[Federal Register Volume 64, Number 64 (Monday, April 5, 1999)]
[Proposed Rules]
[Pages 16373-16383]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-8258]


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ENVIRONMENTAL PROTECTION AGENCY

40 CFR Part 82

[FRL-6319-2]
RIN 2060-AH67


Protection of Stratospheric Ozone: Allowance System for 
Controlling HCFC Production, Import and Export

AGENCY: Environmental Protection Agency (EPA).

ACTION: Advance Notice of Proposed Rulemaking.

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SUMMARY: EPA is seeking comments on a variety of options for 
establishing an allowance allocation system to control the U.S. 
consumption of class II controlled substances, the 
hydrochlorofluorocarbons (HCFCs), in accordance with U.S. obligations 
under the Montreal Protocol on Substances that Deplete the Ozone Layer 
(Protocol). Under the Protocol, the United States is obligated to limit 
HCFC consumption (defined by the Protocol and this notice as production 
plus imports, minus exports) under a specific cap, which will be 
reduced in a step-wise fashion over time. To ensure that the U.S. does 
not exceed this internationally mandated cap, EPA is presenting many 
options for establishing a future HCFC allowance allocation system. EPA 
is considering, among other things, an option where the allowance 
system would become effective only under certain conditions, i.e., once 
a specified percentage of the current U.S. HCFC cap has been reached or 
exceeded.

DATES: Comments on this advanced notice of proposed rulemaking must be 
received on or before June 4, 1999.

ADDRESSES: Comments on this advance notice of proposed rulemaking 
should be submitted in duplicate to: Air Docket No. A-98-33, U.S. 
Environmental Protection Agency, 401 M Street, SW., Room M-1500, 
Washington, DC 20460. The Docket is located in Room M-1500, First 
Floor, Waterside Mall at the address above. The materials may be 
inspected from 8 am until 4 p.m., Monday through Friday. A reasonable 
fee may be charged by EPA for copying docket materials.

FOR FURTHER INFORMATION CONTACT: Vera Au, EPA, Stratospheric Protection 
Division, Office of Atmospheric Programs, Office of Air and Radiation 
(6205-J), 401 M Street, SW., Washington, DC 20460, (202) 564-2216 or 
the Stratospheric Protection Hotline at (800) 296-1996.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
    A. Montreal Protocol on Substances that Deplete the Ozone Layer
    B. Title VI of the Clean Air Act Amendments of 1990
II. Options for Establishing an HCFC Allowance System
    A. Allowance Allocation System to Control U.S. HCFC Consumption
    1. Type of Allowances
    2. Unit of Measure of Allowances
    B. Method for Distributing Allowances
    C. Establishing an Equitable Baseline for Distributing 
Allowances
    D. Percentage of Allowances Distributed under U.S. HCFC 
Consumption Cap
    E. Transfers of Class II Allowances
    1. Transfers Within Groups of Class II Substances
    2. Inter-Pollutant Transfers
    3. Inter-Company Transfers
    4. Inter-pollutant Transfers Combined with Inter-Company 
Transfers
    5. Transfers of Current-Year Allowances
    6. Permanent Transfers of Baseline Allowances
    7. International Trades of Current-Year Allowances
    8. Offset for a Transfer of Allowances
    F. Conditions Under Which a Control System Would Become 
Effective
III. Other Regulatory Options for Controlling HCFCs
    A. Labeling
    B. SNAP Approval and Restrictions
    C. Non-Essential Product Ban under Section 610
IV. Administrative Requirements
    A. Executive Order 12866
    B. Regulatory Flexibility Act
    C. Executive Order 13045: Children's Health Protection
    D. National Technology Transfer and Advancement Act

Annex A: Ozone Depletion Potentials for Class II Substances as 
Currently Listed Under the Montreal Protocol

I. Background

A. Montreal Protocol on Substances that Deplete the Ozone Layer

    Signatory countries that are Parties to the international agreement 
called the Montreal Protocol on Substances that Deplete the Ozone Layer 
(Protocol), during their second meeting in London in 1990, identified 
hydrochlorofluorocarbons (HCFCs) as transitional substitutes for 
chlorofluorocarbons (CFCs) and other more destructive ozone-depleting 
substances. At the Parties' fourth meeting in Copenhagen in 1992, a 
detailed phaseout schedule for HCFCs (listed in Annex C, Group I of the 
Protocol) was created. At this fourth meeting, the Parties to the 
Protocol established a freeze level (a cap) on the consumption of HCFCs 
for industrialized countries (Parties governed by Article 2 of the 
Protocol). Consumption is defined by the Protocol as production plus 
imports minus exports. The cap on HCFC consumption for industrialized 
countries went into effect on January 1, 1996, and was derived from the 
formula of 3.1 percent (reduced to 2.8 percent at the seventh meeting 
of the Parties) of a Party's CFC consumption in 1989, plus the Party's 
consumption of HCFCs in 1989. This formula puts the current U.S. cap 
for HCFC consumption at 15,240 ODP-weighted metric tons. The Parties to 
the Protocol then created a schedule for the gradual reduction and 
eventual phaseout of the consumption of HCFCs by 2030. The Copenhagen 
Amendments to the Protocol call for a 35 percent reduction of the cap 
in 2004, followed by a 65 percent reduction in 2010, a 90 percent 
reduction in 2015, a 99.5 percent reduction in 2020, and a total 
phaseout in 2030. The U.S. must, at a minimum, comply with this 
phaseout schedule under the Protocol.

    EPA was petitioned to phase out the most ozone-depleting HCFCs 
first. Upon

[[Page 16374]]

analyzing this approach, EPA determined that the U.S. could in fact 
meet, if not exceed, the required Montreal Protocol reductions by the 
specified dates. Therefore, the U.S., as authorized under the Clean Air 
Act, is implementing a different phaseout schedule, carried out on a 
chemical-by-chemical basis for HCFCs (58 FR 65018), which will meet or 
exceed the Montreal Protocol reductions required. U.S. implementation 
of the HCFC phaseout is described below in parts I.B and I.C of this 
notice.

B. Title VI of the Clean Air Act Amendments of 1990

    The Clean Air Act Amendments of 1990 (CAA or the Act), under 
Section 605(c), originally required the Administrator to promulgate, by 
December 31, 1999, regulations phasing out the production, and 
restricting the use of, class II substances (HCFCs), subject to any 
acceleration of the phaseout of production under Section 606. Section 
605(c) further states that the Administrator shall promulgate 
regulations to ensure that the consumption of class II substances is 
phased out and terminated in accordance with the same schedule. The 
original phaseout schedule established in the Act has since been 
accelerated as authorized under Section 606 and is outlined below in 
part I.C of this notice.

    Section 605 of the Act established the original U.S. phaseout 
schedule for class II substances. Section 605(a) states that, 
``Effective January 1, 2015, it shall be unlawful for any person to 
introduce into interstate commerce or use any class II substance unless 
such substance: (1) Has been used, recovered and recycled; (2) is used 
and entirely consumed (except for trace quantities) in the production 
of other chemicals; or (3) is used as a refrigerant in appliances 
manufactured prior to January 1, 2020.'' Section 605(b) states that, 
``Effective January 1, 2015, it shall be unlawful for any person to 
produce any class II substance in an annual quantity greater than the 
quantity of such substance produced by such person during the baseline 
year. Effective January 1, 2030, it shall be unlawful for any person to 
produce any class II substance.'' This phaseout schedule has since been 
accelerated under authority of Section 606.

    Section 606(a) specifically requires the Administrator to 
promulgate regulations, accelerating the phaseout of production and 
consumption of ozone-depleting substances, ``if (1) based on an 
assessment of credible current scientific information (including any 
assessment under the Montreal Protocol) regarding harmful effects on 
the stratospheric ozone layer associated with a class I or class II 
substance, the Administrator determines that such more stringent 
schedule may be necessary to protect human health and the environment 
against such effects, (2) based on the availability of substitutes for 
listed substances, the Administrator determines that such more 
stringent schedule is practicable . . ., or (3) the Montreal Protocol 
is modified to include a schedule to control or reduce production, 
consumption, or use of any substance more rapidly than the applicable 
schedule under this title.''

