[Federal Register: December 15, 2009 (Volume 74, Number 239)]
[Rules and Regulations]
[Page 66411-66448]
[DOCID:fr15de09-17]

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Part II

Environmental Protection Agency

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40 CFR Part 82

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

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ENVIRONMENTAL PROTECTION AGENCY

40 CFR Part 82

[EPA-HQ-OAR-2008-0496; FRL-9091-7]
RIN 2060-A076

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). This
action allocates production and consumption allowances for HCFC-22 and
HCFC-142b, as well as other HCFCs for which allowances were not
allocated previously, for the control periods 2010-2014. This action
also establishes baselines for HCFCs for which EPA had not established
baselines previously. The HCFC allowance system is part of EPA's Clean
Air Act program to phase out ozone-depleting substances to protect the
stratospheric ozone layer. Protection of the stratospheric ozone layer
helps reduce rates of skin cancer and cataracts, as well as other
health and ecological effects. The U.S. is obligated under the Montreal
Protocol on Substances that Deplete the Ozone Layer (Montreal Protocol)
to limit HCFC consumption and production to a specific level and, using
stepwise reductions, to decrease the specific level culminating in a
complete HCFC phaseout in 2030. The next major milestone, to occur on
January 1, 2010, is a 75 percent reduction from the aggregate U.S. HCFC
baseline for production and consumption. The allowances allocated in
this action ensure compliance with the international stepwise
reduction, consistent with the 1990 Clean Air Act Amendments. In
addition, this action amends the regulatory provisions concerning
allowances for HCFC production for developing countries' basic domestic
needs to be consistent with the September 2007 adjustments to the
Montreal Protocol. Also, this action provides the Agency's
interpretation of a self-effectuating ban on introduction into
interstate commerce and use of HCFCs contained in section 605(a) of the
Clean Air Act and amends existing regulatory provisions to facilitate
implementation of the statutory requirements.

DATES: This rule is effective January 1, 2010.

ADDRESSES: EPA has established a docket for this action under Docket ID
No. EPA-HQ-OAR-2008-0496. 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., confidential business
information (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, 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>.

FOR FURTHER INFORMATION CONTACT: Jeremy Arling by telephone at (202)
343-9055, or by e-mail at<EMAIL_ADDRESS>or by mail at U.S.
Environmental Protection Agency, Stratospheric Protection Division,
Stratospheric Program Implementation Branch (6205J), 1200 Pennsylvania
Avenue, NW., Washington, DC 20460. For technical information, contact
Staci Gatica at<PHONE_NUMBER>, or by e-mail at<EMAIL_ADDRESS>or
by mail at U.S. Environmental Protection Agency, Stratospheric
Protection Division, Stratospheric Program Implementation Branch
(6205J), 1200 Pennsylvania Avenue, NW., Washington, DC 20460. You may
also visit the Ozone Depletion 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: Under the Montreal Protocol on Substances
that Deplete the Ozone Layer (Montreal Protocol), as amended, the U.S.
and other industrialized countries that are Parties to the Protocol
have agreed to limit production and consumption of
hydrochlorofluorocarbons (HCFCs), and to phase out production and
consumption in a stepwise fashion over time, culminating in a general
phaseout by 2020 while permitting a small amount of HCFC production and
consumption to continue solely for servicing existing appliances until
2030. Title VI of the Clean Air Act Amendments of 1990 (CAAA of 1990)
also mandates restrictions on HCFCs, culminating in a complete
production and consumption phaseout in 2030. For purposes of both the
Montreal Protocol and the Clean Air Act, ``consumption'' is defined as
production plus imports minus exports. Sections 605 and 606 of the
Clean Air Act authorize EPA to promulgate regulations to manage the
consumption and production of HCFCs until the terminal phaseout. In
1993, EPA established a chemical-by-chemical, ``worst-first,'' approach
to implement the Montreal Protocol's graduated phaseout in overall HCFC
levels (58 FR 65018). Key concepts in the ``worst-first'' approach
include ``distinguishing among HCFCs based on their ODP [ozone
depletion potential] and phasing out use in new equipment prior to use
for servicing existing equipment'' (58 FR 65026).\1\ The consumption
cap became effective in 1996, and HCFC consumption in the U.S. remained
about 15 percent below the cap for the first two years. In 1998 and
1999, consumption rose to levels that approached the cap. On January
21, 2003, EPA established an allowance system for HCFCs (68 FR 2820),
noting at that time that it would again pursue a notice-and-comment
rulemaking to implement a 2010 stepwise reduction. EPA promulgated
minor amendments to these regulations on June 17, 2004 (69 FR 34024),
and July 20, 2006 (71 FR 41163).
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    \1\ The ozone depletion potential (ODP) is a number that refers
to the amount of ozone depletion caused by a substance. It is the
ratio of the impact on ozone of a chemical compared to the impact of
a similar mass of CFC-11. Thus, the ODP of CFC-11 is defined to be
1.0. Other CFCs and HCFCs have ODPs ranging from 0.01 to 1.0.
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    This action implements the next step in the chemical-by-chemical
phaseout the United States uses to meet its international obligations.
Specifically, EPA is granting specified percentages of the consumption
and production baselines for HCFC-141b, HCFC-22, and HCFC-142b for the
control periods 2010-2014. This action also establishes company-by-
company consumption and production baselines for other HCFCs and grants
specified percentages of those baselines for the control periods 2010-
2014. This action also amends the provisions for HCFC production
allowances to meet the basic domestic needs of developing countries. In
addition, EPA is providing its interpretation of a self-effectuating
ban on introduction into interstate commerce and use of HCFCs, which is
contained in section 605(a) of the Clean Air Act.

    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 on January 1, 2010. APA section 553(d) provides
exceptions for any action that grants or recognizes an exemption or
relieves a restriction or as otherwise provided by the agency for good
cause found and published within the rule. This final rule relieves a
restriction by authorizing the production and import of certain HCFCs
in 2010 that would otherwise be prohibited under the existing
regulations.

Abbreviations and Acronyms Used in This Document

AHRI--Air-Conditioning, Heating, and Refrigeration Institute
BDN--Basic Domestic Need
CAA--Clean Air Act
CAAA--Clean Air Act Amendments of 1990
CFC--Chlorofluorocarbon
EPA--Environmental Protection Agency
FDA--Food and Drug Administration
HCFC--Hydrochlorofluorocarbon
HFC--Hydrofluorocarbon
Montreal Protocol--Montreal Protocol on Substances that Deplete the
Ozone Layer
MOP--Meeting of the Parties
MT--Metric Ton
NPRM--Notice of Proposed Rulemaking
ODP--Ozone Depletion Potential
ODS--Ozone-Depleting Substance
OEM--Original Equipment Manufacturer
Party--States and regional economic integration organizations that
have consented to be bound by the Montreal Protocol on Substances
that Deplete the Ozone Layer
SNAP--Significant New Alternatives Policy
TXV--Thermostatic Expansion Valve
UNEP--United Nations Environment Programme

Table of Contents

I. Regulated Entities
II. 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?
III. Summary of this Final Action
IV. Allocation of Allowances for the 2010-2014 Control Periods
    A. Baselines for HCFC-22 and HCFC-142b Allowances
    1. Adjusting the Baseline for Inter-company and Inter-pollutant
Transfers
    2. Meeting the Needs of Certified Reclaimers
    B. Factors for Considering Allocation Amounts for HCFC-22 and
HCFC-142b
    1. The Importance of HCFC-22 Servicing Needs for Existing
Equipment
    2. Meeting Servicing Needs With Virgin and Reclaimed Material
    3. Annual Reduction in Allocated Amounts
    C. Allocations of HCFC-22 and HCFC-142b
    1. HCFC-22 Allowances for 2010-2014
    2. HCFC-142b Allowances for 2010-2014
    3. How the Aggregate for HCFC-22 and HCFC-142b Translates
Entity-by-Entity
    D. HCFC-123, HCFC-124, HCFC-225ca, and HCFC-225cb Allowances
    1. Baselines for HCFC-123, HCFC-124, HCFC-225ca, and HCFC-225cb
    2. Allocation Levels for HCFC-123, HCFC-124, HCFC-225ca, and
HCFC-225cb
    E. Other HCFCs
V. Article 5 Allowances
VI. Accelerated Use Restrictions Under Section 605
    A. Definition of ``Introduction Into Interstate Commerce''
    B. Interpretation of the Term ``Use''
    C. Interpretation of the Phrase ``Appliances Manufactured Prior
To''
    D. Exceptions to the Accelerated Use Restrictions
    1. Thermostatic Expansion Valves
    2. Medical Equipment
VII. Statutory and Executive Order Reviews
    A. Executive Order 12866: Regulatory Planning and Review
    B. Paperwork Reduction Act
    C. Regulatory Flexibility Act (RFA)
    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 That Significantly Affect
Energy Supply, Distribution, or Use
    I. National Technology Transfer Advancement Act
    J. Executive Order 12898: Federal Actions To Address
Environmental Justice in Minority Populations and Low-Income
Populations
    K. Congressional Review Act

I. Regulated Entities

This rule will affect the following categories:

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                  Category                     NAICS code       SIC code        Examples of regulated entities
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Industrial Gas Manufacturing...............          325120            2869  Fluorinated hydrocarbon gases
                                                                              manufacturers and reclaimers.
Other Chemical and Allied Products Merchant          424690            5169  Chemical gases and compressed gases
 Wholesalers.                                                                 merchant wholesalers.
Air-Conditioning and Warm Air Heating                333415            3585  Air-Conditioning Equipment and
 Equipment and Commercial and Industrial                                      Commercial and Industrial
 Refrigeration Equipment Manufacturing.                                       Refrigeration Equipment
                                                                              manufacturers.
Air-Conditioning Equipment and Supplies              423730            5075  Air-conditioning (condensing unit,
 Merchant Wholesalers.                                                        compressors) merchant wholesalers.
Electrical and Electronic Appliance,                 423620            5064  Air-conditioning (room units)
 Television, and Radio Set Merchant                                           merchant wholesalers.
 Wholesalers.
Plumbing, Heating, and Air-Conditioning              238220      1711, 7623  Central air-conditioning system and
 Contractors.                                                                 commercial refrigeration
                                                                              installation; HVAC contractors.
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This table 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 EPA is now aware
potentially could 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. Background

A. How Does the Montreal Protocol Phase Out HCFCs?

    The Montreal Protocol on Substances that Deplete the Ozone Layer is
the international agreement aimed at reducing and eventually
eliminating the production and consumption of

stratospheric ozone-depleting substances. 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 of 1990), which included Title VI on
Stratospheric Ozone Protection, codified as 42 U.S.C. Chapter 85,
Subchapter VI, to ensure that the United States could satisfy its
obligations under the Montreal Protocol. Title VI includes restrictions
on production, consumption, and use of ozone-depleting substances 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. Both the Montreal Protocol and the Clean Air Act 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-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 \2\''
(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 (Article
2) Parties, a schedule to which the United States adheres. The
consumption cap for each Article 2 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, effective January 1, 1996. This became the U.S.
consumption baseline for HCFCs.
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    \2\ 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 with graduated
reductions and the eventual phaseout of HCFC consumption (Copenhagen,
23-25 November, 1992, Decision IV/4). Prior to the 2007 adjustment, the
schedule called for a 35 percent reduction of the consumption cap in
2004, followed by a 65 percent reduction in 2010, a 90 percent
reduction in 2015, a 99.5 percent reduction in 2020 (restricting the
remaining 0.5 percent of baseline to the servicing of existing
refrigeration and air-conditioning equipment), with a total phaseout in
2030.
    The Copenhagen Amendment did not cap HCFC production. In 1999, the
Parties created a cap on production for Article 2 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
HCFC production cap for the U.S. was 15,537 ODP-weighted metric tons,
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.\3\
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    \3\ 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 become 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 United States and other industrialized countries are
obligated to reduce HCFC production and consumption 75 percent below
the established baseline by 2010, rather than 65 percent as was the
previous requirement. The other milestones remain the same: 90 percent
below the baseline by 2015, and 99.5 percent below the baseline by
2020--allowing, during 2020 to 2030, production and consumption at only
0.5 percent of baseline solely for servicing existing air-conditioning
and refrigeration equipment. The adjustment also resulted in a phaseout
schedule for HCFC production that parallels the consumption phaseout
schedule. All production and consumption for Article 2 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 2009-2010
production and consumption, respectively; (2) to freeze HCFC production
and consumption at those baselines in 2013; and (3) to add stepwise
reductions of 10 percent below baselines by 2015, 35 percent by 2020,
67.5 percent by 2025, and 97.5 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 is phased out by 2040.
    In addition, Decision XIX/6 adjusted Article 2F to allow
industrialized 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.\4\ Paragraph

