances will increase. Because
other countries have different approaches to phasing out HCFC-22, EPA
considers that this increase in the number of production allowances
will also ensure that U.S. companies can continue to meet demand for
HCFCs in global markets. This supports the

Montreal Protocol's overall goal of limiting need for new production
capacity for controlled chemicals by allowing existing producers scope
to better meet the needs of global markets. Additionally, EPA has
determined that in the narrow circumstance of the Court's vacatur of
the baselines in the 2009 Final Rule, it must provide meaningful
compensation for 2010 calendar-year HCFC-22 and HCFC-142b allowances
that companies would have received under the adjusted baselines. EPA
will issue recoupment allowances for that purpose in 2013 and 2014.
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    \1\ Consumption allowances permit an entity to produce and/or
import virgin HCFCs in a given control period (i.e., calendar year).
    \2\ Production allowances permit an entity to produce virgin
HCFCs in a given control period. Domestic production of HCFCs
requires the use of both production and consumption allowances.
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    EPA is also updating HCFC-142b baselines and annual allowances and
is allocating approximately the same amount of calendar-year
consumption allowances as in the 2009 Final Rule. Due to the
recalculation of HCFC-142b baselines, calendar-year HCFC-142b
production allowances are higher than in the 2009 Final Rule, but have
been calculated using the same methodology. Therefore, while the
percentage of baseline issued for HCFC-142b is the same for both
consumption and production allowances, the recalculated production
baseline is now significantly larger than the consumption baseline,
resulting in an overall increase in calendar-year production allowances
compared with the 2009 Final Rule.
    Finally, EPA is modifying the transfer language at 40 CFR 82.23 to
more explicitly reflect EPA's policy on inter-pollutant HCFC allowance
transfers; that is, that inter-pollutant HCFC transfers can occur only
on an annual basis going forward.
    All other aspects of the 2009 Final Rule not addressed in this
rulemaking are unaffected, including, but not limited to: HCFC-123,
HCFC-124, HCFC-225ca and HCFC-225cb allowances, the formula for
determining calendar-year Article 5 allowances, and the use and
introduction into interstate commerce restrictions on HCFC-22 and HCFC-
142b. This preamble includes a summary of comments EPA received in
response to the proposed rule, as well as comments to the 2011 Interim
Final Rule that are relevant to this current rulemaking. A full
response to comments document (``Response to Comments'') is available
in the docket for this rulemaking.

III. Background

    EPA is undertaking this rulemaking as a result of the decision
issued by the Court in Arkema v. EPA (618 F.3d 1, D.C. Cir. 2010)
regarding the December 15, 2009, final rule titled ``Protection of
Stratospheric Ozone: Adjustments to the Allowance System for
Controlling HCFC Production, Import, and Export,'' (``2009 Final
Rule,'' 74 FR 66412). Certain allowance holders affected by the 2009
Final Rule filed petitions for judicial review of the rule under
section 307(b) of the Clean Air Act. Among other arguments, the
petitioners contended that the rule was impermissibly retroactive
because in setting the baselines for the new regulatory period, EPA did
not take into account certain inter-pollutant baseline transfers that
petitioners had performed during the prior regulatory period.
    The Court issued a decision on August 27, 2010, agreeing with
petitioners that ``the [2009] Final Rule unacceptably alters
transactions the EPA approved under the 2003 Rule,'' (Arkema v. EPA,
618 F.3d at 3). The Court vacated the 2009 Final Rule in part,
``insofar as it operates retroactively,'' and remanded it to EPA ``for
prompt resolution,'' (618 F.3d at 10). The Court withheld the mandate
for the decision pending the disposition of any petition for rehearing.
EPA's petition for rehearing was denied on January 21, 2011. The
mandate issued on February 4, 2011. More detail is provided on the case
and EPA's interpretation of the Court's decision in section III.D. of
this preamble.
    For 2011, EPA addressed the Court's partial vacatur in an August 5,
2011, interim final rule, ``Protection of Stratospheric Ozone:
Adjustments to the Allowance System for Controlling HCFC Production,
Import, and Export,'' (``2011 Interim Final Rule,'' 76 FR 47451).
Today's final rule follows that action, and establishes a path forward
for the remainder of the regulatory period ending on December 31, 2014.

A. How does the Montreal Protocol phase out HCFCs?

    The Montreal Protocol on Substances that Deplete the Ozone Layer
(Montreal Protocol) is the international agreement aimed at reducing
and eventually eliminating the production and consumption of
stratospheric ozone-depleting substances (ODS). 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), which included Title VI on Stratospheric
Ozone Protection, codified as 42 U.S.C. Chapter 85, Subchapter VI, to
ensure that the U.S. could satisfy its obligations under the Montreal
Protocol. Title VI includes restrictions on production, consumption,
and use of ODS 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 (CAA Sec.  606). Both the Montreal
Protocol and the Clean Air Act (CAA) 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 ozone depletion potential (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'' \3\ (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 countries not operating under Article 5
of the Montreal Protocol (non-Article 5 Parties), a schedule to which
the U.S. adheres. The consumption cap for each non-Article 5 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 (MT), effective
January 1, 1996. This became the U.S. consumption baseline for HCFCs.
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    \3\ 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.
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    The 1992 Copenhagen Amendment created a schedule of graduated
reductions and provided for the eventual phaseout of HCFC consumption
(Copenhagen, 23-25 November, 1992, Decision IV/4). Prior to a later
adjustment in 2007, the schedule initially allowed a non-Article 5
country to consume 65 percent of its consumption cap in 2004, followed
by 35 percent in 2010, 10 percent in 2015, 0.5 percent in 2020 for the
servicing of existing refrigeration and air-conditioning equipment, and
a total phaseout in 2030.
    The Copenhagen Amendment did not cap HCFC production. In 1999, the
Parties created a cap on production for non-Article 5 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 U.S. HCFC
production cap was 15,537 ODP-weighted MT, 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.\4\
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    \4\ 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 became binding for all Parties on May 14,
2008.
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    As a result of the 2007 Montreal Adjustment (reflected in Decision
XIX/6), the U.S. and other non-Article 5 countries may only consume 25
percent of their HCFC baseline beginning in 2010, rather than 35
percent. Other milestones remain the same. The adjustment also resulted
in a phaseout schedule for HCFC production that parallels the
consumption phaseout schedule. All production and consumption for non-
Article 5 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 of 2009-2010
production and consumption, respectively; (2) to freeze HCFC production
and consumption at those baselines in 2013; and (3) to add stepwise
reductions to 90 percent of baseline by 2015, 65 percent by 2020, 32.5
percent by 2025, and 2.5 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 will be phased out by 2040. Decision XIX/6, included in the
Report of the Nineteenth Meeting of the Parties to the Montreal
Protocol on Substances that Deplete the Ozone Layer, is available in
the docket for this rulemaking.
    In addition, in the Montreal Adjustments, Parties agreed to adjust
Article 2F to allow non-Article 5 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. Paragraph 14 of
Decision XIX/6 notes that by 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 non-Article 5 and Article 5 countries. The term
``servicing tail'' refers to an amount of HCFCs needed to service
existing equipment, such as certain types of air-conditioning and
refrigeration appliances.

B. How does the Clean Air Act phase out HCFCs?

    The U.S. 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 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,
which focuses on phasing out certain chemicals with higher ODP 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).
    On January 21, 2003, EPA promulgated regulations (``2003 Final
Rule,'' 68 FR 2820) 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 the 2003 Final Rule, EPA established chemical-specific
consumption and production baselines for HCFC-141b, HCFC-22, and HCFC-
142b for the initial regulatory period ending December 31, 2009.
Section 601(2) states that EPA may select ``a representative calendar
year'' to serve as the company baseline for HCFCs. In the 2003 Final
Rule, EPA concluded that because the entities eligible for allowances
had differing production and import histories, no single 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 for new entrants that began importing after the end of
1997 but before April 5, 1999, the date the advanced notice of proposed
rulemaking was published. EPA took this action to ensure that small
businesses that might not have been aware of the impending rulemaking
would be able to continue in the HCFC market.
    The 2003 Final Rule apportioned production and consumption
baselines to each company in amounts equal to 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 zero percent of that substance's baseline for production and
consumption in the table at 40 CFR 82.16. EPA did, however, create a
petition process to allow applicants to request small amounts of HCFC-
141b until 2015. The 2003 Final Rule also granted 100 percent of the
baselines for production and consumption of HCFC-22 and HCFC-142b for
each of the years 2003 through 2009. 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 December 15, 2009, EPA had not allocated any HCFC
allowances for 2010 or beyond. The regulations at section 82.15(a) and
(b) only addressed the production and import of HCFC-22 and HCFC-142b
for the years 2003-2009. Absent the granting of calendar-year
allowances, section 82.15 would have prohibited the production and
import of HCFC-22 and HCFC-142b after December 31, 2009. The 2009 Final
Rule allowed for continued production and consumption, at specified
amounts, of HCFC-142b, HCFC-22, and other HCFCs not previously included
in the allowance system, for the 2010-2014 control periods.
    In the U.S., an allowance is the unit of measure that controls
production and consumption of ODS. 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. A calendar-

year allowance represents the privilege granted to a company to produce
or import one kilogram (not ODP-weighted) of the specific substance.
EPA allocates two types of calendar-year allowances--production
allowances and consumption allowances. ``Production allowance'' and
``consumption allowance'' are defined at section 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 request a refund of
those consumption allowances by submitting proper documentation and
receiving approval from 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 transfer calendar-year allowances of one type of
HCFC for calendar-year allowances of another type of HCFC, with
transactions weighted according to the ODP of the chemicals involved.
Pursuant to section 607 of the CAA, EPA applies an offset to each HCFC
transfer 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).
    The U.S. remained comfortably below the aggregate HCFC cap through
2009. The 2003 Final 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 number 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 noted that it
would likely achieve the 2010 stepwise reduction by applying a
percentage reduction to the HCFC-22 and HCFC-142b baselines. EPA
subsequently reviewed market conditions to estimate servicing needs and
market adjustments in the use of HCFCs, including HCFCs for which EPA
did not establish baselines in the 2003 Final Rule.
    In the 2009 Final Rule, EPA estimated the need for HCFC-22 during
the 2010-2014 regulatory period, and determined the percentage of that
need for which it was appropriate to allocate allowances. As described
in section IV.B.3. of the proposed rule (77 FR 237), EPA determined
that the percentage of the estimated need allocated in the form of
allowances should not remain constant from year to year but rather
should decline on an annual basis. For 2010, EPA allocated allowances
equal to 80 percent of the estimated need for HCFC-22, concluding that
reused, recycled, and reclaimed material could meet the remaining 20
percent. Under the 2009 Final Rule, the percentage of estimated need
for which there was no allocation, and therefore would need to be met
through recycling and reclamation, rose from 20 percent in 2010 to 29
percent in 2014 to ensure the U.S. market would have a viable
reclamation industry and could meet the 2015 stepwise reduction under
the Montreal Protocol.
    As explained in the Background section, EPA is undertaking this
rulemaking as a result of the decision issued by the Court in Arkema
(618 F.3d 1, D.C. Cir. 2010), in which the Court vacated portions of
the 2009 Final Rule.

