is still working to refine), EPA proposes to find that the U.S.
production baseline is 375 MMTEVe and the U.S. consumption baseline is
299 MMTEVe. To provide the most accurate production and consumption
baselines, EPA reiterates its request for data submissions and other
information relevant to HFC production and consumption in 2011, 2012,
and 2013. Once established through the final rule, EPA does not intend
to amend the baselines. While EPA is taking comment on the inputs to
the calculation, the Agency notes that the formulas used for
calculating the baselines are established in the AIM Act.

                     Table 4--Inputs for Calculation of Production and Consumption Baselines
----------------------------------------------------------------------------------------------------------------
                                                                       Value      Percentage  in  Modified value
                              Input                                  (MMTEVe)        baseline         (MMTEVe)
----------------------------------------------------------------------------------------------------------------
2011-2013 average HFC production................................             331             100             331
1989 HCFC production............................................           216.9              15            32.5
1989 CFC production.............................................         2,799.8            0.42            11.8
                                                                 -----------------------------------------------
    Production baseline.........................................  ..............  ..............             375
2011-2013 average HFC consumption...............................             256             100             256
1989 HCFC consumption...........................................           210.3              15            31.5
1989 CFC consumption............................................         2,784.5            0.42            11.7
                                                                 -----------------------------------------------
    Consumption baseline........................................  ..............  ..............             299
----------------------------------------------------------------------------------------------------------------

VI. How is EPA proposing to establish allowances?

    This section provides an overview of how EPA intends to establish a
system providing for HFC production and consumption allowances and
EPA's proposed methodology for issuing allowances. The AIM Act in
subsection (e)(3) requires EPA to conduct a rulemaking to phase down
production and consumption of regulated substances in the United States
through an allowance allocation and trading program. Aside from
establishing the cap on the allowance program (by defining how to
calculate the baseline and requiring a set percentage reduction in
specific years from that baseline), the AIM Act provides EPA
considerable discretion in determining how to establish the allowance
program and how to allocate allowances in that program. Because EPA has
experience phasing out production and consumption of ODS under Title VI
of the CAA in similar industries, EPA is using that experience to
inform this proposal.\42\
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    \42\ Collectively, EPA's regulations governing the phaseout of
ODS can be found in Subpart A to 40 CFR part 82. https://ecfr.federalregister.gov/current/title-40/chapter-I/subchapter-C/part-82.
---------------------------------------------------------------------------

A. What is an allowance?

    EPA uses an allowance as the unit of measure that controls
production and consumption. Subsection (e)(2)(D)(ii) of the AIM Act
specifies that an allowance allocated by EPA under the AIM Act is a
limited authorization for the production or consumption of a regulated
substance and does not constitute a property right. EPA is proposing
that the Agency would issue allowances that would be valid between
January 1 and December 31 of a given year, also known as a ``calendar-
year allowance.'' A calendar-year allowance represents the privilege
granted to a company to produce or import regulated substances in that
year. EPA proposes to allocate production allowances, consumption
allowances, and ``application-specific allowances'' for six uses
specified in the Act.\43\ EPA proposes that producing HFCs would
require expending both production allowances and consumption
allowances, since production is a component of the AIM Act definition
of what composes consumption. Importing HFCs would require expending
only consumption allowances. This is the mechanism EPA has used to
implement the ODS phaseout and would meet the expectations of, and be
understood by, producers and importers of HFCs. This design also helps
EPA ensure that both the production and consumption caps from the AIM
Act will be met through the allowances allocated. As discussed later,
EPA is proposing that ``application-specific allowances'' are a third
category of allowances that can be

expended to either produce or import HFCs.
---------------------------------------------------------------------------

    \43\ The ODS framework also issued allowances for specific uses
such as an essential use allowance or a critical use allowance.
---------------------------------------------------------------------------

    EPA is proposing that producing or importing HFCs that will be used
and entirely consumed (except for trace quantities) in the manufacture
of another chemical (i.e., for use as a feedstock, which is also known
as transformation) would not require expending production or
consumption allowances. In general, such HFCs are exempted from the
term ``produce'' under subsection (b) of the AIM Act. However, HFCs
intended to be used for transformation are regulated substances and
thus certain provisions, such as recordkeeping and reporting, apply to
them to verify that they are in fact transformed. As such, EPA is
proposing that an importer must submit a petition and receive a non-
objection notice before importing HFCs for transformation. EPA
discusses proposed recordkeeping and reporting requirements for HFCs
that are intended to be used for transformation in section IX.D of this
preamble.
    The definition of ``Produce'' in the AIM Act and as proposed in
this rulemaking explicitly excludes the reclamation, reuse, or
recycling of a regulated substance. Because the definition of
``Consumption'' includes production, EPA intends to not include the
amounts of domestically reclaimed HFCs for calculating the yearly
production or consumption limits. The AIM Act does not exempt HFCs that
have been reclaimed or otherwise reprocessed from consideration when
determining the volume of HFCs imported into the United States. EPA is
therefore proposing to require consumption allowances for the import of
reclaimed HFCs, unless the reclaimed HFCs are being imported solely for
the purpose of destruction. In the situation of reclaimed HFCs imported
solely for the purpose of destruction, if the imported reclaimed HFCs
were counted towards consumption, it would be subtracted back out when
destroyed. If a consumption allowance were required to be expended in
this circumstance, EPA would likely give that allowance back after the
substance was destroyed. In this circumstance, it seems appropriate to
simply permit reclaimed HFCs to be imported solely for purposes of
destruction without expenditure of an allowance, assuming it can be
reasonably demonstrated that the HFC will in fact be destroyed. EPA is
accordingly proposing recordkeeping and reporting requirements in Sec.
84.31. There is further discussion of the proposed process related to
import of used HFCs for destruction in section VIII.F. of this
preamble.
    EPA is also proposing that producers of HFCs need not expend
production or consumption allowances if the HFCs are destroyed in a
timely manner using an approved technology. More specifically, EPA
proposes that if a company intends to utilize onsite destruction
capability, the company does not need to expend allowances for the HFC
production if the HFCs are destroyed within 30 days. If a company
intends to utilize offsite destruction capability, the company need not
expend allowances for the HFC production if the HFCs are destroyed
within 90 days. These timelines seem achievable as a practical matter
while being short enough to avoid potential malfeasance that could
occur over an elongated time horizon. EPA welcomes comment on this
question and would consider longer time windows if necessary, to allow
companies adequate time to destroy these chemicals.
    This proposal is consistent with the definition of ``Produce'' in
the AIM Act, which excludes ``the destruction of a regulated substance
by a technology approved by the Administrator.'' HFCs that are
domestically produced but are intended for destruction are regulated
substances and thus certain provisions, such as recordkeeping and
reporting, apply to them to verify that they are in fact destroyed. As
discussed in the definitions section, EPA is proposing to exclude from
production ``the inadvertent or coincidental creation of insignificant
quantities of a regulated substance during a chemical manufacturing
process, resulting from unreacted feedstock, from the listed
substance's use as a process agent present as a trace quantity in the
chemical substance being manufactured, or as an unintended byproduct of
research and development applications.'' Under this proposal, such
insignificant quantities created through the above-listed circumstances
would not be considered production. The necessary implication of this
proposed definition is that any other regulated substances created
during the manufacturing process, either in quantities that are not
insignificant or outside of the listed circumstances, would be
considered ``production'' and would require expenditure of production
and consumption allowances unless destroyed in a timely manner (there
are additional restrictions related to HFC-23, as discussed further in
subsection F). This proposal is intended to ensure that the regulated
substances identified under the AIM Act are appropriately controlled
and their production and consumption are reduced under the schedule
outlined by Congress. Whether the regulated substance is inadvertently
created through the chemical manufacturing process does not seem to be
relevant to Congress's directive to phase down regulated substances on
the statutorily defined schedule.
    EPA is proposing that any import of bulk regulated substance in any
quantity requires consumption allowances. This would include a company
that brings into the United States a rail car, tank truck, or ISO tank
containing a heel of regulated substances. It would also include
imports of HFCs that are classified as ``U.S. goods returned.'' In such
situations, the company would need to expend consumption allowances for
the import. As with the proposal related to production, this proposal
is intended to ensure that all the regulated substances identified
under the AIM Act are appropriately phased down according to the
schedule outlined. EPA is additionally concerned that providing an
exemption for imports of heels or U.S. goods returned could provide
avenues for illegal imports of HFCs if an entity were to mislabel a
full container as only containing a heel or foreign produced material
as a U.S. good returned. EPA is interested in comments, however, on
whether it should consider exempting heels or U.S. goods returned as a
necessary part of importers' standard practice to enable easier import
and export of regulated substances.
    However, EPA is proposing that companies that tranship HFCs do not
need to expend allowances for that transhipment. In order to meet the
definition of transhipped material, the HFCs cannot enter interstate
commerce. Transhipped materials are also, by design, intended to be
imported into, and then exported out of, the country in identical
quantities. EPA is proposing that an entity does not have to expend
consumption allowances for transhipped materials if the regulated
substances are exported within 6 months of import. If a company does
not tranship HFCs within six months of entry, EPA is proposing that the
company would have to expend allowances. As explained in the reporting
section, EPA is proposing that companies notify the Agency when a
transhipment arrives and leaves the U.S. The intent of this proposal is
to minimize the risk of illegal imports through the guise of
transhipments. The United States experienced this method of illegal
importation during the phaseouts of CFCs and HCFCs. EPA requests
comment on the length of time a transhipment could reasonably be
expected to be in the United States and

whether it is appropriate to allow as little as two months or as much
as twelve months. EPA also requests comment on other ways to reduce the
risk of HFC transhipments entering interstate commerce, such as monthly
reporting (or other reporting frequency) of status while it remains in
transit; making the bonded warehouse the responsible party for any
transhipments that enter the market unaccounted for or vented;
requiring a label; or registration with the certification ID tracking
system discussed later in this proposal.
    EPA is proposing that allowances issued under the AIM Act be an
exchange value-weighted number rather than having allowances that are
specific to each HFC. This approach would align with the approach for
calculating the baseline envisioned in the AIM Act. Such an approach
also maintains flexibility in the market if a producer or importer
decides to switch between regulated substances. This would allow
entities to efficiently distribute allowances as the market needs and
may encourage transitions into regulated substances with lower exchange
values earlier than would happen under the statutorily outlined
schedule, which could lead to greater environmental and health
benefits.
    Under this proposed approach, one allowance would be equal to one
metric ton of exchange value equivalent (MTEVe). Producers and
importers would multiply the quantity of the HFC they seek to produce
or import, in kilograms, by its exchange value and then divide by 1,000
to determine the total number of allowances needed. For example, based
on the exchange values assigned to regulated substances in the tables
provided in subsection (c) of the AIM Act, an importer would need to
expend 1.43 consumption allowances to import one kilogram of HFC-134a.
Given the variation in exchange values, one would need to expend
between 0.053 allowances to produce one kg of HFC-152 and 14.8
allowances to produce one kg of HFC-23. EPA is proposing to adopt the
table of regulated substances and their corresponding exchange values
provided in section (c) of the AIM Act into appendix A to the subpart
established for this rule.
    EPA notes that the exchange values listed in the AIM Act for each
regulated HFC, and for the CFCs and HCFCs used in the baseline
calculations, are numerically identical to the 100-year global warming
potentials (GWPs) of each substance, as given in the Errata to Table
2.14 of the IPCC's Fourth Assessment Report (AR4) \44\ and Annexes A,
C, and F of the Montreal Protocol. In practical terms, producers,
importers, and exporters would be able to use the AR4 GWP of a blend
that contains only regulated HFCs in determining the amount of EVe
allowances necessary to produce or import that blend, or more
precisely, the regulated HFC components contained in the blend. If a
blend contains components that are not listed as a regulated substance,
only the components of the blend that are regulated HFCs would be
included in determining the EVe. As a result, the EVe would be lower
than the CO2e value for blends that are not limited to
regulated substances.
---------------------------------------------------------------------------