14 of Decision XIX/6 notes that 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 industrialized and developing countries. The
term ``servicing tail'' refers to an amount of HCFCs used to service
existing equipment, such as certain types of air-conditioning and
refrigeration appliances.
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    \4\ Paragraphs 4-6 of adjusted Article 2F read as follows:
    4. Each Party shall ensure that for the twelve-month period
commencing on 1 January 2010, and in each twelve-month period
thereafter, its calculated level of consumption of the controlled
substances in Group I of Annex C does not exceed, annually, twenty-
five percent of the sum referred to in paragraph 1 of this Article.
Each Party producing one or more of these substances shall, for the
same periods, ensure that its calculated level of production of the
controlled substances in Group I of Annex C does not exceed,
annually, twenty-five percent of the calculated level referred to in
paragraph 2 of this Article. However, in order to satisfy the basic
domestic needs of the Parties operating under paragraph 1 of Article
5, its calculated level of production may exceed that limit by up to
ten percent of its calculated level of production of the controlled
substances in Group I of Annex C as referred to in paragraph 2.
    5. Each Party shall ensure that for the twelve-month period
commencing on 1 January 2015, and in each twelve-month period
thereafter, its calculated level of consumption of the controlled
substances in Group I of Annex C does not exceed, annually, ten
percent of the sum referred to in paragraph 1 of this Article. Each
Party producing one or more of these substances shall, for the same
periods, ensure that its calculated level of production of the
controlled substances in Group I of Annex C does not exceed,
annually, ten percent of the calculated level referred to in
paragraph 2 of this Article. However, in order to satisfy the basic
domestic needs of the Parties operating under paragraph 1 of Article
5, its calculated level of production may exceed that limit by up to
ten percent of its calculated level of production of the controlled
substances in Group I of Annex C as referred to in paragraph 2.
    6. Each Party shall ensure that for the twelve-month period
commencing on 1 January 2020, and in each twelve-month period
thereafter, its calculated level of consumption of the controlled
substances in Group I of Annex C does not exceed zero. Each Party
producing one or more of these substances shall, for the same
periods, ensure that its calculated level of production of the
controlled substances in Group I of Annex C does not exceed zero.
However:
    i. Each Party may exceed that limit on consumption by up to zero
point five percent of the sum referred to in paragraph 1 of this
Article in any such twelve-month period ending before 1 January
2030, provided that such consumption shall be restricted to the
servicing of refrigeration and air conditioning equipment existing
on 1 January 2020;
    ii. Each Party may exceed that limit on production by up to zero
point five percent of the average referred to in paragraph 2 of this
Article in any such twelve-month period ending before 1 January
2030, provided that such production shall be restricted to the
servicing of refrigeration and air conditioning equipment existing
on 1 January 2020.
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B. How Does the Clean Air Act Phase Out HCFCs?

    The United States 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 that 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 focusing on certain chemicals 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). EPA
explained that its action modified the schedule contained in paragraphs
(a) and (b) of section 605 (58 FR 65025). Paragraph (a) addresses use
and introduction into interstate commerce, while paragraph (b)
addresses production.
    On January 21, 2003 (68 FR 2820), EPA promulgated regulations 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 that rule
EPA established chemical-specific consumption and production baselines
for HCFC-141b, HCFC-22, and HCFC-142b. Section 601(2) states that EPA
may select ``a representative calendar year'' to serve as the baseline
for HCFCs. In the 2003 allocation rule, EPA concluded that because the
entities eligible for allowances had differing production and import
histories, no one 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 an exception allowing new
entrants provided that they began importing after the end of 1997 but
before April 5, 1999, the date the advanced notice of proposed
rulemaking (ANPRM) was published. EPA believed that such small
businesses might not have been aware of the impending rulemaking that
would affect their ability to continue in the HCFC market.
    The 2003 allocation rule apportioned production and consumption
baselines to each company in amounts equal to the amounts in 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 0 percent of that substance's baseline for
production and consumption in the table at Sec.  82.16. EPA did,
however, create a petition process to allow applicants to request very
small amounts of HCFC-141b beyond the phaseout. The rule also granted
100 percent of the baselines for production and consumption of HCFC-22
and HCFC-142b. 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 this rulemaking, EPA had not allocated any HCFC
allowances for year 2010 or beyond. The regulations at 40 CFR 82.15(a)
and (b) only permitted the production and import of HCFC-22 and HCFC-
142b for the years 2003-2009. Through this rulemaking, EPA is now
allocating calendar-year allowances for HCFC-142b and HCFC-22 to allow
production and import during the 2010-2014 control periods. Absent the
grant of calendar-year allowances, Sec.  82.15 would prohibit their
production and import after December 31, 2009. This final rule allows
for continued production and consumption, at specified amounts, of
HCFC-142b, HCFC-22, and other HCFCs not previously granted allocations,
for the 2010-2014 control periods.
    In the United States, an allowance is the unit of measure that
controls production and consumption of ozone-depleting substances. An
allowance represents the privilege granted to a company to produce or
import one kilogram (not ODP-weighted) of the specific substance. 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. EPA has
allocated two types of calendar-year allowances--production allowances
and consumption allowances--for HCFC-22 and HCFC-142b. ``Production
allowance'' and ``consumption allowance'' are defined at 40 CFR 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 obtain a refund of those consumption allowances upon submittal of
proper documentation to 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 trade allowances of one type of HCFC for
allowances of another type of HCFC, with transactions weighted
according to the ozone depletion potential (ODP) of the chemicals
involved. Pursuant to section 607 of the Clean Air Act, EPA applies an
offset to each HCFC trade 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).
    Because EPA has allocated the same amount of allowances every year
from 2004 to 2009--with minor changes reflecting permanent trades of
baseline allowances--and because EPA tracks the production and
consumption of all HCFCs (including those for which baselines are not
allocated), the Agency can ascertain that the U.S. will remain
comfortably below the aggregate HCFC cap through 2009. The 2003
allocation 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 exact amount 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 stated that it would likely
achieve the 2010 reduction step by applying a percentage reduction to
the HCFC-22 and HCFC-142b baseline allowances. EPA has monitored the
market to estimate servicing needs and market adjustments in the use of
HCFCs, including HCFCs for which EPA did not establish baselines in the
2003 allocation rule.

C. What Sections of the Clean Air Act Apply to This Rulemaking?

    Several sections of the Clean Air Act apply to this rulemaking.
Section 605 of the Clean Air Act phases out production and consumption
and restricts the use of HCFCs in accordance with the schedule set
forth in that section. Section 606 provides for acceleration of 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 has
previously accelerated the section 605 schedule through a rulemaking
published December 10, 1993 (58 FR 65018). Through this action, EPA is
further accelerating the HCFC production and consumption phaseouts in
section 605(b)-(c).
    Section 606 provides authority for EPA 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 this instance, all three criteria have
been met with respect to the schedule for phasing out production and
consumption of HCFC-22 and HCFC-142b.
    The first criterion allows the Administrator, based on an
assessment of credible current scientific information, to determine
that a more stringent schedule may be necessary to protect human
health. The recent scientific findings by the Montreal Protocol's
Science Assessment Panel, Science Assessment of Ozone Depletion: 2006,
available in the docket for this rulemaking, were initially presented
to the Parties to the Montreal Protocol in October 2006 at the 18th
Meeting of the Parties in New Delhi, India. The Assessment was
published in March 2007, and hard copies were available to the Parties
in advance of the 26th Open-Ended Working Group Meeting held in June
2007 in Nairobi, Kenya. The assessment report shows that
notwithstanding the evidence of a healing of the ozone layer, there
continue to be human health and environmental effects associated with
ozone depletion and that recovery continues to rely on a successful
total global phaseout of ODS. Specifically, the report concludes that
the date when equivalent effective stratospheric chlorine (EESC)
relevant to mid-latitude ozone depletion returns to pre-1980 levels is
2049, which is five years later than projected in the previous
Scientific Assessment. The later return is primarily due to higher
estimated future emissions of CFC-11, CFC-12, and HCFC-22. The report
includes scenarios where additional actions taken by the Parties would
result in a faster recovery. While these specific scenarios (including
complete phaseout by the end of that calendar year) were not all
necessarily deemed to be practical, they demonstrated to the Parties
what could be achieved with additional actions. The percentage
reduction in EESC attributed to HCFCs is larger than previously
reported and the scenarios showed that reducing HCFCs could have a
greater effect than reducing any of the other compounds or groups of
compounds given their current production levels. These findings
contributed in part to the willingness of many Parties, including the
United States, to consider the adjustments to the Montreal Protocol's
HCFC phaseout schedule that were successfully negotiated in September
2007. EPA published a notice of data availability (72 FR 35230)
concerning the potential changes in HCFC consumption from proposed
adjustments to the Montreal Protocol submitted by the United States for
consideration at the 19th Meeting of the Parties held in Montreal
September 2007. The data made available through that notice were
specific to the United States' proposal but had general applicability
to the other five proposals submitted by various Parties to the
Protocol and to what was ultimately agreed to by the Parties at the
19th Meeting. EPA believes the recent scientific findings on
stratospheric ozone depletion, together with the well-established
relationship between ozone depletion and increased risk of human health
effects, support a determination that a more stringent HCFC phaseout
schedule may be necessary to protect against such effects.
    The second criterion allows the Administrator to determine that a
more stringent schedule is practicable based on the availability of
substitutes for ODS, taking into account technological achievability,
safety, and other relevant factors. Since the establishment of the
domestic chemical-by-chemical phaseout in the United States, advances
by industry have resulted in the availability of substitutes for a
large variety of end-use applications. Under section 612 of the CAA,
EPA's Significant New Alternatives Policy (SNAP) program evaluates
alternatives for ODS and lists as acceptable those that do not pose a
greater risk to human health than other substitutes that are currently
or potentially available. Alternatives include chemical replacements,
product substitutes, and alternative technologies. The SNAP program has
reviewed approximately 400 alternatives to date. EPA makes information
available concerning potential alternatives for various end-use
applications. Suitable alternatives--in many cases, multiple suitable
alternatives--are available for all end-use applications for the HCFCs
considered in this action. However, as discussed later in this
preamble, EPA has learned of three niche end use applications where
substitutes exist but other factors may be affecting the timing of
their implementation. Because sufficient quantities of HCFC have
already been produced for these uses, EPA took this information into
account in evaluating the schedule for phasing out use under section
605(a) rather than the schedule for phasing out production under
section 605(b)-(c). The use phaseout is discussed below.
    The SNAP program has reviewed substitutes to ODS for the following
industrial sectors:
     Refrigeration & Air Conditioning
     Foam Blowing Agents