C. What sections of the Clean Air Act apply to this rulemaking?

    Several sections of the CAA apply to this rulemaking. Section 605
of the CAA phases out production and consumption and restricts the use
of HCFCs in accordance with the schedule set forth in that section. As
discussed in the 2009 Final Rule (74 FR 66416), section 606 provides
EPA authority to set a more stringent phaseout schedule than 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 previously
set a more stringent schedule than the section 605 schedule through a
rule published December 10, 1993 (58 FR 65018). Through the 2009 Final
Rule, EPA accelerated the section 605 schedule to reflect the
acceleration under the Montreal Protocol as agreed to under the
Montreal Protocol in September 2007. The more stringent schedule
established in that rule is unaffected by the 2010 Court decision and
is therefore still in effect.
    Section 606 provides EPA authority 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 the 2009 Final Rule, EPA determined that
all three criteria had been met with respect to the schedule for
phasing out production and consumption of HCFC-22 and HCFC-142b.
    As noted in the 2009 Final Rule, while section 606 is sufficient
authority for establishing a more stringent schedule than the section
605 phaseout schedule, section 614(b) of the CAA provides that in the
case of a conflict between the CAA and the Montreal 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 Montreal Protocol. To meet the 2010 stepdown
requirement, EPA is continuing to allocate HCFC allowances at a level
that will ensure the aggregate HCFC production and consumption will not
exceed 25 percent of the U.S. baselines. For more discussion of this
point, see 74 FR 66416.
    Finally, section 607 addresses transfers of allowances both between
companies and chemicals. EPA is further clarifying the policy and
procedures applicable to inter-pollutant transfers in this action, and
is making a minor change to the regulations governing inter-pollutant
transfers to provide additional clarity to stakeholders.

D. How does this action relate to the 2010 court decision?

    Certain allowance holders affected by the 2009 Final Rule filed
petitions for review in the U.S. Court of Appeals for the District of
Columbia Circuit. Among other arguments, the petitioners, Arkema, Inc.,
Solvay Fluorides, LLC, and Solvay Solexis, Inc., contended that the
rule was impermissibly retroactive because in setting the baselines for
the new regulatory period, EPA did not take

into account certain inter-pollutant baseline transfers that
petitioners had performed during the prior regulatory period. The 2011
Interim Final Rule contained a description of those transfers and the
EPA approvals of those transfers. As explained in the 2011 Interim
Final Rule, Solvay Solexis, Inc. submitted two Class II Controlled
Substance Transfer Forms for consumption allowance transfers to Solvay
Fluorides, LLC on February 15, 2008, and March 4, 2008. Arkema, Inc.
submitted two Class II Controlled Substance Transfer Forms for
consumption and production allowance transfers on April 18, 2008. Each
company requested EPA's approval to convert HCFC-142b allowances to
HCFC-22 allowances, and checked a box on the EPA transfer form
indicating that ``baseline'' allowances would be transferred. EPA sent
non-objection notices to Solvay Solexis, Inc. and Solvay Fluorides, LLC
on February 21, 2008, and March 20, 2008, and to Arkema, Inc. in April
2008. The transfer requests and EPA's non-objection notices were
attached to petitioners' court filings and are available in the docket
for this action.
    In the Notice of Proposed Rulemaking titled ``Protection of
Stratospheric Ozone: Adjustments to the Allowance System for
Controlling HCFC Production, Import, and Export,'' published in the
Federal Register at 73 FR 78680 on December 23, 2008 (2008 Proposed
Rule), EPA requested comments on establishing baselines for the 2010-
2014 regulatory period ``with or without'' taking into account baseline
inter-pollutant transfers made during the 2003-2009 regulatory period
(73 FR 78687). The proposed regulatory text accounted for the inter-
pollutant transfers discussed above. The increase in HCFC-22 baseline
allowances for Arkema, Inc. and Solvay Fluorides, LLC presented in the
2008 Proposed Rule resulted in a larger amount of HCFC-22 baseline
allowances overall and therefore a lower percentage of HCFC-22
baselines allocated across the board in each control period.
Specifically, the proposed shift resulted in a 16 percent decrease in
allocation share for all other HCFC-22 allowance holders, and increases
for the petitioners: Arkema and Solvay.
    In the 2009 Final Rule, after considering comments, EPA determined
that allowing inter-pollutant transfers from one regulatory period to
become a part of the baseline in the next regulatory period could
undermine the agency's chemical-by-chemical phaseout approach and
encourage market manipulation. EPA also concluded that section 607 of
the CAA was best read as limiting inter-pollutant transfers to those
conducted on an annual basis. For these reasons, EPA did not take the
2008 inter-pollutant transfers into account in establishing the
baselines for the 2009 Final Rule covering 2010-2014.
    The Court issued a decision on August 27, 2010, agreeing with
petitioners that ``the [2009] Final Rule unacceptably alters
transactions the EPA approved under the 2003 Rule'' (Arkema v. EPA, 618
F.3d at 3). The Court vacated the rule in part, ``insofar as it
operates retroactively,'' and remanded to EPA ``for prompt
resolution,'' (618 F.3d at 10). The Court withheld the mandate for the
decision pending the disposition of any petition for rehearing. On
November 12, 2010, EPA filed a petition for rehearing, which was denied
on January 21, 2011. The mandate issued on February 4, 2011.
    EPA presented its interpretation of the Court's decision with
regard to baseline allowances and 2011-2014 calendar-year allowances in
the 2011 Interim Final Rule (76 FR 47456). EPA has not changed that
interpretation but is repeating it here for ease of reference. Because
the Court vacated the rule only in part, and because various parts of
the rule are intertwined, EPA relied on its expertise in administering
the HCFC phaseout regulations under Title VI of the CAA to determine
how to apply the vacatur within the confines of the balance of the
rule, which was not vacated. First, EPA noted that the rule contains
elements that were not at issue in the litigation. EPA concluded that
the vacatur had no effect on allowances for any substances other than
HCFC-142b and HCFC-22, since the petitioners' claims and the opinion
itself discuss only those two substances. Similarly, EPA concluded that
other discrete portions of the rule, such as the provisions on use and
introduction into interstate commerce, were unaffected by the vacatur.
    The baselines for HCFC-142b and HCFC-22 were clearly at issue in
the litigation and indeed are the focus of the Court's opinion. The
Court found that ``the agency's refusal to account for the Petitioners'
baseline transfers of inter-pollutant allowances in the Final Rule is
impermissibly retroactive,'' (618 F.3d at 9). Because baseline and
calendar-year allowances are inextricably linked,\5\ EPA determined
that the Court's vacatur voided the HCFC-22 and HCFC-142b baselines in
40 CFR 82.17 and 82.19 as well as the percentage of baseline allocated
for those specific substances in 40 CFR 82.16 for all companies listed
in those sections.\6\ This meant that in the absence of this rule,
production and import of these two substances were prohibited under 40
CFR 82.15. Recognizing this scenario, EPA sent letters in January 2012
and January 2013 to affected stakeholders informing them that the
agency would exercise enforcement discretion for a limited period
provided their production and import did not exceed specified levels
and provided that they adhered to additional conditions.
---------------------------------------------------------------------------

    \5\ Baseline and calendar-year allocations are inextricable
because calendar-year allocations are expressed as a percentage of
baseline, and the percentage of baseline allocated for a specific
substance varies depending on the sum of all company baselines for
that substance. The process is described in greater detail in
section IV.
    \6\ The companies' allocations are inter-related because, as
noted in footnote 5, the percentage of baseline allocated varies
according to the sum of the company-specific baselines.
---------------------------------------------------------------------------

    In determining the meaning of the Court's vacatur, EPA considered
whether this interpretation was consistent with what the Court intended
and a good fit for the specific circumstances, which include the goals
and design of the HCFC allowance program and the basic structure of the
2009 Final Rule. While this interpretation is appropriate in this
instance, it is possible that another interpretation would be more
appropriate in a case involving a program with different goals, design,
or structure.
    EPA's initial response to the Court's partial vacatur was to issue
the 2011 Interim Final Rule (76 FR 47451). That rule allocated
allowances for 2011 only. Through today's notice, EPA is addressing the
Court's decision as it relates to the remainder of the regulatory
period ending December 31, 2014.

IV. How is EPA allocating HCFC-22 and HCFC-142b allowances for 2012-
2014?

    EPA is continuing the system established in previous rulemakings
(68 FR 2820, 74 FR 66412, 76 FR 47451) for HCFC production and import
in the U.S. The process works as follows for each HCFC: First, all the
company-specific baselines listed in the tables at 40 CFR 82.17 and
82.19 are added to determine the aggregate amount of baseline
production and consumption, respectively. Second, EPA determines how
many consumption allowances the market needs for a given year, taking
into account sources other than new production and import, and then
divides that amount by the aggregate

amount of baseline allowances. The resulting percentage is listed in
the table at section 82.16 and becomes what each company is allowed to
consume in a given control period. For example, a company with 100,000
kg of HCFC-22 baseline consumption allowances would multiply that
number by the percentage allowed for the year (for example, 17.7
percent in 2012) to determine its calendar-year consumption allowance
is 17,700 kg.
    In this rulemaking EPA is (1) establishing 2012-2014 company-by-
company consumption and production baselines for HCFC-22 and HCFC-142b
in the tables at 40 CFR 82.17 and 82.19 identical to the baselines
established in the 2011 Interim Final Rule (76 FR 47468); (2)
allocating company-by-company production and consumption allowances for
these substances for 2012-2014 by establishing allowed percentages of
production and consumption baselines in two tables at section 82.16;
and (3) revising the regulatory text at 40 CFR 82.23 to make the
procedure for all future inter-pollutant transfers clear. EPA will
address the baselines and allocations for the control periods beyond
2014 at a later date. All aspects of the 2009 Final Rule promulgated on
December 15, 2009, (74 FR 66412) that are not addressed in this final
rule are unchanged.
    EPA again notes that beginning January 1, 2015, section 605 of the
CAA prohibits the use and introduction into interstate commerce of any
HCFC listed as a class II substance unless it ``(1) has been used,
recovered and recycled; (2) is used and entirely consumed (except for
trace quantities) in the production of other chemicals; (3) is used as
a refrigerant in appliances manufactured prior to January 1, 2020; or
(4) is listed as acceptable for use as a fire suppression agent for
nonresidential applications in accordance with section 612(c).'' In
addition, EPA's regulations at 40 CFR 82.15 restricted use and
introduction into interstate commerce of HCFC-141b, HCFC-142b, and
HCFC-22 beginning in 2010, with limited exceptions.