    Thus, Section 606 (a)(3) requires EPA to accelerate the phaseout to 
conform to any acceleration under the Protocol. In addition, Section 
614(b) provides that in the case of a conflict between Title VI of the 
Act and the Protocol, the more stringent provision shall govern. The 
Parties to the Protocol, based on scientific evidence that losses of 
stratospheric ozone were occurring more rapidly than earlier believed, 
accelerated the phaseout of class I substances and established the 
phaseout schedule for class II substances at the Fourth Meeting of the 
Parties in Copenhagen in 1992. Pursuant to authorities provided by 
Title VI, EPA amended its regulations on December 10, 1993 (58 FR 
65018) to provide for these accelerations. Targeting the phaseout set 
by the Protocol, EPA chose to phase out production and consumption of 
HCFCs on a chemical-by-chemical basis, beginning with those with the 
highest ozone depletion potential (ODP). EPA accelerated the phaseout 
of production and import of HCFC-22, HCFC-141b and HCFC-142b, the three 
HCFCs with the highest ODPs. Specifically, EPA's rule bans the 
production and import of HCFC-141b as of January 1, 2003. The 
production and import of HCFC-142b and HCFC-22 in excess of baseline 
allowances are prohibited effective January 1, 2010, except for the use 
in equipment manufactured prior to January 1, 2010. Beginning January 
1, 2020, the production and import of HCFC-142b and HCFC-22 are banned. 
Production and import of the remaining HCFCs, in excess of their 
baseline production and consumption levels, will be prohibited 
beginning January 1, 2015, except as a refrigerant in equipment 
manufactured before January 1, 2020. All HCFCs will be completely 
phased out by January 1, 2030. EPA did not establish an allocation 
system for class II substances, as it did for class I substances.

    Section 605(d) of the Act speaks to exceptions to the original 
phaseout schedule for HCFCs. Beginning in 2030, EPA can authorize up to 
10 percent of the baseline per year for production of class II 
substances for medical devices considered essential by the U.S. Food 
and Drug Administration (FDA) and for which no safe and effective 
alternative has been developed and approved. EPA can authorize use of 
these quantities beginning in 2015 as an exception to the use 
restrictions contained in 605(a). EPA can authorize this limited amount 
of production and use, to the extent consistent with the Protocol, if 
FDA, in consultation with EPA, determines that it is necessary for use 
in these medical devices. In addition, beginning in 2015, and 
continuing up until 2030, EPA may authorize production of up to 110 
percent of the baseline per year solely for export to and use in 
developing countries (Article 5 countries) that are Parties to the 
Protocol. This production is intended to be solely for the purpose of 
satisfying basic domestic needs of the importing developing country. 
Between 2030 and 2040, no more than 15 percent of the baseline can be 
produced annually for export to Article 5 countries. Section 605(d) 
does not permit any production for export to and use in Article 5 
countries after January 1, 2040.

    Per Section 602(b) of the Act, EPA published a list of class II 
substances in 40 CFR Part 82, Subpart A, Appendix B. All HCFCs fall 
into one grouping under class II ozone depleting substances, and, since 
publication of the initial list, no new class II substances have been 
added to the list.

    Section 602(e) requires EPA to assign numerical values representing 
the ozone depletion potential (ODP) of all class II substances; and 
Section 602(e) further states that, ``Where the ozone depletion 
potential of a substance is specified in the Montreal Protocol, the 
ozone depletion potential specified for that substance under this 
section shall be consistent with the Montreal Protocol.'' Annex A of 
this notice lists the ODPs for all class II substances as currently 
specified by the Protocol. Note that some of the ODPs listed under 
Annex A vary slightly from those listed under Appendix B to 40 CFR Part 
82, Subpart A due to revisions of those ODPs under the Protocol since 
May 10, 1995. However, because this notice merely seeks comments and 
presents options, the future final rulemaking for the class II 
allowance allocation system will amend the list of ODPs currently 
presented in 40 CFR Part 82. Unless there are future revisions of the 
ODPs

[[Page 16375]]

for class II substances under the Protocol, entities involved in the 
HCFC market can expect to use the ODPs listed in Annex A of this notice 
for any ODP-weighted calculations that may be necessary as part of an 
HCFC allowance system.

    Section 607(b) of the Act requires EPA to permit the transfer of 
any class I or class II allowances, within each group or class, on an 
ozone depletion weighted basis. In allowing transfers, under Section 
607(a) of the Act, EPA must ensure that ``the transactions under the 
authority of this section will result in greater total reductions in 
the production in each year of class I and class II substances than 
would occur in that year in the absence of such transactions.'' In 
other words, transfers cannot be made at a 1:1 ratio. In the class I 
regulations, an offset of one percent was required in any transfer to 
accomplish the environmental benefit required by Section 607. Those 
transfer requirements are set forth in 40 CFR Part 82, Subpart A, 
Section 82.12 (60 FR 24970, May 10, 1995). Transfer of class II 
allowances between entities and interpollutant transfers on an ODP-
weighted basis, along with an appropriate offset, are addressed under 
II.E of today's notice.

    Section 616 of the Act states that the U.S. may transfer allowances 
to another Party, under certain conditions. Few countries currently 
have a system in place for allocating, trading and expending HCFC 
allowances. As discussed in today's notice, differences exist between 
the manners in which the Protocol and the U.S. have structured their 
respective HCFC phaseout systems. Nevertheless, a trading regime 
similar to that implemented by EPA for class I international trades (40 
CFR 82.9, 82.10) (60 FR 24970, May 10, 1995) could work effectively for 
class II trades. One possible such system is outlined in II.E.6 of this 
notice.

    Reporting requirements mandated in Section 603 relative to HCFCs 
are currently in place in 40 CFR 82.13(n). Additional reporting 
requirements will likely accompany the implementation of a class II 
allowance allocation system.

II. Options for Establishing an HCFC Allowance System

    Section 607 of the Act requires EPA to issue allowances for the 
production and consumption of class II substances. With this notice, 
EPA is putting forth options as to how such an allowance system could 
be established. The allowance system must ensure that U.S. consumption 
of class II substances does not exceed the cap agreed to under the 
Protocol (currently at 15,240 metric tons but will be reduced over 
time).

    For the class I substances, EPA considered many methods for 
achieving the required reductions that were agreed to under the 
Protocol. The approaches distinguished between economic incentives and 
engineering controls or bans. EPA concluded that the most equitable, 
least costly and easiest system to administer for achieving the 
Protocol's required reductions for class I ozone-depleting substances 
was a marketable allowance system. EPA established such a system. The 
system proved highly successful and by January 1, 1996, the production 
and import of class I substances were completely phased out (but for 
narrow exemptions granted by the Parties to the Protocol) with minimal 
economic impact.

    Unlike the class I allowance system, however, EPA is considering an 
approach whereby an allowance system for class II substances would only 
become effective if a certain threshold (i.e., a certain percentage of 
the total U.S. cap for class II substances) were reached or exceeded.

A. Allowance Allocation System to Control HCFC Consumption in the 
United States

1. Type of Allowances

    a. Production Allowances and Consumption Allowances for Class I 
Controlled Substances. Under the control system for class I substances, 
EPA created a unit of measure called an allowance (see 40 CFR 82). An 
allowance, for a class I substance, represents the marketable rights 
and privileges granted to a company to produce or import a specific 
quantity of that class I substance. Under the class I allowance 
program, there were two types of allowances: production allowances and 
consumption allowances. One allowance in the regulatory program for 
class I substances was equal to one kilogram of either production or 
consumption of a substance, depending on the type of allowance.

    Under the class I phaseout regulations, a company was required to 
expend both production and consumption allowances to be able to 
produce. To be able to import a class I controlled substance, a company 
was required to expend consumption allowances (See 40 CFR 82.4). After 
proper documentation was presented to EPA reflecting an export of a 
class I controlled substance, consumption allowances were refunded or 
returned to the exporting company (See 40 CFR 82.10).

    b. Options for Allowances for Class II Controlled Substances. EPA 
is considering, and seeking comment on, the following options for class 
II allowances. One option for a class II allowance system would be to 
follow the structure established for the class I substances. To 
produce, a company would expend both production allowances and 
consumption allowances for a specific quantity of a class II controlled 
substance. To import, a company would expend consumption allowances for 
a specific quantity of a class II controlled substance. An exporter of 
class II substances would be able to obtain consumption allowances by 
providing documentation indicating the quantity of substance exported 
abroad.