     Cleaning Solvents
     Fire Suppression and Explosion Protection
     Aerosols
     Sterilants
     Tobacco Expansion
     Adhesives, Coatings & Inks
    HCFCs have been used in all of these industrial sectors except for
tobacco expansion. Within the air conditioning and refrigeration
industrial sector, end uses where HCFCs have been used include
chillers, industrial process refrigeration systems, industrial process
air conditioning, bus and passenger train AC, ice machines, very low
temperature refrigeration, ice skating rinks, cold storage warehouses,
refrigerated transport, retail food refrigeration, household
appliances, and residential and light commercial air conditioning and
heat pumps. The SNAP program lists substitutes for each of these end
uses.
    A wide range of alternative refrigerants found acceptable under
EPA's SNAP program are available in the AC and refrigeration sector.
Hydrofluorocarbons (HFCs) and HFC-based alternatives, including R-134a,
R-410A (composed of HFC-32/HFC-125), R-407C (composed of HFC-32/HFC-
125/HFC-134a), R-404A (composed of HFC-125/HFC-143a/HFC-134a), and R-
507A (composed of HFC-125/HFC-143a), are currently used in a variety of
refrigeration and AC equipment. In addition, other refrigerants such as
CO2, ammonia, and hydrocarbons are available as
alternatives. The pace of transition to equipment using these
alternatives has varied by industry and type of equipment. Appendix A
to the Servicing Tail report found in the docket to this rule presents
EPA's estimates of the market penetration of alternatives for each end
use within this sector.
    Some mobile AC equipment has been using alternatives since the
early 1990s, with some buses and trains using R-134a, and some heavy
rail cars using R-407C. Stationary AC equipment using R-410A has been
commercially available since 1996, and is expected to dominate the U.S.
residential market in the near future. The projections in the Servicing
Tail report are based on information regarding the transition to
alternatives. New sales of residential AC systems are modeled such that
only 10 percent of the market adopts alternatives by the end of 2008
and the remainder of the market for new equipment transitions
completely by the end of 2009. Consumers naturally prefer equipment,
services, and refrigerant that costs less. Previously, R-22 has been
cheaper than alternatives. However, the economics are changing and R-
410A pricing is beginning to match that of R-22. Most residential AC
equipment purchasers now are buying equipment using R-410A.
    Retail food refrigeration end-uses have been transitioning to
alternatives more quickly than AC end-uses. EPA estimates that half of
the refrigerant used in existing stores is R-22 but only 5% of new
refrigeration systems installed in 2009 were charged with R-22.
Advanced refrigeration technologies (e.g., distributed systems and
secondary loop systems) represent an estimated 40% of new equipment
sales and such systems installed in the last ten years have been
charged with HFC refrigerants.
    As mentioned in the Servicing Tail report, several AC and
refrigeration equipment manufacturers have indicated that they have
discontinued production of new equipment that uses R-22. These actions
are consistent with the actions taken in the mid-1990s, when the
refrigeration and AC industries phased out CFC refrigerants from new
production chillers, refrigerators, motor vehicle air conditioners, and
other products two or more years before the 1996 CFC consumption
phaseout.
    Alternatives are available in the other sectors as well. For
example, numerous alternatives exist for HCFC-22 and HCFC-142b for foam
blowing agents, including water, Ecomate[supreg], saturated light
hydrocarbons (e.g., cyclopentane), CO2, HFO-1234ze, and a
number of HFCs or HFC blends. In place of HCFCs as propellants, most
aerosol cans use saturate light hydrocarbons (e.g., propane, n-butane,
isobutane) or dimethyl ether where flammability is not a major concern
or HFCs or compressed gases (e.g., CO2, nitrogen) where
flammability is a concern. (A complete list of substitutes is available
at http://www.epa.gov/ozone/snap/lists/index.html.) EPA believes that
given the availability of substitutes, a more stringent phaseout
schedule for HCFC-22 and HCFC-142b is now practicable.
    The last criterion is that the Montreal Protocol be modified to
include a schedule to control or reduce production, consumption, or use
of any substance more rapidly than section 605 would dictate. The
United States submitted a proposal to adjust the Montreal Protocol in
March 2007 to accelerate the phaseout of HCFCs. This was one of six
proposals considered by the Parties at their 19th Meeting. Due to the
efforts of the United States and others, the Parties agreed to
adjustments that result in a more aggressive phaseout schedule for both
developed and developing countries. Therefore, this third criterion has
been met. Through this action, EPA is incorporating in its regulations
a schedule that reflects the 2007 Montreal Adjustment. While section
606 is sufficient authority for this acceleration of the section 605
phaseout schedule, section 614(b) of the Clean Air Act provides that in
the case of a conflict between the Act and the 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 Protocol. To meet the 2010 stepdown
requirement, EPA is allocating HCFC allowances for the years 2010
through 2014 at a level that will ensure the aggregate HCFC production
and consumption will not exceed 25 percent of the U.S. baselines.
    In addition to implementing the 2007 Montreal Adjustment, this rule
also addresses provisions in section 605 of the Clean Air Act that
relate to use and introduction into interstate commerce of class II
substances. This action completes EPA's implementation (begun in 1993)
of the section 605 provisions on use of class II substances. EPA is
also promulgating regulatory language to reflect the section 605
provisions on introduction into interstate commerce of class II
substances. EPA previously addressed the provisions concerning use of
class II substances in a 1993 rulemaking that accelerated the phaseout
schedule for HCFC-22 and HCFC-142b (58 FR 15014, 58 FR 65018). The
intent of the 1993 rulemaking was to accelerate not only the production
and consumption schedule, but also the use restrictions for those two
substances under the authority of section 606(a)(1) and (2). In the
March 18, 1993, notice of proposed rulemaking, EPA stated that the
effect of this acceleration was ``to prohibit the use of the chemicals
(virgin material only) for any use except as a feedstock or as a
refrigerant in existing equipment as of January 1, 2010'' (58 FR
15028). EPA noted in the December 10, 1993, final rulemaking that
``HCFC restrictions and the approach included in this final rule have
not changed from those proposed by the Agency in March'' (58 FR 65028).
The regulatory provisions included with that notice, however, did not
control use directly, but instead banned production and import for most
uses. This action completes the prohibitions contemplated in the 1993
rule by adding to the regulatory text the restriction on use as well as
the corresponding prohibitions on introduction into interstate
commerce.

EPA is providing exceptions to this ban for medical equipment and
thermal expansion valves, for which the practicability of substitutes
remains an issue. EPA is also clarifying its interpretation of the
section 605(a) restrictions on use and introduction into interstate
commerce.

III. Summary of This Final Action

    In this action, EPA is amending the existing regulations to
implement the next major milestone in the HCFC phaseout. As a Party to
the Montreal Protocol, and having ratified the Montreal Protocol and
all of its amendments, the United States is required to decrease its
amount of HCFC consumption and production to 25 percent of the U.S.
baseline by 2010. Our domestic chemical-by-chemical approach results in
differing schedules for the phaseout of individual HCFCs. EPA believes
that the chemical-by-chemical allocation of HCFC allowances ensures
that the United States continues to maintain an overall HCFC production
and consumption level that is below the 2010 cap specified by the
September 2007 Montreal Adjustment, while at the same time ensuring
that servicing needs consistent with section 605(a) of the Clean Air
Act and EPA's implementing regulations continue to be met. Thus, the
aggregate allowances for all U.S. HCFC consumption in the years 2010-
2014 do not exceed 3,810 ODP-weighted metric tons (25 percent of the
aggregate U.S. consumption baseline) annually and the aggregate
allowances for all U.S. HCFC production in the years 2010-2014 do not
exceed 3,884.25 ODP-weighted metric tons (25 percent of the aggregate
U.S. production baseline) annually.
    To meet the 2010 cap for the 2010-2014 control periods, EPA is
maintaining its past practice of apportioning company-specific
production and consumption baselines for individual HCFCs, and
allocating a certain percent of that baseline in an amount necessary to
meet demand. For HCFC-22, that percentage decreases on an annual basis
to reflect a projected decrease in demand as well as to promote
recycling and reclamation, which in turn should prevent shortages that
might otherwise occur upon the stepdown in 2015. This approach was
discussed briefly in the proposal (73 FR 78691) and was supported in
comments to the Agency. For HCFC-141b, HCFC-22, and HCFC-142b, EPA is
adjusting the previously established company-specific baselines to
reflect (1) permanent inter-company transfers of baseline allowances
for a particular HCFC and (2) changes to the names of entities
identified in the tables at Sec.  82.17 and Sec.  82.19. These
adjustments do not reflect inter-pollutant transfers occurring on an
annual basis. For 2010-2014, given the previous phaseout of HCFC-141b,
EPA will continue to allocate zero percent of the HCFC-141b baseline,
and allow only limited amounts of production via the existing EPA
petition process.\5\ EPA is allocating an annually declining percentage
of baseline for HCFC-22 ranging from 41.9 percent in 2010 to 26.1
percent in 2014 and is allocating 0.47 percent of baseline for HCFC-
142b in all years 2010-2014 to meet the U.S. obligations under the
Montreal Protocol and to reflect the use restrictions under section
605(a) of the CAA while providing for servicing needs consistent with
those restrictions.
---------------------------------------------------------------------------

    \5\ EPA did not propose, and is not implementing in this action,
any changes to the HCFC-141b petition process for the 2010-2014
control periods.
---------------------------------------------------------------------------

    EPA is also implementing production and consumption controls for
HCFC-123, HCFC-124, HCFC-225ca, and HCFC-225cb, which did not have
baselines prior to this rulemaking. EPA is apportioning company-
specific baselines for these HCFCs based on production and import data
available to the Agency. For control periods 2010-2014, EPA is granting
125 percent of baseline for these HCFCs.
    The allocations for HCFC-22, HCFC-142b, HCFC-123, HCFC-124, HCFC-
225ca, and HCFC-225cb reflect EPA's analysis of market data for these
chemicals. The allocation levels for these HCFCs meet the need for
virgin material and avoid shortages during the affected control
periods, as well as accommodate some market growth for the HCFCs for
which EPA is allocating allowances for the first time in this action.
    For the years 2010-2014, the Montreal Protocol allows a cap of
3,810 ODP tons for U.S. HCFC consumption (resulting in an aggregate of
19,050 ODP tons over the five control periods) and 3,884.25 ODP tons
for U.S. HCFC production (resulting in 19,421.25 ODP tons over five
control periods). Of that amount, EPA is allocating allowances totaling
12,355.5 ODP tons of consumption and 11,621.43 ODP tons of production
over the five control periods. These allocations represent 65 percent
of the consumption cap and 60 percent of the production cap established
by the Montreal Protocol for 2010-2014. The difference between the cap
and the total allocation reflects EPA's estimate of the need for HCFCs
during these control periods. It also will accommodate minor
adjustments in the market, particularly to allow potential market
growth for HCFCs that have not been produced or imported since 2003
(and which are therefore not reflected here). As discussed in more
detail in Section IV.B.3, it will also encourage greater reclamation of
recovered refrigerant and will facilitate preparation for the 2015
phasedown in the consumption cap to 10% of baseline.
    This action also changes two other components of the HCFC allowance
allocation framework. First, to reflect the September 2007 Montreal
Adjustments, EPA is adjusting the amount of Article 5 allowances for
control periods 2010-2019. Second, EPA is completing its implementation
of the provisions in section 605 of the Clean Air Act that relate to
use and introduction into interstate commerce of class II substances.
As discussed in Section VI.D. below, EPA is excepting the use of HCFC-
22 in thermostatic expansion valves and in medical equipment from the
accelerated restrictions on introduction into interstate commerce and
use. EPA also is providing a limited grandfathering for use of HCFCs in
refrigeration appliances that have not yet been ``manufactured'' under
EPA's interpretation of that term but whose components have been
specified for installation under a building permit or contract dated on
or before January 1, 2010.
    This final rule combined with the accompanying final rule titled
``Protection of Stratospheric Ozone: Ban on the Sale or Distribution of
Pre-Charged Appliances'' (EPA Docket: EPA-HQ-OAR-2007-0163) (referred
to in this preamble as the Pre-Charged Appliances rule) will have the
following effects on the sale, distribution, and installation of air-
conditioning and refrigeration products charged with HCFC-22, HCFC-
142b, or blends containing one or both of these substances.
     Sale and distribution of appliances pre-charged with HCFC-
22 or HCFC-142b is allowed for self-contained, factory-charged
appliances such as pre-charged window units, packaged terminal air
conditioners (PTACs), and some commercial refrigeration units, if
manufactured before January 1, 2010. The pre-charged appliance rule
does not prohibit sale and distribution of pre-2010 inventory (i.e.,
stockpiled inventories).
     Sale and distribution of appliances pre-charged with HCFC-
22 or HCFC-142b is not allowed for self-contained, factory-charged
appliances such as pre-charged window units, PTACs, and some commercial
refrigeration units, if manufactured on or after January 1,

