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Synthetic Greenhouse Gases and the Emissions Trading Scheme

Executive Summary

1 Introduction

2 Bulk Chemical Importers

3 Stationary Refrigeration and Air Conditioning Equipment

4 Mobile Air-Conditioning

5 Aerosols and Metered Dose Inhalers

6 Fire Protection

7 Foam

8 Solvents and Other HFC/PFC Applications

9 Recycling and Destruction

10 Summary

11 References

2 Bulk Chemical Importers

This section considers the options for the bulk chemical importers who would be the key points of obligation in an ETS. Stakeholders, export implications, compliance costs, price impacts and uncertainties are discussed but potential for alternatives is not relevant because it is associated with user sectors and is discussed in the appropriate sections.

2.1 Stakeholders and potential points of obligation

The seven most significant importers and distributors of HFCs/PFCs in 2006¹ were:

• Polychem Marketing Ltd

• Patton Refrigeration

• Heatcraft NZ Ltd

• Refrigeration Engineering

• Orica Chemnet

• Ilys Ltd (trading as Cooling Supplies)

• BOC Gases.

Dupont operates from Australia and imports relatively small quantities of specialised refrigerants into New Zealand on a cost insurance freight basis, meaning that the suppliers receiving these refrigerants should be reporting them for inventory purposes.

Some mobile air conditioning (MAC) suppliers have sometimes imported containers (~10 tonnes net) of HFC-134a jugs that are mainly sold to MAC servicers. In 2005/06, Carrier Ltd (through its Totaline parts division) and Repco Ltd each imported a container.

Temperzone Ltd imports its own refrigerants for manufacturing its range of air-conditioning units. The amounts of R407C and R410A have been relatively small over the period 2002–2006 for which records have been provided. However, during 2007 the company stated that it has rapidly shifted away from R22 (HCFC) and expects to use up to 50 tonnes of HFC in 2008.

Pacific Urethanes Ltd stated it was importing annually 1 to 3 tonnes of the high-cost HFC-245fa/365mfc mixture for co-foam-blowing with HCFC-141b. In 2006, as well as its own use, it supplied the HFC to at least two other companies. Three other foam-blowing chemical suppliers (Huntsman, NZ Urethanes, Polymer Developments) had imported small amounts of HFC-245fa/365mfc for customer trials but found little demand because of the high price.

There are two potential points of obligation for the bulk chemical suppliers: at the Customs border or at the point of sale to customers. The advantage of the border point is simplicity and the ability to check compliance returns against Customs records while the disadvantage is that suppliers may import large quantities before January 2010 to avoid the obligation.

A sales point of obligation on the bulk chemical importer (and not on wholesalers) would remove any incentive for a supplier to import large quantities before January 2010 although users would still have this incentive. A possible advantage is that HFC users may be less likely than suppliers to carry the costs of holding large quantities. The disadvantage of a sales point of obligation would be the increased complexity resulting from sales between importers and other chemical importers. Currently, there are major difficulties in eliminating double counting for inventory purposes from such sales. Chemical importers would ensure they held records to prove an obligation had already been met by the importer they purchased from. For this reason and because of stock change differences between import and sales records, these records would be more difficult to verify than for a border point of obligation.

With either a simple border or sales point of obligation on bulk chemical importers, if the ETS had applied in 2006, it would have covered 100% of 336 tonnes calculated HFC emissions together with about 31% of the 265 tonnes chemical contained in new equipment.

With either a border or sales point of obligation, there is an argument that the chemical installed in new equipment should be exempted until it is released at the end of its life (or alternatively a portion exempted based on projected recovery for recycling or destruction). The advantages would be that the ETS is more directly linked to actual rather than potential emissions and incentives would be created for recycling or collection for destruction of the HFC in the retired equipment. The overwhelming disadvantages would be the administrative complexity of calculating the exemptions for a large range of products and verifying equipment sales. Because it would be impractical to monitor all equipment retirement and to require points of obligation on retirement emissions, ETS coverage would be reduced.