    \44\ IPCC, 2007: Summary for Policymakers. In: Climate Change
2007: The Physical Science Basis. Contribution of Working Group I to
the Fourth Assessment Report of the Intergovernmental Panel on
Climate Change [Solomon, S., D. Qin, M. Manning, Z. Chen, M.
Marquis, K.B. Averyt, M.Tignor and H.L. Miller (eds.)]. Cambridge
University Press, Cambridge, United Kingdom and New York, NY, USA.
https://www.ipcc.ch/report/ar4/wg1.
---------------------------------------------------------------------------

    Under CAA Title VI, EPA allocated baseline allowances and annual
year allowances derived from those company-specific baselines.\45\ EPA
is proposing to take a different approach for allowances allocated
under the AIM Act. Specifically, EPA is proposing to only issue
calendar-year allowances and not create company-specific baseline
allowances. Under the ODS phaseout, baseline allowances were revisited
periodically and updated based on transfers between companies. However,
baseline allowances effectively became ``permanent'' and had value
across control periods. Companies that stopped producing ODS had the
ability to continue receiving allowances annually until the phaseout
date, or could sell their market share to another company by
transferring their baseline and/or calendar-year allowances. Under the
AIM Act, EPA is proposing to only issue calendar-year allowances, which
are only usable in the year they are issued, without the system of
baseline allowances. This is intended to promote more flexibility in
future years to adjust approaches and issuances of allowances to a
dynamic marketplace as opposed to having allocations tied to a singular
time in the past.
---------------------------------------------------------------------------

    \45\ See, e.g. 78 FR 20007; April 3, 2013. https://www.federalregister.gov/d/2013-07758/p-93.
---------------------------------------------------------------------------

B. What are EPA's proposed options for determining allocations?

1. For which years is EPA proposing to issue allowances?
    EPA is planning to issue allowances for 2022 according to the
framework and procedure established through this rulemaking by October
1, 2021. EPA intends to provide notice of 2023 allowances by October 1,
2022, using the framework and procedure to be established in this
action. Given the AIM Act's deadline of finalizing a rule within 270
days of enactment, EPA has focused on what can be implemented in a
short timeframe. EPA recognizes that phasing down a regulated substance
as required under the AIM Act may have different implications for
stakeholders than the Agency's past experience with phasing out ODS. To
allow more time for consideration of these differences, EPA intends to
seek additional input from stakeholders for later years. As such, EPA
intends to develop another rule before allowances are allocated for
calendar year 2024 that may alter the approach and procedure for
allowance allocations past the year 2023. Given the phasedown schedule
in the AIM Act, EPA is intending to revisit the initial approach for
determining allowance allocations established through this rulemaking
before the 2024 phasedown step to consider whether any changes would be
appropriate and further build out aspects of this program. In 2024 the
number of allowances will decrease from 90 percent of baseline to 60
percent of baseline. Additional analysis of the market--as well as the
effects of implementing other provisions of the AIM Act--may be
necessary before issuing allowances for that stepdown.
    EPA welcomes comment on its intention to issue allowances later
this year only for 2022. EPA is also considering issuing allowances for
2022 and 2023 by October 1 of this year. EPA's preference for proposing
to establish a framework but issuing allowances only one year at a time
provides time for the Agency to solicit and consider other potential
mechanisms for issuing allowances. The Agency is also uncertain it can
accurately forecast at this time the full quantity of allowances
necessary for application-specific uses at this time. As discussed
further in this section, application-specific allowances must be
provided from within the general cap of available allowances. Until EPA
can determine the number of application-specific allowances needed by
the statutorily identified end users, it cannot know how many
allowances remain from within the cap for general

allowances. As a result, EPA is proposing to determine the general pool
of available allowances, and subsequently provide for individual
company allocations, each calendar year, as opposed to allocating for
multiple years at a time.
2. Based on currently available data, which companies is EPA proposing
to issue allowances to?
    EPA is proposing to issue allowances to companies that produced or
imported HFCs in 2017, 2018, and/or 2019, and were still active in
2020. There are two elements within this proposal to discuss: Which
companies will be eligible to receive allowances and which years of
operation will be relevant to EPA's determination. Note that this is
separate but related to how many allowances each company may be
allocated. How EPA proposes to determine individual allocation amounts
are discussed separately later.
    EPA proposes that considerations for determining who should receive
allowances in this initial rulemaking would include providing as
seamless a transition as possible to a regime where allowances are
needed to produce and import HFCs, promoting equity, timeliness of
implementation, and availability of robust data. EPA is proposing to
issue allowances to active HFC producers and importers operating in
2020 while providing a set aside for new entrants as a way to meet
these objectives.
    With regards to production allowances, EPA is proposing to issue
allowances to companies that produced HFCs in the United States in
2017, 2018, or 2019 that were also still producing HFCs in 2020. In
determining the appropriate approach for issuing allowances, EPA seeks
to avoid issuing production allowances to entities that are unable to
use them. In particular, EPA would like to avoid issuing allowances to
companies that no longer produce HFCs or for HFC production capacity
that has been shut down. EPA also seeks to avoid encouraging the
creation of new high-GWP HFC production capacity within the United
States, as that would be contrary to the intended goal of the AIM Act
to phase down EV-weighted production by 85 percent from the calculated
baseline figure within 15 years. Production facilities are capital
intensive and are typically used for long periods of time. The list of
HFC producers in the United States is included in a memo included in
the docket (``HFC Production and Consumption Data--Proposed Rule''). As
noted at an earlier point in this section, EPA is proposing that
production of HFCs would require expenditure of both production and
consumption allowances, since production is a component of the AIM
Act's definition of consumption. As a result, EPA is proposing to issue
production allowances to those companies that are currently listed as
HFC producers, as well as any additional companies that can document
their production of HFCs during the relevant years by the close of the
comment period listed above in the DATES section of this preamble and
report to the GHGRP.\46\
---------------------------------------------------------------------------

    \46\ As noted previously, there is no minimum threshold for
production of HFCs in the GHGRP. People may have previously noticed
that e-GGRT was limited to submitting and revising GHGRP annual
reports for years 2015 to 2020. However, EPA has now made available
a supplemental XLS form for years 2011 to 2014 for HFC producers who
were subject to the GHGRP, did not submit an annual report for one
or more of those years, and would now like to submit their supply
data for those corresponding years. If you have questions, please
contact the person listed under FOR FURTHER INFORMATION CONTACT.
---------------------------------------------------------------------------

    Consistent with the definition of ``Produce,'' EPA proposes that
companies receive production allowances based on the total EVe quantity
produced minus amounts for transformation minus amounts destroyed. EPA
proposes that consumption allowances be determined for each company
based on the EVe quantity of HFCs they produced (subtracting out
transformation and destruction) plus the amount they imported
(excluding the amount imported for transformation or destruction) minus
the amount exported. As such, if a company produced HFCs, but then
exported HFCs, their production allowances would be higher than their
consumption allowances, assuming the company did not import more HFCs
than it exported.
    With regards to consumption allowances, EPA is taking a similar
approach and proposing to issue allowances to companies that produced
and/or imported HFCs during 2017, 2018, or 2019 that were still active
in 2020. Similar to the discussion in the baseline section, EPA is
proposing to use data reported to GHGRP under subpart OO requirements
to determine companies' import and export activities in 2017-2020. As
discussed in the section on establishing the baseline, there may be
companies that imported and exported HFCs in quantities less than
25,000 MTCO2e and therefore were not required to report to
the GHGRP. EPA is proposing to issue allowances to importers under the
25,000 MTCO2e threshold so long as the company provides
import and export records to EPA, such as Customs forms or bills of
lading, to document their historic practice consistent with that
required under subpart OO. EPA will consider all data provided by the
close of the comment period listed above in the DATES section of this
preamble. EPA plans to verify any claimed import and export before a
company is included in the allowance allocation.
    EPA is also proposing to issue allowances at the parent company
level. If multiple companies and/or facilities that imported HFCs in
2020 are controlled or owned by the same corporate entity, EPA is
proposing to issue allowances only to their parent company. If a parent
company had multiple subsidiaries reporting consumption or production,
EPA is proposing to base the parent company's allocation on the single
year where all subsidiaries combined were at their highest level. This
approach would be administratively easier and improve transparency in
the market. It would also avoid providing allowances at a higher level
than is warranted for parent companies that have imported under
multiple company names. As discussed later, to ensure the integrity of
the set aside, EPA is proposing that new entrants cannot be a
subsidiary or otherwise related to a calendar-year allowance holder.
EPA therefore intends to request corporate ownership information from
all companies for which allowances may be allocated.
    EPA discusses the question of who could receive allowances in
greater detail in another section of this proposal. As noted
previously, EPA intends to revisit the initial approach and procedure
for determining allowance allocations and for trading for the 2024 and
later control periods in a subsequent rulemaking after additional
public input and seeks advanced comment later in this proposal on ideas
that are currently under consideration.
    EPA is proposing to allocate allowances only to companies that
produced or imported in 2020, even if they were active in prior years,
to increase the likelihood that allowances are allocated to companies
that are active in the HFC market. If a company was not actively
producing or importing in 2020, EPA would generally presume this means
the business exited the production and/or import market. Allocating
allowances to companies no longer producing or importing would be at
the expense of companies who are still actively invested in HFC
production and import. However, the Agency is open to consider
something different from this presumption for individual companies if
their inactivity

was due to the COVID-19 pandemic or some other reason, and they have
documentation to justify such inactivity. If a company wants
individualized consideration of their market inactivity or activity in
2020, it must submit comments on this rulemaking containing relevant
information no later than the end of the comment period.
    EPA recognizes that some importers may be unaware of EPA's
regulatory activity in this area. EPA is undertaking best efforts to
develop a comprehensive dataset for purposes of allowance allocation by
determining the universe of potential importers. EPA is using data
available through the GHGRP, its February 11, 2021, NODA, stakeholder
outreach meetings, outreach to trade associations that can inform their
members, and direct communication with companies that EPA suspects may
have imported in relevant years that are not captured in the Agency's
data sources. EPA invites public input on whether there are any other
means EPA should use to reach this potentially regulated community. EPA
provides a list of companies that would be eligible for consumption
allowances under this framework based on currently available data in
the docket to this rule. EPA is proposing to issue allowances to those
importers that are currently listed, as well as any additional
importers that can provide import records to EPA such as Customs forms
or bills of lading. As noted previously, EPA is also willing to
consider individual circumstances of businesses that are generally
active in the HFC import market, but did not import HFCs in 2020, if
the reason for their inactivity is adequately justified to EPA by the
close of the comment period.
    For companies that have not previously reported their HFC import
relevant data, such as through the GHGRP's e-GGRT or in response to the
February 11, 2021, NODA, they should report to EPA no later than by the
close of the comment period listed above in the DATES section of this
preamble if they wish to be eligible for allowances in 2022 and 2023.
Please contact the person listed under FOR FURTHER INFORMATION CONTACT
and report your HFC import data for years 2011 through 2020 at https://ghgreporting.epa.gov/ghg/login.do if you have not reported previously.
EPA needs to verify production and consumption data for companies that
have not reported previously. Failure to provide data by the stated
date will mean companies will not receive allowances for 2022 or 2023
if EPA finalizes the allocation approach as proposed, except for the
possible availability of the set aside pool for importers not
previously subject to GHGRP requirements. Any company that was required
to report to the GHGRP under 40 CFR part 98, but did not do so in
accordance with the regulatory requirements, should be aware that
information on potential noncompliance will be forwarded to the
appropriate EPA enforcement staff.
    As an alternative to looking to data from 2017-2019, EPA is also
taking comment on issuing allowances only to those companies that
produced or imported HFCs in 2011-2013 or some other combination of
years, including all years, between 2011 and 2019, assuming the company
is still actively producing or importing as of 2020. To develop the
baseline, EPA has been working to address data gaps and develop a
fuller understanding of production and import in those years. EPA has
already provided the public with a list of those companies through a
Notice of Data Availability in the Federal Register (February 11, 2021;
86 FR 9059). EPA sees advantages and disadvantages to this approach.
For example, once companies began to suspect that they might receive
allowances based on the quantities that they imported, new importers
may have entered the market with more HFCs than the level of demand.
2011-2013 is also prior to any anti-dumping and countervailing duties
(AD/CVD) were finalized (see the memo to the docket on AD/CVD). To
reward such behavior could harm companies that were already
participating in the market and/or have invested heavily in developing
new alternatives to replace HFCs. On the other hand, to exclude all
newcomers based on the actions of a few could penalize those companies
that had not entered the market to game their potential for allowances.
Another factor to consider is when companies may have become aware that
a phasedown on HFCs was likely and whether companies significantly
changed their behavior. Reasonably, companies would have been aware
that the United States may be taking action to phase down HFCs as of
October 15, 2016, which is when countries agreed to the Kigali
Amendment. EPA could consider relying on years prior to 2016, or,
assuming companies that changed behavior did not significantly do so
between October 15, 2016, and January 1, 2017, EPA could consider years
prior to 2017. Using years prior to 2016 or 2017 would reflect the
production and import market prior to this global agreement to phase
down HFCs. Other proposed considerations surrounding eligibility for
allowances are discussed in section VII.C of this proposal. EPA is also
seeking comment on whether the Agency should consider individualized
circumstances to take into account a company's 2020 data for
determining allowances for companies that have newly entered the HFC
import market, for example a company that entered the market or
acquired another company late in 2019.
3. What is EPA's proposed framework for determining how many allowances
each company receives?
    This section discusses how EPA proposes to determine how many
allowances each company receives from the general allocation pool. EPA
is proposing that under this initial framework, the amount of
allowances to allocate to producers and importers would be determined
based on the levels of production and import in 2017-2019.
Specifically, EPA is proposing to use a company's highest year of
production or import, on an EVe basis, in those years. Every company's
highest year amount would then be added together and used to determine
a percentage market share for each company. EPA proposes to then
multiply each company's percentage market share with the total amount
of available calendar-year allowances to determine each company's
production or consumption allowances. As noted earlier, EPA is
proposing to establish this process as an initial approach to
allocating allowances, but intends to revisit this procedure and
consider whether any changes to it would be appropriate before the 2024
phasedown step.
    EPA is proposing to choose the highest year over multiple recent
years, rather than an average or a single year, to account for
fluctuations in the market. As noted in the previous section, EPA is
proposing to base the allocation amount on 2017-2019 data, but only
companies who were actively producing or importing in 2020 would be
eligible to receive allowances (unless EPA agrees that the company
merits individualized determination based on comments received through
this proposed rulemaking process). The Agency could also consider using
a company's highest market share--a company's exchange value-weighted
production and consumption relative to the total exchange value-
weighted production and consumption in a given year--over the selected
years.
    As mentioned previously, EPA is proposing to set aside a small
amount of allowances out of the total cap for new market entrants. As
will be discussed in the next section, EPA is also proposing