2010. This prohibition which is contained in the pre-charged appliance
rule, applies regardless of when the refrigerant was produced and
whether it is virgin or reclaimed. Under the allocation rule, neither
stockpiled HCFC-22 produced prior to January 1, 2010, nor new HCFC-22
produced after that date can be used to manufacture new appliances on
or after January 1, 2010.
     Sale and distribution of appliance components pre-charged
with HCFC-22 or HCFC-142b is allowed if the components (e.g. condensing
units, line sets, and coils that are charged with refrigerant) were
manufactured before January 1, 2010. The pre-charged appliance rule
does not prohibit sale or distribution of pre-2010 inventory (i.e.,
stockpiled inventories).
     Pre-charged components manufactured before January 1,
2010, may be used to service appliances manufactured before January 1,
2010, but may not be assembled to create new appliances unless there is
no use of virgin HCFC-22 or HCFC-142b, in the components or otherwise.
The allocation rule prohibits use of virgin HCFC-22 and HCFC-142b in
manufacturing new appliances.
     There is no exemption from the pre-charged appliance rule
for the sale or distribution of pre-charged appliances and pre-charged
components that are charged with reclaimed HCFC-22 or HCFC-142b
refrigerant. In other words, the provisions banning sale and
distribution apply equally regardless of whether the appliances or
components contain virgin or reclaimed refrigerant.
     Under the allocation rule, virgin HCFC-22 or HCFC-142b may
only be used to service existing appliances. Virgin HCFC-22 and HCFC-
142b may not be used to manufacture new pre-charged appliances and
appliance components. Virgin HCFC-22 and HCFC-142b also may not be used
to charge new appliances assembled onsite on or after January 1, 2010,
though new appliances (not pre-charged) may be charged with reclaimed
refrigerant.
     EPA is providing an exception to the allocation rule that
allows virgin HCFC-22 to be used in the onsite ``manufacture'' of
appliances for a particular project between January 1, 2010, and
December 31, 2011, if the components have been specified for use at
that project under a building permit or contract dated before January
1, 2010.
     Under the allocation rule, HCFC-22 produced prior to
January 1, 2010, may be used until January 1, 2015, for the manufacture
of thermostatic expansion valves (TXVs).
     The sale and distribution of used appliances is not
affected by either rule.

IV. Allocation of Allowances for the 2010-2014 Control Periods

A. Baselines for HCFC-22 and HCFC-142b Allowances

    In the proposed rule, EPA presented five options for allocating
HCFC-22 and HCFC-142b allowances for the control periods 2010-2014: (1)
Allocating a percentage of the baseline production and consumption
allowances (see 40 CFR 82.17 and 82.19 respectively), with or without
considering any intra- and/or inter-pollutant transfers that resulted
in a different amount of production or consumption for a specific HCFC;
(2) allocating allowances based on evaluation of the most recent three
years of production, import, and/or export data as reported to EPA; (3)
allocating allowances based on an evaluation of past sales of HCFCs by
allowance holders by considering how the HCFCs were ultimately used
(e.g., servicing refrigeration or air-conditioning vs. original
manufacture of refrigeration or air-conditioning equipment and foam
blowing); (4) allocating allowances based on aggregated ODP tons; or
(5) allocating a total amount of allowances and allowing for purchase
by establishing an auction system.
    As discussed in the proposed rule, each of these five methods
offers advantages and disadvantages for potential allowance holders
that vary according to whether a particular entity is predominantly a
producer or importer; whether it currently sells HCFC-22 and HCFC-142b
to original equipment manufacturers, wholesalers, retailers, or
companies that service appliances; whether the portion of its business
that is ODS-based is expanding or contracting as the next major
milestone in the phaseout approaches; its liquidity; whether it holds
both HCFC-142b and HCFC-22 allowances and/or engages in inter-pollutant
transfers; and whether it sold HCFCs for applications that do not lend
themselves to servicing. Without regard to the practices of individual
entities, each of the allocation schemes also offers advantages and
disadvantages associated with the ease of implementation and other
administrative burdens.
    In this final action, EPA is finalizing option 1 by allocating a
percentage of the baseline allowances (Sec. Sec.  82.17 and 82.19) for
HCFC-22 and HCFC-142b. As discussed in Section IV.A.2. of the preamble,
EPA is modifying the baseline allowances through the consideration of
permanent inter-company baseline transfers for the same HCFC but is not
accounting for inter-pollutant transfers within a single company that
resulted in a different amount of production or consumption for a
specific HCFC on an annual basis.
    Of all the options, applying a uniformly smaller percentage of the
existing baseline as the method for allocating HCFC-22 and HCFC-142b
allowances is the least disruptive to the current market and best
ensures a continued smooth transition away from ozone-depleting
substances. This system closely matches the current HCFC allocation
method, with which producers and importers are familiar. EPA provided
notice of this option in the preamble to the 2003 allocation rule by
indicating that EPA ``intends to achieve this reduction step through
notice and comment prior to 2010 and will likely implement the
reduction by simply listing a percent of baseline allowances to be
granted in Sec.  82.16 for the years after 2009'' (68 FR 2823). Many
commenters have informed EPA that, based in part on this statement,
producers and importers have aligned their business activities around
the baselines set forth in the 2003 allocation rule. Such planning
includes not only ensuring capacity to produce or import these HCFCs
but also the establishment and maintenance of relationships with
distributors and contractors.
    Second, on a related note, EPA agrees with a comment that this
approach is the most consistent with the existing framework for
recordkeeping and reporting. This option utilizes EPA's existing ODS
tracking system and does not require additional one-time or periodic
reporting obligations that may be necessary under the other options.
EPA uses information from quarterly, annual, and other periodic
reporting requirements to monitor consumption, production, imports, and
exports of all HCFCs. EPA also uses this information to ensure
companies' compliance with regulatory requirements and to develop
reports that are requested by the Parties to the Montreal Protocol,
including reports ascertaining U.S. compliance with the phaseout caps.
The information enables EPA to monitor production and consumption for
all HCFCs, including HCFCs for which baselines have not yet been
established and for which allowances have not yet been allocated.
Option 1 limits administrative burden for allowance holders, and
additionally, can be implemented more quickly than other options.
    Third, EPA prefers option 1 because it applies an established and
well-vetted baseline. All of the other options would require the Agency
to disregard the

existing baseline in its entirety and rely on another basis for
allocating production and consumption allowances. This would minimize
the value of establishing a baseline and lead to market uncertainty.
EPA seeks instead to minimize unanticipated changes and prevent market
disruptions. EPA, however is making minor changes to company baseline
allowances to reflect inter-company baseline trades, as discussed
below.
    Most commenters preferred option 1 for the reasons described above.
Some commenters, however, favored the alternative approaches. The
second-most-favored allocation method was option 5, under which EPA
would auction allowances. Commenters favoring this option preferred it
because it could potentially allow for new entrants into an HCFC-22
market that those commenters say is dominated by a small number of
large companies. These commenters typically disagreed with option 1
because it would favor the existing set of stakeholders. Option 1 does
not automatically prohibit new entrants, as they could acquire
allowances from existing allowance holders under the existing
regulatory framework. While EPA acknowledges that not having allowances
can be a barrier to entry into this market, EPA does not believe it is
necessary or appropriate to adopt a particular regulatory approach
specifically for the purpose of encouraging new entrants at this point
in a phaseout.
    In the July 20, 2001, proposed HCFC allocation rule, EPA expressed
skepticism about promoting new entrants into the HCFC market:
``Encouraging new companies to join the business after the ANPRM would
counter the efforts of moving people out of HCFCs into more
environmentally sound substitutes. EPA believes that any new entrants
following the ANPRM publication would not be precluded from entering
the market, because they could purchase allowances from existing
allowance holders who may not intend to use their full amount of
allowances. They also have the opportunity to import recovered HCFCs
through EPA's petition system or deal in substitutes to HCFCs, which
would benefit the ozone layer and provide longer-term business
security. Accordingly, EPA believes that the market will sufficiently
allow for any new entrants after April 5, 1999, as appropriate.'' (66
FR 38073). In the 2003 final rule, EPA provided a limited exemption for
companies that began importing HCFCs after the first stakeholder
meeting in 1997 but before the ANPRM publication date, after which they
would have had reason to know of an imminent rulemaking allocating
allowances based on historical production and importation. EPA did not
extend this exemption further because once public notice was given via
the ANPRM, ``businesses that desired an allocation of HCFC allowances
would have known the risks of jumping into the business at this
juncture.'' (66 FR 38073). Since that time eight years ago, access to
information and knowledge of the risks regarding entering the HCFC-22
market have only increased. There have been new entrants to the market,
as evidenced by commenters seeking allocation rights who were not in
operation in 2003. These entities have entered the market by purchasing
consumption allowances, as EPA predicted they could back in 2003. These
entities can continue to purchase consumption allowances or import
substitutes for HCFCs. As the market continues to decrease, EPA does
not believe that providing consumption allowances to these or other new
entities is necessary to prevent disruption to the continued servicing
of existing equipment. Given EPA's intent to phase down, and ultimately
phase out, the use of HCFC-22, consistent with the requirements of the
CAA and obligations under the Montreal Protocol, EPA believes it is
justified in continuing to allocate only to those entities who
participated in the market at the initial stages as well as those that
have entered the market by purchasing HCFC-22 baseline allowances in
accordance with the established practices. EPA therefore does not
believe that choosing this option for the purpose of opening up the
market to new entrants is appropriate at this time as it may create
disruption to the existing regulatory framework.
    EPA also suggested, in option 4, that it could allocate allowances
on an ODP-ton-weighted basis, authorizing allowance holders to consume
or produce any combination of HCFC up to that ODP limit. Only one
commenter supported this option, saying it would be more closely
aligned with the requirements of the Montreal Protocol, which
established a total ODP cap, and would more closely approximate an
unregulated market. Furthermore, EPA would not need to predict the
supply and demand for individual HCFCs. The commenter recognized,
though, that it would have been better to establish such a system in
the 2003 allocation rule and that it would be more difficult to
implement today. At this point in the phaseout, EPA does not believe
that it would be appropriate to switch to an ODP-weighted allocation.
EPA raised, and rejected, this option in 2003 when it initially
established baselines and allocated production and consumption
allowances for HCFCs. In 2003, EPA applied a ``worst first'' approach
to the phaseout of HCFCs and set limits only on HCFC-141b, HCFC-22, and
HCFC-142b. Moving to an ODP-weighted allocation system at this point
would disrupt the market and not reflect the market decisions made
between 2003 and 2009.
    Finally, options 2 and 3 received limited support from commenters.
EPA is not persuaded that changing the baseline allowances through any
of the methods presented in those options would be more appropriate
than the manner proposed under option 1. EPA discusses comments on
these options in the response to comments document, available in the
docket for this rulemaking.
    After considering comments, EPA is allocating a percentage of the
baseline allowances for HCFC-22 and HCFC-142b, per option 1, in this
final rule. The specific percentages are discussed in Section IV.C.
below.
1. Adjusting the Baseline for Inter-company and Inter-pollutant
Transfers
    Sections 607(b) and (c) of the Clean Air Act permit inter-pollutant
and inter-company transfers of allowances, respectively. Inter-
pollutant transfers are the transfer of an allowance of one substance
to an allowance of another substance on an ODP-weighted basis. Inter-
company transfers are transfers of allowances for the same ODS from one
company to another company. Section 607(c) also authorizes inter-
company transfers combined with inter-pollutant transfers, so long as
the requirements of both are met. The corresponding regulatory
provisions appear at 40 CFR 82.23.
    EPA proposed in allocation option 1 to establish a percentage of
baseline allowances for each HCFC ``with or without considering any
permanent baseline transfers and/or inter-pollutant transfers that
resulted in a different amount of production or consumption for a
specific HCFC included'' (emphasis added). The company-specific
baselines in the proposed regulatory text did, though, reflect
adjustments resulting from approved inter-company transfers of baseline
allowances (i.e., permanent rather than calendar-year allowances) as
well as intra-company, inter-pollutant transfers. EPA received multiple
comments on how transfers of allowances should be reflected in company
baselines. All comments on the issue supported

