CRS Report: 93-382 - CFC Phaseout: Future Problem for Air Conditioning Equipment?

In response to both domestic law (the Clean Air Act as amended) and international agreement (The Montreal Protocol on Substances that Deplete the Ozone Layer), the United States is well down the road toward complete phase-out by 1996 of production of chlorofluorocarbons (CFCs) and other ozone depleting substances. For most uses, the phaseout will probably not cause severe side effects.

For air conditioning and refrigeration equipment, however, the jury is still out; there is a large inventory of CFC-using equipment; shortages of phased-out refrigerants in 1996 and thereafter could cause sharp increases in refrigerant prices, problems in servicing equipment dependent on the phased-out refrigerants, and shortages of equipment able to use the new generation of refrigerants. In response to these possible difficulties, the Environmental Protection Agency (EPA), the Alliance for Responsible CFC Policy, the Air Conditioning and Refrigeration Institute (ARI), the Mobile Air Conditioning Society (MACS), and others have initiated programs designed to foster recovery of CFC refrigerants, reduce refrigerant leakage, and stimulate early conversion of CFC-using equipment to substitute refrigerants such as hydrochlorofluorocarbons (HCFCs) and hydrofluorocarbons (HFCs).

Despite these programs, the rates of retrofit, on the one hand, and recovery and "banking" of CFCs, on the other hand, as envisioned today, do not appear to be great enough to avoid significant transition problems.

INTRODUCTION
PHASE-OUT BY SECTOR
CFC'S FOR SERVICING EXISTING EQUIPMENT
NEEDED: A LONG-TERM CFC INVENTORY SYSTEM?
WHAT WILL HAPPEN AS CFC PRODUCTION GOES TO ZERO?

FIGURES
FIGURE 1. Total World Production: CFC-11, 12, and 113
FIGURE 2. CFCs Needed for Servicing Refrigerators and Air Conditioners
FIGURE 3. CFC Prices and Taxes

CFC PHASEOUT: FUTURE PROBLEM FOR AIR CONDITIONING EQUIPMENT?

INTRODUCTION

Chlorofluorocarbons (CFCs) and a number of other chlorine- and bromine-containing substances have been indicted scientifically as responsible for an ongoing depletion of the ozone content of the stratosphere. The indictment was handed down in 1974; the societal response has come in stages. First, the United States and several other countries banned the use of CFCs in aerosol products. This occurred in 1978 and led to an abrupt, though temporary, drop in CFC usage around the world.

Secondly, through intensive international negotiations under the guiding hand of the United Nations Environmental Program (UNEP), a series of international agreements has been hammered out. In 1985, the Vienna Convention for the Protection of the Ozone Layer was agreed to by 20 countries. The Convention provided a mechanism for further negotiations. In 1987, 23 countries (47 by 1989) signed on to the Montreal Protocol on Substances that Deplete the Ozone Layer. Under the terms of this Protocol, production of CFCs was to be capped at 1986 levels one year after it came into force (which turned out to be Jan. 1, 1989), followed by a 20% cut over 3 years and an additional 30% by 1999. Halon production was to be capped at 1986 levels. Five CFCs and three halons (bromine-containing substances) were listed.

In 1990, with over 70 countries now involved, the Protocol was strengthened to require a 100% phaseout by 2000 and by adding two chlorine-containing non-CFC solvents -- methyl chloroform and carbon tetrachloride --to the phaseout schedule. A nonbinding resolution calling for a phaseout of a set of first generation substitutes -- hydrochlorofluorocarbons (HCFCs) -- was also adopted, with an ultimate target date of no later than 2040.

In 1992, the Protocol was strengthened again. CFCs, methyl chloroform, and carbon tetrachloride are to be phased out by the end of 1995, with an interim goal of 75% by 1994 (Figure 1). Methyl bromide, primarily used as an agricultural chemical, was intensely discussed but not made subject to a phase-out schedule. Rather, agreement was reached to cap production at 1991 levels. (1) HCFCs were brought under binding regulation, are to be 90% phased out by 2015, and will be completely phased out by 2030.

In the United States, after a several-year-long debate on whether an auction system or a fee or tax would be preferable, a tax was first placed on CFCs in 1990 (Omnibus Budget Reconciliation Act [OBRA] of 1989), revised and extended in 1991 by the OBRA of 1990, and revised upward in 1993 by the Energy Policy Act of 1992. As a result, starting in 1990, CFCs became subject to both a production quota (decreasing over time) and a tax (increasing over time).

