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Climate Synthetic Greenhouse Gases and the Emissions Trading Scheme Online version
10 Summary
Applying the ETS to HFCs will have a major impact on the price of these chemicals (mainly refrigerants) in the various sectors. For a $30 per tonne CO2 market price, the prices for the three common refrigerants would increase by factors of three to seven times the current wholesale prices (plus any mark-ups and the significant costs of market participation).
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.
Table 2 summarises the ETS design issues around maximising coverage while minimising compliance costs and competitiveness / 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. There would be a negative impact on the competitiveness of four New Zealand manufacturers from imported equipment containing HFC not covered by the ETS. There would also be no price signals for imported equipment. As well as 100% of refilling HFC (replacing leakage), about 19% of HFC in new equipment (mainly commercial refrigeration / air-conditioning) 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. As well as 100% of refilling HFC, 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 air-conditioning) 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).
- 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.
- 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.
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 (including up to 500 vehicle importers) 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.
In terms of projected HFC usage and emissions, CRL Energy assesses that there may be surprisingly little impact from the ETS pricing by 2015 (assuming the equivalent for $30 per tonne CO2 in 2008 dollars). These projections are highly speculative. Based on the assumption that the business as usual (BAU) case will include major international technology developments and corporate decisions to reduce ‘carbon footprints’, these shifts will happen regardless of the ETS price level. Consequently, it is assessed that the ETS pricing will have negligible impact compared with BAU on HFC imports or emissions in the household, self-contained refrigeration, refrigerated transport and MAC sectors.
The major price influence (assuming competitiveness concerns are addressed) is likely to be increased investment in preventing leakage and helping to drive supermarket chains away from HFCs to CO2 refrigerant in up to 20% of installations by 2015. Because the lifetimes of these systems are about 15 years before total overhaul, the pricing impact on total emissions from this sector is likely to be less than 10% below BAU. Similarly, the shift for new coolstores (and dairy refrigeration systems) to ammonia and other alternatives will largely be driven by the HCFC phase-out and corporate environmental policies rather than ETS pricing, so the overall emissions impact from ETS pricing may be much less than 10% below BAU.
The ETS pricing may however influence the sales of the lower-priced brands of household air-conditioning units (because of the relatively large charge of refrigerant and shorter lifetimes). This might result in 10% fewer imports by 2015 than BAU (and consequent lower retirement emissions about 10 years after the ETS introduction).
While there would be minimal impact on inhaler use from the ETS pricing by 2015 (compared with BAU), imports of aerosol cans (with a much higher proportional price increase) could be reduced by up to 30%. If the ETS covers imported fire protection equipment, there may be no new HFC installations. With a low leakage rate, the ETS pricing will have a negligible impact on emissions by 2015.
HCFC-141b 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 (apart from hydrocarbons for large manufacturers). CRL Energy assesses that HFC emissions in 2015 could be more than 50% lower than BAU because of ETS pricing (depending on the alternatives available).
There exists the potential for the perverse outcome that until the 2015 phase-out, some HCFCs (with ozone depleting and global warming properties) 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.
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 industry associations in capacity building to facilitate participation in the ETS. 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).
