Proposed revisions to the Ozone-Depleting Substances Regulations: chapter 3

3. Accelerating the Phase-Out of Hydrochorofluorocarbons

As a Party to the Montreal Protocol, Canada had committed to the phase-out schedule for domestic consumption of HCFCs as well as to controls on the production of HCFCs for developed countries (known as non-Article 5 Parties).

The Montreal Protocol requires Parties to make the scheduled reductions at an aggregate (Canada-wide) level, and provides individual countries with the flexibility to achieve the reductions in ways that account for the special circumstances applicable in each country.

3.1 Existing Regulations

Canada has guaranteed phase-out level of HCFCs through the Ozone-depleting Substances Regulations, 1998, under the Canadian Environmental Protection Act, 1999, imposing the Montreal Protocol reduction schedule on each person engaged in these activities.

Relative to the current baseline that has been in place since 1996, Canada had agreed to reduce its HCFC consumption according to the following schedule:

• Reduce by 35 % by 2004;
• Reduce by 65 % by 2010;
• Reduce by 90 % by 2015;
• Reduce by 99.5 % by 2020; and,
• 100 % elimination by 2030.

In addition to these consumption reductions, Canada committed to a freeze in HCFC production starting January 1, 2004. Aside from this freeze, production is not directly controlled or limited under the Regulations. Currently, HCFC production in Canada is much lower than the calculated level of production allowed under the Montreal Protocol (see Annex 2; Table 4).

Sections 22 to 30 of Part 2 of the Regulations contain restrictions on the manufacture, import, use, sale or offer for sale of HCFCs in Canada. In summary, the Regulations state that:

• Effective January 1, 2010:
  - Manufacture, use, sale and import of HCFC-22, HCFC-141b and HCFC-142b are prohibited, except for use as refrigerants and for exportation; and
  - Manufacture and import of products containing HCFC-22, HCFC-141b and HCFC-142b are prohibited.
• Effective January 1, 2015:
  - Manufacture, use, sale and import of all HCFCs are prohibited, except
  • For export or for use as refrigerants until 2020; and
  • HCFC-123 until 2030.
• Effective January 1, 2020:
  - Import and manufacture of products containing any HCFC are prohibited; and
  - Some activities will be restricted to used, recovered, recycled or reclaimed (URRR) HCFCs under permit.
• Effective January 1, 2030:
  - Complete phase-out on import and manufacture of HCFCs.

3.2 Purpose of Proposed Regulatory Revisions

The purpose of the proposed revisions is to adjust the reduction schedule for the consumption of HCFCs in Schedule 1 of the Regulations and to introduce a phase-out schedule for production to reflect the accelerated phase-out schedule agreed to by Canada and other nations in Decision XIX/6 of the Parties to the Montreal Protocol.

Canada has an international obligation to meet the reductions committed to under the Montreal protocol, and a responsibility to ensure that the text of the Canadian Regulations reflects at a minimum the Montreal Protocol agreement. There is a continued need to ensure that the Regulations reflect the schedule in the Montreal Protocol, and that the Regulations encourage further reductions according to what is technically and economically feasible.

With the new commitments stemming from the agreement to accelerate the phase-out of HCFCs, the Regulations must be revised to align Canada’s HCFC reduction schedule with the reduction schedule agreed to at the 19th Meeting of the Parties.

Under the agreement reached at the 19th Meeting of the Parties, developed countries, including Canada, agreed to phase-out the production and consumption by 75% of their HCFCs by 2010; 90% by 2015; and complete this accelerated phase-out by 2020, while allowing for the continued use of 0.5% for servicing until 2030. The agreement also includes an accelerated phase-out and stepwise reductions of the production and consumption of HCFCs in developing countries.

The decision of the Parties also included the provision to allow for production of up to 10% of baseline levels until 2020 in order to satisfy the basic domestic needs of developing countries (Article 5 Parties).

It is important to note that prior to the agreement reached at the 19th Meeting of the Parties to the Montreal Protocol, phase-out targets were mandated only for the consumption of HCFCs. Under the new agreement, the phase-out of both the production and consumption of HCFCs is now targeted.

The following table compares the existing reduction requirements set by the Regulations and the new reduction obligations as agreed under the Montreal Protocol.

3.3 Consumption in Canada

The 1996 baseline calculated level of consumption of HCFCs in Canada is 887 tonnes. According to the internationally agreed phase-out schedule for domestic consumption of HCFCs (see section 2), the calculated level of HCFC consumption for Canada was reduced to 576 ODP tonnes on January 1, 2004, which met the required 35 percent reduction in consumption under the Montreal Protocol.

The consumption will be further reduced to 222 ODP tonnes on January 1, 2010, to meet the next reduction target of 75 percent as per the recent adjustment to the phase-out schedule under the Montreal Protocol.

As per the Regulations, the annual initial consumption allowance for HCFCs is divided among users in two authorized sectors: the “Cooling” sector, whether in refrigeration or air conditioning, and the “Other Uses” sector, where the substances are used in any application other than for cooling.

