The Senate’s ratification of Kigali brings the United States’ international commitments into line with domestic legislation already passed in the United States Innovation and Manufacturing (AIM) Act of 2020, which mandated a similar phase-down of HFCs. In 2021, the EPA enacted rules to enact the AIM Act, including establishing a cap and trade program to reduce HFC production and consumption. This program is expected to have a significant impact on certain economic sectors, as companies may have to either pay increasing prices for HFC allowances or switch to alternative processes.
What is the Kigali Amendment?
The Kigali Amendment, adopted on October 15, 2016, amended the 1987 Montreal Protocol on Substances that Deplete the Ozone Layer, a landmark successful environmental treaty designed to phase out certain ozone-depleting chemicals and repair the ozone layer, to specifically address HFCs and their role in contributing to climate change. Under the Kigali Amendment, each ratifying country commits to significantly reduce global production and use of HFCs by more than 80% over the next 30 years. Indeed, one of the key features of the amendment is its ambitious HFC phase-down schedule, which foresees that developed countries would start reducing their HFC consumption from 2019, with the ultimate goal of reducing production and HFC use to around 15% of 2012 levels by 2036. Most developing countries, on the other hand, would freeze HFC consumption by 2024 and reduce it to 20% of 2021 levels d by 2045. A small group of developing countries with unique geographical circumstances are expected to freeze consumption by 2028 and reduce it to around 15%. % of 2025 levels by 2047.
In addition to the HFC phase-down, the Kigali Amendment also requires ratifying parties to treat HFCs as other controlled substances, thereby prohibiting countries that have ratified the Amendment from trading HFCs with non-ratifying countries. from 2033. In addition, each ratifying party must establish a licensing system for the import and export of new, used, recycled and reclaimed HFCs and an annual report on their production and use of HFCs. Finally, the Amendment requires ratifying parties to destroy, to the extent possible, emissions of by-products of HFC-23, a particularly potent greenhouse gas, and to report on these efforts.
Successful implementation of the Kigali Amendment globally is expected to avert over 80 billion metric tons of carbon dioxide equivalent emissions by 2050, a concerted feat that is expected to prevent global warming climate of up to 0.5 degrees Celsius by 2100.
While important, the Senate’s formal ratification of the Kigali Amendment is somewhat symbolic. Indeed, the AIM law already mandates the gradual reduction of domestic production, import and consumption of HFCs. Specifically, the AIM Act states that the production and consumption of HFCs in the United States must be reduced by at least 10% from baseline levels (based on HFC consumption and production from 2011 to 2013) by 2023, 40% by 2028, 70% by 2033, 80% by 2035, and ultimately 85% by 2036 – a schedule that is consistent with the schedule of developed countries under of the Kigali Amendment.
As required by the AIM Act, the EPA promulgated the HFC allocation rule in September 2021. The rule implements the HFC phase-down mandated by the AIM Act through an allocation program and trading scheme and establishes the initial quota allocation methodology for 2022 and 2023. The EPA also has rules promulgated specifically regarding HFC-23.
An allowance is the privilege of a company to produce or import a specified quantity of HFCs in a given year. Under this program, the EPA can allocate companies a certain number of allowances to be used the following year. Quotas can be used by a company to produce or import HFCs or can be transferred to another company requesting HFC quotas. The total number of allowances is decreasing every year, generating market pressure for companies to reduce their use of HFCs or find alternatives. The phase-down of HFCs is expected to have a significant impact on certain economic sectors, such as groceries, building materials, maritime transport or data centers.
While the EPA has established the framework and criteria for awarding allowances to specific companies for 2022 and 2023, it has stated its intention to develop a separate notice-and-comment rule to establish criteria for allocation for 2024 and subsequent years.
Take away food
Given that the HFC phase-down mandates of the Kigali Amendment are already being met through the AIM Act and EPA HFC regulations, ratification of the Amendment by the Senate is significantly modifying the EPA’s HFC allocation program currently in effect for 2022 and 2023. The EPA intends to revise its HFC allocation approach for future years in a future regulation, in which affected companies that were not previously involved in the initial regulatory process will be able to participate. Given the potential impact of the HFC phase-down on certain sectors such as the refrigeration and cooling sectors, this could be a key opportunity for certain industries to address the quota program structure or quota amount allocated to their sector.