A. What baselines is EPA using for HCFC-22 and HCFC-142b allowances?

    In the January 4, 2012, notice, EPA proposed to establish 2012-2014
company-by-company consumption and production baselines for HCFC-22 and
HCFC-142b that were identical to the baselines established in the 2011
Interim Final Rule (see 40 CFR 82.17 and 82.19). EPA also provided
advance notice that it would consider updating baselines for the 2015-
2019 regulatory period, especially if there is an environmental benefit
to doing so.
1. What baselines is EPA using for 2012-2014?
    Four companies commented on how EPA should proceed with
establishing baselines for 2012-2014. Arkema and Solvay both support
EPA's inclusion of past inter-pollutant transfers of baseline
allowances, and believe that the proposed baselines are fully
consistent with the Arkema decision. On the other hand, DuPont and
Honeywell state that Arkema does not require EPA to recognize the
inter-pollutant baseline transfers beyond 2009, nor does it address the
validity of the 2008 transfers. These commenters also state that
recognizing these transfers beyond 2009 is contrary to section 607,
EPA's transfer regulations, and the agency's interpretation of those
regulations for chemicals that are being phased down. In addition, they
assert that if EPA does take those transfers into account in
establishing baselines for 2012-2014, the agency should only allocate
the percentage of the transferred baselines that would be allocated if
the baselines had never been converted from HCFC-142b to HCFC-22. They
state that recognizing the transfers has the effect of increasing the
baseline share of the petitioners in Arkema and reducing the share of
other companies in violation of their due process rights. Finally, they
state that under the Arkema decision, their share of the baseline is
vested.
    EPA cited several reasons why it would prefer to set baselines
without taking into account inter-pollutant transfers in the 2009 Final
Rule (74 FR 66420), in the Response to Comments document included in
the record for that rulemaking and in the 2011 Interim Final Rule (76
FR 47451). These considerations remain important, and are the basis for
EPA's policy on future inter-pollutant transfers, which is discussed in
section V of this notice. However, EPA must act in accordance with the
Court's holding regarding the 2008 transfers. In Arkema, the Court
concluded that EPA's non-objection notices for the 2008 transfers
created ``vested rights'' in the transferred baselines, which EPA must
reflect in rules governing the current regulatory period, at least to
the extent such rules continue to use the historical production and
consumption baselines. The Court explicitly held that ``the Agency's
refusal to account for the Petitioners' baseline transfers of
interpollutant allowances in the Final Rule is impermissibly
retroactive,'' (Arkema, 618 F.3d at 24). Given the Arkema decision, and
given the recent decision in Honeywell International, Inc. v. EPA, DC
Cir. No. 10-1347 (January 22, 2013) (``Honeywell''), EPA is recognizing
the 2008 transfers in establishing the baselines through 2014. Thus,
the baselines finalized for 2012-2014 in today's rule are identical to
the HCFC-22 and HCFC-142b baselines established in the 2011 Interim
Final Rule.
    The commenters assert that the Arkema decision did not determine
the validity of the transfers. They further assert that EPA lacked
authority to approve permanent inter-pollutant baseline transfers, that
the 2008 transfers as characterized by the Court are thus invalid, and
that EPA should not recognize them in setting baselines. The validity
of the 2008 transfer approvals was challenged in Honeywell. The brief
filed by the agency on January 30, 2012, provides further response to
several of the arguments that Honeywell and DuPont make in their
comments on the proposed rule and is included in the docket for this
rulemaking.
    The commenters do not assert that EPA lacked authority to approve
inter-pollutant transfers whose effects were limited to the regulatory
period ending in 2009. Rather, they assert that EPA lacked authority to
approve inter-pollutant transfers with effects lasting beyond 2009.
They state that Arkema did not determine the validity of such
transfers. Yet the Arkema Court found contrary to the Agency's
position, that EPA had ``approved permanent changes to the baseline as
a result of inter-pollutant transfers'' and that the Agency could not
``undo these completed transactions,'' (Arkema, 618 F.3d at 23). It is
not plausible that the Court would have reached this holding if it
viewed EPA's authority to approve inter-pollutant transfers with
effects beyond the immediate regulatory period as open to debate. As
the Court stated in Honeywell, ``the Arkema Court necessarily concluded
that permanent inter-pollutant transfers were permissible under the
statute'' (slip op. at 7). The Honeywell Court noted that it was bound
by Arkema and denied commenters' petition for review of the 2008
transfers. The Honeywell decision is available in the docket for this
action.
    Contrary to the commenters' assertions, section 607 of the CAA is
ambiguous with regard to whether inter-pollutant transfers may have
permanent effects that carry forward to subsequent regulatory periods.
EPA has discretion under section 607 to determine how to treat such
transfers. While EPA did not intend its non-objection notices to confer
permanence to the 2008 inter-pollutant transfers, EPA disagrees with

commenters' implication that under section 607, the agency could not
have done so. That would be true only if section 607 expressly
prohibited permanent inter-pollutant transfers, which it does not. As
discussed in more detail in section V.A. of this preamble, for policy
reasons EPA will approve only annual inter-pollutant transfers in the
future. EPA also believes that while section 607 is not clear on its
face, it is best interpreted as precluding permanent inter-pollutant
transfers, as explained in section V.A. of this preamble. As noted by
the Court in Arkema, interpreting section 607 to preclude permanent
inter-pollutant transfers ``may more accurately track the statutory
mandate,'' (Arkema, 618 F.3d at 22).
    Commenters assert that EPA has departed from its own regulations in
proposing to recognize the 2008 inter-pollutant transfers in the
baselines for 2012-2014. Commenters ignore, however, the Court's
interpretation of those regulations. EPA's intent in the 2003 Rule,
which established the transfer provisions, was to preclude permanent
inter-pollutant transfers of baseline allowances (see 68 FR 2835). EPA
notes that until the rulemaking that resulted in the 2009 Final Rule,
the agency did not specifically develop a policy on whether inter-
pollutant transfers could ever carry forward to a new regulatory period
following one of the intermediate phasedown steps. Nonetheless, the
Arkema decision found that the agency's conclusion in the 2009 Final
Rule not to carry inter-pollutant transfers forward to a new regulatory
period ``departed from the policy it had adopted in the 2003 Rule,''
(Arkema, 618 F.3d at 6). EPA cannot disregard the Court's holding on
the ground that the 2003 Rule prohibited permanent inter-pollutant
transfers where the Court has found otherwise.
    The commenters are also incorrect that EPA previously interpreted
its regulations as creating a ``phasedown follows the allowance''
principle. Commenters assert that under this principle, EPA should only
allocate the percentage of the transferred baselines allocated for
HCFC-142b. However, EPA has never adopted such a principle. Preamble
statements leading up to and accompanying the 2003 Rule refer to the
elimination of HCFC-141b baseline upon the chemical's complete
phaseout, ``regardless of what inter-pollutant transfers had taken
place,'' (68 FR 2835). That is a different matter from a partial
phasedown, like the phasedown of HCFC-22 and HCFC-142b in 2010.
Additionally, the commenters' approach runs counter to the way EPA
allocates allowances as described in section IV of this preamble.
    Finally, the commenters assert that EPA has violated their due
process rights by decreasing their market share, which they argue is a
vested right under Arkema. From a substantive perspective, what they
assert is a vested right (i.e., a specific share of allowances) is not
in fact a vested right, nor is it protected under the due process
clause. The Court held that EPA's actions in approving the 2008
transfers created vested rights in the transferred baselines. The Court
placed particular emphasis on the fact that the Agency took affirmative
actions that appeared to ratify the transfers: ``The Agency's approval
and acknowledgement of Petitioners' actions distinguishes this case
from situations where a company's unilateral business expectations are
thwarted by a change in the regulatory framework,'' (Arkema, 618 F.3d
at 20). The Court did not examine the issue of whether companies
possessed vested rights in baseline or calendar-year allowances
generally, or in a specific share of allowances. Nor did the Court hold
that the transferred baselines, baseline allowances generally, or
calendar-year allowances, are property rights protected under the Due
Process Clause. Furthermore, it did not state that companies had any
right to a specific number of production or consumption allowances. On
the contrary, the Court noted that ``the 2010 stepdown gave the EPA
occasion to adjust its distribution of allowances,'' (Arkema, 618 F.3d
at 25).
    EPA's regulatory definitions specify that production and
consumption allowances are privileges, not rights (see 40 CFR 82.3). As
discussed in Section II, the U.S. is in the process of phasing out
production and consumption of HCFCs, culminating in a complete phaseout
in 2030. EPA's regulations prohibit production and consumption of HCFCs
without allowances (40 CFR 82.16(a), (b)). In the absence of this final
rule, no allowances would exist for 2012 or beyond. In this regulatory
environment, no company has an entitlement to a specific number or
share of HCFC allowances.
    In addition, under this final rule, commenters are receiving the
same number of baseline allowances they received under previous HCFC
allocation rules. Recognition of the 2008 transfers in the aggregate
HCFC-22 consumption baseline does not require EPA to extract baseline
allowances from other companies.
    From a procedural perspective, commenters were given multiple
opportunities to comment on or challenge the effects of the 2008
transfers at issue in Arkema on baselines for the current regulatory
period. As noted in Honeywell, they had ``notice and an opportunity to
present [their] views during EPA's pre-Arkema regulatory proceedings,
during the Arkema litigation, and during EPA's subsequent post-Arkema
proceedings'' (slip op. at 7). They commented on the 2009 Final Rule,
the 2011 Interim Final Rule and the proposal for this final rule. They
also had the opportunity to intervene in the Arkema lawsuit and the
opportunity to challenge the 2011 Interim Final Rule, in which EPA
actually reflected the 2008 transfers in establishing baselines. A more
detailed summary of the comments on this issue, as well as the Agency's
response to issues not addressed in the preamble or the briefs, is
included in the Response to Comments, found in the docket for this
rulemaking.
2. What baselines is EPA considering for 2015-2019?
    Looking ahead to the next regulatory period, the agency received
four comments on whether it should use more recent production and
import data in establishing baselines for 2015-2019. Two commenters
recommend using data from 2005-2007 because these years were used to
establish baselines in the 2009 Final Rule for newly-controlled HCFCs
(74 FR 66412). In addition, using the highest production and import
levels from 2005-2007 would reflect current and stable market
conditions. One commenter points out that production and consumption in
2008 and 2009 were likely affected by the economic downturn, while 2010
and 2011 fall under the stepdown established by the 2009 Final Rule.
Another commenter believes that updating baselines would avoid
rewarding companies for attempting to manipulate their baselines by
converting allowances from HCFCs with lower future market value (i.e.,
HCFC-142b) to HCFC allowances they knew would retain value in the next
regulatory period (i.e., HCFC-22).
    Two other commenters do not support revised baselines. One of the
commenters believes that the current allocation method is the fairest
method because it is transparent and well understood by all market
participants. The other commenter sees no benefit to updating
baselines, but says future reductions in allocations will benefit the
environment by promoting reclamation.
    Since EPA did not propose to establish baselines for 2015-2019, the
agency will continue to assess the merits of using a more recent set of

years to establish baselines in a later rulemaking. The agency is still
receptive to the idea of updating baselines in 2015, but notes that it
did not receive any evidence that there is an environmental benefit to
doing so.