adjusting the baselines to reflect inter-company transfers. Most
commenters were opposed, however, to adjusting a company's baseline to
reflect inter-pollutant transfers occurring within that company. As
discussed in this section, the final allocation reflects adjustments
due to inter-company transfers but not inter-pollutant transfers.
    In this final rule, EPA is updating the baselines for HCFC-22 and
HCFC-142b to reflect name changes and permanent inter-company baseline
transfers. Doing so reflects the changes in the marketplace that have
occurred since the last time EPA addressed these baselines. As
discussed above, permanent inter-company baseline transfers provide a
mechanism for new entrants to join or expand in the HCFC-22 market and
for other companies to expand their business. When EPA allocated
allowances from 2004 to 2009, the Agency made minor changes to reflect
such permanent trades of baseline allowances. EPA recognizes that in
some cases entities are no longer actively involved in HCFC production,
import, and/or export activities. EPA sought comment on whether it
should retain the baselines for such entities or whether it should
retire, auction, or redistribute the baselines among the active
entities. EPA received only one comment on the issue, which favored
EPA's preferred approach of retaining the baseline for those entities.
The commenter noted that any allowances distributed to passive holders
will find their way into circulation if needed. EPA agrees, as this has
been a mechanism by which new entrants have entered the HCFC allocation
system in the past.
    Eight commenters opposed, and two commenters supported, the
proposed adjustments to company baselines to reflect intra-company,
inter-pollutant transfers. At issue is the fact that two companies have
made inter-pollutant transfers with the apparent intent of reflecting
them as permanent adjustments to their baseline allowances. Comments in
opposition stated that adjusting the baselines to account for these
permanent inter-pollutant transfers would inequitably redistribute
allowances. Because allowance holders receive allocations based on a
percentage of market share, increasing allowances to two companies has
the effect of decreasing allowances to the other market participants.
Thus, two companies would receive 38% and 912% more HCFC-22 allowances
while the remaining companies would each receive 16% fewer HCFC-22
allowances. Commenters opposed to this redistribution requested that
EPA utilize the 2003 baseline and claim it would be the most equitable
way of reducing and allocating allowances among the entire community.
    Three commenters also stated that allowing these transfers would
unnecessarily disrupt the marketplace. They stated that stakeholders
believed that EPA would allocate allowances in 2010-2014 by reducing
allowances to all baseline allowance holders by an equal percentage and
planned accordingly. They did not anticipate an increase in allowances
to some companies resulting in a significant decrease for them.
According to the commenters this shift in HCFC-22 allowances would
require distributors to seek material from different suppliers than in
the past and would thus disadvantage the allowance holders and their
customers.
    In the 2003 rule, both EPA and commenters to that rule recognized
the flexibility that inter-pollutant and inter-company transfers
provide. One company has utilized inter-pollutant transfers annually
since 2006. Each year it has converted over 95% of its HCFC-142b
allowances to HCFC-22 allowances to supply the servicing market.
Allowing inter-pollutant transfers since 2006 has had little impact on
the greater marketplace because it did not reduce the allocation levels
for the other allowance holders. Commenters have demonstrated to EPA
how treating inter-pollutant trades as permanent would negatively
affect all other allowance holders. While the company that has
historically relied on these transfers would be negatively affected by
not treating its inter-pollutant transfers as permanent, EPA is
concerned that reflecting such transfers in this rule would disrupt the
entire market in 2010 and could encourage greater disruption in future
control periods. Commenters pointed out that adjusting the baselines to
reflect intra-company, inter-pollutant transfers could create
incentives for future manipulation of the allocation system in
anticipation of the future control periods. For example, in 2020 EPA
will no longer be issuing HCFC-22 allowances. EPA has anticipated that
companies with HCFC-22 allowances would no longer be in the HCFC market
at that date if they did not hold allowances for other HCFCs that are
still allowed after 2020. For example, if EPA were to establish an
allocation framework based on inter-pollutant trades, in 2019 companies
with HCFC-22 allowances could convert them all to allowances for HCFC-
123 or some other compound for which allowances are available and thus
remain in the market. As another example, in 2015 a producer or
importer that previously had not participated in the HCFC-123 market
could dominate that market by converting its HCFC-22 allowances in 2014
to HCFC-123 allowances. Given the different ODPs of HCFC-22 and HCFC-
123, converting one allowance of HCFC-22 would result in 2.75
allowances of HCFC-123. Also, since companies hold many more HCFC-22
allowances than HCFC-123 allowances, converting those HCFC-22
allowances would have an overwhelming effect on the current HCFC-123
allowance holders. In effect, establishing allocations based on
permanent inter-pollutant transfers would transform the U.S. HCFC
phasedown from a chemical-by-chemical phaseout, as established under
the ``worst-first'' approach in the 1993 rule, to an ODP-weighted
phasedown. Under an ODP-weighted phasedown, allowance holders could
permanently transfer their production and import of specific HCFCs so
long as the total ODP cap is not affected. Companies that do not
transfer their allowances, however, would remain holding a smaller
percentage of the total ODP cap, and thus would be left with fewer
allowances. The ODP-weighted method was rejected in both the 2003 rule
and this rule, though EPA did take comment on it in the proposal, as
discussed in the previous section.
    Some commenters stated that modifying the baselines by taking into
account intra-company, inter-pollutant transfers would be contrary to
the Clean Air Act. One commenter argued that section 607 of the Clean
Air Act allows EPA to approve inter-pollutant transfers of allowances
only on a year-to-year basis. That commenter pointed to language in
section 607(b) stating that EPA regulations are to permit ``a
production allowance for a substance for any year to be transferred for
a production allowance for another substance for the same year on an
ozone depletion weighted basis.'' The commenter also discussed the
legislative history of the 1990 Clean Air Act Amendments.
    After considering the language of section 607 and the legislative
history, EPA believes that section 607(b) is best read as permitting
only year-by-year inter-pollutant transfers. Section 607(b) states that
EPA's rules are to permit ``a production allowance for a substance for
any year to be transferred for a production allowance for another
substance for the same year.'' This language emphasizes the year-by-
year nature of such transactions. No parallel language appears in
section 607(c). That section does, however, provide that any

inter-pollutant transfers between two or more persons must meet the
requirements of section 607(b). Hence, EPA interprets section 607 as
requiring that all inter-pollutant transfers, whether occurring between
companies or within a single company, be conducted on a yearly--and
thus temporary--basis.
    EPA has made past statements that are consistent with this
interpretation. In the 2003 rule that established the allowance system
for HCFCs (68 FR 2835), EPA stated: ``The permanent transfer of
baseline allowances is a lasting shift of some quantity of a company's
allowances to another company.'' EPA also indicated what would happen
at the time of the next stepdown or phaseout date: ``[A]t the time of a
reduction step or a phaseout of the substance, the current holder of
baseline allowances that were received in a permanent transfer would be
the person who would have them deducted.'' EPA decided in the 2003 rule
to ``allow permanent transfers of baseline allowances with those
allowances disappearing at the phaseout date for the specific HCFC,
regardless of what inter-pollutant transfers had taken place'' (68 FR
2835). Further discussion of this issue appears in the response to
comments document available from the docket.
    In summary, this final rule reflects the changes in consumption and
production baseline allowances from inter-company transfers but not
inter-pollutant transfers. The resulting consumption baseline amounts
for HCFC-22, HCFC-142b, and HCFC-141b are shown below in Table 3.
2. Meeting the Needs of Certified Reclaimers
    Many commenters requested that EPA allocate allowances to certified
reclaimers to ensure that they would be able to obtain the virgin HCFCs
needed for mixing with recovered HCFCs during the reclamation process.
Recovered refrigerant often contains contaminants, including air,
water, particulates, acidity, chlorides, high boiling residues, and
other impurities including other refrigerants. Reclamation is the re-
processing and upgrading of a recovered controlled substance through
such mechanisms as filtering, drying, distillation, and chemical
treatment in order to restore the substance to the purity levels
specified in Appendix A to 40 CFR part 82, subpart F (based on ARI
Standard 700, ``Specifications for Fluorocarbon and Other
Refrigerants''). While most of the contaminants can be efficiently
removed to bring the purity to ARI Standard 700, removing cross-
contamination from other refrigerants poses additional challenges due
to their chemistry. One method of separating out other refrigerants is
to pass the material through a distillation tower, potentially several
times. Some reclaimers blend virgin material with cross-contaminated
recovered material to bring the material up to ARI Standard 700.
Reclaimers do not currently have a consumption baseline per se;
however, a limited number of reclaimers that also are HCFC importers do
have a consumption baseline. Therefore, generally reclaimers purchase
virgin HCFC-22 from allowance holders in a manner similar to other HCFC
users such as air-conditioning and refrigeration appliance
manufacturers.
    Forty-five commenters encouraged EPA to allocate HCFC-22
consumption allowances to reclaimers so that they would have improved
access to virgin HCFC-22 which they could then blend with recovered
HCFC-22. The comments stated in various ways that having allocations
would (1) improve the economics of reclamation, (2) foster greater
recovery, (3) foster greater reclamation, and (4) provide environmental
benefits. The primary mechanism suggested by commenters was that EPA
provide to reclaimers an amount equal to 10% of the total annual HCFC-
22 allocation. This method would reduce the amounts that the existing
allowance holders would otherwise have received by 10% and redirect
those allowances to certified reclaimers. EPA would allocate that 10%
among reclaimers based on the amount of material each company reclaimed
in some prior year, as reported to EPA under existing section 608
requirements.
    First, commenters in support of allocating consumption allowances
to reclaimers stated that it would improve the economics of the
reclamation industry. Reclamation through separation and distillation
requires costly distillation towers that are energy-intensive, and thus
expensive, to operate. Alternatively, reclaimers who practice blending
must purchase virgin HCFC-22, often at market prices. These commenters
stated that having allocation rights would allow reclaimers to import
HCFC-22 at a lower cost and thus be able to sell reclaimed HCFC-22 at a
price that is competitive with domestically produced or imported virgin
HCFC-22.
    Second, these commenters stated that acquiring less expensive
virgin material could help defray other costs associated with
refrigerant reclamation, thereby allowing them to reclaim more
contaminated (i.e., more economically marginal) refrigerant. One
commenter stated that reclaimers have many tons of material in
inventory that could be reclaimed through blending but that it
currently cannot reprocess without virgin material at competitive
prices.
    Third, these commenters stated that allocations to reclaimers would
increase refrigerant recovery rates. Reclaimers would be more
financially able to accept slightly cross contaminated HCFCs from
contractors and wholesalers without needing to assess additional fees
on them to pay for destruction or fractional distillation. Removing
this disincentive for returning contaminated material would encourage
more recovery and discourage an incentive to vent refrigerant. One
commenter estimated that allocations for reclaimers would result in as
much as a 15% increase in recovered refrigerant within the first two
years of allocations.
    Finally, these commenters claimed an environmental benefit from
encouraging these less expensive blending practices. They stated that
blending reduces the need for fractional distillation, a process that
utilizes 300 times more energy than blending and they observed that
increased recovery means less refrigerant is vented into the
atmosphere.
    In addition to comments supporting allocation of consumption
allowances to certified reclaimers, EPA also received two comments
stating that allocations to reclaimers are not necessary and will not
encourage greater recycling/reclamation in the marketplace. These
commenters stated that (1) current reclamation capacity is sufficient
to meet greater future demand; (2) separation and distillation
technology currently exists, precluding the need for virgin HCFC-22 to
reclaim recovered HCFCs; and (3) allocating allowances to reclaimers
creates numerous administrative and practical challenges that were not
presented for notice and comment.
    EPA has previously detailed the importance of recovering and
reusing HCFC-22 and the Agency strongly encourages increased recovery
and either recycling or reclamation \6\ of