to issue allowances for statutorily defined applications according to
the AIM Act requirements outlined in subsection (e)(4)(B)(iv).
Subsection (e)(2)(D) of the AIM Act ensures that the total amount of
allowances issued does not exceed the production and consumption caps,
even including application-specific allowances.\47\ Therefore, the pool
of available calendar-year allowances must be determined after the
amounts for uses in subsection (e)(4)(B)(iv) are determined. These
calculations would be conducted by EPA to protect company claims of
CBI. EPA intends to issue allowances to individual companies for 2022
and release information on the amount of allowances allocated to each
company publicly no later than October 1, 2021. EPA discusses its
approach to releasing data in a later section of the proposal. EPA
intends to issue allowances to individual companies for 2023 and
release that information publicly no later than October 1, 2022. As
discussed previously, EPA is proposing this annual process for
allowance allocations from the general allowance pool because
application-specific allowance figures may change, and those would need
to be subtracted from the general pool before EPA determines how many
allowances are remaining in the general pool to be allocated.
---------------------------------------------------------------------------

    \47\ Under the ODS phaseout, essential uses were exempt from the
phaseout and were therefore in addition to the amounts allocated.
Under the AIM Act, application-specific and essential use
allocations are not exemptions from the cap but rather receive
priority within the cap. In this NPRM, EPA is not proposing to issue
essential use allocations.
---------------------------------------------------------------------------

4. What is EPA's proposed framework for issuing allowances?
    This section contains EPA's proposed formula for determining the
amount of production and consumption allowances to be issued to each
producer and importer.
    First, EPA would multiply the production and consumption baselines
by the current phasedown step shown in subsection (e)(2)(C) of the AIM
Act. EPA is proposing to codify the phasedown steps shown in the table
in (e)(2)(C) into the regulations at Sec.  84.7. For 2022 and 2023,
total production and consumption cannot exceed 90 percent of baseline.
Thus, EPA would multiply each baseline by 0.9 to determine the
production and consumption caps for those years.
    Second, EPA would subtract from the consumption and production caps
the amount of application-specific allowances that EPA has determined
are necessary for the year at issue and the amount of allowances for
the set aside pool, if EPA finalizes the set aside option proposed. As
discussed in the next section, EPA is proposing to re-calculate the
amount of application-specific allowances every year. The remainder is
the general allowance pool for that year.
    Third, EPA would determine the list of companies that meet the
framework eligibility criteria for allowances, add up each company's
EV-weighted high production and consumption amounts in the relevant
years, and divide each company's high production and consumption amount
by the total amount to determine what each company's market share would
be.\48\
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    \48\ If EPA finalizes an approach where it uses each company's
highest market share instead of highest production and consumption
level, the Agency would add up each company's high production and
consumption market share in the relevant years, and divide each
company's high production and consumption market share by the total
amount to determine what each company's revised market share would
be for allowances available in the year.
---------------------------------------------------------------------------

    Fourth, EPA would multiply each producer or importer's market share
by the general allowance pool to determine each company's calendar year
production or consumption allocation amounts. For 2022 and 2023, EPA
proposes to issue allowances in whole units of MTEVe. This could result
in rounding issues. Any HFC with an exchange value more than 1,000
would be issued allowances at less than a kilogram of regulated
substance. When deducting allowances to account for production or
import, EPA would round up if the value was greater than or equal to
0.5 MTEVe and down if below that level. For example, HFC-134a has an
exchange value of 1,430 and importing one kg would require 1.4
allowances. However, EPA would only deduct one allowance. Rarely is
someone importing only one kg of a chemical though, so importing 100 kg
of HFC-134a, for example, would require 143 allowances and no rounding
is needed at the total tonnage level. EPA may revisit this approach if
low-exchange value HFCs become more prevalent and greater precision is
needed. For example, HFC-152a has an exchange value of 124 and thus the
import of one kg would require expenditure of 0.1 allowances. EPA is
taking comment on whether to use less or more granular detail for
allowance allocations, such as issuing allowances out to one or two
decimal points.
    Lastly, EPA would then issue by October 1st the list of companies
receiving production or consumption allowances and application-specific
allowances as well as the quantities received.
    For allowances for the 2022 calendar year, EPA intends to also
issue allowances from the set aside pool (see section VI.E. of the
preamble) by March 31, 2022, if finalized, and distribute any unused
allowances from the set aside at the same time.
5. What process is EPA proposing to respond to requests for additional
consumption allowances?
    EPA is proposing a process in Sec.  84.17 to allow a person to
obtain consumption allowances equivalent to the quantity of newly
produced (``virgin'') regulated substances that the person exported,
provided that the substances were originally produced or imported with
consumption allowances in the same calendar year. Given that the AIM
Act excludes exports from the definition of ``consumption'' under
subsection (b)(3), it would be consistent with the Act to essentially
refund consumption allowances that were expended to import or produce
regulated substances if those regulated substances were later exported
from the country. In order to ensure that the statutorily defined
production and consumption reduction targets are met each year, EPA
proposes that both the export and the request for additional
consumption allowances (RACA) must occur in the year in which
consumption allowances were expended. This approach would prevent a
producer or importer from over producing or importing high-GWP HFCs
prior to January 1, 2022, and exporting them to gain additional
allowances for the initial phasedown years.
    EPA is proposing to require the exporter to submit certain
information to EPA for the Agency to review before either granting or
denying the request. This information is needed to verify that the
regulated substances were in fact exported and would include: (i) The
identities and addresses of the exporter and the recipient of the
exports; (ii) the quantity (in kilograms) and names of regulated
substances exported; (iii) the source of the regulated substances and
the date purchased; (iv) the date on which, and the port from which,
the regulated substances were exported from the United States or its
territories; (v) the country to which the regulated substances were
exported; (vi) a copy of the bill of lading and the invoice indicating
the net quantity (in kilograms) of regulated substances shipped and
documenting the sale of the regulated substances to the purchaser; and
(vii) a written statement from the producer that the regulated
substances were produced with expended allowances or a written
statement from the importer that the

regulated substances were imported with expended allowances. The full
list of required information in a request for additional consumption
allowances can be found at Sec.  84.17. EPA is seeking comment on
whether additional records should be provided to verify allowances were
expended as part of the request, at least until the proposed
certification ID tracking system is established.

C. What are EPA's proposals for the sectors to receive application-
specific allowances?

    This section discusses EPA's proposal to implement subsection
(e)(4)(B)(iv) of the AIM Act, which directs the Administrator to
allocate allowances necessary to meet HFC demand for six specified end
uses, or ``applications.'' The Act directs EPA to issue ``the full
quantity of allowances necessary, based on projected, current, and
historical trends.'' The Act also includes a limitation on application-
specific allowances in subsection (e)(4)(B)(iii). This provision
reinforces the requirement in subsection (e)(2)(A) that a person
receiving an allocation may not produce or consume a quantity of
regulated substances that exceeds the number of allowances held by
them. Further, this reinforces that application-specific allowances are
to be part of the annual production and consumption caps.
    In order to carry out this statutory direction, EPA is proposing to
create a third category of allowances called ``application-specific
allowances'' that can be expended to either produce or import HFCs. EPA
is proposing to create this third category, and permit the allowance to
be used for either produced or imported HFCs, because manufacturers of
products in the statutorily identified applications may not know in
advance how HFCs will be procured, and EPA wants to promote flexibility
to ensure that end users receive the ``full quantity of allowances
necessary.'' In order to ensure that these application-specific
allowances are provided from within the overall annual production and
consumption caps, EPA proposes to subtract the amount of application-
specific allowances allocated from both the production and consumption
general allowance pools.
    This section provides an overview of the applications receiving
allocations, estimated demand for HFCs in these applications in 2022,
and EPA's proposed process for issuing and transferring allowances for
these applications.
1. Overview of the Application-Specific Sectors
    The AIM Act lists six applications in subsection (e)(4)(B)(iv) that
are to receive the full quantity of allowances needed, based on
projected, current, and historical trends. As part of the docket to the
NODA that preceded this proposed rule, EPA released reports
characterizing the Agency's current understanding of the market for
five of the six applications (86 FR 9059; February 11, 2021). These
reports provided data on projected, current, and historical trends for
the use of HFCs in each sector. EPA received comments on four of the
five reports (all except defense sprays) noting agreement with
definitions, consideration of additional applications, and potential
updated sources for projections of HFC use in certain applications. EPA
has updated the reports based on the information provided in the
comments, where applicable, and has included the updated reports in the
docket to this rule. EPA held a broad stakeholder meeting on February
25, 2021, related to the AIM Act and the Agency's plans for
implementation. EPA also held five workshops March 11-12, 2021, related
to the AIM Act and focused on HFC use for the five applications that
can receive allocations. Materials from the stakeholder meeting and the
five workshops are included in the docket to this rule.
Metered Dose Inhalers
    MDIs are handheld pressurized inhalation systems that deliver
small, precisely measured therapeutic doses of medication directly to
the airways of a patient. MDIs provide reliable and effective therapy
for asthma and chronic obstructive pulmonary disease (COPD).
    The pharmaceutical industry historically used CFCs, specifically
CFC-11, CFC-12, and CFC-114, as a propellant. The pharmaceutical
industry began introducing HFC propellants (also known as
hydrofluoroalkanes (HFAs)) for MDIs as replacements for CFCs in the
mid-1990s, specifically HFC-134a in 1996 followed by HFC-227ea in 2006.
CFCs continued to be used after their phaseout in MDIs through the
essential use exemption authorized by the CAA and the Montreal
Protocol. EPA, along with interagency partners, annually assessed
demand for CFCs in MDIs and the ability of the pharmaceutical industry
to transition in order to nominate an exempted amount under the
Montreal Protocol procedures. The United States stopped making annual
requests for CFCs for MDIs in 2009. By 2014, the CFC MDI market was
replaced with HFC MDIs and not-in-kind (NIK) medical inhalers. EPA
estimates that in 2020, approximately 458 MT of HFC-134a and 78 MT of
HFC-227ea propellant were contained in MDIs sold in the United States.
EPA received comments to the market characterizations released with the
NODA stating that the demand was twice what EPA estimates. The use of
HFC MDIs in the United States, absent a transition to alternatives, is
expected to continue as they may be more appropriate for certain
patients than NIK medical inhalers, such as when the patient requires a
reliever medication for exacerbations of asthma or other requirements
(e.g., inhalation strength).
Defense Sprays
    Defense sprays are aerosol-based sprays intended for self-defense
and include pepper spray and animal sprays. The defense spray industry
historically used CFCs as a propellant. The defense spray industry
transitioned to HFC propellants as replacements to CFCs in the mid-
1990s, specifically HFC-134a.
    EPA estimates that in 2020, approximately 125 MT of HFC-134a
propellant was contained in defense sprays sold in the United States.
The use of HFC-134a propellant in defense sprays in the United States,
absent a transition to alternatives, is expected to continue due to its
non-flammability and physical properties to provide adequate spray
distance for foam, fog, and vapor defense sprays. Efforts to
reformulate are underway but aerosol fillers report that alternatives
have not yet reached their desired specifications.
    EPA is proposing to interpret the AIM Act statutory text to mean
that EPA provide an allocation for the propellant used in defense
sprays. EPA is not aware of any other reasonable interpretation, but
seeks comment on this. EPA's proposed definition states that these
products use capsaicin and related capsaicinoids (derived from
oleoresin capsicum) as an irritant. EPA is taking comment on whether
this definition is inclusive of defense sprays potentially covered by
subsection (e)(4)(B)(iv) of the AIM Act. One type of defense spray,
bear spray, is designed to be more potent than pepper sprays designed
for personal self-defense. EPA regulates bear spray as a pesticide, and
requires labeling consistent with 40 CFR 156.70 for human hazards
associated with a product. Labels for bear sprays often contain
language on hazards to humans & domestic animals similar to the
following statement: ``DANGER: May cause irreversible eye damage if
sprayed in the eyes at close range.