B. What factors did EPA consider in determining allocation amounts for
HCFC-22 and HCFC-142b?

    In the 2009 Final Rule, EPA decided to allocate HCFC-22 and HCFC-
142b allowances based on the projected servicing needs for those
substances, taking into account the portion of need that can be met
through recycling and reclamation. EPA is not changing that general
approach, and continues to believe it is necessary in order to promote
the use of used, recycled, and reclaimed material in anticipation of
the 2015 phasedown step. In accordance with the Court's decision in
Arkema, the agency proposed, and is now finalizing, baselines that
reflect 2008 inter-pollutant baseline transfers. This approach
necessitates issuing a different percentage of company baselines in
order for the aggregate number of calendar-year HCFC-22 consumption
allowances to be less than or equal to the 2009 Final Rule. In fact,
EPA proposed to allocate significantly fewer consumption allowances for
HCFC-22 relative to the 2009 Final Rule based on an analysis of updated
market conditions.
    Specifically, the agency considered to what extent servicing need
can be met by (1) significant inventories of existing HCFC-22, (2)
increased reclamation capacity, and (3) re-use of HCFC-22 within
supermarkets. See ``Analysis of HCFC-22 Servicing Needs in the U.S. Air
Conditioning and Refrigeration Sector: Additional Considerations for
Estimating Virgin Demand'' (Adjustment Memo), included in the docket to
this rulemaking. In the Adjustment Memo, EPA considers a higher and a
lower HCFC-22 allocation scenario for each year. In the larger
allocation scenario: (1) Surplus inventory from past years (hereinafter
called ``existing inventory'') meets 6,000 MT of estimated need each
year; (2) recovery and reclamation meet 12,500 MT of need, the same
amount as in the 2009 Final Rule; and (3) 20 percent of total need in
the large retail food sector is met by in-house recovery and reuse. In
the smaller allocation scenario: (1) Existing inventory also meets
6,000 MT of estimated need each year; (2) recovery and reclamation meet
19,700 MT of estimated servicing need; and (3) 70 percent of total need
in the large retail food sector is met by in-house recovery and reuse.
    As shown in Table 4 of the Adjustment Memo, the agency proposed to
issue HCFC-22 consumption allowances as follows: (1) Between 25,100 and
36,200 MT in 2012 (a decrease of 11 to 38 percent relative to the 2009
Final Rule); (2) between 20,800 and 31,400 MT in 2013 (a decrease of 13
to 42 percent); and (3) between 16,400 and 26,300 MT in 2014 (a
decrease of 15 to 47 percent). These proposed amounts correspond to
allocations of 17.7 to 25.5 percent of baseline in 2012, 14.7 to 22.1
percent in 2013, and 11.6 to 18.5 percent in 2014. The agency took
comment on its analysis of market conditions, which specifically looked
at existing inventory, reclamation capacity, and HCFC-22 reuse in the
supermarket industry. EPA also asked for comment on potential
difficulties faced by small businesses and on whether or not the
installation of dry-shipped HCFC-22 condensing units affects the
phaseout.
    Between the 2011 Interim Final Rule and the proposed rule, the
agency received a total of 50 comments (some with multiple signatories)
on the market conditions (see section 2 of the Response to Comments)
considered in allocating HCFC-22 and HCFC-142b allowances. As discussed
in the proposed rule, the need for HCFC-22 to service existing
equipment is the primary factor affecting EPA's overall allocation of
production and consumption allowances for the current regulatory
period. Thus, the Adjustment Memo only discusses HCFC-22 and most
comments, as well as the agency's response, focus primarily on HCFC-22.
    Additionally, EPA received 13 comments, four from the Interim Final
Rule and nine from the proposed rule, on whether or not to provide more
HCFC-22 and/or HCFC-142b consumption and/or production allowances as
compensation for lost opportunities during 2010 (``recoupment'').
Lastly, the agency proposed to allocate different annual percentages of
baseline for consumption than for production (``decoupling''). Without
decoupling the baselines, the percentage of baseline allocated for
production would be the same as that for consumption for a given HCFC.
Nine comments specifically addressed decoupling of baseline
percentages.
1. How is EPA adjusting estimated servicing need to account for surplus
inventory from past years?
    The agency proposed to account for existing inventory of HCFC-22
produced in previous years by making downward adjustments to the
consumption allocation of 6,000 MT each year. EPA's analysis indicated
the amount of existing inventory was between 22,700 MT and 45,400 MT.
Including relevant comments received on the 2011 Interim Final Rule,
EPA received eight comments on its assessment of existing inventory of
HCFC-22. Seven comments state there are significant volumes of HCFC-22
in existing inventory and that accounting for this inventory is
essential for supporting recovery and reclamation. One of those
commenters indicates the 6,000 MT proposed annual adjustment and the
45,400 MT stockpile estimate should be considered a minimum, not
maximum amount. Another also supports EPA's consideration of existing
inventory, and believes the estimates used in the proposed rule may be
too low based on their own inventory and their own estimates of
industry-wide inventory.
    All comments on EPA's analysis, including confidential comments,
indicate EPA's estimate of existing inventory is reasonable and that an
annual adjustment to the estimated servicing need of 6,000 MT is
supportable. EPA considered a wide range of existing inventory (between
22,700 MT and 45,500 MT), but comments support the proposed 6,000 MT
adjustment regardless of the total stock of existing inventory. Based
on the information provided, the agency does not believe the annual
adjustment or the estimate of existing inventory should be increased.
Overestimating the amount in inventory could limit the ability of
consumers to service their equipment, resulting in systems being
prematurely decommissioned. EPA provides a full summary of comments and
agency responses in the Response to Comments, but notes here that all
commenters who addressed the proposed 6,000 MT adjustment specifically
were in support of an adjustment at least that large. EPA is finalizing
the consumption allocation with the proposed adjustment for existing
inventory.
2. How is EPA adjusting allowances to encourage recovery, reclamation
and reuse?
    In the 2009 Final Rule, the agency recognized that servicing needs
can be met with a combination of newly-manufactured or imported HCFCs
(virgin HCFCs) and HCFCs that have been recovered and either reused,
recycled, or reclaimed. The 2009 Servicing Tail Report analyzed various
reclamation scenarios, and after several rounds of industry feedback,
the agency decided to issue allowances 12,500 MT below estimated need
in 2010-2014. For 2010, 12,500 MT was 20 percent of the

estimated need. EPA continues to believe that reused, recycled, and
reclaimed material can help meet HCFC-22 servicing needs. The agency
published new projections of reclaim capabilities in the Adjustment
Memo, and took comment on those projections via this rulemaking.
    Out of the 15 comments EPA received on reclaim capabilities, 14
comments (some signed by multiple organizations) supported EPA's
analysis that the reclamation industry has the capacity to reclaim more
than 19,700 MT per year. One comment stated that the infrastructure to
effectively and efficiently recover, recycle, redistribute, and reuse
HCFC-22 likely will take several years to develop. In addition, one
company agreed that the industry has the capacity to meet reclaim
needs, but disagreed with the base assumption that this activity will
automatically take place.
    In the Adjustment Memo, EPA considered annual reclamation levels of
12,500 MT and 19,700 MT. Several organizations state that the 19,700 MT
figure should be a minimum, rather than a maximum, because established
companies that reclaim refrigerants have the technical capacity to
recover 19,700 MT or more in 2012 alone and could easily expand
capacity to meet additional need. One company comments that reclamation
companies will be able to expand to cover the need that will ultimately
be driven by higher prices and a decrease in supply. However, companies
will not expand until there is a need. Another company also states that
it could easily triple its current capacity, and believes the same is
true for many reclamation companies. Many companies support an
allowance reduction to encourage an increase in reclamation capacity
and volume. These commenters, including 20 EPA-certified reclaimers
that submitted a single comment, all believe that the capacity exists
to handle increased reclamation volumes.
    Several commenters believe sufficient recovery and reclamation
capacity exists, but that the supply chain of used refrigerant from
equipment-in-use to reclamation facilities is fragmented and complex.
The concern is not whether capacity exists, or whether reclaimers could
quickly expand capacity, but whether material is actually being
recovered and brought to reclaimers. A group of recovery companies
believes that existing reclaimers have the capacity to process more
than enough HCFC-22 to meet the industry needs, but are not convinced
that given the present situation, there will be enough refrigerant
recovered to meet the raw material needs of the reclaimers. However, a
group of recovery companies that focuses exclusively in recovering used
refrigerant from retiring equipment does believe reducing allowances
will change the incentives for recovery. Finally, one company believes
that EPA's estimate of the potential for recovery and reuse is too
optimistic during 2012-2014, particularly because residential air
conditioners use only small quantities of the gas.
    EPA's assessment that the reclamation industry has the capacity to
reclaim 19,700 MT of HCFC-22 per year, as presented in the Adjustment
Memo, is supported by most of the comments received. The amount of used
refrigerant that can be recovered from retiring equipment is sufficient
to allow for the reclamation of 19,700 MT per year, based on expected
recovery rates used in the Vintaging Model.\7\ Included in the docket
for this rulemaking is a new supporting memo titled ``Recovered HCFC-22
Available to Meet Servicing Needs'' (Recovery Memo). In this memo EPA
shows the amount of HCFC-22 that can be recovered from HCFC-22
equipment that reaches its end of life under two scenarios. In the
first scenario, EPA uses the end-of-life assumptions in the Vintaging
Model to determine how much HCFC-22 is recovered from retiring
equipment. The Vintaging Model uses a 35 percent recovery rate in
retiring residential air conditioning systems. The Recovery Memo
details all the recovery assumptions used, which are nearly identical
to those used in the 2009 Servicing Tail Report. These numbers are
similar to those presented in table 4-5, ``Scenario 50: 50% Recovery
Rate,'' which was also presented in the 2009 Servicing Tail Report. In
the second scenario, EPA assumes all HCFC-22 is recovered at the end-
of-life. The intent of this memo is to show that it is technically
feasible to recover and reclaim 19,700 MT of HCFC-22 per year between
2012-2014, even when only 35 percent of the HCFC-22 is recovered from
residential air conditioning systems--the largest use for HCFC-22.
---------------------------------------------------------------------------

    \7\ The Vintaging Model is the primary tool that EPA uses to
estimate 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. This information is used to project the servicing
needs of ODS-containing equipment. Additional information on the
Vintaging Model is available in the 2009 Servicing Tail Report,
which can be found in the docket for this rulemaking.
---------------------------------------------------------------------------

