Takeaways

The American Innovation and Manufacturing Act (AIM Act) of 2020 aims to combat climate change by significantly reducing hydrofluorocarbons (HFCs), chemicals commonly used in refrigerants.
The AIM Act directs the EPA to spearhead an aggressive phasedown of U.S. HFC production and use by approximately 85 percent over the next 15 years.
Because HFCs are used in many cooling systems, AIM may result in significant transition costs for industries such as supermarkets and data centers.

Hydrofluorocarbons (HFCs) are greenhouse gases commonly used in a variety of applications including refrigeration, air-conditioning, building insulation, fire extinguishing systems, refrigerated shipping and aerosols. The use of HFCs is particularly prevalent in the supermarket and data center industries—two important U.S. sectors that rely on commercial-scale refrigeration systems to operate. For example, it has been reported that annual HFC emissions from U.S. grocery stores have the equivalent climate potential of 49 billion tons of coal. The data center cooling industry has been reported to contribute to more than two percent of global HFC emissions. 

Due to their high global warming potential, HFCs are widely considered as one of the most potent drivers of climate change. For that reason, an ambitious HFC phasedown has long been touted as a critical climate strategy. In fact, a quadrennial Scientific Assessment of Ozone Depletion report issued in October 2018 noted that a concerted, worldwide HFC phasedown effort could avoid up to 0.5°C of global warming. 

To that end, the recently passed American Innovation and Manufacturing (AIM) Act of 2020, H.R. 133, sec. 103, requires EPA to pass regulations that will reduce U.S. HFC production and use by approximately 85 percent over the next 15 years. While some sectors will be spared from this phasedown, the majority of companies will be required to transition their facilities to non-HFC refrigerants in order to comply with the EPA’s new regulations. The AIM Act directs EPA to issue a final rule on the HFC phasedown on or before September 23, 2021, and it is expected that EPA’s proposed rule and public comment period will begin this spring or early summer.

Of course, transitioning to an HFC-free alternative cooling system is much easier said than done. The deceptively simple act of swapping one coolant for another often requires extensive and costly upgrades to a business’s facilities and operations. This program will impact businesses in a number of ways. Affected industries would be well-advised to closely monitor or participate in the EPA’s rulemaking process. Some impacts may be positive. For example, because the AIM Act includes a cap-and-trade system for HFCs, companies which are early movers could generate revenue by selling unneeded allowances.

I. Overview of the AIM Act

On December 27, 2020, President Trump signed into law the AIM Act, which was tucked into last year’s massive omnibus legislation known as the Consolidated Appropriation Act of 2021 (P.L. 116-260). The AIM Act is the product of bipartisan agreement and directs the EPA to spearhead a phasedown of both HFC production and consumption in the United States. The AIM Act marks the return of federal HFC regulation, an area formerly rife with uncertainty after the legality of prior HFC regulations was called into question in a series of federal court decisions. 

Additionally, the passage of the AIM Act brings the United States in line with the ambitious climate change goals under the Kigali Amendment. The Kigali Amendment—an amendment to the 1987 Montreal Protocol treaty—is a global pact to phase down HFCs worldwide over the coming decades. The U.S. signed the Kigali Amendment in 2016, however, it was largely ignored by the previous Administration. On January 27, 2021, President Biden signed an Executive Order directing his administration to forward the Kigali Amendment for Senate ratification, where it is expected to pass.  

In short, the AIM Act will cut U.S. production and use of HFCs by approximately 85 percent over the next 15 years. In addition to setting monitoring and reporting requirements for HFC uses, AIM grants the EPA authority to undertake the following actions:

  • Promulgate rules phasing down the production and consumption of HFCs through an allowance program, which functions as a cap-and-trade system designed to both incentivize businesses to reduce HFC emissions and provide flexibility for individual markets and businesses to decide how best to meet HFC reduction targets;
  • Establish standards for managing HFC use in refrigerants through recovery, reclamation, improved servicing, repair and disposal practices; and
  • establish sector-based use restrictions to facilitate the transition to alternative, next-generation technologies for refrigeration solutions. AIM Act, sec. 103(d)–(e).  