Contact through touching or rubbing eyes may result in substantial but
temporary eye injury. Strongly irritating to nose and skin. Do not get
in eyes, on skin or on clothing. Wash thoroughly with soap and water
after handling. Remove contaminated clothing and wash clothing before
reuse.'' \49\ Recent news reports indicate there may be use that is
inconsistent with the label in the product (i.e., use of bear spray on
people instead of bears).\50\ Bear sprays are not intended for use
against people, and EPA lacks the authority to regulate or authorize
such use under the Federal Insecticide, Fungicide and Rodenticide Act.
EPA is taking comment on whether the Agency should distinguish between
misuse and proper use when evaluating ``the full quantity of allowances
necessary'' for such sprays.
---------------------------------------------------------------------------

    \49\ Labeling Notification per Pesticide Registration Notice
(PRN) 2007-4, dated July 3, 2019. Available at https://www3.epa.gov/pesticides/chem_search/ppls/072265-00001-20190703.pdf.
    \50\ Briley, John. ``Bear Spray Is Showing up at Protests and
Riots. Here's Why, and How It Affects Humans.'' The Washington Post,
19 Mar. 2021, www.washingtonpost.com/lifestyle/wellness/bear-spray-pepper-riot-dangerous/2021/03/19/053c3870-87fb-11eb-bfdf-4d36dab83a6d_story.html.
---------------------------------------------------------------------------

Structural Composite Preformed Polyurethane Foam
    Structural composite preformed polyurethane (PU) foams are used for
increased structural integrity and weight reduction in marine and
trailer applications. The structural composite foam industry
historically used HCFCs as a foam blowing agent (i.e., HCFC-22) and
transitioned to HFC blowing agents as replacements for HCFCs in the
early 2000s, specifically HFC-134a.
    The PU foam and recreational boating industries estimate that in
2020, structural composite preformed PU foam for marine and trailer
uses used approximately 28 MT of HFC-134a blowing agent. This specific
use of HFC-134a blowing agent is expected to continue in the United
States due to performance issues with alternatives (e.g., lack of
structural integrity, shrinking). However, it is projected that at some
point HFC-134a blowing agent will no longer be used in structural
composite PU foam for marine and trailer use as it is anticipated that
alternatives will replace HFC-134a throughout the market.
    EPA is proposing to interpret the statutory text to mean that EPA
provide application-specific allocations for HFC blowing agent used to
manufacture structural composite preformed polyurethane foam for use in
manufacturing boats and trailers. EPA is not aware of any other
reasonable interpretation, but seeks comment on this.
Semiconductors
    The fourth listed application is ``the etching of semiconductor
material or wafers and the cleaning of chemical vapor deposition
chambers within the semiconductor manufacturing sector.''
    Semiconductor devices are critical to the functioning of electronic
equipment. Semiconductor manufacturers use a variety of high-GWP
fluorinated gases, including HFCs, perfluorocarbons, and sulfur
hexafluoride, in two main stems of the manufacturing process: Etching,
also known as plasma etching, and to clean CVD chambers. Depending on
the complexity of the product, the manufacturing process may require
upwards of 100 steps utilizing high-GWP gases.
    Semiconductor manufacture uses HFC-23, HFC-32, and HFC-41,
primarily in etching processes, but also minimally in CVD chamber
cleaning processes. HFC use in semiconductor manufacturing began in the
mid-1980s.
    EPA estimates that in 2019, semiconductor fabrication facilities in
the United States used 43 MT of HFC-23, HFC-32, and HFC-41. Absent the
uptake of alternatives or use of used HFCs that meet the acceptable
purity levels, the use of HFCs in semiconductor manufacture is likely
to continue as HFCs have physical properties that make them well suited
for this use.
Mission-Critical Military End Uses
    Mission-critical military end uses of HFCs are those uses by an
agency of the Federal Government responsible for national defense which
have a direct impact on mission capability as determined by the U.S.
Department of Defense (DoD), including, but not limited to, uses
necessary for development, testing, production, training, operation,
and maintenance of Armed Forces vessels, aircraft, space systems,
ground vehicles, amphibious vehicles, deployable/expeditionary support
equipment, munitions, and command and control systems. Based on
preliminary information, near-term annual EV-weighted use of HFCs in
mission-critical military end uses is anticipated to be less than 2
MMTEVe.
On Board Aerospace Fire Suppression
    EPA is proposing to define on board aerospace fire suppression as
use of a regulated substance in fire suppression equipment used on
board commercial and general aviation aircraft and space vehicles. This
definition excludes military aircraft because they are already covered
under the definition of mission-critical military end uses. On board
commercial aviation fire suppression systems have historically used
halons and are installed on mainline and regional passenger and
freighter aircraft to protect valuable and sensitive assets. Fire
suppression systems on board aircraft can be divided into two main
product categories: Total flooding systems and streaming applications;
currently HFC-236fa and HFC-227ea have replaced halon 1301 in total
flooding systems in lavatory trash receptacles. Due to weight and
volume restrictions or penalties (e.g., increased fuel consumption),
HFCs have not been popularized in other fire suppression systems on
board aircraft. HFCs have replaced halon 1301 lavatory trash receptacle
fire suppression systems in new and existing commercial aircraft. EPA
estimates that in 2020, approximately 0.38 MT of HFC-227ea and 0.30 MT
of HFC-236fa were installed in new aircraft lavatory fire suppression
systems. Absent transition to use of alternatives or of used HFCs, the
use of HFCs in lavatory fire suppression systems is expected to
continue as new aircraft are sold.
    EPA has previously defined ``space vehicle'' under the Title VI
regulations at 40 CFR 82.62 as ``a man-made device, either manned or
unmanned, designed for operation beyond earth's atmosphere. This
definition includes integral equipment such as models, mock-ups,
prototypes, molds, jigs, tooling, hardware jackets, and test coupons.
Also included is auxiliary equipment associated with test, transport,
and storage, which through contamination can compromise the space
vehicle performance.'' EPA takes comment on whether space vehicle, as
defined above, is inclusive of applications that would be considered as
on board fire suppression. EPA requests relevant information on HFC use
in these applications.
2. At which point in the application-specific sector production process
is EPA proposing to issue allowances?
    EPA is requesting comment on which entity should be the recipient
of application-specific allocations. The Act does not specify who
should be issued these allowances so the Agency has considered
allocating either directly to the entity manufacturing the product
listed in the application (end user) or to the producer or importer who
supplies the bulk HFC to that entity.
    EPA is proposing to issue application-specific allowances to the
end user of the HFC who is manufacturing the product listed in
subsection (e)(4)(B)(iv)

of the Act or the Department of Defense, in the case of mission-
critical military end uses. EPA has experience under the essential use
exemption, as implemented under Title VI of the CAA, with issuing
allowances directly to end users. In that instance, EPA issued
essential use allowances directly to MDI manufacturers, for example,
who then conferred those allowances to a company for the production or
import of a specified regulated substance. One advantage of this system
was that it ensured that those companies manufacturing MDIs had the
allowances needed and they could choose which producer or importer they
would confer their allowances to. This allowed the MDI manufacturers to
have power to make a competitive choice in a more open market for the
material and price best suited to their needs, or import the material
directly themselves. Another advantage was that it helped to ensure
that the allowances would be expended only for an essential use.
Because EPA has seen these advantages in its past practice, EPA is
proposing to use this established process for the application-specific
allocations. In other words, EPA is proposing to issue application-
specific allocations to the end users for the six statutorily listed
applications.\51\
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    \51\ For the purposes of clarity and consistency, any reference
or mention of EPA issuing application-specific allowances in this
proposed rulemaking to the end user of the HFC who is manufacturing
the product excludes mission-critical military end uses. Instead, as
noted earlier, EPA proposes to directly allocate application-
specific allowances to the Department of Defense for mission-
critical military end uses.
---------------------------------------------------------------------------