    A second option for a class II allowance system would be to operate 
the system using only one kind of allowance, which could be applied 
equally for production, imports and exports. This means that such an 
allowance (hereafter referred to as ``class II allowance'') could be 
applied to any element of the formula for consumption (consumption = 
production + imports-exports). Producers and importers alike would be 
allocated class II allowances according to baseline calculations. To 
produce, a company would expend class II allowances for a class II 
substance. To import, a company would expend class II allowances for a 
class II substance. Upon export, a company would receive class II 
allowances for the quantity of a class II substance exported. 
Essentially, allocation and expenditure of allowances under this system 
would differ from the class I system in that only one allowance would 
be allocated and expended for production. For example:

------------------------------------------------------------------------
                                  Class I allocated/  Class II allocated/
            Activity                   expended            expended
------------------------------------------------------------------------
Production......................  production &        class II
                                   consumption.        allowance.
Import..........................  consumption.......  class II
                                                       allowance.
Export..........................  consumption         class II allowance
                                   returned.           returned.
------------------------------------------------------------------------


[[Page 16376]]

2. Unit of Measure for Allowances

    Allowances can be accounted for in a variety of ways. They can 
equal any quantity one assigns to them, calculated by any workable 
measure. In the class I allowance system, EPA assigned each allowance a 
value of one kilogram of a class I substance. To produce or import, 
allowances were expended similarly, by kilograms. Since each chemical 
has its own ODP, any trades that took place between class I chemicals 
took into account the difference in ODPs, weighting the resulting 
allowances accordingly.

    Due to the aforementioned differences in ODPs among chemicals, 
another possible measure for an allowance is an ODP-weighted unit (ODP 
x kilogram), tied to no specific chemical. EPA is considering, and 
seeking comment on, both an absolute allowance allocation by kilogram 
(which is chemical-specific) and an ODP-weighted allocation system 
(which is also allocated in kilograms but not chemical-specific). With 
this notice, EPA is exploring both options but attempts below to 
illustrate what the advantages and disadvantages of each system may 
entail.

    a. Absolute Kilogram Allowances on a Chemical-by-Chemical Basis. 
One option for assigning a value to class II allowances would be to 
allocate them on an absolute quantity (kilogram) basis, as was done in 
the class I allocation system. In such a system, one kilogram of an 
HCFC would correspond to one allowance. In this absolute system, one 
would track the production, import or export of a specific chemical on 
a kilogram basis.

    If trades were to occur between different class II substances in a 
system where one allowance equals one kilogram, any difference in ODP 
between the substances would have to be factored into the exchange, as 
was done with transfers and trades among class I substances (See 
Section 607(b)(1) of the Act). A brief example of such transfers is 
described below, but further options related to, and a more thorough 
explanation of, transfers are discussed in part II.E of today's notice.

    To better illustrate how an absolute allowance system would 
function, take for example, Company A, which produced 1000 kilograms of 
HCFC-141b and 550 kilograms of HCFC-22 in its baseline year. Under an 
absolute allowance system, Company A would be allocated 1000 allowances 
for HCFC-141b and 550 allowances for HCFC-22. To produce 70 kilograms 
of HCFC-141b, 70 allowances would be subtracted from 1000, leaving 
Company A with 930 kilograms or allowances of HCFC-141b. If Company A 
wanted to produce more than 1000 kilograms of HCFC-141b, it could trade 
with another holder of HCFC-141b allowances or transfer its own HCFC-22 
allowances to HCFC-141b allowances, taking into account the difference 
in ODP between the two substances. In this case, if Company A wanted to 
produce 200 additional kilograms of HCFC-141b, it could, through an 
intra-company transfer, shift the appropriate number of HCFC-22 
allowances that, accounting for ODP differences, would represent the 
equivalent of 200 HCFC-141b allowances. Therefore, Company A would 
exchange 400 HCFC-22 allowances to add 200 HCFC-141b allowances, since 
the ODP of HCFC-22 is 0.055 and the ODP of HCFC-141b is 0.110. 
Similarly, Company A could have purchased 200 allowances of HCFC-141b 
or 400 allowances of HCFC-22 from some other allowance holder.

    It is important to note what would occur under an absolute 
allowance system when various phaseout dates become effective. In 2003, 
for example, when the ban on production and importation of HCFC-141b 
takes effect (See 40 CFR section 82.4), entities with HCFC-141b 
baseline allowances, measured in kilograms, would no longer be 
authorized to produce or import HCFC-141b. Essentially, these entities 
would receive zero percent of their baseline allowances on January 1, 
2003. The same would occur when other individual phaseout dates (e.g., 
for HCFC-22 and HCFC-142b in 2010) become effective.

    In 2004, under the Protocol, the U.S. is required to reduce its 
current HCFC consumption cap (15,240 ODP-weighted metric tons) by 35 
percent. At this time, every entity still holding HCFC baseline 
allowances may receive 65 percent (or 35 percent less) of their 
remaining HCFC baseline allowances.

    Administratively, an absolute allocation system based on kilograms 
may be advantageous for its simplicity. Both for the regulated entities 
and EPA, an absolute system would afford greater ease, clarity, and 
predictability. Holders of absolute allowances would report their 
transactions in kilograms of each chemical. To determine future 
regulatory actions, EPA needs to keep a running tab on market supply 
and demand of the various chemicals. EPA is much better able to track 
which companies are expending which allowances for which chemicals if 
EPA carries out the calculations involving trades and expenditures, and 
then tracks the absolute quantities of each chemical. EPA is also 
obligated to report to the United Nations Environment Programme (UNEP) 
annually on U.S. production and importation on an absolute basis for 
each individual substance. Producers and importers have been operating 
and reporting under the class I absolute allocation system for many 
years, and are familiar with the necessary calculations, reporting 
forms, and tracking requirements. Therefore, any additional 
administrative burden of adopting a similar system for class II 
substances may be minimal for the regulated community. Consistency 
between the class I and potential class II systems would present a 
significant advantage. Under an absolute system, flexibility would not 
be compromised, due to the trading opportunities that can be 
established. EPA requests comment on the advantages or disadvantages of 
an absolute allocation system.

    b. ODP-Weighted Allocation. Another means of allocating allowances 
is through an ODP-weighted system, whereby each allowance holder's 
allocation would be calculated according to the numerical value of the 
ODP associated with each chemical in the allowance holder's baseline 
year(s). In this case, the ODP weight of each HCFC becomes the 
meaningful variable and companies would be allocated an aggregate 
number of ODP-weighted (ODP x kilogram) units. For example, a company 
that produced 1000 kilograms of HCFC-142b in the baseline year(s) would 
be allocated 65 ODP-weighted allowances because HCFC-142b has an ODP of 
0.065. Likewise, if this same company imported 1000 kilograms of HCFC-
22 during the baseline year(s), they would also be allocated 55 ODP-
weighted allowances (HCFC-22 has an ODP of 0.055). Thus, the company 
would have a total of 120 ODP-weighted allowances. The company would be 
able to expend the 120 ODP-weighted allowances by producing or 
importing any class II controlled substance or combination of class II 
controlled substances that it chooses, as long as the weighted total 
(kilogram x ODP) does not exceed the number of allowances. For example, 
the company could expend all of the 120 ODP-weighted allowances to 
produce 2,181 kilograms of HCFC-22. Alternatively, the company might 
expend the 120 ODP-weighted allowances to produce 6,000 kilograms of 
HCFC-123 (ODP = 0.02), or 1,091 kilograms of HCFC-141b (ODP=0.11). 
Under this system, intra-company transfers would not be necessary; 
inter-company trades would be in increments of ODP-weighted units.


[[Page 16377]]


    The ODP-weighted allowance system may be viewed as more 
advantageous to regulated entities. Altering patterns of production and 
importation in response to market changes could be done more easily, 
and the offset required for intra-company transfers under an absolute 
kilogram allowance system would not apply, simply because there would 
be no actual transfer of allowances within a company where ODP units 
are concerned. The offset would still apply to inter-company trades 
because allowances would in fact be trading hands.

