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Executive Summary

The government has developed legislation enabling the introduction of an emissions trading scheme (ETS) for New Zealand. The legislation currently provides for the entry of emissions of hydrofluorocarbon (HFC) and perfluorocarbon (PFC)¹ gases as part of the industrial processes sector on 1 January 2010. Details on that entry, including estimation methodologies, will be part of regulations yet to be drafted.

HFCs are used in a wide range of equipment and products in the refrigeration/air conditioning, aerosols, fire protection and foam-blowing sectors (in decreasing level of significance). The most common HFCs have 100-year GWPs² between 650 and 3800. HFC emissions accounted for 742,000 tonnes CO₂-equivalent in 2005 (1.0% of New Zealand’s gross greenhouse gas emissions).

Assessment of options for points of obligation

The proposed emissions trading legislation currently obliges those undertaking the bulk importation of HFCs to surrender an equivalent number of emission units from 2010 at the end of each reporting period. Bulk importation is a simple proxy for potential emissions (assuming that all HFCs crossing the border will one day be emitted). It fails to account for some important elements:

the importation of equipment pre-charged with HFCs (estimated at 281 tonnes or 46% of potential HFC emissions in 2006)
the competitiveness impacts on domestic refrigeration and air conditioning manufacturers that compete with pre-charged equipment
the proportion of potential emissions that are re-exported in manufactured equipment.

For the New Zealand greenhouse gas inventory, a combination of methods has been developed over the years to estimate emissions from different HFC applications, some based on IPCC default leakage rates and equipment lifetimes and others based on New Zealand-specific data.

For imported or manufactured aerosol cans (or inhalers), this approach means that all HFC propellants are assumed to be emitted within two years from the year of import. At the other extreme, foam insulation and fire protection products are assumed to have very long lives with relatively low annual leakage rates. In between these extremes are the various refrigeration and air conditioning (AC) applications with a range of assumed equipment lifetimes, e.g. 50% of household refrigerators/freezers have been assumed to be retired after 20 years (compared with 100% for commercial self-contained refrigerators/freezers). The original, full HFC charge is assumed to be emitted on retirement of a household refrigerator while for retired commercial equipment, a portion of the original HFC is assumed to be collected for recycling or destruction.

Table B at the end of this summary outlines the ETS design issues around points of obligation that maximise coverage while minimising compliance costs and equity concerns.

The following options for points of obligation are assessed in detail:

Upstream border point of obligation: bulk chemical importers are the only points of obligation for simplicity with relatively simple exemptions for four significant exporters of HFC-containing equipment. The lack of ETS coverage of imported equipment containing HFCs would have a major impact on the competitiveness of four New Zealand manufacturers. There would also be no price signals to encourage refrigerant changes in imported equipment. As well as 100% of refilling HFC (replacing leakage), about 19% of HFC in new equipment (mainly commercial refrigeration/AC) would be covered by the ETS in 2010.
Upstream border point of obligation + limited equipment exemptions: the same chemical importers as (1) with exemptions for new self-contained equipment filled in New Zealand (not just exports) that faces competition from imports. Competitiveness impacts would be overcome with relatively low compliance costs but there would be no price signals for imported equipment. About 15% of HFC in new equipment would be covered by the ETS in 2010.
Widespread border obligation: the same chemical importers as (1) plus up to about 100 equipment importers for an annual 1000 tonnes CO₂ equivalent threshold (or up to perhaps 600 for 100 tonnes). Competitiveness impacts would be overcome and there would be price signals for imported equipment but with high compliance costs. As well as 100% of refilling HFC, more than 99% of HFC in new equipment (at the lower threshold, including mobile AC) would be covered by the ETS in 2010.

The following options for points of obligation have been rejected because of their limited benefits and/or relatively high compliance costs:

Upstream sales point of obligation: the same chemical importers as (1) except applying the point of obligation on sales rather than imports may provide less incentive for avoidance behaviour (extra stocks of HFCs before 2010) for somewhat higher compliance costs. Otherwise the same impacts as (1).

2. Upstream border point of obligation + exemptions for all equipment: the same chemical importers as (1) with exemptions for all equipment (self-contained and remote systems) filled in New Zealand. Competitiveness impacts would be overcome with very high compliance costs (due to complexity and lack of verifiability) and there would be no price signals for imported equipment.
3. Upstream border point of obligation + equipment exemptions based on projected collection for destruction: the same chemical importers as (1) with exemptions for all equipment (self-contained and remote systems) filled in New Zealand based on a range of negotiated emission factors related to projected collection for destruction. This could provide good recovery incentives and competitiveness impacts would be overcome but with very high compliance costs (due to complexity and lack of verifiability) and there would be no price signals for imported equipment.