    One challenge EPA foresees in issuing application-specific
allowances to end users is identifying all of the end users. Essential
use allowances were issued by EPA to companies that had submitted
applications to the Agency. EPA attempted to identify all of the end
users for each of the applications listed in subsection (e)(4)(B)(iv)
of the Act and put this understanding of the market in the
characterization reports contained in the docket for the NODA. Through
its NODA, EPA invited potentially affected entities to provide EPA with
further information or point to existing or suspected data gaps. EPA
also held five workshops March 11-12, 2021, related to the AIM Act and
focused on HFC use for five of the six applications (not including
mission-critical military end uses) that can receive allocations.
Materials from the five workshops are included in the docket to this
rule. EPA still through this proposed rulemaking welcomes information
on whether this is a complete listing of companies. Acknowledging the
potential limits on its knowledge, EPA also recognizes that it will
need to provide application-specific allowances on a certain schedule,
and so proposes to limit the application-specific allocation to 2022
for those companies that EPA is aware of by the close of the comment
period listed above in the DATES section of this preamble. In a
subsequent section, ``What is EPA's Proposed Set Aside Pool of
Allowances,'' EPA outlines its proposed approaches for setting aside
additional allowances in the event that other end users are identified
after the finalization of the rule. EPA recognizes that the preferred
approach may vary by application depending upon the current methods for
acquiring HFCs. EPA specifically requests comment from end users in
these applications and the suppliers of those HFCs.
3. How is EPA proposing to address transfers of application-specific
allowances?
    EPA is proposing to allow limited transfer of application-specific
allowances. Specifically, end users within a specific application may
transfer their allowances only with another end user that will use the
application-specific allocation for that same application. These could
be viewed as ``intra-application transfers.'' EPA is proposing to
prohibit transfers with companies in other applications. Section
(e)(4)(B)(iv) of the AIM Act states that application-specific
allowances are provided ``for the exclusive use'' of HFCs ``in an
application solely for'' those in the statutory list. These transfer
provisions would help to ensure that, after EPA allocates the full
quantity of allowances necessary for each application, the full
quantity stays available to fully supply that application and ensure
that the application-specific allowances are being exclusively used
solely for one of the six listed applications. EPA takes comment on
this proposed approach, which seems consistent with Congress's intent
in creating this application-specific allocation program.
    EPA is similarly proposing to prohibit the transfer of application-
specific allowances back into the larger market for production and
consumption allowances. The AIM Act specifies that the allocation is
for the exclusive use of one of the listed applications. It follows
that an application-specific allocation could not be transferred to
produce or import HFCs for a use that was not enumerated. Note that
there is no restriction on a company who uses HFCs in one of the listed
applications from acquiring calendar-year allowances from the general
pool or from purchasing HFCs produced or imported with calendar-year
production and consumption allowances. In other words, any company that
uses HFCs in one of the six listed applications has several avenues for
acquiring HFCs, for example if their actual demand exceeds the amount
of HFCs covered by their application-specific allowances.
    EPA is proposing similar restrictions to the sale of HFCs acquired
by expending application-specific allowances. If an application-
specific allowance was expended for the production or import of a
regulated substance, that substance must be used solely for the
application it was produced or imported for. EPA is therefore proposing
to also prohibit the sale of that HFC for use in a different
application from the one that was intended. This would be an outgrowth
of the statutory restriction placed on application-specific allowances
that they be for the exclusive use in the application for which the
allowance is provided. If an entity could procure HFCs with the
application-specific allowance, but then freely sell that HFC on the
open market, that would seem to create a loophole to the restriction
placed on the use of the application-specific allowance. EPA is
proposing to allow the intra-application sale of material (i.e.,
amongst companies within the same application), since such intra-
application sale would be consistent with the exclusive use limitation.
EPA requests comment on the described approach for allowances and HFCs
acquired with those allowances.
4. What are the criteria EPA is proposing to use for evaluating
application-specific allowance requests?
    As discussed in section IX.D, EPA is proposing to collect
information from companies who use HFCs in five of the six applications
listed in the AIM Act. As noted previously, companies who believe they
qualify for application-specific allowances should provide data on
their historical and current use of HFCs in the relevant application to
EPA by the date the comment period closes on this proposed rule. This
information should also include a detailed description of how the HFCs
are used so EPA can determine whether the use is consistent with the
definition of the application. EPA will use that information to
determine the full quantity of allowances necessary, based on
projected, current, and historical trends, for the production or
consumption of HFCs for the exclusive use of the regulated substance
for each application, on a company-specific

basis. For the initial five years after enactment of the AIM Act, EPA
is proposing to base application-specific allowances on the eligible
amount of HFCs used by each company requesting such allowances based on
the higher of the two approaches:

--HFC use by the company in the specific application in the prior year
multiplied by the average growth rate of use for the company over the
past three years; or
--HFC use by the company in the specific application in the prior year
multiplied by the average growth rate of use by all companies
requesting that type of application-specific allowances (e.g., for
MDIs) over the past three years.

    EPA is seeking comment on whether the gross domestic product or
U.S. population growth rates would be appropriate for each of the
applications, and whether EPA should allow for consideration of
individual circumstances factually documented to the Agency (e.g., when
a company projects significant growth due to acquiring another
company). EPA could also factor in the availability of reclaimed HFCs
(if suitable), inventory of previously produced and imported HFCs,
availability of alternatives, or other relevant features. EPA seeks
comment on this proposed approach and other approaches it could adopt
to allocate the amount of allowances necessary for each of the
applications specified in subsection (e)(4)(B)(iv) of the Act. EPA also
proposes that if future information reveals a company applying for
application-specific allowances has provided false information, EPA
reserves the right to revoke allowances, require future retirement of
allowances at a greater level than the number of application-specific
allowances allocated, prohibit companies from receiving future
allowances if there is noncompliance with relevant legal and regulatory
requirements, and pursue any other appropriate enforcement action.

D. What are EPA's proposed provisions for transferring allowances?

    Subsection (g) of the AIM Act directs EPA to issue rules that
govern the transfer of production and consumption allowances. EPA is
proposing to establish transfer provisions in Sec.  84.19 that are
based in large part on the ODS transfer provisions.
    EPA is proposing to require that the transferor must submit to the
Administrator a transfer claim setting forth the following: The
identities and contact information of the transferor and the
transferee; the type of allowances being transferred (i.e., production
or consumption allowance); the quantity (in EVe) of allowances being
transferred; the total cost of allowances transferred; the remaining
quantity of allowances held by the transferor; and the quantity of the
offset. For transfers of allowances issued for use in one of the
applications listed in AIM Act subsection (e)(4)(B)(iv), the transferor
must also include a signed document from the transferee certifying that
HFCs produced or imported with these allowances will only be used for
the same application they were initially allocated for.
    EPA would then certify with records in its possession that the
transferor has unexpended allowances sufficient to cover the transfer
claim. Within three working days of receiving a complete transfer
claim, EPA intends to issue either an objection letter or non-objection
letter to the transferor and transferee. The transfer cannot proceed
until EPA issues a non-objection notice. Given reporting to the Agency
is often after the fact for quarterly activity, EPA is also proposing
that if after issuance of a non-objection notice the Agency finds that
the transferor did not have sufficient unexpended allowances to cover
the claim, the transferor and transferee, where applicable, will be
held liable for any violations of the regulations of this subpart that
occur as a result of, or in conjunction with, the improper transfer.
    In cases where EPA issues an objection notice disallowing the
transfer, either transferor or transferee may file a notice of appeal,
with supporting reasons, with the relevant Agency official within 10
working days after receipt of notification that a transfer was
disallowed. The official may affirm or vacate the disallowance. If no
appeal is filed electronically by the tenth working day after
notification, the disallowance shall be final on that day.
    EPA does not intend to broker transactions but rather solely
confirm that the transferor has sufficient allowances to cover the
transfer. EPA also proposes to collect information on the price of
allowances transferred to inform future analyses of rule costs and
provide additional insight into the market when assessing potential
regulatory changes and future allocation options.
    Additionally, subsection (g)(2) of the Act requires that the
regulations ``ensure that the transfers under this subsection will
result in greater total reductions'' in the production or consumption
``of regulated substances in each year than would occur during the year
in the absence of the transfers.'' In other words, the transfer of
allowances must result in less overall production or consumption than
would have occurred absent the transfer. The AIM Act also specifies
that, for transfers between two or more persons, the transferor's
allowances be reduced by an amount greater than the amount of
allowances being transferred.
    EPA is proposing to allow transfers of allowances for HFCs provided
the transferor's remaining allowances are reduced by the amount it
transferred plus some percentage of the amount transferred (i.e., an
offset). EPA is proposing that the offset be five percent, and is
taking comment on a range from one percent to 10 percent. A five
percent offset would meet the AIM Act statutory directive and provide a
net environmental benefit without discouraging trading necessary to
meet market demands.
    EPA analyzed HCFC inter-company transfer data for 2010 through
2018. The amount of consumption allowances transferred each year ranged
between five percent and thirty percent of the total number of
allowances allocated. Thus, a five percent offset would result in a
reduction in the total allowances in the general pool by 0.25 percent
to 1.5 percent. Given that small size, EPA's consideration for the size
of the offset, at this time, pertains more to the effect on an
individual company and less on the impact to the market overall. As the
phasedown progresses, EPA may revisit the size of the offset.
    EPA is considering and taking comment on an offset as low as one
percent and as high as 10 percent. EPA is less inclined to use an
offset as low as one percent because it would result in the least
environmental benefit of the proposed options. EPA anticipates that the
transaction costs resulting from a one percent offset would be minimal.
Under the class I ODS allowance system, EPA required through rulemaking
an offset of one percent for any U.S. transfer to achieve the
reductions in production and consumption required for transfers by
section 607 of the CAA (60 FR 24970, May 10, 1995). However, the
phaseout of HCFCs included chemical-specific allowances and required a
company to exchange allowances for one specific HCFC for another
specific HCFC (See 68 FR 2820, January 21, 2003). In this rulemaking,
EPA is proposing to issue allowances on an exchange value-weighted
basis, which would provide allowance holders with the flexibility to
determine which HFCs to produce or import without needing to make a
transfer from one HFC to another HFC. In other words, the Agency is
proposing to structure the HFC allocation program

in a way that negates the need to transfer allowances between regulated
substances, and thus EPA anticipates fewer transfers overall than would
occur under a chemical-specific phasedown schedule. EPA is also
considering an offset amount as high as 10 percent to be more
protective of the environment. This level of offset, however, could
discourage transfers, resulting in less efficient allocation of
production and consumption allowances. On the other hand, it may
encourage the recovery and reclamation of HFCs.
    EPA seeks comment on setting the offset at five percent and is also
seeking comment on the full range presented. While numerically all the
percentages would result in a greater total reduction, EPA is
specifically seeking comment on how to balance the statute's intent of
providing flexibility through transfers yet doing so in a manner that
further reduces overall production and consumption, which would result
in greater environmental protection. This proposal seeks to maximize
the protection of the environment, while also providing for the ability
to transfer allowances. However, it may be the case that tolling
agreements, the fact that most HFCs are used in blends, or other
factors result in market dynamics for HFC production and import that
EPA has not considered. Evidence supported by data of harm to the
market for HFCs or consumer access could be compelling to the Agency.
    EPA is proposing that an offset would apply to all transfers of
allowances under the AIM Act, including transfers of application-
specific allowances, as subsection (g) appears to apply generally to
transfers of allowances and does not exempt any allowances from its
requirements. However, EPA is proposing a one percent offset, but is
seeking comment on whether a lower offset amount in a range of 0.1
percent to one percent is more appropriate for the transfer of
application-specific allowances between companies in a particular
application. Since the AIM Act states that EPA should provide
allowances under subsection (e)(4)(B)(iv) of the Act at the levels
necessary for the statutorily listed applications, a lower transfer
offset level may be more consistent with the intent of that subsection
of the AIM Act.
    Note that EPA is proposing that an application-specific allowance
holder could confer their allowances to an importer or producer, who
would procure the HFC for the end user, without any offset. EPA does
not consider the conferral of allowances to be a transfer but rather an
actualization of the allowance by an end user that is not a producer or
importer. Because Congress made clear in subsection (e)(4)(B)(iv) of
the Act that the statutorily listed applications should receive the
amount of allowances necessary, based on projected, current, and
historical trends, EPA is proposing to allow these conferrals as part
of the inherent process of ensuring end users can receive the necessary
amount of HFCs. As discussed previously, EPA is proposing to define the
term ``confer,'' to distinguish the concept from ``transfer.''
    EPA welcomes comments on the proposed size of the offset, the
Agency's assumptions about the likely amount of transfers, and the
treatment of transfer of allowances issued under subsection
(e)(4)(B)(iv). EPA seeks comment in a later section of this proposal on
the applicability of subsection (g) to international transfers.