HCFC-22. Section 608 of the CAA prohibits the intentional venting of
HCFCs and EPA regulations require that they be recovered and then
either recycled, reclaimed, or destroyed. The recovery and reuse of
HCFCs prevents emissions to the atmosphere where they can deplete the
stratospheric ozone layer and reduces the amount of virgin material
that needs to be produced. Recovery becomes even more important in
light of the 2015 Montreal Protocol phasedown step, when the U.S. HCFC
consumption cap is reduced from 3,810 ODP-weighted metric tons to 1,524
ODP-weighted metric tons. In its report The U.S. Phaseout of HCFCs:
Projected Servicing Needs in the U.S. Air-Conditioning and
Refrigeration Sector (the ``Servicing Tail'' report), EPA estimates
that to meet demand in 2015, recovered material will have to provide
29% of the total servicing demand for HCFC-22. A smooth transition for
stakeholders--including continued availability of needed material for
approved uses--has historically been an essential aspect of the U.S.'s
success in implementing the Montreal Protocol and Clean Air Act
requirements. EPA therefore has given much consideration to the
suggestion raised by commenters. EPA does not believe, though, that
allocating allowances to reclaimers in this rulemaking is necessary or
the most appropriate action that EPA can take to foster greater
recovery and reclamation of HCFC-22.
---------------------------------------------------------------------------

    \6\ EPA has defined Recover, Recycle, and Reclaim at Sec.
82.152 as follows: (1) Recover refrigerant means to remove
refrigerant in any condition from an appliance and to store it in a
external container without necessarily testing or reprocessing it in
any way; (2) recycle refrigerant means to extract refrigerant from
an appliance and clean refrigerant for reuse without meeting all of
the requirements for reclamation. In general, recycled refrigerant
is refrigerant that is cleaned using oil separation and singe or
multiple passes through devices, such as replaceable core filter-
driers, which reduce moisture, acidity, and particulate matter.
These procedures are usually implemented at the field job site; (3)
reclaim refrigerant means to reprocess refrigerant to all of the
specifications in appendix A to 40 CFR part 82, subpart F (based on
ARI Standard 700-1995, Specification for Fluorocarbons and other
Refrigerants) that are applicable to that refrigerant and to verify
that the refrigerant meets these specifications using the analytical
methodology prescribed in section 5 of appendix A of 40 CFR part 82,
subpart F.
---------------------------------------------------------------------------

    First, while commenters stated that providing allowances to
reclaimers for HCFCs to be used in blending may foster increased
recovery, EPA is concerned that it may foster unsustainable reclamation
practices. Commenters stated that the blending ratios of virgin to
recovered material range from 4:1 to as high as 10:1 (reflecting
``blending up'' recovered material from either 98.5% pure or 97.5% pure
respectively, to 99.5%). The amount of virgin HCFC-22 produced or
imported for all purposes, including for blending out impurities, will
decrease significantly in 2015 when the overall HCFC cap declines from
25% of baseline to 10% of baseline. Production and import of virgin
HCFC-22 for refrigerant uses will cease in 2020. Therefore, reclamation
through separation and distillation will be more important in 2015 and
absolutely necessary in 2020.
    Second, allocating allowances to reclaimers would be a major change
to the rule that would affect other stakeholders who have not had the
opportunity to comment on the reclaimers' suggestion. Current allowance
holders would have their allocations reduced 10% under this suggestion.
If EPA were to finalize such a suggestion, EPA would want to provide
other stakeholders an opportunity to comment. The suggestion raises
several issues that would benefit from the notice and comment process.
Specifically, issuing allowances to reclaimers raises questions of who
would receive allowances, what the baselines would be, and how many
allowances would be allocated. Other questions about how to implement
this suggestion would include whether EPA should provide additional
allowances to reclaimers that currently have baseline allocations, and
whether EPA should set the baseline according to the amount reclaimed,
as commenters suggested, or according to the amount recovered.
Furthermore, some reclaimers currently manufacture and sell niche blend
refrigerants that include HCFC-22 as a component, so EPA would need a
mechanism to ensure that they would use the allocation for reclamation
purposes, not for continued production of these blends. Different
allocation methods offer advantages and disadvantages for potential
allowance holders that vary according to the specific characteristics
of the stakeholder. Thus, altering the final rule to accommodate the
reclaimers' suggestion is not a simple matter. If EPA were to issue a
supplemental proposal to provide an opportunity for all stakeholders to
comment on these issues, the rule would likely be delayed beyond
January 1, 2010. This would have a negative impact on all stakeholders
who are depending on an allowance allocation for the production and
import of HCFCs in 2010.
    Third, EPA believes that it can take other actions in this rule
that will foster recovery and reclamation while avoiding the
complications raised by the commenters' suggestion. The same commenters
that suggested allocations to reclaimers also noted that a constant
allocation rate over the five control periods, as proposed, might
discourage rather than foster reclamation. To avoid that, in this final
rule EPA is allocating at 80% of the estimated demand in 2010 and is
reducing the allocation over five years. EPA anticipates that the price
of HCFC-22 will increase as allocations decrease and supply is reduced.
Some of the economic constraints for recovery and reclamation will
therefore loosen and more recovered material being held in inventory
may be reclaimed. EPA believes that encouraging the market for
recovered material in this way will be the most effective and
appropriate mechanism that this current rulemaking can take to increase
recovery and reclamation.
    Overall, while EPA agrees that recovery practices should be
improved and reclamation expanded, the Agency does not agree with
commenters that EPA should provide allocations to reclaimers at this
time as a way of doing so. Therefore, in this final rule, EPA is not
adding new entrants based on their status as EPA-certified refrigerant
reclaimers. EPA may consider such an approach when proposing future
allocation rules.

B. Factors for Considering Allocation Amounts for HCFC-22 and HCFC-142b

    EPA proposed to allocate HCFC-22 and HCFC-142b allowances based on
the projected servicing needs for those compounds, taking into account
the amount of those needs that can be met through recycling and
reclamation. The proposed rule discussed and sought public comment on
two alternate methods for determining how many allowances to allocate
in 2010-2014 for these two compounds. One alternative that EPA rejected
would have allocated the maximum amount of HCFC-22 and HCFC-142b that
ensures compliance under the Montreal Protocol aggregate cap in 2010
without room for other HCFCs. The other alternative EPA rejected would
have been to allocate a percentage of the aggregate HCFC consumption
and production caps in 2010 for HCFC-22 and HCFC-142b equal to the same
overall percentage of the aggregate HCFC consumption and production
caps allocated for each substance in the 2003 allocation rule. Thus, in
2003, EPA allocated HCFC-22 allowances equal to 66 percent of 9,906 ODP
tons and HCFC-142b allowances equal to 13 percent of 9,906 ODP tons.
This second method would have applied the same percentages to the total
allowable HCFC consumption level for 2010-2014 of 3,810 ODP-weighted
metric tons (i.e. 2,515 ODP tons of HCFC-22 and 495 ODP tons of HCFC-
142b). EPA rejected these alternate methods because they do not
consider servicing needs and thus could result in shortages or
oversupply of HCFC-22. Additional discussion of these alternatives is
found in the proposed rule. Neither of these approaches received
favorable comment. EPA

therefore concludes that an approach based on the servicing need is
most appropriate for allocating HCFC-22 and HCFC-142b allowances.
Because it is important to promote greater use of recycled and
reclaimed material in anticipation of the 2015 phasedown step, EPA does
not intend to allocate the difference between the allocation authorized
by the Parties of the Montreal Protocol and the allocation authorized
by this rulemaking except under unforeseen extenuating circumstances.
1. The Importance of HCFC-22 Servicing Needs for Existing Equipment
    HCFC-22 is the most widely used HCFC and the demand for its use in
servicing existing equipment is the primary factor affecting EPA's
estimate of production and consumption of HCFCs in the coming years.
EPA has issued and sought comment on three versions of a draft report
analyzing servicing demand for the HCFC appliances in the U.S.
refrigeration and air-conditioning sector projected to be in service
from 2010-2019. The Servicing Tail report focuses on air-conditioning
and refrigeration appliances because such equipment will represent the
bulk of the servicing need. In addition, the servicing exception to the
use ban for HCFC-22 and HCFC-142b pertains only to use as a refrigerant
in such equipment. Under section 605(a) of the Clean Air Act and EPA's
implementing regulations, nearly all other uses of these two HCFCs are
banned effective January 1, 2010. The projected servicing need for
HCFC-22 in 2010 is approximately 62,500 metric tons (3,438 ODP-weighted
metric tons), or approximately 90 percent of the consumption cap for
all HCFCs in 2010, which is 3,810 ODP-weighted metric tons. HCFC-142b
has primarily been used as a foam blowing agent, a use which will be
phased out in 2010. The projected servicing need for existing
refrigeration equipment containing HCFC-142b is extremely low:
approximately 100 metric tons (7 ODP tons). EPA therefore has focused
the analysis on HCFC-22 because that compound is the predominant HCFC
in the installed base of air-conditioning and refrigerant equipment for
which servicing in the U.S. will likely continue.
    The Servicing Tail Report provides a classification of
refrigeration and air conditioning equipment that continue to use HCFC-
22. Refrigeration equipment can be categorized as: (1) Domestic
refrigeration, (2) refrigerated transport, (3) industrial process
refrigeration, and (4) commercial refrigeration. Domestic refrigeration
includes household refrigerators, household freezers, combination
refrigerator/freezer units, and water coolers. With the exception of
certain older household freezers that use HCFC-22, this category
typically does not use HCFCs or blends containing HCFCs. Refrigerated
transport includes refrigeration used in equipment that moves products
from one place to another and includes refrigerated ship holds, truck
trailers (i.e., reefer trucks), railway freight cars, and other
shipping containers. Industrial process refrigeration systems are
complex, customized systems used to cool process streams in the
chemical, food processing, pharmaceutical, petrochemical, and
manufacturing industries. This sector also includes industrial ice
machines, equipment used directly in the generation of electricity, and
ice rinks. Commercial refrigeration appliances that continue to use
HCFC-22 can be further broken down into two end uses: cold storage
warehouses and retail food refrigeration systems.
    The majority of HCFC-22 equipment that is projected to be in use
from 2010 onward will be air-conditioning applications, including
window units, packaged terminal units, unitary air-conditioning,
chillers, dehumidifiers, water and ground source heat pumps, and mobile
air-conditioning in buses and trains. EPA projects that approximately
145.6 million units of all such types of HCFC-22 air-conditioning
equipment will be in use in 2010, decreasing from 2010 levels by about
41 percent in 2015 and 86 percent in 2020. In addition, approximately
3.8 million units of HCFC-22 refrigeration equipment will be in use in
2010. The installed base of HCFC-22 refrigeration equipment is
projected to decrease from 2010 levels by about 44 percent in 2015 and
75 percent in 2020.
    EPA developed these estimates using its Vintaging Model. This model
is the primary tool that EPA used to launch the analysis and form the
basis for quantitative estimates of 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. Additional information on the Vintaging Model is available in the
docket for this rulemaking.
    On November 4, 2005, EPA published a Notice of Data Availability
(70 FR 67172) making the first draft of the Servicing Tail report
available for public review and comment. On September 29, 2006, EPA
held a stakeholder meeting presenting the findings in the second draft
of the Servicing Tail report along with other important information
regarding the next major milestones in the HCFC phaseout. EPA solicited
additional comments on the findings presented at the meeting.
Representatives of air conditioning and refrigeration manufacturers,
chemical producers, importers, reclaimers, industry associations, and
environmental organizations commented on the projected amount of HCFCs
needed to service the installed base of equipment and on the amounts
expected to be available from reclamation. In June 2008, EPA prepared a
third draft of the Servicing Tail report to: (1) Reflect the September
2007 Montreal Adjustment, in which the Parties agreed to adjust the
stepwise reduction in 2010 from 65 percent of baseline to 75 percent of
baseline for non-Article 5 Parties; (2) consider more recent production
and consumption data in the United States; and (3) consider more recent
trends in the air-conditioning and refrigeration sectors. EPA placed
this revised draft report in the docket and accepted comments on it
during the public comment period. These comments are discussed below.
    The projections of past HCFC consumption, as presented in the
Servicing Tail report, showed reasonable agreement with production,
import, and export data reported to the Agency as required by 40 CFR
82.24 on a quarterly, annual, and transactional basis. EPA's analysis
of the reported data confirms that the United States is satisfying its
obligations as it phases out ODS and enables EPA to consider trends in
the HCFC markets on a chemical-by-chemical basis. EPA also uses this
information to submit an annual report