    Under an ODP-weighted allowance system, however, complex 
calculations would be necessary by the reporting companies to arrive at 
the total quantity of class II substances produced or imported during 
the reporting period. For each chemical, the number of kilograms would 
have to be multiplied by its ODP and compared to the number of ODP-
weighted allowances. Blends would present an additional complication by 
requiring a calculation of the percentage of each HCFC in a substance 
(e.g., R-401A), at each applicable ODP, and including that in the total 
reported ODP produced or imported for a quarter.

    When the first phaseout date becomes effective in 2003 for HCFC-
141b, under an ODP-weighted system, an entity participating in the 
HCFC-141b market would no longer receive the amount of ODP-weighted 
allowances associated with that entity's ODP units of HCFC-141b 
produced and/or imported in the baseline year(s). The same would be 
true for subsequent phaseouts. Complications come into play, however, 
when ODP-weighted allowances have been transferred on a permanent 
basis; that is, when a company actually trades baseline allowances. 
Where baseline trades (discussed more in part II.E.4 of this notice) 
have been made, adequately tracking ODP-weighted class II substances 
from one holder to another becomes very difficult. This is extremely 
important at each phaseout, to determine who holds the baseline 
allocation of the chemical being phased out.

    EPA seeks comments on the viability of an ODP-weighted allowance 
system as presented above. Though presented as a possible option, EPA 
recognizes the many difficulties that could emerge with an ODP-weighted 
system (e.g., monitoring chemicals that have been produced or imported 
with traded allowances; reporting to UNEP the absolute quantities of 
all class II substances in kilograms). An ODP-weighted allowance system 
would also possibly be in conflict with Section 605(b)(1) of the Act, 
which states that, ``Effective January 1, 2015, it shall be unlawful 
for any person to produce any class II substance in an annual quantity 
greater than the quantity of such substance produced by such person 
during the baseline year.'' This is because ODP-weighted allowances 
could be shifted within a company and thus allow that company to 
produce a greater quantity of a class II substance than in its 
baseline. (Such an intra-company transfer of allowances is discussed 
below in part E of this notice.)

B. Method for Distributing Allowances

    EPA is required, under Section 607 of the Act, to issue allowances 
for the production and consumption of class II substances. There are a 
variety of methods for allocating allowances and EPA seeks comments on 
these options. First, EPA is considering allocating allowances for the 
full time period until the complete production and importation phaseout 
for all class II substances (currently 2030), taking into account both 
accelerated phaseouts for individual chemicals (e.g., those for HCFC-
141b, HCFC-22 and HCFC-142b) and the step-wise reduction of the 
consumption cap as mandated under the Protocol. This allocation of 
allowances was the method followed in the regulatory program for class 
I substances. For class I substances, a quantity of allowances was 
allocated to listed companies as a baseline in the Federal Register. 
Allocating allowances for the full time period until a particular 
phaseout date provides certainty and stability for the market. Assuming 
the regulatory program includes smooth procedures for trading 
allowances, the full-term allocation of allowances establishes the 
basis for a ``marketable permit'' system.

    The second option being considered is a system for re-calculating 
and re-allocating allowances on a ``rolling basis.'' This would 
essentially move the baseline forward in time so that the baseline 
would always be the most accurate reflection of the current HCFC 
market. Under this option, EPA would review data on the production, 
import and export of HCFCs on some periodic basis, establish a new 
baseline for each entity, and re-allocate the allowances accordingly. A 
re-allocation of allowances may require an amendment to the original 
list in the regulation of entities with their respective baseline 
allowances. Alternatively, an administrative mechanism could be 
established to re-allocate allowances automatically at regular 
intervals.

    However, if the regulatory system includes smooth procedures for 
trading allowances, shifts in demand and changes in market share could 
be addressed by individual companies, thus obviating the need to re-
allocate allowances. Identifying the appropriate length of time for 
periodic review and re-allocation of allowances would be important, 
especially given both the existing phaseout schedule for specific HCFCs 
and the step-wise reduction of the HCFC consumption cap over time. 
Likewise, the length of time for periodic re-allocation of allowances 
may depend on the definition of a trigger mechanism for making the 
final rule effective, which is discussed in II.H of this notice. For 
example, instead of establishing specific years for the re-allocation 
of allowances (e.g., 2000 and 2002), the re-allocation could be linked 
with the trigger mechanism, so that re-allocation of allowances would 
occur, say, 2 years and 4 years after the allowance system becomes 
effective.

    A final option would involve allocating allowances on a year-by-
year basis. However, this would generate a large administrative burden 
for both EPA and those who produce, import and export HCFCs. The 
ability of those producers, importers and exporters to plan for the 
longer term would also be hampered.

    EPA is seeking comments on all of the aforementioned options for 
distributing allowances.

C. Establishing an Equitable Baseline for Distributing Allowances

    In developing the regulatory program for class I controlled 
substances, EPA collected information on the amounts of each class I 
substance produced, imported and exported during a given calendar year. 
EPA collected the data by publishing two notices in the Federal 
Register under authority of Section 114 of the Act (52 FR 47489 
(December 14, 1987) and 55 FR 49116 (November 26, 1990)). The data 
requested from U.S. companies included reports on production runs, 
quantities of feedstock chemicals used in production, bills of lading, 
invoices, and other documents for a specific calendar year. The data 
submitted to EPA was used to assign company-specific production and 
import rights (allowances) to companies.

    EPA is considering, and seeking comment on, many options for 
establishing a baseline for HCFC allowances. Consistent with the 
procedures associated with class I controlled substances, EPA will 
likely use historical information regarding a

[[Page 16378]]

company's activities to establish the baseline for class II allowances. 
EPA is considering following the same procedures used for establishing 
the baseline for class I controlled substances, including the 
publication of a Section 114 notice requesting specific information.

    Options for establishing the actual baseline allowances for class 
II controlled substances are represented by a spectrum of choices, 
including using historical information from one year, from an average 
of multiple years, or using a formula for combining multiple years. At 
the extremes, EPA is considering historical information from 1989 or 
1997, and many variations in between. EPA believes that the process of 
establishing the baseline should take into account, inter alia, the 
agreements by the Parties to the Protocol to control and phase out 
class II substances, the signing of the Clean Air Act Amendments of 
1990 into law, the publication of regulations under Title VI of the Act 
governing the phaseout of class II substances, and the development of 
the current HCFC market in the U.S. EPA is seeking comments on the 
various options discussed below, as well as any other ideas for 
establishing an allocation baseline.

    One option EPA is considering for establishing the baseline for 
class II controlled substances is historical information from one year. 
Collecting documents and information from companies for one year of 
activity would be less of an administrative burden for both EPA and the 
companies than if EPA were to collect information for more than one 
year. Another option EPA is considering is using data from multiple 
years to establish the baseline for class II substances. EPA is 
considering using historical information from consecutive years and 
averaging the data. EPA is also considering averaging historical data 
from non-consecutive years to establish the class II baseline. 
Calculating baseline allowances for class II substances by using a 
weighted average of multiple years is also being considered. For 
example, using a number of either consecutive or non-consecutive years 
within the time frame 1989-97, EPA would first calculate the production 
and importation for each. Then, after deciding upon the relative 
importance of each of those years regarding production and importation 
quantities, EPA would weight each year accordingly and make the 
baseline calculation to reflect the weighted average of those years. 
Once the option for determining the baseline is chosen, EPA believes 
that steps to ensure accuracy of historical data will be of utmost 
importance. Any baseline calculation involving multiple years will have 
to be reconciled with the definition of ``baseline'' in Section 601(2) 
of the Act, which states that the term ``baseline year'' means ``a 
representative calendar year * * * in the case of any class II 
substance.''

    Another option EPA is considering for establishing a baseline is to 
use different years for establishing each HCFC's individual baseline. 
As an example, EPA might consider using one particular year (or years) 
to establish the baseline for HCFC-141b and a completely different year 
(or years) for establishing the baseline for HCFC-22 and HCFC-142b. In 
this example, EPA might consider using yet another year (or years) for 
establishing the baseline for all remaining HCFCs. Using this type of 
approach, and linking it with the options discussed above, EPA might 
choose the average of multiple years for one HCFC and a formula for 
establishing the baseline for another HCFC.