E. What is EPA's proposed set aside pool of allowances?

    As explained previously, it is reasonable for this initial
allocation period to largely allocate allowances based on companies'
practice in the market since 2017, but EPA also acknowledges that this
approach could exclude companies that have historic practice in the HFC
market that is not reflected in EPA's existing data and could create a
market barrier to new market entrants. As a potential way to avoid
these problems, in addition to the allocation framework and procedure
outlined in the prior sections, EPA is also proposing to establish a
single set aside pool of consumption and production allowances. The set
aside pool as proposed would be available to three groups of companies:
(1) End users in applications identified for allocations under
subsection (e)(4)(B)(iv) of the AIM Act that EPA has not recognized in
the initial allocation of allowances (i.e., the allocation called for
by October 1, 2021); (2) importers of HFCs in 2017 through 2019 that
have not been required to report through the GHGRP under 40 CFR part
98, where EPA does not learn of their past imports in time to issue
allowances as part of the general pool despite the Agency's best
efforts; and (3) importers that are new market entrants. EPA is
proposing that the set aside pool would not be open to companies
looking to newly enter as producers of HFCs because the Agency does not
wish to encourage the construction of new HFC production capacity.
    EPA proposes to give priority access to the set aside pool to end
users in the applications identified in subsection (e)(4)(B)(iv) of the
Act. EPA acknowledges that not all end users may be aware of EPA's
regulatory activity in the HFC space, and providing access to the
proposed set aside pool would ensure end users in the statutorily
identified applications have the allowances necessary for their
continued business. EPA proposes to issue allowances to these end users
only for 2022, recognizing that once aware of the requirements these
entities will be able to apply for 2023 in the same manner as all other
application-specific allowance holders.
    After allowances are provided to the (e)(4)(B)(iv) of the Act
identified applications, EPA would provide allowances from the same set
aside pool to importers that were not previously required to report to
GHGRP and were not identified in time to be included in the general
allowance pool. EPA is not including producers in this stage because
all HFC producers were required to report to the GHGRP. EPA proposes to
issue allowances to these previously unidentified importers only for
2022. EPA's expectation would be that once these importers came into
the allocation system, these entities will have provided sufficient
information to receive allocations through the general pool for 2023.
    Finally, EPA is proposing to issue remaining allowances to new
market entrants seeking to import HFCs in line with the criteria
outlined later in this subsection. EPA is proposing to provide
allowances for these new market entrants for both 2022 and 2023. EPA
proposes to issue the new market entrants allowances for 2022 and 2023
at the same time in the same quantity for both years. As noted
elsewhere in this proposal, EPA intends to revisit the overall process
for allocating allowances for all years past 2024, but would generally
expect these new market entrants to be able to participate the same as
historic importers in those later future years.
    EPA acknowledges that creating a set aside pool for new market
entrants would deviate from historic regulatory practice under CAA
Title VI, but given that the AIM Act outlines a phasedown, but not
phaseout, of HFC production and consumption in the United States, in
this instance it may be appropriate to continue to facilitate
participation by new market entrants in the HFC import business. EPA
further proposes to have this set aside pool accessible only to
businesses that meet the Small Business Administration (SBA) criteria
for a small business.\52\ During the HCFC

phaseout, EPA heard from some small businesses that they had been
unable to source material from domestic suppliers in sufficient
quantity and/or at a competitive price. EPA's proposal would allow
small businesses experiencing this challenge to request allowances as a
new market entrant and import HFCs directly.
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    \52\ A small business is principally defined and determined
based on size standards as established by the SBA. The size of a
small business is defined by either the average number of employees
over the past 12 months or the average annual receipts over the past
three years and may vary based on a business's economic activity, or
industry, under the North American Industry Classification System
(NAICS). SBA further defines a small business as a for-profit
business of any legal structure, independently owned and operated,
not nationally dominant in its field, and physically located and
operated in the United States or its territories (13 CFR part 121).
https://ecfr.federalregister.gov/current/title-13/chapter-I/part-121.
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    If the set aside program is established as outlined in this
proposal, EPA specifically encourages businesses to apply for set aside
allowances that may have had particular challenges entering the HFC
import market due to systemic racism, market-access barriers, or other
challenges particularly faced by small disadvantaged businesses such as
minority- and woman-owned small businesses. EPA is mindful of the
Executive Order on Tackling the Climate Crisis at Home and Abroad (E.O.
14008), which calls for ``undertaking robust actions to mitigate
climate change'' and ``developing programs, policies, and activities to
address the disproportionately high and adverse human health,
environmental, climate-related and other cumulative impacts on
disadvantaged communities, as well as the accompanying economic
challenges of such impacts. . . .'' (86 FR 7619). EPA conducted a
preliminary review of HFC importers and HCFC allowance holders
(available in the docket). EPA is specifically soliciting comment on
whether any individuals have experienced structural barriers inhibiting
their earlier access to the HFC import market, including if there was
difficulty entering the HFC import market based on criteria such as
business location, employment of socially or economically disadvantaged
individuals, or other criteria related to business ownership, employee
characterization, or business location. The Agency is concerned that
certain businesses historically have and could continue to experience
difficulty entering the HFC market due to societal problems, such as
systemic racism or sexism, and the Agency is interested in collecting
the information requested in this paragraph to better understand
whether such issues are affecting entry into this market and to explore
future opportunities to ensure a more equitable marketplace.
    EPA has reviewed data available to the Agency and determined that
of the companies that imported HFCs between 2011-2013, eight companies
were no longer importing HFCs by 2017-2019. It is possible some of
these companies were still importing under a different name. Nineteen
companies reported imports of HFCs in 2017-2019 that were not importing
HFCs in 2011-2013. Again, it is possible that some companies changed
names, which would reduce this number. With the exceptions of companies
that were reporting under a different name, EPA would generally view
these nineteen companies as new market entrants. If EPA establishes a
set aside allowance pool, it would be appropriate to establish a pool
that roughly estimates the market shifts EPA has seen over this
timeframe with additional allowances to accommodate for businesses that
would have met EPA's criteria to be eligible for general or
application-specific allowances, but were not identified in time.
Accordingly, EPA is proposing to establish a set aside pool for new HFC
importers of a total of five MMTEVe of consumption allowances for 2022,
but is considering a range up to 15 MMTEVe. Because application-
specific allowances can also function as production allowances, EPA is
proposing to set aside one MMTEVe of production allowances as well.
Because EPA anticipates the application-specific end users to be a
smaller group than the other two groups, EPA is proposing a smaller set
aside amount. EPA specifically invites comments on the size of the set
aside for consumption and production allowances.
    As noted previously, EPA proposes that priority access would be
given to end users that would have been eligible for application-
specific allowances. Such end users would be given an allocation equal
to what EPA determines that end user would need. For the other
applicants to the set aside pool, EPA proposes that each would be
eligible for up to 0.2 MMTEVe in allowances. This value is based on the
aggregated median quantity of AIM Act-regulated HFC imports (highest of
2017-2019 for ``new'' importers that did not also import in 2011-2013)
reported to the GHGRP and scaled based on a common HFC blend, in
MMTCO2e. EPA seeks comment on whether it should finalize a
higher limit for companies other than those seeking application-
specific allowances, up to one MMTEVe.
    If there are more applicants for allowances than EPA has set aside,
EPA proposes to reduce each new market entrant applicant's share on a
pro rata basis. EPA proposes that allowances received by applicants to
the set aside pool would be nontransferable because this is the best
way to ensure that applicants to the set aside pool only request
allowances they are able to use, and do not simply participate in the
pool in order to sell the allowances on the open market. If there are
fewer applicants for allowances such that 2022 allowances remain in the
pool, EPA proposes to redistribute them to the general pool of existing
allowance holders on a pro rata basis by March 31, 2022. Alternatively,
EPA could auction the remaining allowances by March 31, 2022, should it
finalize this proposed set aside. An auction would promote a more
dynamic market in which companies could choose to participate if they
are seeing additional demand for allowances than they were allocated,
and an auction allows companies to purchase allowances based on what
the allowance is worth to the company.
    EPA is proposing that companies would have until November 30, 2021,
to apply to the set aside pool. For entities that fall within the six
statutorily identified applications in subsection (e)(4)(B)(iv), but
did not initially receive application-specific allowances from EPA,
they would apply to EPA in the same manner as they would for the
application-specific allowances. For all other applicants, in order to
apply to the set aside pool, EPA proposes that businesses would need to
demonstrate that they have the ability and intention to enter the HFC
import market. Specifically, EPA proposes to require applicants to the
pool to submit an application showing: (1) Name and address of the
company and the complete ownership of the company (with percentages of
ownership); (2) whether the company is a woman or minority owned
business; (3) contact information for the owner of the company; (4) the
date of incorporation and State in which the company is incorporated
and State license identifier; (5) a plan for importing HFCs; and (6) a
prospective foreign exporter that the applicant anticipates working
with. EPA recognizes that this new entrants pool, if not structured
appropriately, could result in allowances going to companies that are
already importing HFCs or are associated with companies that currently
import HFCs. To prevent fraud and to ensure that these allowances go to
new entrants in the HFC import business, EPA seeks comment on whether
there are other data it should

request. EPA also proposes to limit the set aside to owners of
companies, not operators or designated agents, and that businesses
applying to the set aside pool cannot be a subsidiary of or have any
common ownership stake or familial relationship with another allowance
holder. EPA also seeks comment on whether it should limit new entrants
to companies that have not previously imported HFCs. Given the focus of
the set aside is to allow for companies that seek to newly import HFCs,
providing allowances to companies who exited the import business seems
at odds with the general goal of the set aside. If the set aside pool
is limited to small businesses, applicants would also need
documentation demonstrating that they meet the SBA criteria for a small
business. EPA is soliciting comment on this list and invites public
input on whether any of these items should not be included or if other
elements should be added. EPA proposes that it would review the
information provided, conduct follow-up verification as needed, and
issue allowances to applicants that meet the stated program criteria no
later than March 31, 2022. EPA also proposes that if future information
reveals a company has provided false information or has not disclosed
financial or familial relationships between a new entrant and another
allowance holder, EPA reserves the right to revoke allowances and
require the company to retire a greater number of allowances than those
received through the set aside pool.

F. What is EPA proposing to require for HFC-23 emission controls for
allowance holders?

    As outlined in the definition section, EPA is proposing that the
creation of a regulated substance beyond insignificant quantities
inadvertently or coincidentally created in three specific circumstances
would be considered ``production.'' As explained in an earlier portion
of this section, EPA is proposing that such production, whether
intentional or unintentional, would generally require expenditure of
production and consumption allowances unless the regulated substance is
timely destroyed. In this subsection, EPA is outlining a narrowing of
this general approach particular to HFC-23. Specifically, EPA is
proposing that HFC-23 must be captured and controlled to a specific
standard outlined later in this subsection. Entities could either
destroy the HFC-23 or expend production and consumption allowances to
capture, refine, and sell it for consumptive uses.
    As noted at the start of this section, the AIM Act provides EPA
with significant discretion in how to establish an allowance allocation
system. EPA is proposing to exercise this significant discretion to
only allow production and consumption allowances to be expended for
HFC-23 if the HFC-23 is refined and sold for consumptive uses, such as
in semiconductor etching or refrigeration at very low temperatures. EPA
understands that currently, some HFC-23 is unintentionally created as a
byproduct in chemical production processes and vented to the
atmosphere.\53\ EPA proposes that allowances created through the AIM
Act cannot be expended for HFC-23 that is vented. An entity that
creates HFC-23 would need to capture the HFC-23 and could either (1)
expend production and consumption allowances to sell that HFC-23 for
consumptive uses or (2) destroy the captured HFC-23 using a technology
approved by the Administrator.
---------------------------------------------------------------------------

    \53\ See, e.g., ``Fluorinated Greenhouse Gas Emissions and
Supplies Reported to the GHGRP.'' Epa.gov, Environmental Protection
Agency, 24 Feb. 2021, www.epa.gov/ghgreporting/fluorinated-greenhouse-gas-emissions-and-supplies-reported-ghgrp#production.
---------------------------------------------------------------------------