to the Ozone Secretariat as required by the Parties to the Montreal
Protocol.
    The projected servicing need for HCFC-22 in 2010 is 62,500 metric
tons (3,438 ODP-weighted metric tons), or approximately 90 percent of
the ODP-weighted consumption cap for all HCFCs in 2010, which is 3,810
ODP-weighted metric tons. EPA estimates that the servicing need for
HCFC-22 will continue to decrease each year, and this final rule
accounts for this by decreasing the allocation annually in each of the
years 2011-2014. In contrast, the lead option in the proposed rule
would have maintained a constant HCFC-22 allocation of 50,000 metric
tons in 2010 through 2014. EPA recognizes that in 2013 and 2014 the
proposed HCFC-22 allocation would surpass projected need. This is one
reason why EPA is not allocating a constant amount of HCFC-22
allowances for the years 2010-2014. This final rule allocates at 20%
below modeled need in 2010, decreasing to 26% below the modeled need in
2014, and relies on a consistent amount of reclaimed material to assist
in meeting projected servicing needs. This approach is described in
Section IV.B.3 below. Estimates of projected need are discussed in the
Servicing Tail report found in the docket to this rule.
    After review of comments and other data and estimates of HCFC
servicing needs, EPA is not convinced that there is any reason to
allocate above the need projected in the Servicing Tail report. In
general, commenters supported the analysis presented in the Servicing
Tail report. These repeated efforts to seek and incorporate comments on
this analysis are important to the Agency, as the final rule bases the
allocation amounts on the demand estimates it contains. While EPA
received four additional comments on the Servicing Tail report in
association with the proposed rule, the Agency is confident that this
report accurately reflects the existing demand for HCFC-22 to support
servicing of existing equipment.
    Two commenters asked EPA to describe why it projects a decrease in
post-2010 HCFC-22 demand of approximately 6,100 metric tons compared to
the previous version of its Servicing Tail report. The decrease in
projected HCFC-22 demand between the September 2006 and June 2008
reports is a direct result of updates made to EPA's Vintaging Model
based on industry and stakeholder input as well as EPA's own research.
EPA updated the Vintaging Model to reflect slight increases in HCFC-22
demand for chillers, cold storage, and industrial process
refrigeration, and to reflect a decrease in HCFC-22 demand for
dehumidifiers and a significant decrease in HCFC-22 demand for retail
food end uses. These changes are part of EPA's ongoing effort to
improve modeling assumptions. Model assumptions and results (such as
consumption and emissions estimates) from major air-conditioning and
refrigeration end-uses were presented at the April 2007 spring meeting
of the Air-Conditioning, Heating, and Refrigeration Institute (AHRI).
EPA revised the Vintaging Model based on research done in preparation
for those meetings and based on comments received on those
presentations. EPA subsequently used revised model output to update the
June 2008 report.
    One of the commenters also asked technical questions pertaining to
the Vintaging Model and stated a belief that the change might be due to
clerical errors in the 2008 report. Specifically, the commenter noted
that (1) HCFC-22 chilling units expected to be in service in 2010
increase by 4,295% between the 2006 and 2008 reports; (2) 2010 unitary
projections for HCFC-22 retail food refrigeration equipment increases
72% between the two most recent reports; and (3) there is a decrease of
over two million dehumidifiers projected to be in service in 2010,
which is the only significant projected equipment reduction. The
increase in R-22 chiller units between the 2006 and 2008 reports is not
a clerical error; it is the result of the addition of new chiller end-
uses into the model and resulting analysis. Second, updates made to
assumptions for the retail food end-uses in the model did result in an
increase in equipment. However, despite the increase in the number of
units, there was a decrease in stocks, growth rates, leak rates, and
charge sizes which caused a decrease in R-22 demand post-2010. Finally,
conversations with industry indicated that dehumidifier projections in
the September 2006 report were too high. EPA discusses these questions
raised by commenters in more detail in the response to comments
document.
    One commenter suggested that the current economic climate may slow
the transition to new equipment, as owners seek to repair rather than
replace existing equipment, an effect which the 2008 Servicing Tail
report does not reflect. While the Servicing Tail report does not
consider effects from the recent economic downturn, the servicing
estimate does account for the practice of replacing components rather
than installing new equipment. EPA notes that while the economic
downturn may extend the time existing HCFC-22 equipment is used, it has
also reduced the amount of HCFC-based equipment installed and hence
will reduce future demand for servicing. EPA understands that the
actual transition will not perfectly synchronize with the model year-
by-year, whether for economic conditions, weather, or other events.
However, the combination of reclaimed and virgin HCFCs should be
sufficient to meet demand.
    One commenter stated that there are significant barriers to a rapid
transition to equipment that uses ozone-safe hydrofluorocarbons (HFCs)
before and after January 1, 2010. EPA responds that the transition to
HFC or other SNAP-acceptable substitute refrigerants is only required
for new equipment. Furthermore, EPA's discussion with manufacturers of
equipment and foam formerly reliant on HCFC-22 and HCFC-142b indicate
that the industry has been working for some time to implement such
alternatives by January 1, 2010. The January 1, 2010, date for
restricting the use of newly production or imported HCFC-22 and HCFC-
142b was established and published in the Federal Register on December
10, 1993 (58 FR 65018).
    Using reported data, the June 2008 version of the Servicing Tail
report, and comments provided at the September 2006 stakeholder
meeting, submitted in subsequent correspondence (available in the
docket), and provided in response to the proposed rule, the Agency has
sufficient information to allocate a percentage of baseline allowances
for HCFC-22 and HCFC-142b for production and consumption in 2010-2014
for servicing needs. The specific percentage of baseline for each of
the affected compounds is discussed below.
2. Meeting Servicing Needs With Virgin and Reclaimed Material
    The Agency recognizes that servicing needs can be met with a
combination of newly-manufactured HCFCs (virgin HCFCs) and HCFCs that
have been recovered and either recycled or reclaimed. Therefore, EPA
does not anticipate that virgin HCFC-22 will need to be produced or
imported to meet the entire HCFC-22 servicing need (estimated to be
3,438 ODP tons in 2010). The Servicing Tail report analyzes various
scenarios regarding reclamation. In addition, EPA's memo to the docket
``Summary: EPA Analysis of U.S. Reclamation Practices and Trends''
provides background on the reclamation industry, includes information
concerning capacity to reclaim greater amounts of refrigerants, and for
2010 projects that more than 20 percent of the servicing need can be
met by recovering HCFC-22 from existing equipment.

    Recycled and reclaimed HCFCs offset the need for newly-manufactured
HCFCs and after the terminal phaseout, as with the CFC phaseout, will
become the only material available for servicing existing equipment.
EPA regulations at 40 CFR part 82 subpart F, promulgated under section
608 of the CAA, are targeted to reduce the use and emission of certain
substances including HCFCs by maximizing their recapture and recycling
during the service, maintenance, repair, and disposal of appliances.
These regulations, and section 608 of the CAA, prohibit the venting or
knowing release into the environment of HCFCs. The regulations require
that they be recovered and then either recycled, reclaimed, or
destroyed. Therefore, it is reasonable to assume that some amount of
recovered HCFCs will be available to meet servicing needs. In
accordance with the chemical-by-chemical phaseout regime adopted by the
United States, after 2020 only recycled, reclaimed, and stockpiled
HCFC-22 and HCFC-142b will be available to service appliances that
require those substances. EPA's existing regulations at Sec.  82.16
terminate HCFC-22 and HCFC-142b production and consumption at the end
of 2019. The very small amount of additional production and consumption
of HCFCs allowed under Article 2F of the Montreal Protocol between 2020
and 2030 for servicing existing appliances (0.5 percent of baseline)
will only be permitted for HCFCs other than HCFC-141b, HCFC-22, and
HCFC-142b, per Sec.  82.16(e), and will be restricted to servicing air-
conditioning and refrigeration equipment manufactured prior to January
1, 2020, per Sec.  82.16(d).
    The Servicing Tail report uses EPA's Vintaging Model to determine
the quantities of HCFC-22 from existing (recycled or reclaimed) sources
that can meet post-2010 servicing needs with the remaining quantities
required through virgin manufacture (expending allowances). For a given
year, the Vintaging Model assumes that a certain percentage, which
varies by end use, of refrigerants are recovered from discarded
equipment. The model aggregates the quantities recovered but does not
distinguish the ``pool'' of refrigerant between quantities that are
reclaimed and those that are recycled.
    For purposes of analysis, the Servicing Tail report considers
scenarios for HCFC-22 where differing amounts of refrigerant from
decommissioned or converted appliances were recycled or reclaimed and
reused for servicing. For example, the report examines scenarios in
which 10 percent, 15 percent, 20 percent, 50 percent, and 75 percent of
the total amount of HCFC-22 in retired or converted equipment is
recovered. These analyses depict the potential ratios of new and
recovered HCFC-22 that could be available during the years 2010-2019 to
meet the overall servicing needs, recognizing that the higher recovery
rates are less likely for the earlier control periods.
    Recovery of HCFC refrigerants, with subsequent recycling or
reclamation, will continue to increase over time. During the past
several years the price of newly manufactured HCFC refrigerants has
increased, creating a greater incentive for refrigerant to be reused.
Recently, EPA has learned that many reclaimers are beginning to work
directly with contactors to provide education concerning the benefits
of refrigerant recovery. Certain reclaimers have recently established
programs to provide incentives for contractors to return used
refrigerants, including avoiding unnecessary mixing of refrigerants and
thereby increasing the amount of refrigerant that can meet AHRI
Standard 700. Such programs should encourage the existing trends of
increased amounts of recovered refrigerants available for reuse. Given
its previous experience with the class I phaseout, EPA believes that
over time an increasing percentage of HCFCs will be recovered for
reuse. For example, after the 1996 CFC phaseout, motor vehicles with
CFC-12 air-conditioning systems continued to be serviced with recovered
CFC-12. Recovered CFC refrigerants are still in use today for servicing
a range of older equipment.
    Three commenters disagreed with EPA's assumption that 20% of the
total amount of HCFC-22 in equipment retired or retrofitted beginning
in 2010 can either be recovered or made available for reuse. Generally
this concern centered on the fact that current recovery and reclamation
rates are not 20%. One of these commenters stated that the current use
of reclaimed HCFC-22 is closer to seven percent. Though not stated in
the comment, EPA believes this is a reference to data reported to EPA
under 40 CFR part 82 subpart F showing that 4,556 MT of HCFC-22 was
reclaimed in 2008. This amounts to 7.3% of the modeled demand in 2010,
up from 5.9% in 2007. This value, though, does not reflect the total
recovery rate as it excludes the amount of recycled refrigerant. EPA
does not track recycled refrigerants, since recycled refrigerant
(unlike reclaimed refrigerant) must be charged back into equipment with
the same ownership rather than re-enter the market. EPA therefore knows
that the combined amount of recycled and reclaimed refrigerants is
greater than 7.3%. Two commenters provided estimates for the combined
reclamation and recycling rates. One commenter said it is currently
less than 15% of the modeled demand while the other estimated
approximately 24 million pounds, or 17%. As described in the proposed
rule, EPA has both anecdotal and reported information concerning
recovery rates for refrigerants, though it does not have figures for
recycled refrigerants. Furthermore, EPA notes that the amount reclaimed
in one year does not mean that it was recovered in that year. Many
reclaimers collect more than they reclaim in any one year due to market
shifts. One commenter said that reclaimers have many tons of material
in inventory waiting to be reclaimed when the economics of reclamation
improve, which EPA believes will occur through the allocation levels
established in this rule. EPA is aware that 20% recovery and
reclamation for 2010 is greater than current industry practice but has
not received comments that convince us that the rate is unreasonable.
    The third commenter opposed to EPA's 20% recovery assumption was
not optimistic that reclamation facilities currently had sufficient
capacity or could increase capacity during the next few years to meet
the demand. However, the reclamation companies together provided a
comment stating that they currently have sufficient capacity to reclaim
36 million pounds of refrigerants each year, which is equal to 16,329
MT, or 26% of the estimated demand in 2010. The main concern of the
reclaim industry is not reclamation capacity but rather the economic
disincentive to reclaim and poor recovery practices. One commenter
pointed to an expansion in the number of distributors offering
refrigerant recovery services in support of EPA's goal of achieving 20%
recovery. Multiple commenters suggested methods to improve contractor
participation in the recovery, and recycling or reclamation of
refrigerant, such as certification programs, enforcement, educational
outreach, and training. EPA agrees that such approaches could improve
contractor participation although they are beyond the scope of this
rulemaking and welcomes further discussion with stakeholders to improve
recovery and recycling or reclamation rates in 2010 and beyond.
    EPA is basing the HCFC-22 allocation amounts on the amount EPA has
estimated is needed, recognizing that reclamation and recycling reduce
the