    However, EPA agrees with some commenters that the amount of
refrigerant that is available to be recovered does not necessarily
equal the amount that is recovered in practice, and that it will take
time for recovery practices to change. The agency recognizes that
assuming 19,700 MT of annual servicing need can be met by recovered and
reclaimed material--instead of 12,500 MT--does not mean that amount
will actually be reclaimed each year. EPA's adjustment to encourage
recovery and reclamation could also encourage transition to HCFC-22
alternatives and more recovery and reuse of HCFC-22 in systems that
require a large refrigerant charge. Although both of these outcomes are
difficult to measure and predict, EPA expects that these outcomes will
sufficiently deal with any gap between the adjustment in allocation and
realized reclamation levels. EPA adopted the same general approach in
the 2009 Final Rule (using 12,500 MT instead of 19,700 MT) to foster
recovery and reclamation. In addition, EPA has received anecdotal
information from stakeholders that reclaimers are already offering
increased incentives to return recovered refrigerant and that this will
continue as long as there is an economic incentive to do so. As the
supply of virgin refrigerant shrinks, the incentive to recover and
reclaim used refrigerant will likely increase. EPA provides a full
summary of comments and agency response in the Response to Comments.
    EPA does not believe any of the concerns raised should preclude the
agency from increasing the adjustment for reclamation from 12,500 MT to
19,700 MT to foster reclamation, especially in light of the 2015
Montreal Protocol cap and the 2020 phaseout of HCFC-22 production and
import. EPA believes increased recovery and reclamation is necessary to
ensure a smooth transition between now and 2020 and is increasing the
difference (relative to the 2009 Final Rule) between estimated
servicing need and the allocation for virgin production and import. The
agency is finalizing the proposed 19,700 MT adjustment to

foster increased HCFC-22 recovery and reclamation.
3. How is EPA accounting for recovery and reuse of HCFC-22 in the
supermarket industry?
    In the proposed rule, EPA considered adjusting the allocation for
virgin HCFC-22 production and import to account for current recovery
and reuse practices in the supermarket industry. Specifically, the
agency estimated that between 20 percent and 70 percent of annual
servicing need in the large retail food sector could be met by HCFC-22
recovered and reused in-house. In addition to the analysis conducted to
develop the Adjustment Memo, EPA considered late comments that
addressed recovery and reuse of HCFC-22 in supermarkets. The comments,
combined with EPA's findings presented in the Adjustment Memo, indicate
that supermarkets deal with recovered refrigerant in a variety of ways.
Some appear to meet 10-20 percent of their annual servicing need with
material they recovered from internal existing prior uses. Others have
the material reclaimed and do not reuse or bank any of the material. A
third group meets 80 to 100 percent of their annual need with reused
material.
    EPA received an additional comment on reuse by large end users, but
not specifically supermarkets. The commenter notes that large users
retiring equipment can efficiently and effectively capture the majority
of refrigerant from commercial refrigeration and air conditioning
units. These users can recover refrigerant for future servicing of
other equipment they own. These users do not require reclamation
technology or equipment, and can recover and reuse significant volumes
of refrigerant. Such recovery and reuse should continue to be
considered as a source of HCFC-22 service refrigerant.
    EPA agrees that large end users, including supermarkets and other
large commercial applications, can be a source for recovered HCFC-22.
However, the agency only received information on how six companies
reuse refrigerant in-house, and their reuse percentages are very
different. Since the agency does not have sufficient data on in-house
reuse, EPA is not accounting for supermarket reuse as its own category.
However, the agency's Vintaging Model has reasonable estimates for
actual recoverable material for various sectors, and EPA is using those
modeled recovery rates for supermarkets to help support overall
recovery and reuse estimates in this rule (see the Recovery Memo for
specifics on modeled recovery rates).
4. Did EPA consider providing allowances to small businesses in this
final action?
    In response to the 2011 Interim Final Rule, one small business
informed EPA that it could not acquire either HCFC allowances or the
HCFCs it needs to manufacture its HCFC blend (see the letters from ICOR
dated May 17, 2011 and September 6, 2011, available in the docket for
this action). To remedy this situation, the commenter requested that
EPA provide unused allowances to companies that purchased either HCFCs
or HCFC consumption allowances in 2008 and 2009. In the proposed rule,
EPA noted that the inability to acquire allowances and/or HCFCs
themselves does not appear to be a widespread problem, as numerous
companies have made a significant number of transfers over the last
year alone, and no other company has commented that it cannot acquire
HCFCs. However, EPA took comment on whether other companies were having
difficulty acquiring HCFCs or HCFC allowances. In the proposed rule,
the agency also provided some historical background on how EPA provided
flexibility for small businesses when establishing the HCFC allocation
system.
    EPA received four comments on providing allowances to manufactures
of HCFC blends, all of which were in opposition. Two companies point to
the flexibility for companies without baselines to obtain HCFCs or HCFC
allowances by purchasing them from others. Another commenter notes that
EPA provided for new entrants when it established the allocation system
in 2003.
    Since EPA did not receive any additional comments in support of
providing HCFC allowances to manufacturers of HCFC blends, and because
the agency has previously stated its belief that the current allocation
system provides significant flexibility for new entrants (as documented
in the revised Flexibility Memo), EPA is not providing allowances for
new entrants at this time.
    EPA also sought comment on the concept of providing HCFC-22
allowances to reclaimers, but expressed reservations. EPA received
eight comments on this topic: four in opposition and four in support.
Comments in opposition state that providing allowances to reclaimers
could encourage blending of refrigerant, instead of reclaiming
refrigerant. They also cite administrative hurdles in establishing
allowances for reclaimers and their skepticism that reclaimers would
actually use the allowances to reclaim more material. All three
commenters state that the proposed reduction in allowed production and
import will encourage recovery and reclamation (without providing
allowances).
    One comment in support encouraged EPA to provide allowances to
reclaimers as a reward for reclamation activities. The commenter also
stated that manufacturers create a difficult working environment for
reclaimers, claiming, for example:
     The manufacturers exert pressure on wholesalers and
contractors not to return their used refrigerants to a reclaimer, using
their supply of virgin refrigerants as leverage.
     The manufacturers have asked cylinder manufacturers not to
sell pre-labeled DOT 39 cylinders for their blends to reclaimers.
     The manufacturers or their agents will buy an account back
by offering a higher price for the used refrigerants than justified.

The commenter argues that the desire of manufacturers to promote their
own best self-interest results in a difficult environment for a
refrigerant reclaimer to prosper.
    EPA continues to have serious concerns about providing allowances
to reclaimers that did not historically produce or import HCFC-22 and
have not already acquired HCFC-22 allowances. As stated in the proposed
rule, the agency's primary concern is that providing allowances for
reclaimers could foster unsustainable reclamation practices that rely
on blending, instead of investment in the technology to fully reclaim
HCFCs. Reclamation through separation and distillation will be more
important in 2015 when the HCFC-22 allocation must drop by at least 45
percent from 2010 levels, and it will be absolutely necessary by 2020,
at which time production and import of HCFC-22 must be phased out
entirely. In addition, many businesses have either found a way to
secure reliable access to virgin HCFCs or have made investments to
reclaim HCFCs in a sustainable way, without a direct allocation of
allowances.
    EPA continues to believe that allocating fewer allowances--rather
than providing allowances to reclaimers--is the best way to foster
reclamation and recovery. In this final rule, EPA is taking significant
steps to encourage recovery and reclamation by providing fewer HCFC-22
consumption allowances. Fewer allowances for new production and import
increases the

value of existing HCFCs, which in turn increases the incentives for
recovery and reclamation. While the agency appreciates the concerns
raised by reclaimers about the difficulties they encounter in the
refrigerant reclamation business, these barriers have not stopped
companies from becoming EPA-certified reclaimers--currently there are
more than 50. Given the considerations above, the agency is not
providing allowances to reclaimers at this time.
5. Does the installation of dry-shipped HCFC-22 equipment affect the
phaseout of HCFC-22?
    In the proposed rule, EPA took comment on whether allowing repairs
using HCFC-22 dry-shipped condensing units affects the phaseout of
HCFC-22. Eight commenters believe the repairs of existing equipment
that involve installation of dry-shipped HCFC-22 condensing units is
affecting the phaseout and/or should be stopped. They claim that
continued installation of dry-shipped condensing units effectively
allows the manufacture of otherwise banned HCFC-22 air-conditioning
systems, increasing demand for HCFC-22 and undercutting the market for
alternative refrigerants. One company does not believe dry-shipped
condensing unit repairs can be properly addressed through a reduction
in HCFC-22 allocation levels. Cost associated with the HCFC-22
refrigerant needed for the re-charging of the HCFC-22 system is quite
small (<5% of the total servicing cost), so even a significant
inflation of the cost of HCFC-22 will still have a minimal impact on
the end-user's decision. Two commenters ask EPA to ban repairs using
HCFC-22 dry-shipped condensing units, one explicitly asking for this
action in lieu of further reducing HCFC-22 production. Another
commenter is concerned about the negative effects of dry-shipped
condensing units on equipment efficiency.
    One joint comment from several environmental groups indicated that
the market for dry-shipped HCFC-22 units is expanding rapidly; however,
no data were provided. The commenters express concern that because
newly-produced HCFC-22 is so cheap, service technicians are venting
HCFC-22 from broken units, installing dry-shipped units in their place,
and then charging the unit with virgin HCFC-22.
    EPA received seven comments saying installation of dry-shipped
condensing units does not significantly affect the phaseout and/or that
dry-shipped HCFC-22 condensing unit repairs should not be banned. These
commenters believe dry-shipped condensing units are providing consumers
a legal, affordable repair option, and thus not actually increasing
demand for HCFC-22 or displacing the sale of new systems. They contend
that the primary application of the uncharged HCFC-22 replacement
condensing units is as a service option to major compressor and coil
failures. While two of the equipment manufacturers who do not support a
ban on dry-shipped unit repairs also do not support reduced allocations
of HCFC-22, another equipment manufacturer believes that addressing the
availability of the refrigerant is the appropriate driver for phasing
out virgin HCFC-22, and that the installation of dry-shipped HCFC-22
condensing units does not have a negative effect on the phaseout.
Another commenter suggests that if EPA has verifiable evidence that the
servicing or repair of HCFC-22 appliances is resulting in increased
emissions of the refrigerant, then EPA should consider extending the
leak repair requirements to all appliances, not just appliances with a
refrigerant charge greater than 50 lbs.
    Five additional comments discuss HCFC-22 condensing units in more
general terms. One organization suggests that EPA consider that most
dry-shipped condensing units are being sold and installed with multi-
year warranties, which may require a revision to EPA's servicing tail
analyses if HCFC-22 replacement refrigerants are not approved by the
compressor and equipment manufacturers for warranty servicing beyond
2015. Two other commenters state that the installation of HCFC-22
condensing units affects the need for HCFC-22. One commenter states
that contractors prefer selling new R-410a systems instead of repairing
older systems, since it is much more profitable, but that American
consumers are struggling to pay bills. One commenter states that
further reductions in consumption allowances might discourage
installation and field charging of new condensing units with HCFC-22.
The commenter also states that continued installation of such units
will only increase the challenge of meeting the 2015 stepdown and in
turn increase emissions of HCFC-22 to the atmosphere.
    The issue of whether repairs involving the installation of dry-
shipped HCFC-22 condensing units ``affects the phaseout'' can be broken
into several questions. First, do repairs involving installation of
dry-shipped HCFC-22 condensing units increase demand for HCFC-22?
Second, do such repairs slow transition from HCFC-22 equipment to
equipment using non-ODS alternatives? And finally, does this practice
affect EPA's ability to stop the production and importation of virgin
HCFC-22 by January 1, 2020?
    Based on comments, there is no industry consensus on each of these
questions. Specific responses to each comment are included in the
Response to Comments found in the docket for this rulemaking. However,
given the paucity of concrete quantifiable information on this subject
currently available to the Agency, EPA is not ready to determine
whether the installation of dry-shipped HCFC-22 condensing units will
affect EPA's ability to phase out HCFC-22 by 2020. The limited data
received to date suggest that it will not. EPA did not propose to ban
dry-shipped condensing units in the proposal and is not taking such
action in this final rule. For purposes of future rulemakings, EPA is
still interested in quantifiable information on the number of dry-
shipped condensing units being shipped, whether they are being used as
a repair in lieu of a compressor or motor replacement, and whether and
to what extent condensing unit replacements extend the life of an
existing system. EPA will continue to evaluate the issue as it develops
future regulations.
6. How is EPA addressing the court's decision with regard to 2010 HCFC
allowances?
    As noted in the proposed rule, EPA interprets the Arkema decision
as applying, at a minimum, to the baseline and calendar-year allowances
for 2011-2014. The agency took comment on whether to interpret the
decision as applying to the 2010 allocation, and if so, how allowances
in future control periods might be adjusted to reflect this. EPA also
took comment on (1) whether it should provide recoupment allowances for
HCFC-22 and HCFC-142b, or just HCFC-22 allowances, and (2) whether it
should provide recoupment for production and consumption, or just
consumption allowances. In this final action, EPA concludes that it has
an obligation to consider 2010 allowances in responding to the Court's
remand and that recoupment for both HCFC-22 and HCFC-142b production
and consumption allowances is an appropriate response to the Court's
holding that the agency committed legal error in deciding not to carry
the 2008 transfers forward when it established the baselines for the
current regulatory period.
    EPA received 13 comments in opposition to recoupment. Four comments
specifically state that it is too