The AIM Act mandates a nationwide HFC production and consumption reduction, based on an average of 2011-2013 levels as the baseline, of at least 10 percent by 2023, 40 percent by 2028, 70 percent by 2033, 80 percent by 2035, and finally 85 percent by 2036, AIM Act, sec. 103(e)(2)(A)-(C). AIM directs EPA to implement these reductions through regulations promulgated before September 23, 2021. AIM Act, sec. 103(e)(3). Specifically, EPA is required to calculate the allowable quantity of HFCs that may be used each year, then allocate allowances to companies to allow the consumption and production of HFCs up to the limit. AIM also authorizes EPA to impose a more stringent phasedown schedule than that set forth in the Act. AIM Act, sec. 103(f).

AIM contains a narrow exception for niche applications of HFCs deemed “essential uses” for which there are no substitute chemicals. These uses include defense sprays, medical inhalers, polyurethane foam for marine and trailer use, semiconductor manufacturing, and mission-critical military end uses. The exception protects these uses from HFC regulation (other than reporting requirements) for five years and mandates that EPA allocate the full number of allowances that are necessary for such “essential uses.” See AIM Act, sec. 103(e)(4). The Act also creates a three-year grant program for small businesses, allocating $5 million annually toward increasing recovery and reclamation of refrigerants reaching their end-of-life. AIM Act, sec. 103(h)(5).

II. Impacted Industries

The impacts of AIM will be highly significant in the supermarket and data center industries, both of which do not qualify as essential uses, but heavily rely on cooling systems which utilize HFCs. 

  • Supermarkets - Supermarkets use HFCs to keep perishable goods cold, but these gases often leak from improperly installed cooling systems. Under AIM, U.S. supermarkets must reduce their HFC emissions and eventually cease use. Currently, the average supermarket refrigeration system contains thousands of pounds of HFCs and leak at an average annual rate of 25 percent from at least 38,000 supermarkets across the nation. Transitioning a single store to a cooling system using a non-HFC refrigerant has been estimated to cost $1-2.5 million dollars. Further, as HFCs are phased out their price per pound will presumably increase, resulting in escalating costs for those stores which delay in transitioning their systems.
  • Data Centers - Similarly, data centers using air conditioning units known as “chillers” to cool critical IT equipment must conduct an overhaul of their HFC use. With the passage of AIM, data center businesses are now compelled to quickly adopt new technologies and cooling strategies. One study forecasted the size of the U.S. data center cooling market—the bulk of which use HFC chillers—will increase to 3.99 billion dollars by 2024. To comply with the AIM Act’s mandates while also accounting for fast-paced industry growth (and accommodating newly developed processing units that can generate up to 600 W of heat), data centers will need to revamp their existing cooling systems. Accordingly, both data centers and their customers are encouraged to review the terms of existing service agreements and determine whether these cost increases are addressed in the agreements.

Because the AIM Act requires EPA’s final rule to be issued by this September, EPA’s rulemaking process is anticipated to begin in the next few months. 

Supermarkets, data centers and other impacted industries are encouraged to take immediate steps to prepare for the EPA’s forthcoming HFC regulations. Companies in these sectors would be wise to participate in the EPA rulemaking to ensure the regulations appropriately consider their business needs. The amount of allowances EPA grants a particular industry, and the speed at which EPA mandates the phasedown of particular HFCs, will have a significant impact on the costs the AIM Act imposes on businesses over the next 15 years. Pillsbury is well-suited to provide public policy and rulemaking support to ensure this emerging regulatory framework is enacted in a way favorable to long-term business interests, to assist clients in the sourcing and development work necessary to transition their facilities and operations to non-HFC alternatives, and to help clients develop the compliance programs necessary to comply with the AIM Acts new regulatory framework.

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