amount of virgin HCFC-22 that needs to be produced to meet that
servicing need. EPA also continues to believe that an allocation at 80%
of the estimated servicing demand is appropriate for 2010. Ten
commenters stated that EPA's proposal to meet 80% of servicing demand
through HCFC-22 consumption allowances, with the remaining demand being
met through recovered material, is an appropriate approach. Six of
these commenters stated that reducing the available supply of new HCFC-
22 will create a need, and therefore a market, for recovery and
reclamation. Four commenters stated that EPA should issue allowances at
more than 80% of servicing demand and shared the concern that there
will be insufficient recovered and reclaimed HCFC-22 to meet the
difference. Three other commenters encouraged EPA to issue consumption
allowances equaling less than 80% of HCFC-22 servicing demand in 2010.
    EPA believes that if the 2010 allocation is 80% of the modeled
demand, the remaining servicing need can be met from recycled or
reclaimed material. Given the regulatory requirements for recycling and
reclamation (at 40 CFR part 82 subpart F), experience with the CFC
phaseout, and industry practices, EPA believes that by January 1, 2010,
the effective date of this rule, the remaining 2010 servicing need can
be met with recycled or reclaimed material. The Agency believes that
20% of the HCFC-22 in equipment that is retired or retrofitted each
year after 2010 can be recovered and reclaimed and that the
availability of recycled or reclaimed material will increase through
2014 as recovery practices improve. In 2020, all HCFC-22 and HCFC-142b
used to service air-conditioning and refrigerant equipment will be
supplied by recycled or reclaimed refrigerant that has been recovered
from existing appliances in light of the nearly-complete phasedown of
production and import of virgin material in accordance with the CAA and
the Montreal Protocol. Additionally, EPA regulations already prohibit
the intentional venting of refrigerants and require refrigerant
recovery, and the market for recycled and reclaimed refrigerant is
predicted to grow as the phaseout progresses. As discussed below, EPA
also believes that reducing the allocation each year from 2010 to 2014
to reflect declining demand will lead to higher rates of recovery and
recycling/reclamation. Additional information concerning recovery,
recycling, and reclamation is found in the Servicing Tail report and
the ``Summary: EPA Analysis of U.S. Reclamation Practices and Trends''
report in the docket.
3. Annual Reduction in Allocated Amounts
    EPA's proposal to allocate 80% of the 2010 servicing demand for
HCFC-22 (50,000 metric tons) was based on its belief that the remaining
need could be met with refrigerant that was recovered and either
reclaimed or recycled. Thirty three commenters pointed out, though,
that EPA's proposal to maintain a constant allocation for each control
period over 2010-2014 did not reflect that demand will decrease over
that time as equipment goes out of service and are replaced with
appliances using alternative refrigerants. Therefore, while an
allocation of 50,000 MT would equal 80% of estimated demand in 2010, an
allocation of 50,000 MT in 2013 and 2014 would exceed the modeled
demand for those years (by 1,600 MT in 2013 and 6,400 MT in 2014). The
proposed rule took comment on the idea of increasing the expected
contribution of recycled and reclaimed refrigerant for each control
period by annually reducing the allocation of HCFC-22. EPA now believes
that unless it were to reduce the allocations for virgin HCFC-22
between 2010 and 2014, there could be an oversupply of HCFC-22 and the
contribution of recycled and reclaimed refrigerant would decrease, both
in the total number of kilograms and as the proportion of overall need.
    Commenters expressed the possibility that a constant allocation as
proposed could harm the rates of recovery and reclamation. Reclaimers
commented that they would not be able to compete with the less
expensive virgin material that would exceed the market demand in 2013-
2014. With no economic incentive to reclaim, they claim they could be
driven to idle their reclamation facilities, restarting them in 2015 to
meet the demand resulting from that stepdown. They argue that two years
of inactivity would weaken their contacts with contractors and
distributors and hamper efforts to instill proper recovery practices.
EPA is unable to predict the precise effect of allowing production
levels in excess of demand and does not believe that all reclaimers
will be affected in the same way. However, EPA does agree that this
could harm the recovery and reclaim industry at exactly the time when
rates of recovery and reclamation need to be increasing.
    EPA is particularly concerned with providing as smooth a transition
to the 2015 stepdown as possible. At that date, the U.S. must meet a
90% reduction below the baseline for all HCFCs, which is equivalent to
1,524 ODP-weighted metric tons. EPA's Servicing Tail report shows that
even a 20% recovery rate would be insufficient to meet the demand for
HCFC-22 in 2015. As shown in Table 4-5 in the report, demand for HCFC-
22 in 2015 is projected to be 38,800 MT while the cap for all HCFCs
equates to 27,709 MT of HCFC-22 (assuming no allocation for any other
HCFCs). A 20% recovery rate would allow for the additional use of 8,800
MT but would still leave a shortfall of 2,291 MT in 2015. EPA
calculates that to meet the total demand in 2015, the recovery rate
must increase to 26% (representing 29% of total servicing demand) by
that year.
    Based on the comments, EPA believes it is desirable to institute a
year-by-year reduction for the period of 2010-2014. A smooth transition
for stakeholders--including continued availability of needed material
for approved uses--has historically been an essential aspect of the
U.S.'s success in implementing the Montreal Protocol and Clean Air Act
requirements. To ease the transition to 2015 and avoid disruptions to
the market and shortages in HCFC-22 at that date, the Agency believes
it is necessary to take steps now to foster further recovery.
    EPA believes that the servicing demand over 2010-2014 can continue
to be met under the new allocation levels in the final rule. Since EPA
is not banning the use of existing HCFC-22 appliances that have been
manufactured prior to January 1, 2010, recovered and reclaimed HCFC-22
will become more valuable as the phaseout progresses. The demand for
HCFC-22 to service existing equipment will provide an economic
incentive to increase the quantities of recovered HCFC-22 available for
reclamation. As an indicator of the improved economics, several
reclamation companies have recently started offering financial payments
for recovered HCFC-22. The docket provides further information on EPA's
assumptions regarding the availability of recovered and reclaimed HCFC-
22 to meet servicing needs.
    Finally, annual reductions to the allocation provides clear
environmental benefits compared to the lead option in the proposed
rule, assuming the same starting point. Over the five-year period 2010-
2014, the proposed rule would have allocated 250,000 metric tons of
HCFC-22. Over the same period, the final rule is allocating 203,100 MT
of HCFC-22, a difference of 46,900 MT, or 2,574 ODP tons.
    Commenters suggested various possible methods for allocating HCFC-
22 allowances on a declining annual

basis. One commenter supported an annually declining allocation but did
not support a total allocation over the five-year period less than what
EPA proposed. EPA believes that such an approach would negate many of
the benefits of annually reducing the allocations, including easing the
transition to the 2015 control period and providing an environmental
benefit. To implement the suggestion, the allocation would have to
equal demand in 2010, which would not create any impetus for
reclamation in that year, and be 84% of demand in 2014. EPA believes
that meeting 20% of demand with used material in 2010 is feasible and
that the Agency should not wait until 2014 to approach that goal. For
the same reason, EPA also rejects another suggested method that would
increase the 2010 allocation from 50,000 MT to 55,000 MT. The majority
of commenters agree with EPA's approach of allocating at 80% of demand
in 2010, with recovered and either recycled or reclaimed HCFC-22
meeting the remainder. Indeed, other commenters agreed with an
allocation of 50,000 MT in 2010 and used that value as the starting
point for a straight-line annual reduction to other 2014 endpoints. One
suggestion was to set allocations that decline linearly from 2010-2014,
where the allocation if extrapolated to 2015 would equal the 2015 cap.
This results in a yearly reduction of 4,458 MT. Another similar
suggestion rounded up the annual reduction to 5,000 MT, which results
in a line that would be below the cap in 2015.
    Because the primary benefit of annually reducing the allocation is
to ensure demand in 2015 is met through greater recovery and
reclamation, EPA believes that it is more appropriate to base the
allocation more directly on that goal. In 2015, EPA estimates demand of
HCFC-22 at 38,800 MT. Were the allocations to consist entirely of HCFC-
22, the cap would limit the 2015 HCFC-22 allocation to only 27,709 MT,
a difference of 11,091 MT that would have to be made up with recovered
material. Furthermore, it is likely that the allocation in 2015 will
not consist entirely of HCFC-22 as EPA will need to reserve room under
the cap for other HCFCs, similar to the approach EPA is taking in this
rule for the 2010-2014 control periods. EPA believes it is appropriate
to establish an annual step-down such that the amount of total demand
to be met from recovered HCFC-22 will equal 12,500 MT each year, as
that is the amount EPA proposed to be met in 2010 and it is
approximately the amount that will be needed to meet the servicing
demand in 2015. Under this approach, the allocations would equal 50,000
MT in 2010, 45,400 MT in 2011, 40,700 MT in 2012, 35,900 MT in 2013,
and 31,100 MT in 2014. These values, shown in the table below, are
derived by subtracting 12,500 MT from the estimated demand each year.
EPA will not issue allowances for 2015 and beyond until a future
rulemaking but extends the table to 2015 to show the estimated demand
for that year and the amount of recovered material that must be used to
meet the demand at that date, assuming the allocation in 2015 consists
entirely of HCFC-22 and does not include other HCFCs.

----------------------------------------------------------------------------------------------------------------
                                                        2010      2011      2012      2013      2014      2015
----------------------------------------------------------------------------------------------------------------
Estimated Demand (MT)...............................    62,500    57,900    53,200    48,400    43,600    38,800
Total Allocation (MT)...............................    50,000    45,400    40,700    35,900    31,100    27,709
                                                     -----------------------------------------------------------
    Reclaimed Amount (MT)...........................    12,500    12,500    12,500    12,500    12,500    11,091
----------------------------------------------------------------------------------------------------------------

    This annual stepdown lies between the two rates suggested by
commenters. As the total demand decreases, maintaining the supply of
recovered HCFCs at a constant level results in recovered material