late to address 2010 allowances, since the Court's mandate did not
issue until 2011, and allowances are only good for the calendar year in
which they are issued. Two comments assert that providing recoupment
allowances would allow for banking or transferring of allowances to
later years, which is at odds with the CAA and EPA regulations. Most of
these comments point out that some allowances conferred in 2010
actually went unused in that year, and that EPA's current proposal to
reduce allowances in 2012-2014 is further rationale for not providing
additional allowances to compensate for any perceived lost opportunity
in 2010. They point to EPA's statement in the proposal that not
providing recoupment would have advantages for the environment, public
health, and the goal of encouraging reclamation. They assert that there
was an oversupply of HCFC-22 allowances in 2010, that Arkema and Solvay
were not harmed in 2010, and that recoupment allowances would
constitute a windfall. They refer to the Court's denial of Arkema's and
Solvay's motions for a stay of the 2009 Final Rule as evidence that
these companies were not harmed. One commenter also asserts that if
Arkema and Solvay believe they are entitled to compensation, they must
file a claim for compensation under the Tucker Act, 28 U.S.C. 1491.
Finally, four comments cite that providing recoupment distorts market
share, in contradiction to past EPA policy and the Arkema decision as
it relates to vested rights.
    On the other hand, the two companies that would benefit most from
recoupment, Solvay and Arkema, state that EPA should provide recoupment
and that the agency must do so in order to comply with the Court's
decision in Arkema. Solvay states that EPA deprived it of its rightful
allowances by failing to recognize its permanent inter-pollutant trades
in the 2009 Final Rule and that recoupment is necessary to remedy that
error. Arkema asserts that its losses were significant because of its
inability to compete effectively in the after-market, stockpile
material for sale in later years, and sell other refrigerants to one-
stop shoppers.
    The primary rationale the commenters present in favor of providing
recoupment is that when an agency `` * * * commits legal error, the
proper remedy is one that puts the parties in the position they would
have been in had errors not been made,'' (AT&T Corp. v. FCC, 448 F.3d
426, 433 (D.C. Cir. 2006) (quoting Exxon Co. v. FERC, 182 F.3d 30, 48
(D.C. Cir. 1999)). The Court has further held that the proper remedy to
an error is ``to put the victim of the agency `error in the economic
position it would have occupied but for the error,''' (Ethyl Corp. v.
Browner, 67 F.3d 941, 945 (D.C. Cir. 1995) (quoting Delta Data Sys.
Corp. v. Webster, 744 F.2d 197, 206-07 (D.C. Cir. 1984)).
    Arkema contends that providing recoupment for losses would not
require improper retroactive action. It states that because there is a
strong equitable presumption in favor of retroactivity that would make
the injured party whole, EPA can make a correction that goes back to
the time the agency error occurred (Exxon Co. v. FERC, 182 F.3d 30, 48
(D.C. Cir. 1999)). In addition, the commenter argues that in this
circumstance EPA may go beyond its otherwise applicable statutory
authority. The commenter states that each agency has ``general
discretionary authority to correct its legal errors,'' which extends to
imposing retroactive changes, even when the statute does not expressly
and affirmatively authorize the agency to do so in the first instance
(Natural Gas Clearinghouse v. FERC, 965 F.2d 1066, 1073 (D.C. Cir.
1992)).
    As expressed in the proposed rule, EPA's preferred approach to the
2010 allocation was not to provide recoupment. However, EPA reviewed
comments and considered the policy and legal aspects of providing or
not providing recoupment. In particular, EPA considered the following
questions: (1) Does EPA have the obligation to address 2010 allowances
in light of the Court's decision in Arkema, and (2) does EPA have the
ability to provide some form of compensation that would remedy the
retroactive aspects of the 2009 Final Rule with respect to 2010? EPA
believes that the answer to both questions is ``yes.''
    First, EPA believes it has an obligation to address 2010 allowances
in light of the Court's decision in Arkema, to the extent feasible
given the design and structure of this program. The Court stated that
the 2009 Final Rule was, in part, ``impermissibly retroactive'' because
``it attempted to undo the Petitioners' inter-pollutant baseline
transfers'' based on what the Court saw as a ``new interpretation of
section 607'' of the Clean Air Act. The Court vacated the rule
``insofar as it operates retroactively'' and remanded the case ``for
prompt resolution,'' (Arkema, 618 F.3d. at 25). EPA believes that on
remand, it must put allowance holders in the position they would have
occupied had the agency reflected the Petitioners' inter-pollutant
baseline transfers in the 2009 Final Rule (AT&T v. FCC, 448 F.3d 426
(D.C. Cir. 2006); Exxon Co. v. FERC, 182 F.3d 30 (D.C. Cir. 1999)). As
noted in the proposal, it is appropriate for EPA to consider the 2010
allocation on remand whether or not the Court's decision had the effect
of vacating the 2010 allowances. The Court clearly held that the
baselines used in the 2009 Final Rule were invalid, and the 2010
allocation relied on those baselines.
    Second, EPA believes it is feasible to provide compensation for
lost 2010 allowances in the form of recoupment allowances, even though
the 2010 period has ended and all 2010 allowances have expired. As
explained in the proposed rule, EPA allocates HCFC production and
consumption allowances for specific calendar years: They are valid for
that year only. Such allowances cannot be banked or borrowed.
Therefore, EPA cannot provide meaningful compensation by issuing
additional 2010 allowances since they would be void upon issuance. In
the narrow circumstance of responding to the Court's decision, however,
EPA finds it appropriate to issue a corresponding number of allowances
in later years to make up for the 2010 allowances that companies would
have received if EPA had reflected the Petitioners' inter-pollutant
baseline transfers in the 2009 Final Rule. These recoupment allowances
are designed to compensate for lost opportunities to produce or import
HCFCs during 2010 for sale in either 2010 or a later year.
    In responding to concerns that this is effectively allowing for
banking or a transfer of allowances from 2010 to a later year, EPA
disagrees. While EPA does not allow banking of allowances beyond the
control period in which they are issued, nothing in the regulations
bans companies from producing or importing HCFCs with allowances and
then storing the material over time. Companies receiving recoupment
were deprived of their ability to import and/or produce HCFCs in 2010
at a level consistent with the Court's decision in Arkema. Had they
received the requisite level of allowances in 2010, they could have
expended them during 2010 to produce or import HCFCs and banked those
HCFCs until at least the years covered by this rulemaking. EPA also
disagrees with one commenter's characterization of recoupment as an
effective transfer of 2010 allowances to later years. Contrary to the
commenter's assertion, EPA did not adopt this characterization in the
proposal, but instead simply pointed out that the regulations do not
allow banking or borrowing of allowances. The commenter quotes section
607(a), which states that EPA regulations must ensure