    It is important to note that, under any scenario, when the phaseout 
date for HCFC-141b is reached in 2003, all HCFC-141b consumption 
(production + imports-exports) will cease. Those who did not 
participate in the HCFC-141b market will not be affected in 2003. 
However, those who did participate in the HCFC-141b market--through, 
for example, producing or importing HCFC-141b--would no longer receive 
any allowances associated with their historic HCFC-141b activity, and 
thus any authorization to produce or import HCFC-141b. Likewise, any 
company that, through a baseline trade, received allowances associated 
with historic HCFC-141b would no longer receive any allowances 
associated with the baseline trade in 2003.

    In 2004, when the Protocol requires that the HCFC consumption cap 
be reduced from its current level by 35 percent, all remaining 
allowance holders may be affected. At that time, all allowance holders 
may receive up to 35 percent less of their remaining HCFC baseline 
allowances (all HCFC allowances minus HCFC-141b allowances).

D. Percentage of Allowances Distributed Under U.S. HCFC Consumption Cap

    EPA is considering, and seeking comment on, whether to allocate the 
total number of allowances (the total quantity of ODP-weighted HCFC 
consumption) available to the U.S. under the cap as established by the 
Montreal Protocol. As discussed in part I.A of this notice, the current 
U.S. cap for HCFC consumption is 15,240 ODP-weighted metric tons, based 
on the formula of 2.8 percent of CFC consumption in 1989 plus the 
consumption of HCFCs in 1989. Today's notice considers an allocation of 
allowances equal to 100 percent of the 15,240 metric tons. This would, 
however, in the event of some violation of the allowance system, 
provide no cushion for error, thus risking violation of the U.S. cap. 
This risk could demand that EPA request information and monitor more 
often and in greater detail.

    EPA is also considering, and seeking comment on, an allocation of 
some percentage less than the full quantity of the cap. In this 
scenario, consideration is given to potential violations of the 
allocation system by leaving enough unallocated class II allowances to 
cover any overage. In this case, the U.S. would not violate the cap as 
a consequence of a violation of its allocation system. EPA is seeking 
comment on the necessity of providing a safe buffer below the HCFC cap; 
the percentage to be allocated if less than 100 percent is warranted; 
and on the possible size of errors in the reporting of production and 
import data that could occur in a control period.

    Related to the discussion above is the issue of how to allocate the 
remaining class II allowances falling between the U.S. cap (potentially 
allowing for some margin of error) and the selected baseline (discussed 
in II.C of this notice). For example, if the year 1996 were chosen as 
the baseline, this would represent about 82 percent of the U.S. cap, 
thus leaving open the question of how to allocate the remaining 18 
percent, and if all of the remaining 18 percent should be allocated. 
This remaining percentage, or a lower percentage that would provide for 
a margin of error, could simply be added to the allocated baseline 
allowances, to be distributed on a pro rata basis. The entire amount, 
then, would be allocated in the form of allowances to those companies 
that participated in the HCFC market in the baseline year(s). Such a 
system would provide certainty in how the allowances would be 
allocated.

    Depending on the baseline year(s), another possible option would be 
to allocate some portion of the remaining percentage (in our example 
some portion of the 18 percent) to those companies whose historic HCFC 
activity is not well represented by the baseline year(s), such as new 
companies that may have entered the HCFC market after the baseline 
year(s).

[[Page 16379]]

E. Transfers of Class II Allowances

    In establishing the regulatory allowance program for class I 
controlled substances, EPA included provisions that permitted the 
transfer of allowances. The provisions for trades and transfers of 
class I allowances are in Sec. 82.9, Sec. 82.10, Sec. 82.11 and 
Sec. 82.12 of the final rule published in the Federal Register on May 
10, 1995 (60 FR 24970). Today's notice describes the many different 
types of transfers permitted for class I allowances, as well as other 
variations. EPA is seeking comment on how these variations and options 
could apply to the transfer of class II allowances.

    Under the current class I regulatory program, EPA is required to 
process the transfer of allowances within three working days from when 
EPA receives the request for an inter-pollutant or inter-company trade. 
Companies fax the request for a trade to EPA and within three working 
days EPA faxes a reply showing the new balance of unexpended allowances 
(See 40 CFR 82.12(a)(1), (b)(4)).
1. Transfers Within Groups of Class II Substances

    To facilitate transfers among class II substances, EPA is 
permitted, under Section 607(b)(3) of the Act, to establish groups of 
class II substances. Under such a framework, inter-pollutant transfers 
of allowances would be limited to chemicals within an assigned group. 
Class I controlled substances are listed in the Act in groups, and 
inter-pollutant transfers of class I allowances are restricted to the 
specific groups. For example, CFC-11 and CFC-114 are listed in the Act 
as being in class I, Group I and all the halons are listed in class I, 
Group II. Inter-pollutant transfers of allowances can occur among CFCs 
in Group I and among halons in Group II, but transfers of allowances 
cannot occur between the two groups. One option for class II substances 
might be to establish class II groups based on each chemical's ODP. 
Another option might be to establish class II groups based on the U.S. 
phaseout dates for class II substances. EPA requests comment on the 
concept of grouping class II substances and the possible groupings 
themselves.
2. Inter-Pollutant Transfers

    Section 607(b) of the Act states that inter-pollutant transfers 
shall be permitted. An inter-pollutant transfer is the transfer of an 
allowance of one substance to an allowance of another substance on an 
ODP-weighted basis. As an example, under the class I system, a company 
would transfer allowances for CFC-12 to allowances for CFC-115, taking 
into account ODP differences between the two chemicals. If a company 
wanted to transfer 1000 kilograms of their CFC-12 production allowances 
to CFC-115 production allowances, paperwork would be submitted with the 
following calculation: the 1000 kilograms of CFC-12 allowances are 
multiplied by the ODP of CFC-12 (1.0) and then divided by the ODP of 
CFC-115 (0.6), yielding 1667 kilograms of new CFC-115 production 
allowances. Inter-pollutant transfers are sometimes called intra-
company trades because a company might shift allowances internally from 
one substance to another to react to shifts in demand. Inter-pollutant 
transfers of allowances were fairly common for class I controlled 
substances. There were more than 40 inter-pollutant transfers for class 
I substances each year from 1992 through 1995.

    For class II substances, an example of an inter-pollutant transfer 
would be a transfer of 10,000 kilograms of HCFC-142b allowances to 
HCFC-141b allowances, which would result in 5,909 kilograms of HCFC-
141b allowances because of the adjustment for the ODPs of the two 
chemicals (which does not take into account the required offset for 
transfers as discussed in II.E.7 of this notice). If the class II 
allowance system were to distribute allowances on an ODP-weighted 
basis, however, there would be no need to include provisions for inter-
pollutant transfers.
3. Inter-Company Transfers

    Another example of trades of class II allowances that EPA must 
permit under Section 607(c) of the Act are inter-company transfers. 
Inter-company transfers are trades of allowances, for the same 
substance, from one company to another company. Under such a system, 
Company A would simply transfer its allowances of a class II substance 
to Company B who wishes to have more allowances of that particular 
class II substance.
4. Inter-Pollutant Transfers Combined With Inter-Company Transfers

    Both inter-company and inter-pollutant transfers could be combined 
in the same transaction for class I controlled substances, and EPA is 
considering allowing the same combined system for class II substances. 
As an example of how this worked under the class I system, Company A 
would trade 35,000 kilograms of CFC-11 allowances to Company B who 
needed allowances to produce CFC-115. In the information submitted to 
EPA, the two companies would agree that Company A would deduct 35,000 
allowances for CFC-11 from its balance and Company B would receive 
58,333 kilograms of CFC-115, due to the ODP difference between the two 
chemicals. (An additional one percent offset would also be required in 
this calculation as discussed in II.E.7).