    In the alternative, if EPA does not finalize the definition of
production as proposed, or does not finalize the requirements around
the exemption from expending allowances for production if regulated
substances are timely destroyed, EPA proposes to use the significant
discretion provided in the AIM Act to require that, in order to be
eligible to receive production allowances under the system created
through this rulemaking, companies must control, capture, and/or
destroy HFC-23 byproduct that is created at facilities that produce
regulated substances and that would otherwise be emitted to a specific
standard outlined later in this subsection.
    As further support for both EPA's main and alternative proposed
approaches to addressing HFC-23, EPA notes that HFC-23 is a regulated
substance under the AIM Act. In the Congressionally provided table in
subsection (c) of the Act, HFC-23 is assigned the highest exchange
value of any regulated substance of 14,800, indicating that Congress
was well aware of the potential impact of this substance and intended
for it to be regulated on that basis. This exchange value is almost
5,000 more than the next closest regulated substance (HFC-236fa at
9,810). EPA has data available through the GHGRP indicating that there
are emissions of HFC-23 at fewer than four facilities in the country
that produce other HFCs controlled by the AIM Act.\54\ Because existing
data suggests that absent control, there may be significant emissions
of HFC-23 at facilities that produce regulated substances under the AIM
Act, the AIM Act does not prevent a new entrant from producing HFCs if
they have the necessary allowances, and because HFC-23 has a
significantly higher exchange value than any other regulated substance
under the AIM Act, EPA is proposing to require that an entity that
creates HFC-23 would need to capture the HFC-23 and could either (1)
expend production and consumption allowances to sell that HFC-23 for
consumptive uses or (2) destroy the captured HFC-23 using a technology
approved by the Administrator. Specifically, EPA is proposing that, no
later than October 1, 2022, as compared with the amount of chemical
intentionally produced on a facility line, no more than 0.1 percent of
HFC-23 created on the line may be emitted. The HFC-23 must be destroyed
using a technology approved by EPA as outlined in section VII.B. of
this rulemaking and 40 CFR 84.29(b). As explained further in the
supporting documentation provided in the docket, EPA is aware that
these facilities are already taking steps to control, capture, and/or
destroy their HFC-23 emissions and that current information suggests
that some facilities are controlling HFC-23 emissions to the proposed
0.1 percent standard or lower. EPA is also aware of continuous
improvement projects underway to limit HFC-23 emissions at these
facilities. Since some facilities have already achieved this standard,
EPA is proposing that it is reasonable to require facilities to meet
this standard. EPA acknowledges that some facilities may need to
install and calibrate new equipment in order to meet this standard, and
therefore is proposing a compliance date of October 1, 2022.
---------------------------------------------------------------------------

    \54\ There are also reported emissions from other sources
including from the production of HCFC-22 regulated under CAA Title
VI. If EPA were to finalize under the alternative interpretation
proposed, EPA intends to take separate action to address HFC-23
byproduct emissions from HCFC production.
---------------------------------------------------------------------------

    EPA recognizes that individual circumstances could arise that make
it impossible for an individual facility to install necessary controls
by October 1, 2022. Therefore, for companies that can demonstrate to
EPA that at the relevant facilities, they have taken concrete steps to
start to improve their HFC-23 control, capture, and destruction (such
as purchase and installation of necessary equipment), are reporting

under GHGRP, and provide information to EPA regarding their plans to
meet the 0.1 percent HFC-23 emissions limit, EPA proposes that the
Agency may grant a six-month deferral, subject to a one-time additional
six-month extension. Alternatively, EPA is taking comment (in addition
to taking comment on all proposals in this section) on whether the
Agency should grant a one-time, one-year deferral with no possible
extension. Under either method, companies would need to request such a
deferral by August 1, 2022. EPA proposes to make a determination on an
application within 30 days based on whether the company has
demonstrated good faith efforts to comply with the HFC-23 emissions
reduction requirement, there are reasons that have necessitated
compliance deferral, and there are clear plans for the company to come
into full compliance by the deferred date. EPA intends to publicly
announce any compliance deferrals granted under this process.
    EPA understands that destruction of HFC-23 may occur both at the
facility where it is generated (on-site) and may also occur off-site at
another facility, which may or may not be owned by the same corporate
entity. In instances where HFC-23 is destroyed off-site, EPA proposes
that the transportation to and destruction at the off-site facility
would be considered in calculating compliance with the 0.1 percent
emissions standard.

VII. What other elements of the AIM Act is EPA addressing in this
proposed rulemaking?

A. How is EPA proposing to address international trades or transfers of
HFC allowances?

    Subsection (j) of the AIM Act, titled ``International
Cooperation,'' addresses the trade or transfer of production allowances
between entities in the United States and foreign countries.\55\ To
implement this subsection, EPA must determine whether a country has
``enacted or otherwise established . . . the same or similar
requirements or otherwise undertaken commitments regarding the
production and consumption of regulated substances as are contained
in'' the AIM Act. Under subsection (j)(4), EPA is required to
promulgate a rule carrying out this subsection by December 27, 2021,
and to review that rule at least annually and, if necessary, revise
it.\56\
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    \55\ Subsection (j)(1) also addresses exports. In particular,
after January 1, 2033, it prohibits the export of a regulated
substance to a person in a foreign country if EPA determines that
the country has not undertaken certain actions regarding the
production and consumption of regulated substances. Given the timing
of this prohibition, EPA does not intend to further address this
aspect of subsection (j)(1) in this rulemaking.
    \56\ This review would be an internal procedure, but EPA would
engage in notice and comment rulemaking to revise the regulations.
---------------------------------------------------------------------------

    The statute uses the terms ``trade'' and ``transfer'' with respect
to allowances in many parts of both subsections (g) and (j). While EPA
has considered whether Congress intended ``trade'' and ``transfer'' to
signify different actions with respect to allowances in these
provisions, neither term is defined in the AIM Act and EPA cannot
discern a consistent difference in how the terms are used in this
context. EPA is therefore proposing to interpret them as being used
interchangeably.
    In most instances, subsections (g) and (j) use ``transfer'' (either
exclusively or alongside the term ``trade'') to describe the exchange
of allowances between two entities. Subsection (j) uses the phrase
``trade or transfer'' throughout the subsection. However, (j)(2) and
(3) exclusively use ``transfers'' in the paragraph titles, while using
both ``trade or transfer'' and ``transfer'' in the text of both
paragraphs. For example, (j)(2) permits the ``trade or transfer of a
production allowance . . . if, at the time of the transfer'' certain
conditions are met. There is one instance in subsection (g)(2)(C) where
the AIM Act references trade alone in requiring that EPA's rule provide
for ``the trading of consumption allowances in the same manner as is
applicable [for] the trading of production allowances.'' In all other
places in subsection (g), the term ``transfer'' is used exclusively,
for example in (g)(1), which requires EPA to issue a rule that
``governs the transfer of [production] allowances.'' As Congress uses
the term ``transfer'' more frequently when only one term appears in
subsections (g) or (j), EPA is proposing that it would be appropriate
to use the term ``transfer'' in the AIM Act implementing regulations
for all instances where the AIM Act contemplates ``trades'' or
``transfers.'' Hereinafter, EPA refers to ``trade or transfer'' as used
in subsection (j) of the AIM Act as ``transfers'' for simplicity.
    International transfers of production allowances allow for the
production of a chemical to be consolidated at fewer plants in order to
be able to achieve economies of scale as demand shrinks and the HFC
phasedown progresses. EPA proposes to allow such production transfers
where the requirements of the AIM Act are met.
    In relevant part, subsection (j)(1) of the Act prohibits any
company subject to the AIM Act's requirements from transferring a
production allowance to a company in a foreign country that, as
determined by EPA, has not established the same or similar requirements
within a reasonable time from the Act's enactment or otherwise
undertaken commitments regarding the production and consumption of HFCs
as are contained in the Act. Subsection (j)(2) describes specific
conditions that must be satisfied for a company in the United States to
transfer a production allowance to--or from--a company in a foreign
country. Such a transfer to a company in a foreign country may occur if
at the time of the transfer EPA revises the number of production
allowances for the United States so that the aggregate national
production of the regulated substance to be transferred is equal to the
least of three different levels, which are described below. Similarly,
such a transfer may occur from a company in a foreign country to a
company in the United States if, at the time of the transfer, EPA finds
that the foreign country has revised their domestic production limits
of the regulated substance in the same manner. EPA also has discretion
under subsection (j)(3) to reduce the United States' production limits
as a prerequisite to a transfer to a company in a foreign country, or
to increase the United States' production limits to reflect production
allowances transferred from a company in a foreign country to a company
in the United States.
    The proposed regulations that would implement the AIM Act's
international transfer provisions are structured similarly to the
provisions governing international transfers under the ODS phaseout
(see 40 CFR 82.9(c) and 82.18(c)). When a transfer request is
submitted, EPA is proposing to review whether the foreign country where
the foreign company is located meets the conditions of subsection
(j)(1) and is therefore eligible to participate in transfers of
production allowances to or from the United States.\57\ If the foreign
country does not meet the conditions in subsection (j)(1), EPA would
notify the

requestor in writing that no transfers to or from the country can
occur.
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    \57\ In the ODS context, EPA developed a list of countries that
had domestic regulatory requirements in place regarding the
production and consumption of ODS. Given the limited number of
international transfers of production allowances that EPA saw under
CAA Title VI, EPA does not presently anticipate that a list will be
necessary to implement these provisions. EPA is thus not proposing
to establish a list of countries that meet the conditions in (j)(1)
at this time. EPA may consider whether to implement such a list at a
future time, such as when the Agency starts implementing the Jan. 1,
2033, export prohibition in (j)(1).
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    If EPA determines that the foreign country meets the conditions in
(j)(1) of the Act, it would consider whether the applicable
requirements in subsection (j)(2) of the AIM Act are met. For transfers
to a foreign country, a U.S. company may engage in the transfer under
subsection (j)(2)(A) if at the time of the transfer EPA revises the
number of production allowances such that the aggregate national
production of the regulated substance to be transferred is equal to the
lessor of three values listed in subsection (j)(2)(A)(i)-(iii):
     The maximum production level permitted under the AIM Act
for the applicable regulated substance in the year of the international
transfer minus the production allowances transferred;
     the maximum production level for the applicable regulated
substances that are allowed under applicable law minus the production
allowances transferred; or
     the average of the actual national production level of the
applicable regulated substances for the three years prior to the date
of the transfer minus the production allowances transferred.
    In relevant part, subsection (j)(2)(A)(i)-(iii) of the AIM Act
refers to the ``applicable regulated substance'' and ``applicable
regulated substances,'' such as in the phrase ``the maximum production
level permitted for the applicable regulated substance in the year of
the transfer . . . , less the production allowances transferred.''
Since EPA is proposing to issue allowances as an exchange value-
weighted amount and not as a chemical-specific quantity, allowance
holders could use all their allocated production allowances for any one
chemical. As such, if a company transfers production allowances to a
foreign country, EPA considers the ``maximum production level permitted
for the applicable regulated substance in the year of transfer'' to be
the same as the maximum allocation listed in proposed Sec.  84.7(b),
which is an exchange value-weighted amount. EPA would take the same
approach of weighting amounts based on exchange values when considering
the levels consistent with (j)(2)(A)(ii) and (iii). As the production
allowances transferred would also be accounted for in terms of the
exchange value-weighted units, the reduction would be appropriately
reflected in the total.
    EPA is proposing that the U.S. company seeking to transfer
allowances (i.e., the ``transferor'') must submit to EPA a signed
statement requesting that EPA revise the number of production
allowances consistent with the requirements of subsection (j)(2)(A)(i)-
(iii). EPA would determine which is the lesser of the three values. The
transferor would also need to submit to EPA information on the contact
person and foreign country authorizing the transfer; the chemical and
quantity being transferred; documentation that the foreign country
possesses the necessary quantity of unexpended production rights; and
the calendar year for that transfer. EPA seeks comment on whether it
should additionally require prior approval by a foreign country or some
other documentation from the foreign country verifying it can increase
allowable production in the relevant calendar year if EPA approves the
transfer, or whether an application for such reduction or some other
official government communication from the foreign country's embassy in
the United States is sufficient. For these transfers, the allowance
revisions for the company in the United States would be reflected at
the individual transferor level.
    In reviewing submissions for transfers to a company in a foreign
country, EPA would consider whether the transfer and revised production
limits meet the requirements in subsection (j), as discussed above. EPA
is also proposing to define other factors the Agency could take into
account in considering whether to approve such transfers. Under the CAA
Title VI implementing regulations in 40 CFR part 82, subpart A, EPA has
the discretion to take factors into account relating to possible
economic hardships created by a transfer, potential effects on trade,
potential environmental implications, and the total amount of
unexpended allowances held by entities in the United States. For the
AIM Act regulations, EPA sees value in having discretion to consider
the environmental implications, since there could be an environmental
benefit or cost associated with the international transfer that could
influence EPA's decision-making, and the total unexpended allowances
held by entities in the United States, given EPA would not be able to
approve a transfer if there were insufficient allowances to transfer,
and is thus proposing to include these factors among those that could
be taken into account. The Agency seeks comment on this proposal, and
on whether and how it should consider other factors, including possible
economic hardships created by an international transfer (e.g., on U.S.
employment) and potential effects on trade.
    For transfers from a foreign country, subsection (j)(2)(B) of the
Act provides that the U.S. company may engage in the transfer if EPA
finds that the foreign country has revised the domestic production
limits of the regulated substances in the same manner as for transfers
by a company in the United States. Accordingly, EPA proposes that the
company must submit a signed document from an official representative
in that country's embassy in the United States stating that the
appropriate authority within that country has revised the domestic
production limits for that country equal to the least of:
     The maximum production level permitted under the AIM Act
for the applicable regulated substance in the year of the international
transfer minus the production allowances transferred;
     the maximum production level for the applicable regulated
substances that are allowed under applicable law (including the
country's applicable domestic law) minus the production allowances
transferred; or
     the average of the country's actual national production
level of the applicable regulated substances for the three years prior
to the date of the transfer minus the production allowances
transferred.
    Consistent with subsection (j)(2)(B) of the Act, these three
situations are intended to align with the provisions in subsection
(j)(2)(A)(i)-(iii) of the Act. As noted above, subsection (j)(2)(A)(i)-
(iii) of the AIM Act refers to the ``applicable regulated substance''
and ``applicable regulated substances,'' such as in the phrase ``the
maximum production level permitted for the applicable regulated
substance in the year of the transfer . . ., less the production
allowances transferred.'' EPA is proposing that if the country uses an
exchange value-weighted system similar to what EPA has proposed, this
phrase should have the same meaning as for transfers from the United
States to another country. If a foreign country has established
chemical-specific production levels, this phrase would be interpreted
to mean the production level for the particular regulated substance
involved in the transfer. In such a scenario, the production allowances
transferred would be translated into exchange value-weighted amounts
for purposes of tracking compliance with obligations under the AIM Act.
EPA would take the same approach when considering the levels consistent
with (j)(2)(A)(ii) and (iii). If the foreign country has established a
different domestic regulatory approach, EPA would need to consider on a
case-by-case basis how best to review this condition to ensure