Ivan Tottle of Polychem is chair of the Importers and Wholesalers Group (IWG), a committee of the Refrigeration and Air Conditioning Companies Association (RACCA). He said that a key issue for the IWG is the need to have the government use Customs import declarations as a means of regulating HFC and HCFC chemicals, so that imported equipment chemicals and bulk chemicals are treated in a similar way (Tottle 2008). As well as ETS coverage, this is relevant for levies to fund collection and destruction (covered in Section 9).

In terms of the ETS, he has a personal view that it is inappropriate to charge all imported bulk HFCs at the border because then the ETS would not reflect actual emissions (allowing for the delays before equipment retirement) and this could be a disincentive to maximising recovery for destruction. He would prefer to make HFC release illegal and reinforce previous government and industry efforts (No Loss Campaign) with better systems to achieve greater recovery rates.²

However, given the practical options being considered for the ETS, he stated it would be easier to have a border than a sales point of obligation because there would be fewer participants and fewer transactions to be reported. When asked about the transition to the ETS, he said it was inevitable that chemical importers or users respectively would accumulate stock – a sales option would simply shift the accumulation point. He added that he would be surprised if anyone would carry more than 3–6 months stock because of the extra costs of holding it. He could see the possibility of a chemical importer profiteering by holding stock before 2010 and then selling it in 2010 at market rates with the equivalent of the emissions obligation included in the price. Based on his experience of the NZ market, he said he did not think the ETS participation would knock any of the main chemical importers out of the business but it might discourage small importers who have imported HFCs on a sporadic basis (Tottle 2008).

Ivan Tottle said the IWG would consider the inclusion of HFCs in all imported equipment as a critical part of the ETS. Even though there are wrong Customs declarations (both accidental and deliberate), he believes at least 80% of the classifications would be correct and they could be used as a basis for making equipment importers ETS points of obligation. As well as all types of refrigeration and air-conditioning equipment, vehicles with MAC should all be included. While individuals importing vehicles could be excluded, companies importing 10–20 vehicles must be included or it would penalise the importer of 50 vehicles. Similarly, if supermarket chains or small companies imported cheap air-conditioning units, they must be included or the large stakeholders would be penalised – for fairness the small ones should not be exempted (“often the price increase would be less than the profit margin”). He could not estimate the likely number of consequent ETS participants but considered the application of any threshold would result in “the large importers getting penalised and the small ones getting away with it” (Tottle 2008).

He believed it would be worth exploring options for exempting a portion of say the refrigerant based on an estimate of the likely recovery at the end of the equipment life. He dismissed the option of exempting all HFC held in equipment as unrealistic.

In summary, CRL Energy concludes a bulk chemical importer point of obligation at the Customs border has the great advantage of simplicity because it would minimise the number of compulsory market participants (while ensuring the price signal is passed on to users) and compliance returns could readily be verified.

2.2 Export implications

For equity reasons, it would be reasonable to exclude from the point of obligation any HFC that is exported as bulk chemical or in products. This would be consistent with the inventory methodology and would avoid the potential for the chemical becoming an additional point of obligation (or taxation) in the country the HFC is exported to.

Two of the chemical importers have reported export sales of bulk HFCs mainly to South Pacific nations in some years (around 3 tonnes annually from 2004 to 2006). The importers could be required to hold the documentation to demonstrate that such sales need not be included in their annual return.

Similarly, if a customer was to export significant HFC amounts in its products, the importer could be required to hold the documentation to demonstrate that such sales need not be included in their annual return. Therefore the importer would not charge the customer for the permits for that exported chemical it would otherwise have to reconcile around March the following year.

There is a commercial sensitivity issue that arises from such a system for the four HFC users that export significant amounts in their products. One of these companies would not be concerned at all about providing its supplier with such documentation because that supplier could already calculate its exports quite easily. However, another company representative expressed concern that its export sales were highly commercially sensitive and the supplier could have links to a competing manufacturer. He said such a concern might lead to the company importing its own HFC (as Temperzone does). This could also be a potential barrier to competition if an exempted manufacturer wants to change supplier but is concerned about confidential sales data held by the previous supplier. A chemical importer representative (Tottle 2008) considered his company had a system that would sufficiently ensure the confidentiality of customer information.