ETS impacts on HFC prices

A price-based policy measure such as the ETS will have major impacts on HFC prices, as illustrated in Table A. The projected price increases do not include mark-ups by chemical importers or the costs of market participation.

Table A: HFC basic price increases from projected emissions prices

	GWP*	Present cost ($/kg)	At $15/tCO 2 ($/kg)	At $30/tCO 2 ($/kg)	At $50/tCO 2 ($/kg)
HFC-134a	1300	$12	$20	$39	$65
HFC-227ea	2900		$44	$87	$145
R404A mixture	3260	$15	$49	$98	$163
R410A mixture	1720	$17	$26	$52	$86
HFC-245fa / HFC-365mfc#	920		$14	$28	$46

* IPCC 1996 Revised Guidelines 100-year global warming potentials (kilograms of CO₂ equivalent to 1 kg of refrigerant).

# IPCC Third Assessment Report 2001 GWPs are assumed for a 50:50 mixture.

For comparison one chemical importer provided a range of current wholesale prices (excluding GST) for relatively small refrigerant purchases (10–20 kg): $12/kg for HFC-134a, $15/kg for R404A and $17/kg for R410A. So for a $30 per tonne CO₂ market price, the prices for the three common refrigerants would increase by factors of at least three to seven times the current wholesale prices.

Many users of HFCs will simply absorb the price increases because refrigerant (or propellant) costs are a relatively small proportion of total equipment operating costs. Other users will have significant cost increases that may impact on their competitiveness and/or encourage a shift to alternative refrigerants or technologies where these are available. To minimise these cost increases, it will be important to design the ETS in a way that addresses competitiveness and equity concerns with low compliance costs.

The impacts of the three main options are discussed below for each sector.

Stationary refrigeration and air conditioning equipment

Emissions from this sector totalled 133 tonnes of HFCs in 2006 and there will be major growth in future emissions with the accelerating retirement rate of equipment containing HFCs. For the national greenhouse gas inventory, the HFC imports, exports and bank³ for this sector were broken down into seven sub-sectors. The bank estimates for 2006 are presented to indicate their relative significance for future emissions:

household refrigerators and freezers and dehumidifiers: 196 tonnes (low uncertainty)
self-contained refrigerated equipment used in the retail food and beverage industry: 58 tonnes (medium to high uncertainty)
remote cabinet systems as used in supermarkets and some other food retailers: 148 tonnes (low to medium uncertainty)
household and commercial air conditioners 176 tonnes (low to medium uncertainty)
transport refrigeration systems: 45 tonnes (medium uncertainty)
dairy farm refrigeration systems: 113 tonnes (medium to high uncertainty)
other refrigeration (mainly industrial and commercial coolstores): 171 tonnes (very high uncertainty).

Bulk importers, local equipment manufacturers and others would have major concerns about equity and competitiveness if HFCs in imported equipment were not covered by the ETS. It would be relatively easy to overcome the competitiveness concerns for the four major manufacturers affected, but to overcome equity concerns the compliance costs of widespread equipment importer points of obligation would be high.

A number of the larger equipment importers have current mandatory appliance efficiency reporting requirements so extra compliance costs to include refrigerants would be minimal (to achieve an auditable standard). However, there is a large range of other equipment importers (numbering up to 100) that would face significant reporting costs as well as market participation costs that all would experience. Some form of HFC import licensing may be required.

The main impact of ETS price increases (assuming competitiveness concerns are addressed) is likely to be increased investment in improving commercial refrigeration and AC leakage reduction (including refrigerated transport and coolstores). There will perhaps be a shift to CO₂ systems for new supermarket installations and to ammonia systems in new large coolstores.

There exists the potential for the perverse outcome that until HCFCs (hydrochlorofluorocarbons that have ozone depleting and global warming properties) are phased out by 2015, some of them would be cheaper alternatives to HFCs covered by the ETS. This would appear to be a strong possibility in the coolstore sector, meaning that the lives of ageing, inefficient equipment are likely to be extended to avoid the costly HFC alternative.