that transfers ``will result 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.'' The commenter
asserts that if recoupment is provided, the aggregate allowance total
will be higher than it would have been if no recoupment were provided.
However, EPA disagrees that section 607(a), which is titled
``Transfers,'' has any application to this situation. Section 607(a)
refers specifically to ``transactions under the authority of this
section.'' An EPA rulemaking providing allowances is not such a
transaction. The transactions in question are the ``transfers'' and
``trades'' within or between companies explicitly discussed in section
607. EPA has implemented section 607(a) by requiring an offset for all
intra-company and inter-company transfers. See, e.g., 40 CFR
82.23(a)(i)(G).
    Additionally, commenters assert that providing recoupment
allowances would mean taking allowances away from others or distorting
market share. One commenter said that providing recoupment is in
violation of the Arkema decision, asserting that a company's
allowances, or its share of allowances, are a vested right. EPA
disagrees with this comment on both factual and legal grounds. First,
as a result of the Arkema Court's partial vacatur of the 2009 Final
Rule, there are currently no production or consumption allowances for
HCFC-22 in 2012-2014. This final rule is filling a gap, rather than
reshuffling existing allowances or existing market share. Second, even
in the context of today's allocation, EPA is not allocating fewer
allowances to one company for the purpose of allocating more to a
different company. EPA is allocating a fixed percentage of baseline to
each baseline holder at a level that in the aggregate is expected to
meet servicing demand, taking into account the amount of such demand
that can be met through other sources. EPA is then allocating
recoupment allowances to certain companies on top of that fixed
percentage allocation. Regarding market share, the allocation of
recoupment allowances is limited to two years; thus, as a practical
matter, it is unlikely to cause a permanent shift in market share. In
addition, market share is not a simple reflection of EPA's allocation
of allowances: For example, some companies buy or sell allowances and
thus increase or decrease the volume of their business in a particular
HCFC or HCFCs generally.
    Furthermore, EPA takes issue with the commenter's characterization
of the Arkema decision. In Arkema, the Court held that the petitioners
had a vested right in transferred baselines where EPA had taken
affirmative steps to approve the transfers by issuing non-objection
notices. The commenter attempts to broaden the decision to state that
allowance holders have vested rights in any and all allowances issued
under the stratospheric ozone program, and in addition, to a specific
market share or value attached to those allowances. EPA disagrees with
this broad reading and believes the Court's ruling is closely tied to
its factual findings concerning the 2008 transfers. This issue is
discussed further at section IV.A.1.
    Two commenters state that there was a significant oversupply of
HCFC allowances in 2010, that the petitioners in Arkema were not harmed
by the 2010 allocation in the 2009 Final Rule, and that they would
receive a windfall if EPA were to provide recoupment allowances.
However, the fact that not all HCFC allowances were used in 2010 does
not mean that particular companies were not harmed. Companies'
individual situations and business plans may differ. Also, although the
commenter cites the Court's denial of the motions to stay the 2009
Final Rule as evidence that petitioners were not harmed in 2010, harm
to the moving party is only one of the criteria considered by a court
in reviewing a stay motion. Thus, it is erroneous to assume that the
Court's denial equates to a ruling that petitioners suffered no harm.
    Several commenters stated that providing recoupment allowances
would harm human health or the environment; however, this action as a
whole protects human health and the environment by allocating
significantly fewer allowances in 2012-2014 than the agency allocated
in the 2009 Final Rule. Viewed in relation to that rule, EPA is
reducing the total number of HCFC-22 consumption allowances (after
providing for recoupment) by more than 31,100 MT over those three
years. As a result, providing recoupment does not increase the allowed
amount of HCFC-22 production and importation for U.S. use relative to
the 2009 Final Rule. Even with recoupment, total U.S. consumption will
be at least 55 percent below the Montreal Protocol consumption cap.
This overall decrease in consumption also increases the incentives for
recovery and reclamation. In addition, as noted in the proposal, the
amount of recoupment being granted (329 ODP-weighted MT of allowed HCFC
consumption and 280 ODP-weighted MT of allowed HCFC production) is
smaller than the number of allowances that were not used by allowance
holders in 2010 (approximately 425 ODP-weighted MT of HCFC consumption
allowances and approximately 930 ODP-weighted MT of HCFC production
allowances). EPA's response to additional comments on whether to
provide recoupment can be found in the Response to Comments.
    The agency presented four possible options with regard to
recoupment for 2010: (1) Providing recoupment allowances in 2013 in
addition to (i.e., on top of) the aggregate level of production and
consumption; (2) allocating recoupment allowances over two years (2013-
2014) in addition to (i.e., on top of) the aggregate level of
production and consumption; (3) allocating recoupment allowances from
the aggregate level of production and consumption over two years (2013-
2014); and (4) not issuing recoupment allowances. Five comments
specifically support one or more of these options. One comment supports
option 1, two comments support option 3, and two comments support
option 4. Two additional comments do not directly support an option,
but raise concerns with options 1 and 2.
    EPA stated in the proposed rule that if it decided to issue
recoupment, it would prefer option 1. However, after reviewing comment
and considering the options further, the agency believes option 2 is
the best approach for ensuring a smoother path towards 2015, when U.S.
consumption and production of all HCFCs must be at or below 10% of
baseline under the Montreal Protocol. In addition, it does not reduce
the number of allowances available to companies not receiving
recoupment. Also, in light of EPA's decision to reduce the overall
HCFC-22 allocation significantly in relation to the 2009 Final Rule,
EPA can adopt option 2 while still issuing fewer consumption allowances
in 2013 and 2014 than it did under the 2009 Final Rule.
    Option 1 could flood the market in 2013, providing significantly
more allowances in that one year than in either 2012 or 2014, creating
an even more significant drop-off in the number of allowances between
2013 and 2014. EPA also has serious concerns about option 3. Commenters
in support of option 3 state that companies were ``on notice'' that
2010 allowances were in dispute before the Court, so EPA should reduce
allowances for companies not receiving recoupment to make Arkema and
Solvay whole. However, the court rejected petitioners' stay motion and
stayed its own mandate, with the result that companies were operating
under the 2009 Final Rule for all of 2010. Thus, companies that
produced or

imported HCFCs during 2010 using consumption and production allowances
received under the 2009 Final Rule were acting in accordance with the
regulations in effect at that time.
    Commenters in support of option 3 also claim that since refrigerant
customers prefer to purchase all refrigerants from one supplier, and
they could not provide sufficient quantities of HCFC-22 to some of
their customers, the 2009 Final Rule resulted in a loss of sales of
other refrigerants during 2010. EPA strongly believes that if a company
loses its ability to sell to one-stop shoppers when it loses
allowances, the inverse should also be true: Providing additional
allowances in 2013 and 2014 equal to the amounts lost in 2010 should
provide approximately the same ability to compete for sales to one-stop
shoppers as was lost in 2010.
    Only two comments addressed whether EPA should provide recoupment
for both HCFC-22 and HCFC-142b, or just HCFC-22. One commenter
supported providing recoupment for both substances, as it ensures
traceability and consistency. The other commenter believes EPA should
provide recoupment for HCFC-142b based on a total allowance pool of 118
metric tons (the amount allocated for 2010 in the 2009 Final Rule),
instead of using a total allowance pool of 463 MT (the amount that
results from the revised baselines, which are the same as the baselines
proposed in 2008). According to the commenter, this means that the
agency need only provide 69.8 metric tons of HCFC-142b production
allowances in recoupment.
    EPA does not agree with the commenter that it should scale HCFC-
142b recoupment production allowances to match the exact amount
allocated in 2010. The agency is providing recoupment production
allowances based on what it proposed in 2008 (73 FR 78680). In 2008,
the percent of baseline was the same for both consumption and
production. EPA is therefore using the baseline amount and percentage
proposed in 2008 to calculate recoupment for HCFC-142b production. The
HCFC-142b production baseline is much larger than the consumption
baseline (when accounting for the 2008 transfers), so the resulting
2010 allocation would have been much larger, while the consumption
allocation would have been approximately the same under either baseline
scenario. Issuing recoupment based on the 2008 proposal results in
approximately 397 MT of additional HCFC-142b production allowances.
Since manufacturing HCFC-142b in the U.S. for domestic use requires
production and consumption allowances, the agency anticipates that the
only potential increase in HCFC-142b production as a result of
recoupment would be for export.
    One commenter encouraged EPA to account for a company's unused
allowances from 2010 if EPA is providing that company with recoupment
allowances. To do this, EPA would need to divulge information about how
each company uses its allowances: such company-specific information has
never been disclosed in the HCFC phaseout program, and EPA would need
to consider claims of confidentiality before taking such a step. Also,
EPA does not believe it is necessary to account for a company's unused
allowances because the agency is providing allowances to make up for
the lost opportunity to produce or import HCFCs, not the specific usage
or lack thereof. As a result, EPA is not adjusting for a company's
unused allowances in 2010.
    To effectuate option 2, the agency is issuing half of the
recoupment allowances for each company in 2013 and the other half in
2014 and is amending the regulatory text at 40 CFR 82.16(a)
accordingly. Recoupment allowances allocated for 2013 and 2014 will
function in the same way as other calendar year allowances: They can be
used only in the calendar year for which they are issued and will
expire at the end of that calendar year. The agency believes the
issuance of these recoupment allowances discharges its obligation to
consider the 2010 control period in responding to the remand in Arkema.
Table 1 lists the companies receiving recoupment, the substance, and
the total number of recoupment allowances:

                                      Table 1--Final Recoupment Allowances
----------------------------------------------------------------------------------------------------------------
                                                                                Consumption     Production
                    Company                                 Chemical                   (kg)            (kg)
----------------------------------------------------------------------------------------------------------------
Arkema........................................  HCFC-22.........................       4,749,692       4,611,848
DuPont........................................  HCFC-142b.......................           2,339               0
Honeywell.....................................  HCFC-142b.......................          58,291         107,097
Solvay Fluorides..............................  HCFC-22.........................       1,157,895               0
Solvay Solexis................................  HCFC-142b.......................               0         289,800
----------------------------------------------------------------------------------------------------------------

    A full summary and response to all other comments are included in
the Response to Comments.
7. Does EPA have to provide the same percentage of baseline for
production allowances as it does for consumption allowances?
    In considering how to allocate HCFC-22 production allowances for
2012-2014, the agency proposed to decouple production and consumption
baseline percentages. Historically, there has only been one table at 40
CFR 82.16, which lists the percentage of baseline (both production and
consumption) that every baseline allowance holder is issued each year.
EPA proposed to create two tables, and to allocate a different
percentage of baseline for production than for consumption. Decoupling
would allow the agency to reduce consumption allowances in relation to
the 2009 Final Rule without having to make the same reductions to
production allowances. EPA stated its interpretation that section
605(c) of the CAA does not preclude EPA from decoupling baseline
percentages and requested comment on this issue. EPA received two
comments specifically addressing whether the statute precludes
decoupling.
    Section 605(c) states that EPA must ``promulgate regulations
phasing out the production * * * of class II substances in accordance
with [section 605],'' subject to any acceleration under section 606. It
further states that EPA must ``promulgate regulations to insure that
the consumption of class II substances in the United States is phased
out and terminated in accordance with the same schedule (emphasis
added) * * * as is applicable to the phase-out and termination of
production of class II substances under [Title VI].'' Because the
phrase ``same schedule'' is not clear on its face, the agency
considered three possible interpretations of the phrase ``same
schedule,'' as explained in the proposal

and in the 2011 Interim Final Rule. The agency stated that interpreting
``same schedule'' as referring to the phaseout schedule that appears in
section 605, as accelerated under section 606, would be most consistent
with the statutory language and purpose. Examples of milestones in the
phaseout schedule are the 2010 and 2015 phasedown steps. The agency
clarified that it was not proposing to allow production in an amount
that would be inconsistent with those phasedown steps, but simply
proposing to allow a greater amount of production than consumption,
with both amounts below the Montreal Protocol and CAA caps. The one
company that provided comment on this matter agreed with the agency,
and said that it does not believe that production and consumption
allowances are somehow tied to the same regulatory schedule (requiring
the same number of allowances or percentages of baseline for production
and consumption). Rather, the commenter states that production and
consumption are tied to the same statutory and treaty schedule, and
that the agency should provide for increased production.
    The other comment on decoupling was from a group of environmental
organizations, who supported a decrease in production allowances
relative to the 2009 Final Rule. They believe that the language in
section 605(c) equates the quantity of consumption and production
allowances and cannot be interpreted to allow more production than
consumption in a given year.
    EPA disagrees that the language in 605(c) equates the quantity of
consumption and production allowances. EPA has never allocated the same
quantity of production and consumption allowances, only the same
percentage of baseline. The agency would have to provide different
percentages of baseline for calendar-year consumption and production
allowances to keep the allowance quantities the same since the number
of aggregate baseline production allowances is not equal to the number
of aggregate baseline consumption allowances. Additionally, EPA does
not believe there is a single ``natural reading'' of section 605(c), as
the comment suggests. Rather, the language is ambiguous. As explained
in the proposed rule, there are at least three possible
interpretations. EPA's interpretation that the word ``schedule'' in
section 605(c) refers to the schedule that appears in section 605, as
accelerated under section 606, is reasonable. In section 606, Congress
used the word ``schedule'' to refer to a more-stringent schedule than
the schedule set forth in section 605: ``The Administrator shall
promulgate regulations * * * which establish a schedule for phasing out
the production and consumption of * * * class II substances * * * that
is more stringent than set forth in section 7671d [section 605].'' The
original section 605 schedule limited production and consumption to
baseline quantities in 2015 and required a complete phaseout (with some
exceptions) in 2030. It is logical that Congress would have intended
the more-stringent schedule established under section 606 to have a
similar structure: That is, to cap or eliminate production and
consumption on certain milestone dates. EPA in fact established just
this type of schedule at 40 CFR 82. 16(b)-(g). EPA has discretion in
managing the allowance system to achieve this schedule. Therefore, the
agency believes it can issue calendar-year consumption and production
allowances using different percentages of baseline, as long as it
complies with the overall schedule set by Congress, as accelerated
under section 606.
    Discussion of EPA's policy decision to decouple baseline
percentages is found in section IV.C.2.

