The Senate Ratifies the Kigali Amendment, Strengthening U.S. Commitment to Phase Down Hydrofluorocarbons

The Senate’s ratification of Kigali brings the United States’ international commitments in line with already passed domestic legislation in the American Innovation and Manufacturing (AIM) Act of 2020, which mandated a similar HFC phasedown. In 2021, the EPA promulgated 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 large impact on certain economic sectors, as companies may need 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 successful landmark 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 nation commits to significantly decreasing the global production and use of HFCs by over 80% within the next 30 years. Indeed, one of the Amendment’s principal features is its ambitious HFC phasedown schedule, which contemplates that developed countries would begin reducing HFC consumption starting in 2019, with the ultimate goal of reducing HFC production and use to about 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 by 2045. A small group of developing countries with unique geographic circumstances would be expected to freeze consumption by 2028 and reduce it to about 15% of 2025 levels by 2047.

In addition to the HFC phasedown, the Kigali Amendment also requires ratifying parties to treat HFCs like other controlled substances, thereby prohibiting countries that have ratified the Amendment from trading in HFCs with non-ratifying countries beginning in 2033. Further, each ratifying party must establish a system for licensing the import and export of new, used, recycled and reclaimed HFCs and report annually on their production and use of HFCs. Finally, the Amendment requires ratifying parties to destroy, to the extent practicable, byproduct emissions of HFC-23—a particularly potent greenhouse gas—and to report on such efforts.

Successful global implementation of the Kigali Amendment is anticipated to avoid more than 80 billion metric tons of carbon dioxide-equivalent emissions by 2050—a concerted feat estimated to prevent global warming of up to 0.5 degree Celsius by 2100.

Practical Impacts

Though significant, the Senate’s formal ratification of the Kigali Amendment is somewhat symbolic. This is because the AIM Act already mandates the phasedown of domestic HFC production, importation and consumption. Specifically, the AIM Act mandates that HFC production and consumption in the United States must be reduced by at least 10% of baseline levels (based on 2011 – 2013 HFC consumption and production) by 2023, 40% by 2028, 70% by 2033, 80% by 2035, and ultimately 85% by 2036—a schedule that is consistent with the timetable for developed countries under the Kigali Amendment.

As required by the AIM Act, the EPA promulgated the HFC Allocation Rule in September 2021. The rule implements the AIM Act’s mandated HFC phasedown through an allowance allocation and trading program and establishes the initial methodology to allocate allowances for 2022 and 2023. The EPA also promulgated rules specifically addressing HFC-23.

An allowance constitutes a company’s privilege to produce or import a set amount of HFCs in a given year. Under the program, companies may be allotted a certain number of allowances by the EPA for use the following year. Allowances may be used by a company to produce or import HFCs or may be transferred to another business that seeks HFC allowances. The total number of allowances decreases each year, generating market pressure for companies to reduce their use of HFCs or find alternatives. It is expected that the phase down of HFCs could have a large impact on certain economic sectors, such as grocery stores, construction materials, shipping or data centers.

While the EPA has established the framework and criteria for issuing allowances to specific companies for 2022 and 2023, it has stated its intent to develop a separate notice-and-comment rulemaking to establish allowance criteria for 2024 and later years.

Takeaways

Given that the Kigali Amendment’s HFC phasedown mandates are already being met through the AIM Act and the EPA’s HFC regulations, the Senate’s ratification of the Amendment is unlikely to significantly alter the EPA’s HFC allowance allocation program currently in effect for 2022 and 2023. However, the EPA intends to revisit its HFC allocation approach for subsequent years in a future rulemaking, at which time impacted businesses not previously involved in the initial rulemaking process may participate. Given the potential impact of the HFC phasedown on certain sectors such as the refrigeration and cooling sectors, this could be a key opportunity for certain industries to address the structure of the allowance program or the amount of allowances allocated to their sector. 

Pillsbury is well-suited to provide public policy and rulemaking support to ensure companies are adequately represented during the EPA’s HFC future allowance allocation process, or during any future rulemaking. Pillsbury is also able 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 new regulatory framework quickly developing under the auspices of the Kigali Amendment and the AIM Act.