    Under this combined system for class II substances, a company that 
wishes, say, to increase its production of HCFC-141b before the 2003 
phaseout could (1) re-distribute its own allowances that have been 
allocated for another class II substance to HCFC-141b (an intra-
company/inter-pollutant transfer); (2) purchase more HCFC-141b 
allowances from another company (an inter-company transfer); or (3) 
purchase more allowances from another company of a substance other than 
HCFC-141b (an inter-company/inter-pollutant transfer). Any inter-
pollutant transfer would account for differences in ODP.
5. Transfers of Current-Year Allowances

    EPA is considering approaches for permitting transfers of current-
year allowances for class II controlled substances. A transfer of 
current-year allowances means the allowances being traded can only be 
expended for production or import in that specific control period, or 
calendar year. Transfers of current-year allowances do not change the 
quantity of actual baseline allowances assigned to a company. A trade 
of current-year allowances is a one-time trade, only reflected in a 
company's balance of allowances for that control period in which the 
trade occurs. Trades of current-year allowances were permitted in the 
class I regulatory program. From 1992 to 1995, many companies took 
advantage of the opportunity to trade current-year allowances for class 
I controlled substances. As an example, a company might make an inter-
pollutant trade from their unexpended CFC-11 allowances to their CFC-
114 allowances in order to respond to greater market demand for CFC-114 
in that particular year. Another example would be Company A purchasing 
allowances from Company B, because Company A wants to import CFC-113 
sometime during that control period. EPA seeks comment on current-year 
allowance transfers.
6. Permanent Transfers of Baseline Allowances

    EPA is considering the merits of permitting transfers of baseline 
allowances for class II substances. A

[[Page 16380]]

transfer of baseline allowances is a permanent shift of some quantity 
of a company's baseline allowances to another company. The permanent 
nature of the transfer of baseline allowances makes the trade different 
from the transfer of current-year allowances. For example, Company A 
could have produced 1,000 kilograms of HCFC-22 in the baseline year(s), 
and would therefore receive either 1,000 baseline allowances (for the 
kilogram-based system) or 55 ODP-weighted baseline allowances (for the 
ODP-weighted system). Company A could in turn permanently trade away 
these baseline allowances to Company B. In all subsequent years, 
Company A's quantity of baseline allowances would permanently be 
reduced, while Company B's quantity of baseline allowances would 
permanently be increased.

    To implement the current U.S. phaseout schedule for class II 
controlled substances, it may not be possible to allow permanent 
transfers of baseline allowances if the type of allowance chosen is an 
ODP-weighted unit, as described in part II.A.2.b of this notice. Under 
the U.S. phaseout schedule for class II substances, the consumption of 
chemicals with the highest ODP is eliminated first. To efficiently 
eliminate the consumption of a specific chemical, such as HCFC-141b, 
under a possible program using ODP-weighted allowances, a company would 
no longer receive, in 2003, the portion of its allowances attributable 
to its historic consumption of HCFC-141b. Under this scenario, a 
company would not be able to make a permanent trade of a quantity of 
ODP-weighted allowances because the permanent transfer of ODP-weighted 
allowances would not be linked to a specific chemical, unless there 
were groupings of HCFCs according to their phaseout dates or unless 
historical consumption would determine deduction of allowances at a 
particular phaseout. Alternatively, regardless of whether or not 
baseline trades with ODP-weighted units are made, the historic baseline 
ODP-weighted amount for a given chemical could be deducted in the 
relevant phaseout year (e.g. 2003 for HCFC-141b). EPA seeks comment on 
the merits of baseline trades in general, and on the compatibility of 
baseline trades with kilogram-based allowances versus ODP-weighted 
allowances.
7. International Trades of Current-Year Allowances

    Under the Protocol, international trades are recognized as a part 
of a process called ``industrial rationalization.'' In Article 1 of the 
Protocol, industrial rationalization is defined as ``the transfer of 
all or a portion of the calculated level of production of one Party to 
another, for the purpose of achieving economic efficiencies or 
responding to anticipated shortfalls in supply as a result of plant 
closures.'' International trades of production are permitted under the 
Protocol so companies can consolidate the manufacturing of a chemical 
in order to be able to achieve economies of scale as demand shrinks.

    The Protocol includes the following language in Article 2, 
paragraph 5 bis: ``Any Party not operating under paragraph 1 of Article 
5 may, for one or more control periods, transfer to another such Party 
any portion of its calculated level of consumption set out in Article 
2F [pertaining to HCFCs], provided that the calculated level of 
consumption of controlled substances in Group I of Annex A [CFCs] of 
the Party transferring the portion of its calculated level of 
consumption did not exceed 0.25 kilograms per capita in 1989 and that 
the total combined calculated levels of consumption of the Parties 
concerned do not exceed the consumption limits set out in Article 2F. 
Such transfer of consumption shall be notified to the Secretariat by 
each of the Parties concerned, stating the terms of such transfer and 
the period for which it is to apply.''

    International trades of production allowances are permitted under 
EPA's current regulations for class I controlled substances (40 CFR 
82.9(c)). The procedures for international trades involve more review 
than the procedures for inter-pollutant and inter-company trades.

    For class II substances, the implementation challenge of paragraph 
5 bis of Article 2 in the Protocol is that ``consumption'' is a formula 
(production + imports - exports). Pursuant to a decision by the 
Parties, the Protocol language in paragraph 5 bis of Article 2 clearly 
restricts the U.S. from trading away HCFC consumption to another Party. 
The U.S. per capita consumption of CFCs in 1989 was 1.28 kilograms, 
well above the 0.25 kilogram per capita limit for transferring HCFC 
consumption. However, the Protocol language allows the U.S. to 
potentially receive a transfer of HCFC consumption from another Party. 
Only two non-Article 5 Parties, Norway and Poland, had a per capita 
consumption of CFCs in 1989 less than 0.25 kilograms. Thus, these are 
the only non-Article 5 Parties from whom the U.S. could potentially 
receive a transfer of HCFC consumption. We must therefore consider the 
likelihood of such international trades, and whether or not the 
establishment of provisions for class II international trades is 
warranted.

    If EPA were to create provisions for class II international 
transfers, the options for such trades would be intimately linked to 
the type of allowance chosen for the final program, as discussed in 
part II.A.1 of this notice. If EPA were to choose a program with both 
production and consumption allowances (as in the class I system), it 
would be easier to limit international trades to just production by 
following the model already established for class I substances. If, on 
the other hand, EPA were to choose a program with class II allowances 
(which could apply to production, imports and exports), EPA would have 
to ensure that such allowances are used for production only and not for 
import.

    Alternatively, EPA may choose to establish a special type of 
allowance to represent production rights received from an international 
trade. EPA seeks comment on allowing international trades of HCFC 
allowances and how they should be administered.
8. Offset for a Transfer of Allowances

    The final aspect of trades of class II allowances considered in 
today's notice is the manner of achieving greater total reductions than 
would occur in the absence of a trade, as required in Section 607(a) of 
the Act. EPA believes that the offset required by Section 607 of the 
Act is only for inter-pollutant and inter-company transfers. In the 
allowance program for class I substances, an offset was not included in 
international trades.

    Section 607(a) states that, ``transactions under the authority of 
this section will result in greater total reductions in the production 
in each year of class I and class II substances than would occur in 
that year in the absence of such transactions.'' For the class I 
allowance program, EPA adopted a one percent offset, deducted from the 
transferor's allowance balance, for all inter-pollutant trades and all 
inter-company trades (40 CFR 82.12(a)(1)(i)(H), 82.12(b)(4)(i)(F)). 
However, for inter-pollutant trades combined with inter-company trades, 
only one offset is applied to the transfer of allowances. For class II 
controlled substances, EPA is considering re-examining the quantity of 
offset assessed in a transfer of allowances. Because the class II 
substances are less ozone-depleting than class I substances, EPA may 
consider a smaller offset for

[[Page 16381]]

trades of HCFC allowances. EPA requests comment on the degree of offset 
to apply to domestic trades of class II substances.

F. Conditions Under Which a Control System Would Become Effective

    As mentioned in the background section of this notice (part I.B), 
EPA is mandated under the Act to promulgate regulations by December 31, 
1999, to administer the phaseout of class II controlled substances. By 
this time, EPA intends to have in place an allowance system based on 
the options, or some slight variation thereof, discussed throughout 
this notice. However, EPA is considering an approach, whereby the 
allowance system would not go into effect unless a certain percentage 
of the U.S. cap for class II controlled substances were to be reached 
or exceeded.