The Clean Air Act Amendments of 1990 provided, in addition to statutory recognition of the Protocol production phaseout, for a comprehensive set of regulatory requirements covering recovery, recycling, and disposal of CFCs when equipment containing them is serviced or discarded.

The mandated phased decreases in production volumes for products going into markets which have been growing at 3% to 10% per year has led to increased prices. CFCs, for example, cost about 60 cents per pound before the phasedown began; they now cost $2 to $4 per pound (depending on lot size purchased) prior to application of tax. The tax began in 1990 at $1.37 per pound (multiplied by the ozone depleting factor [ODF] which for CFC's is either 1.0 or close to it). It is now $3.35 per pound, scheduled to rise to $4.35 per pound in 1994 and $5.35 per pound in 1995. (2) Purchase prices, including excise taxes, about tripled in 1990 and are currently up to about 10 times their pre-regulation levels.

PHASEOUT BY SECTOR

By the end of 1991, production of controlled substances was down to 60% of 1986 levels; by the end of 1992, it was under 50% of 1986 levels. (3) Foam packaging, flexible foam products, and cleaning agent markets are leading the way. (In the United States, aerosol markets had, by regulation, moved away from CFCs as propellants in the 1970's.) Uses as solvents, rigid foam insulating agents, and refrigerants for building air conditioning have been next most rapid, while the home refrigeration and auto air conditioning markets have been and still are the slowest to respond. However, although new equipment has been or for the most part soon will be using substitute fluids, there remains a very large inventory of CFC-using equipment.

An international group of specialists, in preparation for the latest round of discussions about the possibility of accelerating the CFC phaseout, reported:

Looking back on this history from the vantage point of early 1993, this rapid a phasedown of production is remarkable given the perception in 1987 that the best that could be done was 50% by 1999. Clearly, both government and industry have been aggressive in forcing change in a number of CFC-dependent industrial sectors which thought, until the ozone depletion concern arose, that they had found and were using the ultimate in cheap, safe, high-performance products.

Except for some special cases with small volumes involved, it appears at this time that the foaming agent, sterilant, solvent, and other markets for controlled substances, other than air conditioning and refrigeration, will be able to meet the end-1995 phase-out date settled on by the member countries of the Montreal Protocol. But the air conditioning and refrigeration industries present a particularly difficult case.

With respect to new equipment, the issues are ones primarily of availability of sufficient volumes of the substitute refrigerants and gearing up the manufacturing facilities for the redesigned equipment. Although there are daunting problems of engineering and logistics, they do not appear to be insuperable.

CFCs FOR SERVICING EXISTING EQUIPMENT

The dominant concern is how to deal with service of existing equipment. According to the Air Conditioning & Refrigeration Institute (ARI), there are several million commercial refrigeration systems (EPA says 1.6 million) and some 80,000 commercial air conditioning chillers designed for and containing CFCs (mostly CFC-11 and -12). Most of the units being built today are designed for and contain HCFC-22, HCFC-123, or HFC-134a. The older CFC-using equipment represents a capital stock of over $135 billion. Its useful life ranges from 15 to 30 years. Prior to phaseout requirements, much of this equipment would be expected to be operating until 2010 or so, and some as late as 2025.

There are 150 million domestic refrigerators in use in the United States. All of these are based on CFC-12. Most of those being produced through 1993 and on into 1994 and perhaps even into 1995 are also based on CFC-12. The replacement value of these units is about $5 billion; expected lifetime is 15 to 20 years.

There are well over 100 million (maybe as many as 130 million) auto air conditioners in use. Most 1993 models use CFC-12, and the phase-out plans of automakers include significant numbers of 1994 model vehicles with CFC-12 in their a/c units. (5) These represent about $20 billion in capital cost. Useful life is 10 to 12 years (the car life).

The several million commercial refrigeration systems, including about 540,000 refrigerated trucks, contain about 50 million pounds of CFC. Their leakage rate is about 25% per year; make-up rate is about 12 million pounds per year. EPA's data show an inventory of about 50 million pounds, a leakage rate of 22%, and a servicing demand of 11 million pounds per year.

The 80,000 commercial chillers contain about 80 million pounds of CFCs. Their leakage rate is 15 to 25% per year. Some 12 to 20 million pounds of make-up CFCs would be needed, based on historic loss rates. However, some of these existing units are already being retrofitted or replaced in anticipation of the CFC phaseout, while industrial practice is significantly reducing leak rates; EPA estimates that by 1996, leakage rate will be no more than 10% per year from an inventory of perhaps 67,000 CFC-using units, with a make-up demand of 5 million pounds per year. one industrial observer estimates a range of 5 to 8 million pounds per year.