C. How many HCFC-22 and HCFC-142b allowances is EPA allocating in 2012-
2014?

    The agency is revising the tables in 40 CFR 82 that together
specify the production and consumption allowances available during
specified control periods. The tables at sections 82.17 and 82.19
apportion baseline production allowances and baseline consumption
allowances, respectively, to individual companies for specific HCFCs
during a particular regulatory period. Complementing these tables, the
table at section 82.16 lists the percentage of baseline allocated to
allowance holders for specific control periods. In this rulemaking, EPA
is (1) retaining this framework of complementary tables, (2)
establishing baselines for 2012-2014 identical to those established in
the 2011 Interim Final Rule (76 FR 47451), (3) granting allowances
based on percentages of baselines in a manner that achieves the 2010
phaseout step and lays the groundwork for the next phaseout step in
2015, and (4) providing recoupment allowances.
    In the 2009 Final Rule, 34.1 percent, 30.1 percent, and 26.1
percent of each company's HCFC-22 baselines were allocated for 2012,
2013, and 2014, respectively. The allocation for HCFC-142b was 0.47
percent of baseline. As discussed in section III.D. of this final rule,
EPA interpreted the Court's vacatur as applying to the HCFC-22 and
HCFC-142b allocations for each of these years as well as the baselines.
EPA is putting in place new allocations through this rulemaking, and
proposed various allocation amounts for consumption and production
allowances during the remainder of this regulatory period.
1. How many HCFC-22 consumption allowances is EPA allocating in 2012-
2014?
    The 2009 Final Rule allocated 40,700 MT of HCFC-22 consumption
allowances in 2012, which was 76.5 percent of estimated servicing need,
and 59 percent of the total 2012 HCFC consumption cap. EPA arrived at
this amount by estimating the amount of servicing need, taking recovery
and reclamation into consideration. EPA then finalized an allocation
that was 12,500 MT below estimated need. Using a similar approach, EPA
proposed to allocate 11 to 38 percent less in 2012 relative to the 2009
Final Rule (see the Adjustment Memo in the docket for the rationale
behind the proposed reduction). In the 2009 Final Rule, 2013 and 2014
consumption allocations were 35,900 MT and 31,100 MT, respectively. The
agency proposed to allocate 13 to 42 percent less in 2013 and 15 to 47
percent less in 2014.
    As discussed in sections IV.B.1. and IV.B.2., comments directly
addressing reclamation, recovery, and reuse, and the availability of
existing inventory from past years generally support EPA's estimates of
the inventory and recoverable material that are available each year to
meet HCFC-22 servicing need. The agency also received 54 comments (some
signed by multiple organizations) that address the overall consumption
allocation in more general terms. Forty-two comments support the
decrease in allowances relative to the 2009 Final Rule and 13 comments
oppose the decrease. In addition to these comments, EPA received 47
additional comments that oppose a decrease in HCFC-22 production, but
use the word ``production'' in a general sense. Upon reading, EPA
believes the intent was to oppose a decrease in consumption, or
``production for U.S. use.''
    Generally, comments in support of the reduction state that a lower
allocation will increase the value of HCFC-22, resulting in more
reclamation and increased incentives to recover HCFC-22 from existing
systems. A lower allocation encourages an orderly phaseout and still
provides enough allowances to meet servicing needs. Supporters of a
lower allocation state

that a reduction is justified because of lower-than-expected need for
HCFC-22 and the availability of existing inventory from past years.
Three environmental organizations state that a reduction is (1)
necessary to protect human health and the environment, and (2)
practicable in terms of technology, safety, and availability of
alternatives.
    Comments supporting a higher HCFC-22 consumption allocation cite
concerns about higher price, limited access to refrigerant and
unexpected costs, all of which could lead to premature system
retirements. Others point to U.S. compliance with the Montreal Protocol
under the 2009 Final Rule, and are against any reductions to those
allocation levels.
    EPA responds to individual comments in the Response to Comments,
but generally agrees that the amount of HCFC-22 provided in the 2009
Final Rule was too high to foster an orderly transition. In 2015, the
U.S. must reduce its production and consumption of all HCFCs to below
10 percent of its historic HCFC baseline under the Montreal Protocol.
By 2020, HCFC production and consumption must be below 0.5 percent of
the historic baseline and under EPA regulations HCFC-22 may not be
produced or imported at all. Rather than create a drastic change in
2015, the agency's goal is to finalize an allocation for 2012-2014 that
fosters the market transition necessary to prevent future disruptions.
    Considering that objective, EPA is providing allowances in this
final rule based on its assessment of market conditions. For 2012, the
timing of this rule means that EPA is looking back at actual events
during 2012 rather than projecting future needs. The agency is issuing
2012 HCFC-22 consumption allowances at the lowest proposed amount,
because that amount is consistent with the industry's actual operation
in 2012. The appropriateness of this level is supported by the fact
that EPA has not received any reports of HCFC shortages during the 2012
air-conditioning season. At the same time, this level is commensurate
with the amount of consumption authorized in the January 20, 2012, No
Action Assurance provided by Cynthia Giles, Assistant Administrator for
Enforcement and Compliance Assurance. EPA selected this amount as
reasonable for purposes of the No Action Assurance, recognizing that it
was within the proposed range. Issuing allowances at the No Action
Assurance level enables companies to account for consumption that
occurred in 2012 in accordance with the No Action Assurance. As stated
in the No Action Assurance, any HCFCs produced and imported in 2012
pursuant to the No Action Assurance count towards a company's
allocation and require the expenditure of 2012 allowances.
    In 2013-2014, EPA is making reductions for existing inventory and
for reclamation and reuse, given the support of comments on the
agency's analysis and additional data provided during the comment
period. EPA is not reducing allowances to account for recovery and
reuse in the large retail food sector because there were not sufficient
comments or data, and the agency already accounts for supermarket
recovery (but not in-house reuse) in its Vintaging Model. With these
adjustments, the amount of allowed consumption in 2012-2014 is 29
percent below amounts in the 2009 Final Rule for the same period. The
agency believes that the amounts in this rulemaking will increase
market incentives to properly manage and recover HCFC-22 while still
allowing for servicing of existing HCFC-22 systems.
    EPA is finalizing the following HCFC-22 consumption allocations for
2012-2014:

2012: 17.7 percent of baseline, totaling approximately 25,100 MT
2013: 18.0 percent of baseline, plus 2,954 MT of recoupment, totaling
approximately 28,500 MT
2014: 14.2 percent of baseline, plus 2,954 MT of recoupment, totaling
approximately 23,100 MT

    With this amount, EPA's total HCFC consumption allocation in 2012-
2014, including recoupment, is at least 55 percent below the Montreal
Protocol cap each year, and is below servicing need as estimated in the
Servicing Tail Report.
2. How many HCFC-22 production allowances is EPA allocating in 2012-
2014?
    In the proposed rule, EPA described three options for providing
production allowances. In considering each of these options, EPA
recognized that taking the 2008 transfers into account in accordance
with the Arkema decision affects not only the HCFC-22 consumption
baseline, but the HCFC-22 production baseline as well. Two options
would have decoupled baseline percentage allocated for production and
consumption. These options provided (1) approximately the same amount
of production allowances as the 2009 Final Rule or (2) the same
percentage of baseline as the 2009 Final Rule. The third option would
have kept production and consumption allowances at the same percentage
of baseline, so the resulting production allocation would be dependent
on the final consumption baseline percentage. Option 3 is reflected in
the January 2012 and January 2013,\8\ No Action Assurances sent to
allowance holders by the Assistant Administrator for Enforcement and
Compliance Assurance. EPA took comment on providing the following
percentages of baseline production in 40 CFR 82.16:
---------------------------------------------------------------------------

    \8\ The January 2013 No Action Assurance also preserved all
recoupment options.

Option 1: 28.7% in 2012, 25.3% in 2013, 21.9% in 2014
Option 2: 34.1% in 2012, 30.1% in 2013, 26.1% in 2014
Option 3: 17.7% to 25.5% in 2012, 14.7% to 22.1% in 2013, 11.6% to
18.5% in 2014
    Under option 1, the aggregate allocation in 2012 would be about two
percent lower than in the 2009 Final Rule (37,050 MT in the proposed
rule vs. 37,721 MT in the 2009 Final Rule). The intent would be to keep
the aggregate number of allowances at about the same level as the
amount finalized in the 2009 Final Rule. The memo to the docket for
this rulemaking titled ``Effects of HCFC-22 and HCFC-142b Baseline
Changes: 2009 Final Rule vs. 2011 Proposed Rule,'' (Baseline Memo)
explains these slight differences. While this option would keep the
aggregate number of allowances at about the same level, U.S. production
could actually fall under this option, because under Arkema a greater
share of the allowances would go to a company that does not produce in
the U.S.\9\
---------------------------------------------------------------------------

    \9\ Data submitted to the Greenhouse Gas Reporting program on
byproducts of the HCFC-22 production process indicates that only
three of the four companies holding production allowances produced
HCFC-22 in 2010 and 2011 (see http://ghgdata.epa.gov/ghgp/main.do
and the memo in the docket titled ``2010-2011 Greenhouse Gas
Reporting Program Data on HCFC-22 Production Byproducts''). While
this company can transfer its allowances to another producer, the
fact that they do not produce in the U.S. makes it unlikely that all
calendar-year production allowances will be used.
---------------------------------------------------------------------------

    Under option 2, the production baseline percentage would be the
same as in the 2009 Final Rule. The petitioners in Arkema would receive
the benefit of their 2008 baseline transfers; other companies with
production baselines would get the same number of production allowances
as they received in the 2009 Final Rule, since their baselines did not
change. While the percentage is the same as the 2009 Final Rule, since
the aggregate production baseline is higher, the number of production
allowances increases by

6,299 MT in 2012, 5,560 MT in 2013, and 4,821 MT in 2014. However, as
noted above, this would not necessarily translate to an increase in
production.
    In addition to asking for comment on the two proposed decoupling
options, the agency also asked for comment on several related matters.
EPA asked for comment on whether, relative to the 2009 Final Rule,
allocating the same percentage of baseline for production allowances,
as proposed under option 2, would result in (1) an increase in U.S.
consumption, (2) an increase in U.S. production, either for domestic
use or for export, and/or (3) an increase in worldwide production and/
or consumption of HCFCs. EPA also invited comment on the implications
of any such increase for the U.S. economy and the global environment,
particularly as it relates to the smooth U.S. phaseout of HCFC-22.
    EPA received nine comments on EPA's proposed production allocation.
Six comments support a higher level of production allowances than
consumption allowances (options 1 and 2) and three comments oppose a
higher level of production allowances. EPA provides a complete summary
of and response to all comments in the Response to Comments, but
highlights and responds to most of the comments in this preamble.
    Very few comments voiced a preference for a specific production
option. However, two commenters specifically support option 2, which
provides for the same percentage of baseline as provided in the 2009
Final Rule. Five commenters are in support of options 1 and 2 so that