    It is possible that U.S. HCFC consumption levels will remain within 
a safe buffer of the current cap as agreed to under the Protocol, and 
thus never activate the allowance system. In 2003, under the U.S. 
accelerated phaseout for individual class II substances, HCFC-141b will 
be phased out. An allowance allocation system may not be necessary to 
phase out HCFC-141b. In 2004, however, at which time the U.S. is 
required under the Protocol to reduce its current HCFC consumption cap 
by 35 percent, an allowance system will likely be necessary to ensure 
U.S. compliance with the Protocol. Consequently, EPA should select a 
default date before 2004 when the allowance allocation system would 
become effective, in the event that the allowance system is not in 
place before that default date. EPA is seeking comments on the most 
appropriate timing of a default date for the system to become 
effective.

    The rationale for an approach that would condition the onset of an 
allowance system upon reaching an established percentage of the U. S. 
cap set by the Montreal Protocol would be to avoid premature government 
intervention in the HCFC industry. Therefore, the threshold must be set 
at a level where the implementation of EPA's allowance system would be 
deemed necessary to ensure that the U.S. complies with its cap for 
class II substances. Furthermore, having the allowance system in place 
with a set threshold for implementation will provide the regulated 
community with a relatively predictable regulatory structure.

    EPA is considering, and seeking comment on, the appropriateness of 
such an approach, the percentage of the U.S. cap for class II 
controlled substances that would trigger the onset of the allowance 
system, the time span and type of data used to calculate whether or not 
the percentage has been reached or exceeded, and the amount of time 
deemed appropriate for implementation of EPA's allowance system once 
the threshold has been reached or exceeded.

    EPA is considering a range of percentage options that would trigger 
the onset of the allowance system. A low percentage would possibly mean 
that EPA's implementation of its allowance system occurs with a 
relatively long lag time (e.g., more than one year), whereas a higher 
percentage may require swift implementation (e.g., within one year or 
less). EPA is concerned that a percentage threshold set too high could 
threaten U.S. compliance with its cap for class II controlled 
substances, given the delays inherent in data collection and the need 
for some transition time between reaching the percentage and 
implementing the allowance system.

    The trends that the data on class II consumption (discussed below) 
reveal, combined with the percentage threshold, may also influence the 
speed with which EPA implements its allowance system. For example, if 
class II reporting data reveal that the threshold has been, or will be, 
surpassed by an amount considered ``too close'' to the cap, then EPA 
may implement its allowance system within a shorter time frame; 
likewise, if the threshold were surpassed by an amount considered to be 
within a secure buffer of the cap, EPA could implement its allowance 
system with a longer delay.

    EPA must decide on the time span and type of class II data used to 
determine U.S. class II consumption levels relative to the selected 
percentage. EPA currently receives quarterly data on production, 
importation and exportation of class II substances as required under 
Section 603 of the Act. In order to assess meaningful trends and levels 
of class II consumption relative to the selected percentage, EPA is 
considering, and seeking comment on, a variety of ways of using this 
quarterly data for that purpose.

    Under the Protocol and the Act, compliance for class II substances 
(i.e., consumption relative to the cap) is measured against the 
calendar year. Therefore, aggregating four quarters of quarterly data 
(an annual sum) serves as a convenient method to determine class II 
consumption levels relative to the cap, and thus the selected criteria 
for initiating the allowance system. This would represent one possible 
option for calculating class II consumption levels relative to the 
selected criteria. Another option would be to use a rolling sum in 
determining compliance with an established threshold, based on 
submitted data for four or possibly more consecutive quarters, which 
could include quarters from two calender years. The rationale for using 
four or more consecutive quarters is to avoid seasonality effects, or 
trend biases, which individual quarterly data could bring. If a number 
other than four quarters were used, the appropriate weighting would 
have to be given to each quarter so that their sum would be the 
equivalent of a 12-month period. If five consecutive quarters were 
used, for example, each quarter would be scaled to represent one fifth 
of the 12-month period.

III. Other Regulatory Options for Controlling HCFCs

    To ensure that the U.S. adheres to its phaseout schedule for class 
II controlled substances, EPA has options of pursuing, if necessary, 
other means to contribute to the control HCFC of consumption of class 
II substances. The discussion below pertains to current labeling 
program, SNAP program and the non-essential products ban, and potential 
amendments to those regulations. These options address the use of HCFCs 
rather than their production, import and export, which an allowance 
system would directly control. EPA is seeking comment on using any of 
these options discussed below in controlling HCFC consumption, either 
in combination with an allowance system, each other, or on its own.

A. Labeling

    As an additional means of discouraging use of class II substances, 
so as to ensure that the U.S. does not exceed its cap for class II 
substances under the Protocol, EPA is considering and seeking comment 
on the required use of labels on products containing or manufactured 
with class II substances. According to Section 611 of the Act, such 
labels would read as follows: ``Warning: Contains/manufactured with 
[insert name of substance], a substance which harms public health and 
environment by destroying ozone in the upper atmosphere.''

    According to Section 611(c) of the Act, ``After 30 months after the 
enactment of the Clean Air Act Amendments of 1990, and before January 
1, 2015, no product containing

[[Page 16382]]

a class II substance shall be introduced into interstate commerce 
unless it bears the label [referred to above] if the Administrator 
determines, after notice and opportunity for public comment, that there 
are substitute products or manufacturing processes (A) that do not rely 
on the use of such class II substance, (B) that reduce the overall risk 
to human health and the environment, and (C) that are currently or 
potentially available.'' Section 611(d) of the Act contains the same 
requirements for products manufactured with class II substances. 
Beginning January 1, 2015, all products containing or manufactured with 
a class II substance must bear the specified label regardless of 
whether the Administrator has made a determination regarding the 
availability of substitutes (Secs. 611(c)(2) and 611(e)(5)). Therefore, 
the issue upon which EPA is requesting comment is whether EPA should, 
prior to January 1, 2015, require labels on certain products containing 
or manufactured with class II substances.

B. SNAP Approval and Restrictions

    Section 612 of the Act requires EPA to promulgate rules making it 
unlawful to replace any class I or class II substance with any 
substitute substance that may present adverse effects to human health 
or the environment, where EPA has identified an alternative to such 
replacement that ``(1) reduces the overall risk to human health and the 
environment; and (2) is currently or potentially available.'' In 
accordance with Section 612 of the Act, and under the Significant New 
Alternatives Policy (SNAP) program, EPA publishes lists of acceptable 
and unacceptable substitutes for class I and class II substances. In 
some SNAP sector end-uses, class II substances have been listed as 
acceptable substitutes. Class II substances are viewed by the Agency as 
transition chemicals that facilitate the transition out of more harmful 
class I chemicals. Since 1994, availability of zero-ODP alternatives 
has increased in a number of end-uses. It is therefore possible that 
existing SNAP determinations allowing HCFC end-uses could be revised to 
make them unacceptable for use. This could happen through three 
mechanisms.

    First, EPA could receive a petition from a company to add a 
substance to or delete a substance from the SNAP list of acceptable and 
unacceptable alternatives (See Section 612(d)). Second, EPA could 
receive notification from a company before introduction of a substitute 
into interstate commerce for significant new use as an alternative to a 
class II substance (See Section 612(e)). Finally, EPA can initiate 
changes to the SNAP determinations independent of any petitions or 
notifications received. Such changes could be based on new data either 
on additional substitutes or on characteristics of substitutes 
previously reviewed.

    EPA solicits comments on the possibility of controlling HCFCs 
through SNAP determinations.