The 100+ million auto air conditioners contain at least 200 million pounds; leakage rate is estimated as high as 25% (EPA says 15%); make-up of up to 50 million pounds per year may be needed (EPA estimates 32 million pounds per year).

The 150 million refrigerators contain about 80 million pounds of CFC. Since these are sealed units, they don't leak, but they do fail, at a rate of 2% (EPA estimate) to 4% per year. Were these to be repaired rather than replaced, from 1.6 to 3.2 million pounds per year would be needed for make-up. To the extent they are junked instead, this make-up would not be needed.


Equipment Category	# of Units	CFC Inventory (millions lbs)	Leak Rate	Make-Up Rate (million lbs)
Commercial Refrigeration	2-3 million	50	22-25%	11-12
Commercial Chillers	67,000	80	<10%	5-8
Domestic Refrigerators	150 million	80	2-4%	0-3.2
Auto air conditioners	100 million	200	15-25%	30-50

In total, some 46 to 73.2 million pounds of CFCs would be needed in 1996 to go into existing refrigerating and air conditioning equipment to replace refrigerant lost through leaks and servicing (EPA's estimate is 50 million pounds per year). Leaks during servicing are in process of being controlled through regulation, (6) so servicing losses are becoming small compared to leakage losses. If one assumes a linear decline in need as existing equipment is retired, total refrigerant requirement to service existing units over their historic life cycles (2010 to 2025) could reach several hundred million pounds (Figure 2).

In March, 1993, EPA issued a Notice of Proposed Rulemaking (NPRM) (7) proposing that the CFC production allowance be set at 25% of the 1986 baseline for 1994 and 15% for 1995. (8) This would be about 170 million pounds in 1994 and 100 million pounds in 1995. Also in March 1993, du Pont announced that it would suspend production of all CFC's by the end of 1994. Since du Pont has about half the allotted production allowances, this would remove about 50 million pounds of production in 1995, if the allowances were not transferred to some other producer and used. Du Pont plans to return them to EPA; EPA will have to decide what to do with them and probably won't until it absolutely has to, if that eventuality develops.

NEEDED: A LONG-TERM CFC INVENTORY SYSTEM?

The issue is: Where will these CFCs come from once production stops after 1995? One answer that springs immediately to mind would be some sort of banking system operating now to set some supplies aside while CFC production continues, plus a system from now to the end of the equipment servicing need operating through recovery, reclamation, and placing into inventory of the recovered CFCs. Another source of recovered CFCs will be the system of handling discarded CFC-containing equipment mandated by the new EPA regulations -- the CFCs must be recovered before the equipment is disposed of.

However, there is no national CFC inventory system in operation today. Rather, individual companies are operating independently to build their own inventories. Some companies are far-sighted; others are not. Some sectors have significant opportunity to build inventories; others have less to none.

Where CFC-using equipment is being serviced, the combination of impending regulations, technician training programs, and increasing CFC cost has led to rapid penetration of CFC-capturing equipment. Examples are auto and building air conditioning service operations. CFCs are recharged to the units, but most of the CFCs used for system recharge comes from new production, not from recovery and recycle.

In autos in particular, a major share of units serviced are empty or close to it when they are brought in for servicing; routine preventive maintenance is not the norm. Even so, service stations are almost all equipped now with units which can capture CFCs and do a simple cleanup on it -- filtration and drying, for example. Nonetheless, in the absence of retrofits, the norm is that the volumes of recovered CFCs fall far short of the volumes needed for servicing.

In building air conditioning systems, where service more often is requested when the unit has noticeably begun to lose effectiveness, and where the same service contractor also installs new units using non-CFCs, the contractor has the opportunity to take title to the CFCs removed from the equipment being retired, provided that the replacement unit uses HCFCs or HFCs. Eventually, in such situations, perhaps all of the volumes the contractor needs for his own business will be generated through recovery, reclaiming, and recycle. However, in the early years of the production phaseout, when the service business will mostly be servicing CFC-using equipment and only occasionally installing or servicing non-CFC-using equipment, recovered CFCs may well fall short of the needed volumes.