that requirements of the AIM Act are met.
    EPA is proposing that the language in (j)(2)(A)(i) that establishes
one of the thresholds for determining the appropriate reduction in
production allowances as the maximum production level permitted ``under
this section'' for the applicable regulated substance in the year of
the international transfer be interpreted to restrict international
transfers from a foreign country to situations in which the country has
revised their production limits to establish a phasedown schedule at
least as stringent as that in the AIM Act. As noted above, under
subsection (j)(2)(B), EPA must find that the country has revised the
domestic production limits ``in the same manner'' as provided for
transfers by a company in the United States to a company in a foreign
country in order for the transfer to occur. One requirement for such
transfers to a foreign country in (j)(2)(A) is that the number of
allowances for production under subsection (e)(2) of the Act must be
revised downward such that national aggregate production is equal to
the lessor of one of three values, one of which is the maximum
production level permitted ``under this section'' for the applicable
regulated substance in the year of the international transfer. Under
this proposal, subsections (j)(2)(A) and (j)(2)(B) would be read
together to mean that Congress intended for the international transfer
provisions only to apply to countries that have revised their
production limits to establish a phasedown schedule at least as
stringent as the AIM Act's.
    EPA seeks comment on this proposal and also seeks comment on
whether those provisions could instead be interpreted to allow
transfers from foreign countries where the country has satisfied the
requirements in (j)(1) of the Act and established domestic production
controls for the 18 HFCs regulated under the AIM Act, even if they are
on a different phasedown schedule, and revised the maximum production
limit established under those provisions to account for the transfer.
The language in (j)(1) would allow for transfers of production
allowances to a company in a foreign country if EPA has determined that
the country has put in place ``the same or similar requirements'' as
are contained in the AIM Act. In relevant part, this language appears
to allow for transfers (i.e., of allowed production) between the United
States and countries that have capped their production and are phasing
down listed HFCs, even if the requirements are not identical. EPA
specifically solicits comments on how the phrase ``in the same manner
as provided with respect to transfers by a person in the United States
under this subsection'' in (j)(2)(B) would be understood under such an
interpretation.
    For international production allowance transfers to a U.S. company,
the company would need to submit to EPA a request that includes
information on the contact person and foreign country authorizing the
transfer; the chemical and quantity being transferred; the calendar
year for that transfer; and a signed statement describing whether the
increased production is intended to allow the company in the United
States to serve the export market or to serve the U.S. market. This
information would be helpful to EPA because once the transfer is
complete, EPA proposes to treat production allowances transferred from
a foreign country the same way as all other production allowances
issued by EPA. As such, a production allowance and a consumption
allowance must be expended for each unit of HFC produced, though if the
amounts are later exported, the consumption allowances may be
reimbursed. EPA seeks comment on whether EPA should require prior
approval by a foreign country or some other commitment from the foreign
country's embassy in the United States verifying it has decreased
allowable production before approving of the transfer. Additionally,
EPA seeks comment on whether it could approve such a transfer if the
foreign country has committed that it will decrease the allowable
production after EPA approves but before the transfer occurs. For these
transfers, any allowance revisions for the company in the United States
would be reflected at the individual company level. In reviewing
submissions for transfers from a company in a foreign country, the
Administrator would consider whether the transfer and revised
production limits meet the relevant requirements under subsection (j).
    For both transfers from and to foreign countries, EPA, following
review, would notify the requestor in writing that the appropriate
production allowances were either granted or deducted and specify the
affected year(s), provided EPA determines the request meets the
proposed required conditions. In approving an international transfer,
EPA would notify the transferor in writing of the appropriate revisions
to a transferor's allowance balance at the time of approval. For
transfers from a foreign country, the Administrator would notify the
requestor in writing that the allowances of that company are revised to
equal the unexpended production allowances held by the company plus the
level of allowable production transferred from the foreign country. EPA
would not adjust available allowances until the foreign country's
representative had confirmed the appropriate number of allowances were
deducted in the foreign country.
    For a transfer to a foreign country, the AIM Act does not limit the
quantity of production allowances that may be transferred. EPA is
seeking comment on whether to include a provision like the one used
under the implementing regulations for international transfers for ODS
under CAA Title VI giving the Administrator the option to disapprove
the proposed transfer if the transfer is not consistent with domestic
policy. EPA also seeks comment on what policies might be relevant in
this context. Additionally, EPA is proposing that it would deny the
transfer if the transferor did not possess sufficient allowances to
permit the necessary reduction in aggregate domestic production to be
reflected in the transferor's revised production limits.
    If EPA approves the proposed transfer, EPA would establish revised
production limits for the transferor so that the aggregate national
production permitted reflects the effect of the transfer of production
allowances. In certain circumstances, following a transfer of
allowances to another country, the AIM Act requires that the aggregate
national U.S. production of the HFC to be transferred be reduced by an
additional amount beyond a simple deduction of the number of allowances
transferred to another country. For instance, if the average actual
U.S. production during the three-year period prior to the date of the
transfer is less than the total allowable U.S. production for that
substance under Sec.  84.7(b), then by the time of the transfer, U.S.
production would need to be revised downward to equal the three-year
average minus the amount transferred. This additional reduction would
also need to be reflected in the revised production limit.
    EPA requests comment on whether there are any other scenarios where
a greater reduction would be needed. In such circumstances, EPA is
proposing to conclude that it would be appropriate for the required
reduction in U.S. production to be allocated among all the transferors
participating in international transfers in the same calendar year in
proportion to the number of allowances transferred by each entity. This
approach would be fair, as it treats every company equally based on the
total number of allowances transferred. To

ensure EPA does not need to revise allowances if companies submit their
requests at different times, e.g., one company submits a request by
February 1 and another on September 1, EPA is proposing that all
requests for international transfers of production allowances be
submitted by October 1 of the year prior to the year the transferred
allowances would be useable. If there is only one transferor, the
reduction would be applied exclusively to that company. EPA would
notify each transferor of the revised production limit before January 1
and the allowances would be useable as of January 1 for the full
calendar year. The transfers would be deemed to occur as of January 1,
the date the transferor's production limit is revised and the
allowances are useable, for purposes of determining the three-year
period for purposes of this analysis. The transferor would then be able
to make timely market decisions with the remaining production
allowances. EPA would rely upon the three most recent calendar years'
worth of data. For example, if a request were submitted by October 1,
2022, EPA would rely upon data from January 1, 2019, through December
31, 2021, to determine the average of the actual national production
level over the last three years (as specified in subsection
(j)(2)(A)(iii)). While the AIM Act states the Agency should use the
average production level for the ``three-year period ending on the date
of the transfer,'' such data for the year ending on the date of
transfer would generally not be reported until 45 days after the end of
the quarter, and then would need to be reviewed by EPA for accuracy.
Further, the timing for the availability and/or release of another
country's data is unknown. Thus, EPA is proposing that it is reasonable
to implement this provision through the three most recent calendar
years' worth of data.
    EPA requests comments on this proposal, including the proposed
dates for submission of requests and approvals of the transfers, and
additionally solicits comment on whether it should use a different
three-year period for purposes of this analysis, such as based on the
three-year period starting from the quarter closest to the date of the
transfer that has data reviewed for accuracy by EPA. For example, EPA
requests comments on an alternative under which if requests were
submitted by December 31, 2022, they would be approved by March 1,
2023, and useable for the rest of that year, and the three-year period
would be evaluated from October 1, 2019, to September 30, 2022. EPA
further requests comments on how it should proceed if information on
the actual national production level for the applicable regulated
substances is not available for all of the relevant three-year period.
EPA also requests comment on whether rather than grouping the requests
together, it should alternatively allow requests for international
transfers to be submitted individually on a rolling basis over the
year, evaluate them separately as they come in, and if any request
happens to trigger a need to reduce the aggregate national U.S.
production by an additional amount beyond a simple deduction of the
number of allowances transferred, that additional amount would be
applied exclusively to that requestor's balance.
    EPA is proposing the following method to determine the transferor's
balance of production allowances after a transfer to a company in a
foreign country: The Administrator would determine which of the values
under (j)(2)(A) of the Act leads to the lowest value and adjust
allowance balance(s) accordingly. EPA requests comment on the proposed
provisions and method used to calculate revised production limits for
those wishing to transfer production allowances internationally. EPA
also requests comment on its proposal if more than one company
transfers production of an HFC to a foreign country or countries in one
year, and on possible alternative methods to calculate these revised
production limits.
    Given the discussion at the start of this section explaining how
``transfers'' is used in (g) and (j) of the Act, and that EPA is
proposing to interpret references to that term as synonymous with
references to trade, the Agency is also proposing to apply the
requirement in subsection (g)(2) to international transfers. Subsection
(g)(2) of the Act specifies that EPA's regulations shall ensure that
transfers ``will result in greater total reductions in the production
of regulated substances in each year than would occur during the year
in the absence of the transfer.'' The Agency is proposing to conclude
that it is reasonable to view (g)(2) of the Act as applying equally to
all transfers. This is consistent with the requirement under (g)(1)
that EPA promulgate a regulation that ``governs the transfer of
allowances for the production of regulated substances under subsection
(e)(3)(A)'' of the Act. As the international transfers under (j)(2)
would affect the production allowances issued under subsection
(e)(3)(A), it would be reasonable to apply those requirements to
international transfers as well. This approach would also result in an
additional benefit for the environment than would occur absent the
transfer, consistent with (g)(2). See the discussion earlier in this
proposal for the proposed offset that would be associated with
transfers generally, including international transfers. EPA seeks
comment on this proposal, as well as on whether international transfers
should have the same offset level as all other transfers or if a level
at the lower or higher end of the proposed one to 10 percent range is
more appropriate. For comments addressing this issue, EPA requests that
they include the commenter's views, if any, both on what level the