C. Nonessential Product Ban under Section 610

    Section 610(d) of the Act prohibits the sale, distribution, or 
offer for sale or distribution in interstate commerce, of certain 
nonessential products that contain or are made with class II 
substances. EPA is authorized to grant exceptions to the ban under 
certain conditions. Since the issuance of the final rule providing 
exemptions from the statutory Class II nonessential products ban, EPA 
has received information, including information on new substitutes for 
making certain products, indicating that it may be necessary to 
reconsider the continued appropriateness of those exemptions. The 
Agency also is aware that since the issuance of that initial final 
rulemaking, there has been further substitution away from ozone-
depleting substances in aerosols and pressurized dispensers. EPA is 
currently reviewing information concerning the aerosol products and 
pressurized dispensers that were given exemptions in the December 1993 
rulemaking. In particular, the Agency is evaluating whether there are 
technologically available substitutes for the HCFCs used in these 
products. When EPA completes its evaluation of the existing exemptions 
for HCFCs, if appropriate, the Agency will issue a notice of proposed 
rulemaking. Potentially removing some of these products from the 
current exemptions to the nonessential product ban could provide some 
further assurance that the U.S. would not exceed its cap for class II 
substances under the Protocol.

IV. Administrative Requirements

A. Executive Order 12866

    Under Executive Order (E.O.) 12866 (58 FR 51735, October 4, 1993), 
the Agency must determine whether this regulatory action is 
``significant'' and therefore subject to Office of Management and 
Budget (OMB) review and the requirements of the Executive Order. The 
E.O. defines ``significant regulatory action'' as any regulatory action 
(including an advanced notice of proposed rulemaking) that is likely to 
result in a rule that may:

    (1) Have an annual effect on the economy of $100 million or more or 
adversely affect in a material way the economy, a sector of the 
economy, productivity, competition, jobs, the environment, public 
health or safety, or State, local, or tribal governments or 
communities;

    (2) Create a serious inconsistency or otherwise interfere with an 
action taken or planned by another agency;

    (3) Materially alter the budgetary impact of entitlements, grants, 
user fees, or loan programs or the rights and obligations of recipients 
thereof; or,

    (4) Raise novel legal or policy issues arising out of legal 
mandates, the President's priorities, or the principles set forth in 
the Executive Order.

    It has been determined by OMB and EPA that this action is a 
``significant regulatory action'' under the terms of Executive Order 
12866 and is therefore subject to OMB review under the Executive Order. 
This notice was reviewed by OMB and changes recommended by OMB have 
been made and documented for the public record.

B. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) generally requires an agency 
to conduct a regulatory flexibility analysis of any rule subject to 
notice and comment rulemaking requirements unless the agency certifies 
that the rule will not have a significant economic impact on a 
substantial number of small entities. Small entities include small 
businesses, small not-for-profit enterprises, and small governmental 
jurisdictions.

    EPA determined that the members of the regulated community that may 
be directly affected by this rulemaking are generally not small 
businesses. Small governments and small not-for-profit organizations 
would not be subject to the options in today's notice. The options 
discussed in today's notice are directed to large, multinational 
corporations that either produce, import, export, transform or destroy 
ozone-depleting chemicals covered by this notice. The options discussed 
in this notice, therefore, will not have a significant economic impact 
on a substantial number of small entities.

C. Applicability of Executive Order 13045: Children's Health Protection

    Executive Order 13045: ``Protection of Children from Environmental 
Health Risks and Safety Risks'' (62 FR 19885, April 23, 1997) applies 
to any rule that: (1) is determined to be ``economically significant'' 
as defined under E.O. 12866, and (2) concerns an

[[Page 16383]]

environmental health or safety risk that EPA has reason to believe may 
have a disproportionate effect on children. If the regulatory action 
meets both criteria, the Agency must evaluate the environmental health 
or safety effects of the planned rule on children, and explain why the 
planned regulation is preferable to other potentially effective and 
reasonably feasible alternatives considered by the Agency.

    EPA interprets E.O. 13045 as applying only to those regulatory 
actions that are based on health or safety risks, such that the 
analysis required under section 5-501 of the Order has the potential to 
influence the regulation. This notice is not subject to E.O. 13045 
because it presents options to implement a previously promulgated 
health or safety-based Federal standard, which in this case would be 
the accelerated phaseout schedule for HCFCs (58 FR 65018).

D. National Technology Transfer and Advancement Act

    The National Technology Transfer and Advancement Act of 1995 
(NTTAA), Sec. 12(d), Pub. L. 104-113, requires federal agencies and 
departments to use technical standards that are developed or adopted by 
voluntary consensus standards bodies, using such technical standards as 
a means to carry out policy objectives or activities determined by the 
agencies and departments. If use of such technical standards is 
inconsistent with applicable law or otherwise impractical, a federal 
agency or department may elect to use technical standards that are not 
developed or adopted by voluntary consensus standards bodies if the 
head of the agency or department transmits to the Office of Management 
and Budget an explanation of the reasons for using such standards.

    This advance notice does not mandate the use of any technical 
standards; accordingly, the NTTAA does not apply to this advance 
notice.

Annex A: Ozone Depletion Potentials for Class II Substances as Currently
                   Listed under the Montreal Protocol*
Dichlorofluoromethane (HCFC-21)................  0.04
Monochlorodifluoromethane (HCFC-22)............  0.055
Monochlorofluoromethane (HCFC-31)..............  0.02
Tetrachlorofluoroethane (HCFC-121).............  0.01-0.04
Trichlorodifluoroethane (HCFC-122).............  0.02-0.08
Dichlorotrifluoroethane (HCFC-123).............  0.02
Monochlorotetrafluoroethane (HCFC-124).........  0.022
Trichlorofluoroethane (HCFC-131)...............  0.007-0.05
Dichlorodifluoroethane (HCFC-132b).............  [reserved]
Monochlorotrifluoroethane (HCFC-133a)..........  0.02-0.06
Dichlorofluoroethane (HCFC-141b)...............  0.11
Monochlorodifluoroethane (HCFC-142b)...........  0.065
Hexachlorofluoropropane (HCFC-221).............  0.015-0.07
Pentachlorodifluoropropane (HCFC-222)..........  0.01-0.09
Tetrachlorotrifluoropropane (HCFC-223).........  0.01-0.08
Trichlorotrifluoropropane (HCFC-224)...........  0.01-0.09
Dichloropentafluoropropane (HCFC-225ca)........  0.025
Dichloropentafluoropropane (HCFC-225cb)........  0.033
Monochlorohexafluoropropane (HCFC-226).........  0.02-0.10
Pentachlorofluoropropane (HCFC-231)............  0.05-0.09
Tetrachlorodifluoropropane (HCFC-232)..........  0.008-0.10
Trichlorotrifluoropropane (HCFC-233)...........  0.007-0.23
Dichlorotetrafluoropropane (HCFC-234)..........  0.01-0.28
Monochloropentafluoropropane (HCFC-235)........  0.03-0.52
Tetrachlorofluoropropane (HCFC-241)............  0.004-0.09
Trichlorodifluoropropane (HCFC-242)............  0.005-0.13
Dichlorotrifluoropropane (HCFC-243)............  0.007-0.12
Monochlorotetrafluoropropane (HCFC-244)........  0.009-0.14
Trichlorofluoropropane (HCFC-251)..............  0.001-0.01
Dichlorodifluoropropane (HCFC-252).............  0.005-0.04
Monochlorotrifluoropentane (HCFC-253)..........  0.003-0.03
Dichlorofluoropropane (HCFC-261)...............  0.002-0.02
Monochlorodifluoropropane (HCFC-262)...........  0.002-0.02
Monochlorofluoropropane (HCFC-271).............  0.001-0.03
 
*According to Annex C of the Protocol, ``Where a range of ODPs is
  indicated, the highest value in that range shall be used for the
  purposes of the Protocol. The ODPs listed as a single value have been
  determined from calculations based on laboratory measurements. Those
  listed as a range are based on estimates and are less certain. The
  range pertains to an isomeric group. The upper value is the estimate
  of the ODP of the isomer with the highest ODP, and the lower value is
  the estimate of the ODP of the isomer with the lowest ODP.''

List of Subjects in 40 CFR Part 82

    Environmental protection, Allowances, Administration practice and 
procedure, Air pollution control, Chemicals, Chlorofluorocarbons, 
Exports, Hydrochlorofluorocarbons, Imports, Montreal Protocol, 
Production, Reporting and recordkeeping requirements, Stratospheric 
ozone layer.

    Dated: March 29, 1999.
Carol M. Browner,
Administrator.
[FR Doc. 99-8258 Filed 4-2-99; 8:45 am]
BILLING CODE 6506-50-P