Another potential concern is that the exporter would be limited to dealing with chemical importers and not wholesalers but this is currently irrelevant because all four companies are supplied by chemical importers (or import their own HFC).

An alternative that has the advantage of avoiding the confidentiality issue would be for such chemical importers and customers to pay the emissions price on exported chemical and the manufacturer could be rebated the equivalent amount by the government as part of the free allocation scheme. However, this option has the major disadvantages of increased compliance costs for officials and for the company having to enter the market to sell its permits. It could be provided as an ETS opt-in alternative that would leave the cost-benefit assessment in the hands of the manufacturers.

2.3 Compliance costs

A representative of Polychem (one of the largest importers) stated that additional compliance costs to participate in the ETS were likely to be negligible because the information for its annual return (including any exports) would readily be obtained from the company’s imports or sales records (Tottle 2008). He may be underestimating the attention that will be required to match permit purchases with imports, even though from the EU experience, there are likely to be several permit brokers offering their services.

In summary, it is concluded that importers will inevitably be required to become ETS participants. Auditable record keeping for the annual return is likely to add minimal costs to current imports or sales records. 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. Market participation would add significant costs if considerable management time is spent on optimising permit purchase prices – each company will evaluate the costs and benefits of such an approach compared with utilising brokers.

It is conceivable that small companies (even though they are familiar with handling HCFC licences) may find ETS participation too costly and leave the HFC importing to larger suppliers leading to a reduction in competition.

2.4 Price impacts

A price-based policy measure such as the ETS will have major impacts on HFC prices, as illustrated in Table 1 for projected emissions prices ranging from NZ$15 to $50 per tonne of CO₂ equivalent. The calculations are based on 100-year global warming potentials used for national greenhouse gas inventories developed by IPCC for the 1996 Revised Guidelines (rather than subsequent revisions). The projected price increases do not include ‘pass-through’ factors such as mark-ups by chemical importers or the costs of market participation.

Table 1: HFC basic price increases from projected emissions prices

* IPCC 1996 Revised Guidelines.

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

A Polychem representative provided for comparison a range of current wholesale prices (ex GST) for relatively small refrigerant purchases (10–20kg): $12/kg for R134A, $15/kg for R404A or R507A and $17/kg for R410A. Large purchasers would expect to pay 20–30% less (Tottle 2008). So 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 the significant costs of market participation).

When asked what medium-term impact he expected the ETS pricing would have, he responded that the focus would shift onto reduced leakage and improved installers/servicers performance. Supermarkets and other refrigerant users would still have to purchase the HFCs. He would have to talk to industry experts before he could identify any realistic alternatives to HFCs.

Chemical importers are keen to engage with the Ministry for the Environment on the related issue of HFC levies (on both imported bulk chemicals and equipment) for recovering used refrigerants for destruction (see Section 9 below).

CRL Energy concludes that the economic impacts on bulk importers would not be major: mainly reduced business as HFC usage decreases in the medium term (perhaps replaced by alternatives). The costs of market participation would be passed on to customers. If HFC imports contained in equipment were not covered by the ETS, bulk importers would have major concerns about equity. There might be some avoidance behaviour by equipment importers: many ‘pre-charged’ units are currently imported with a refrigerant container for installation so there might be a shift to importing ‘spare’ containers or ones that are much larger than necessary for installation.

2.5 Uncertainties

Chemical importers’ records of HFC imports and sales are likely to be extremely accurate and readily verified by comparison with Customs records. It is presumed that officials responsible for ETS compliance would be given access to Customs records for auditing purposes. It would also be desirable for the Ministry for the Environment to have access to these Customs records in compiling the national greenhouse gas inventory (as has happened in some years). This would greatly improve the level of accuracy for these key quantities and reduce the time taken by the chemical importers and officials to compile the information for inventory surveys. There are systems in place to ensure commercial sensitivity is respected.

Currently there are four manufacturers exporting significant amounts of HFC in their products. Three already maintain accurate records for reporting exports to Australia so it is likely there will be minimal extra compliance costs in providing accurate records for exemptions from the point of obligation in New Zealand.

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