Mobile air conditioning

It is estimated that 148 tonnes of HFC were emitted from the New Zealand MAC sector in 2006, about one quarter from vehicle retirements. As the HFC MAC fleet ages, emissions are expected to accelerate as more of this fleet retires and releases a higher proportion of the approximately 1600 tonnes HFC contained in vehicles.

Importers of motor vehicles (most having HFC MAC systems) could be made points of obligation at the Customs border to be consistent with a decision to cover imported equipment HFC in the ETS. The advantage of inclusion is that the ETS would then apply consistently across all HFC equipment imports.

The overwhelming disadvantage would be the compulsory market participation for at least 50 and up to about 500⁴ new and used vehicle importers for no clear benefit. ETS inclusion would not drive a MAC technology change and refrigerant recycling would already be incentivised by the ETS coverage of bulk HFC used for servicing.

Aerosols and metered dose inhalers

About 37 tonnes of HFC were emitted from about 4 million metered dose inhalers in 2006 with a further 17 tonnes HFC emitted from using other specialised aerosols in New Zealand.

If a decision was made to implement the ETS with widespread points of obligation covering imported equipment containing HFC, it would be important in terms of equity and emissions coverage to include the aerosols sector. While compulsory market participation would be required for very few importers to cover the major source (metered dose inhalers) there may be a larger number of importers of other aerosols (possibly 10 in total for a 100 tonnes CO₂ equivalent threshold).

The impact of ETS pricing on a New Zealand manufacturer of aerosol cans would be major if its exports were not exempted. The price increase on the average can would be of the order of 50% so the company’s competitiveness against imports would need to be preserved. The basic price impact on inhalers would be smaller – of the order of 10%.

Fire protection

This sector is a very small source of HFC emissions because there are such low discharge and leakage rates. It would be relatively easy to include in the ETS (if imported equipment is covered) with just one or two import points of obligation.

However, apart from ETS consistency with other sectors and within the sector, there are no clear benefits when there is such a low leakage rate. The HFC price is already high enough to ensure that recycling is maximised.

If ETS pricing includes imported equipment, there may be no new HFC installations. If the ETS point of obligation is only on bulk supply, there may be little change in the costs of current systems because of the low leakage rate.

Foam

Rigid foams blown with HFC or HCFC have superior insulating and foam formulation properties to alternative blowing agents but are more expensive to produce. A HFC mixture is being used by at least three companies but the high price (three to five times higher than the HCFC) makes it uneconomic for most purposes.

Three tonnes of HFC were used in 2006 and total emissions were 0.4 tonne but there could be major emissions growth as the main HCFC is due to be phased out in New Zealand by 2015.

Importers of products containing HFC foam (like refrigerators) could be made points of obligation to be consistent with equipment refrigerant points of obligation. It is difficult to see sufficient benefits to justify the administrative complexity of calculating the liability for a large range of products.

HCFC is well suited to foam-blowing and it is likely to be used for as long as possible until the 2015 phase-out. Consequently the ETS impact on the foam industry could be major in the medium term since there are few practical alternatives to HFCs once HCFCs are phased out.

Recycling and destruction

A relatively low proportion of used refrigerants is collected for recycling or destruction in New Zealand compared with Australia. An increasing proportion of the collected refrigerants is HFC for which no recovery levy has been paid. The Recovery Trust and chemical importers are keen to engage with the Ministry for the Environment on the issue of HFC levies on both imported bulk chemicals and equipment.

An incentive scheme could be designed as an effective means of encouraging recycling or collection for destruction. ETS participation by the Recovery Trust would be an inefficient means because market participation costs might be too high to justify the relatively low level of credits granted for exporting for destruction.

Conclusions

In conclusion, assuming that re-exported chemical in equipment is not counted and an import threshold is applied of say 1000 tonnes of CO₂ equivalent, the competitiveness impacts identified in this report from a border obligation on HFC chemical importers would be on four major companies. (There might be a few extra companies for a 100 tonnes threshold.) A widespread border obligation on all equipment imports would remove any competitiveness concerns for relatively high compliance costs while limited exemptions on locally manufactured equipment would achieve the same result for relatively low compliance costs. Instead of limited exemptions, these manufacturers could be given free ETS allocations to protect their competitiveness but there would be extra compliance costs from market participation.

In the transition to 2010, there will be an important role for the Ministry for the Environment, and for industry associations, in capacity building to facilitate participation in the ETS. It is recommended that improved knowledge of potential participants would be required before ETS coverage could be considered for the self-contained commercial refrigeration, refrigerated transport and mobile air conditioning sectors (in particular).