Presently, the “Cooling” sector represents about 19% of the total consumption while the “Other Uses” sector represents 81%. In 2006, “Cooling” was at 99.1% of its maximum allowed consumption (109 ODP tonnes of a total of 110 ODP tonnes) while “Other Uses” were at 94.8% of their allowed consumption (442 ODP tonnes of 466 ODP tonnes).

Canada’s actual consumption of HCFCs has always been within its maximum allowance. Table 1 in Annex 2 shows Canada’s maximum allowance for the period 1996-2010 and historical consumption of HCFCs up to 2006, as reported to the Ozone Secretariat of the Montreal Protocol. Quantities of the historical consumption in Canada are shown by individual sectors in Tables 2 and 3 in Annex 2.

3.4 Production in Canada

In 1999 in Beijing, the Parties to the Montreal Protocol decided that, starting on January 1, 2004, each Party producing one or more HCFC shall ensure that its annual calculated level production does not exceed the base level as decided by the Parties¹. This provided Canada with a maximum allowed calculated level of production of 819.6 ODP tonnes.

According to the internationally agreed phase-out schedule for domestic production of HCFCs, the calculated level of HCFC production for Canada will be reduced to 204.9 ODP tonnes on January 1, 2010, to meet the required 75 percent reduction in production under the Montreal Protocol. Production will be further reduced to 81.96 ODP tonnes on January 1, 2015, to meet the next reduction target of 90 percent.

3.5 Proposed Revisions - Consumption

The reduction schedule for the consumption of HCFCs will be amended to reflect, at a minimum, the recent adjustment to the Montreal Protocol; that is, a phase-out of 75% of the baseline consumption of HCFCs in 2010, an additional 10% over the previous schedule.

It is anticipated that consumption in the “Other Uses” sector will be negligible after the 2010 phase-out date given the restrictions currently in the Regulations on the manufacture, import, use, sale or offer for sale of HCFC-22, HCFC-141b and HCFC-142b in Canada. In 2005, 5.03 ODP kg and in 2006, 6.10 ODP kg of HCFCs other than HCFC-22, HCFC-141b or HCFC-142b were imported into Canada for use in the “Other Uses” sector.

Consumption in the “Cooling” sector will continue. Currently the “Cooling” sector accounts for approximately 19 % of the quantity of HCFCs distributed under the allowance system. Canada could see a reduction of 81 % of the baseline by maintaining the status quo under the current Regulations.

3.5.1 Proposed Options - Reduction Schedule

At a minimum the Regulations will be revised to reflect Scenario A. However, it is reasonable to believe that Scenario B could be achieved given the estimated HCFCs reductions and trends under the current Regulations.

* Estimates are based on the following assumptions: retain the division between the two sectors; reductions implemented in each sector equally; and no transfers between sectors.

3.5.2 Proposed Options - Division Between Sectors

Environment Canada held consultations with stakeholders in 1994 and 1995 to determine how the 887 ODP tonnes allowed under the Montreal Protocol would be distributed. It was decided to use a system of transferable allowances allocated to importers and manufacturers of HCFCs, based on past consumption. It was also decided to allow transfers only within the same sector; and not to allow transfers of allowances between the two sectors.

The main reason to set up such a division was that, at the time the HCFC allowance system was implemented, the conversions from CFC to HCFC or other non-ODS alternatives in the refrigeration and air conditioning sector was only beginning. It was important to reserve a certain portion of the total allowances to the “Cooling” sector for equipment conversion.

A Multistakeholder Working Group on Ozone-depleting Substances and Alternatives, co-chaired by Environment Canada and Industry Canada, was established in 1999 as a forum to discuss and provide strategic advice on the effective implementation of Canada’s program for the control of ODS and their alternatives.

During previous meetings of the Working Group, it has been suggested that Environment Canada should consider the possibility of amending the Regulations to remove the division between the two use sectors. Although some stakeholders expressed their preference for a unified system, many commented that the removal of the division would work as a disincentive for users to move away from alternatives. At that time, Environment Canada decided to maintain status quo as the benefits of pursuing this option were not clear and the current allowance system was working to phase-out HCFCs as intended by the Ozone-depleting Substances Regulations, 1998 and the Montreal Protocol.

Option 1: Set new reduction targets while removing the division between the “Cooling” sector and the “Other Uses” sector

This option would mean that the division between the “Cooling” sector and the “Other Uses” sector would be removed. Consumption allowances would continue to be distributed to companies as previously done in both sectors, and the stepwise reduction (scenario A or B in section 3.5.1) would be applied to holder of a consumption allowance. This option would allow for the transfer of consumption allowances among all allowance holders. The reduction in 2015 would be applied in the same manner.