Table B: Options for points of obligation

	Upstream border obligation	Upstream border obligation + limited equipment exemptions	Widespread border obligation
Participant numbers (2006)	11 (>1000 tonnes CO₂ equivalent) or 12–14 (>100 t CO₂-e)	Same	Same for chemical importers plus: an estimated⁵ 50?? Mobile Air Conditioning and 50? others (>1000 t CO₂-e), or 500?? + 100? (>100 t CO₂-e).
Coverage of 2010 emissions	100% of refilling (replacing leakage) + about 19% of new equipment.	100% of refilling + about 15% of new equipment.	100% of refilling + >90% of new equipment (>1000 t CO₂-e) or >99% of new equipment) (>100 t CO₂-e).
Compliance costs	Reporting costs likely to be minimal for chemical importers. Minimal extra costs in providing accurate records for exempting exports of four major manufacturers. Market participation would add significant costs.	Same with minimal extra costs in providing accurate records for exempting exports and New Zealand sales by four major manufacturers.	Same for chemical importers. Market participation would add significant costs for all. Extra reporting costs for large importers of equipment likely to be minimal if already reporting appliance efficiency. Significant extra costs in reporting accurate records for smaller commercial refrigeration/air-conditioning (AC), refrigerated transport, mobile AC and aerosols importers.
Economic impacts	Main impacts likely to be investment in commercial leakage reduction and perhaps a shift to new supermarket CO₂ systems and ammonia in new large coolstores. Some foam industry impacts could be major as few alternatives once HCFCs phased out. Reduced competitiveness for locally manufactured refrigeration and air-conditioning equipment sold in New Zealand.	Same but no reduced competitiveness for locally manufactured equipment sold in New Zealand.	Same except costs of market participation will be passed to purchasers of bulk HFC and of HFC equipment and no reduced competitiveness for locally manufactured equipment sold in New Zealand. Additional main impacts likely to be reduced sales of relatively low priced aerosol cans and air-conditioning units.
Equity issues	Major concerns about equity and competitiveness if imported equipment not covered. Perhaps some avoidance behaviour by equipment importers. Small chemical importers may find ETS participation too costly and leave HFC importing to larger suppliers leading to a reduction in competition.	Same but no equity issue about imported equipment being exempted if also limited exemptions for New Zealand manufactured equipment.	Same but equity and competitiveness and avoidance concerns removed by covering imported equipment. Some would argue a portion of equipment HFC should be exempted based on projected collection for destruction on retirement.
Advantages	Simplicity and minimising compliance and verification costs. Relatively easy to exempt exports of four major manufacturers. Some future retirement emissions covered.	Relatively easy to exempt exports and New Zealand sales of four major manufacturers. No competitiveness issues over imported equipment.	Equity and competitiveness and avoidance concerns removed by covering imported equipment. Future retirement emissions covered for all equipment purchased from 2010.
Disadvantages	Inconsistent for ETS to cover some future potential rather than all actual emissions. Bulk importers and manufacturers would have major concerns about equity and competitiveness for locally manufactured refrigeration and air-conditioning equipment if imported equipment not covered. Also potential avoidance behaviour by equipment importers. Small importers may find ETS participation too costly and leave HFC importing to larger suppliers leading to a reduction in competition.	Bulk importers would still have major concerns about equity and avoidance if imported equipment not covered. Limited coverage of future retirement emissions.	Significant extra costs in reporting accurate records and market participation for smaller commercial refrigeration/air-conditioning, refrigerated transport, mobile AC and aerosols importers in particular.

1 Nearly all New Zealand PFC emissions are sourced from smelting aluminium. PFC-218 is a component of two rarely used refrigerants that has been assessed to be a minor source of emissions. In general, where HFCs are referred to, the discussion will equally apply to PFC-218 and any other PFC uses that may be developed in future.

2 Global warming potentials (kilograms of CO₂ equivalent warming to 1 kg of refrigerant over 100 years).

3 The HFC bank is the term used for the accumulated chemical held in imported and New Zealand manufactured equipment minus exports, leakage and equipment retirement (treating any recycling or destruction separately).

4 A very approximate estimate is that 500 vehicle importers would import 100 cars or 60 trucks for a threshold of 100 tonnes of CO₂ equivalent (or 50 for a 1000 tonnes threshold).

5 Figures denoted with ‘?’ should be considered speculative and ‘??’ highly speculative

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