Considerations:
a) The removal of the division between the two sectors would allow transfer from one sector, where alternatives exist and industry may be moving away from HCFCs, to the other sector that may need additional quantities of HCFCs.

b) This option could allow market forces to influence the transfer of consumption allowances.

c) Removing the division between the two sectors would simplify the administration of the Regulations.

d) If the division is removed, the quantities of HCFCs designated for a particular sector would no longer be protected, which may represent a challenge for users in a given sector in ensuring steady supplies.

e) The division and the allowance system were established to encourage search and development of alternatives and to promote use of Used, Recovered, Reclaimed, Recycled (URRR) targeted areas. By removing the division, the refrigeration sector may have access to greater quantities of HCFCs, increasing the overall consumption of HCFCs.

f) An increase in consumption by one sector may reduce efforts to find alternatives and slow the use of URRR substances. The pressure and efforts to reach the reductions would be made by the “Other Uses” sector and not by both sectors.

Option 2: Set new reduction targets while retaining the division between the “Cooling” sector and the “Other Uses” sector

This option would mean that the division between the “Cooling” sector and the “Other Uses” sector would be retained. Consumption allowances would continue to be distributed to companies in each sector with the existing distribution of allowances between the sectors. The stepwise reduction would be applied to each holder of a consumption allowance, meaning the aggregate quantity available to each sector in 2010 would be reduced equally by either 75% or 80% (per section 3.5.1) of the baseline. The reduction in 2015 would be applied in the same manner.

With this option Environment Canada would continue to ensure that transfers between sectors would not occur.

Considerations:
a) The quantities of HCFCs designated for a particular sector would be protected.

b) Retaining the division between the two sectors would not allow transfer from one sector, where alternatives exist and industry may be moving away from HCFCs, to the other sector that may need additional quantities of HCFCs.

c) No possibility of alleviating the pressure for a sector through transfer from the other sector that is more advanced in its phase-out.

d) The burden would be shared between the two sectors.

Option 3: Set new reduction targets while maintain status quo

This option would be based on the fact that it is an aggregate 75% reduction that must be achieved and not necessarily a 75% reduction by each sector.

This option would mean that the division between the “Cooling” sector and the “Other Uses” sector would be retained and the consumption allowances would continue to be distributed to companies in each sector. The distribution of allowances between sectors would reflect already significant reductions expected to be achieved by 2010 on the HCFCs used in the “Other Uses” sector as per the current Regulations. Therefore allow for not imposing additional reductions, over the previously scheduled reductions on the “Cooling” sector. The reduction in 2015 would be applied in the same manner.

With this option Environment Canada would continue to ensure that transfers between sectors would not occur.

Considerations:
a) The quantities of HCFCs designated for a particular sector would be protected.

b) Canada would be able to meet its new target without any additional efforts from industry.

c) The majority of the phase-out would be as a result of the advancements made in the “Other Uses” sector; there would be no additional pressure on the “Cooling” sector to find alternatives.

d) Missed opportunity to achieve greater environmental gains.

3.6 Proposed Revisions - Production Controls

As part of the adjustment to the Montreal Protocol, Parties also decided to phase-out the production of HCFCs in line with the phase-out schedule for consumption of HCFCs. A mechanism to phase-out the production of HCFCs in Canada will be introduced to the Regulations.

In order to satisfy basic domestic needs of developing countries, developed countries may produce up to 10% of their baseline level until 2020. This provision will be revisited by the Parties to the Montreal Protocol no later than 2015 to consider further reductions. A provision for the production to meet the basic domestic needs of developing countries will also be introduced to the Regulations.

In addition to including a phase-out schedule on the production of HCFCs in the Regulations, Environment Canada also has to determine a system to distribute the calculated level of production of HCFCs available. Historically, Canada did not directly control production because it was controlled as part of the Canada’s maximum allowance.

Environment Canada is exploring possible options for the control of production under the Regulations, including a system of allowances to allocate quantities of HCFCs that may be manufactured in Canada, i.e. production allowances. This system will be separate from consumption allowances.

Consumption is defined as production plus imports minus exports. Under the current Regulations only those who are entitled to consumption allowances may be able to use production allowances.

Option 1: Allocate the entire production cap to existing HCFC Producer

This option would mean that the whole 819.6 ODP tonnes of available quantities for the production of HCFCs under the Montreal Protocol would be allocated to existing producers.

Considerations:
a) The quantities produced would be easily tracked and controlled.

b) There would be no opportunity for new producers of HCFCs in Canada.

Option 2: Distribute allowances to producers based on historical production or plant capacity, while allowing new producers

Environment Canada could distribute a production allowance equivalent to the existing producers historical production. The existing producers in Canada would therefore get the quantities required to continue producing at current levels. The quantities remaining would be available to companies with consumption allowances to begin or expand production in Canada.

The quantities available to other manufacturers could be allocated through a permit system until the Canadian cap is reached, within their consumption allowance.

Considerations:
a) This option would reflect the current Canadian situation in terms of allowances.

b) This option keeps the flexibility of having new producers of HCFCs in Canada (provided that the company holds a consumption allowance).

c) This option could lead to an overall increase in HCFCs production

¹The base level for the production of HCFCs is calculated as the average of 1989 HCFC production + 2.8 per cent of 1989 CFC production and 1989 HCFC consumption + 2.8 per cent of 1989 CFC consumption. The base level is calculated using the production and consumption of HCFCs as well as CFCs to ensure that a sufficient base level was allowed as HCFCs were produced to replace CFCs in almost all application