From this analysis of current practice and trends, it would appear to be unlikely that an inventory of CFCs adequate to service existing equipment operating over its expected life cycles will be built up in private hands. EPA believes that better maintenance programs, including the use of reduced-emissions purge devices, leak detection and repair practices, and more careful servicing could, if they were to become standard practice, reduce future needs. EPA also believes that HCFCs, HFCs, and blends can serve as replacement refrigerants in servicing much of the existing equipment, reducing future needs even further. But in the absence of some sort of corrective action, EPA expects shortages of CFCs to cause some disruptions to users of these categories of equipment in 1996 and thereafter.

But in a sense, EPA is caught on the horns of a dilemma. It reads its charter from Congress to mean that it should remove CFCs from commerce at the maximum feasible rate. To achieve this goal, it seeks to phase out all CFC-using equipment as rapidly as feasible. The less CFC there is in inventory, arguably the greater the pressure will be on owners of CFC-using equipment to retrofit or replace that equipment. EPA is urging equipment owners to retrofit and is not acting to stimulate inventory-building. On the other hand, to retrofit or replace CFC-using equipment is currently expensive compared to servicing it with CFCs.

Until recently, the retrofit refrigerants have been more expensive than the CFCs. This year, however, the alternatives and the CFCs are about equal in cost when the $3.35 per pound tax is included. Even so, the retrofit option appears to most equipment owners to be more expensive than to continue to service with CFCs. At the same time, CFC prices are not currently high enough to foster their purchase for inventory for future servicing needs.

For potential reclaimers, the combination of CFC price increase plus CFC tax has provided a cost basis for the creation of some reclaiming operations sooner than would the price rises through production phasedown alone. However, the regulatory program is the primary driving force; the recovered refrigerants have to be priced for resale at or near the same cost as virgin material from current production. Alternatively, only a tolling fee may be charged where the service contractor retains title to the CFCs, but the size of the fee is limited by the price of the virgin material to the service contractor. Thus, only a modest amount of CFC inventory-building as a speculative investment is occurring at the reclaimer level.

Where CFC-using equipment is currently in use, the CFC price (including tax) is not high enough to force retrofit to non-CFC products following any individual need for a service call, particularly if the retrofit would impose significant, costly equipment changes. There appears to be minimal impact on retrofit attractiveness from the price increases, and the possibility of future distress (both economic and operational) from shortages of CFCs carries little weight in current decision-making for most affected entities. Examples are chillers in grocery stores, building air conditioners, auto air conditioners, and refrigerators. In these uses, the CFC price would have to be a great deal higher than it now is to force economics-based decisions to retrofit. Attempts at persuasion by vendors of equipment or refrigerants are unsuccessful more often than successful. A more critical driving force in favor of retrofit, when it is chosen, appears to be the current cost of finding slow leaks and the growing unwillingness of service companies to "top off" rather than find the leak.

Some companies with multiple pieces of equipment and on replacement schedules as part of their preventive maintenance (PM) programs are replacing CFC-using equipment when its scheduled life has expired with non-CFC-using equipment (currently mostly using HCFC-22) and banking the salvaged CFCs. This is less price-driven than "prudence-driven", since the PM schedules have long time horizons which incorporate post-phase-out years when supplies of CFCs needed for servicing may well not be available at any price. The banked CFCs are not, however, likely to be available commercially, since they are being held for future internal use.

Private citizens, commercial building operators, and small businesses do not appear to be thinking in such long time frames. For them, the current CFC price, even though perhaps 10 times as high as it was five years ago, is not high enough in itself or as a signal of things to come, to cause action. For example, a major supplier set up a test market in auto service stations in two major sunbelt cities -- Dallas and Atlanta --to evaluate the likelihood of customers being willing to spend incremental money to retrofit away from CFC-12 in their auto air conditioners during normal service. After four months, less than 1% of those offered a retrofit at incremental costs ranging from $35 to $300 chose the retrofit option.

One example of the refusers: the car owner in Texas with an air conditioner needing repair. The service person quoted $535 for a repair with CFC-12 and $585 for a retrofit to a non-CFC refrigerant. The customer refused the retrofit, one more example of the very high discount rates underlying most consumer economic decisions. To this consumer, as to almost all the others, saving possible severe costs several years in the future was not worth $50 this year, and protecting the environment played no role at all, public opinion survey results to the contrary notwithstanding.

WHAT WILL HAPPEN AS CFC PRODUCTION GOES TO ZERO?

The current tendency of seemingly all but the most sophisticated, technically based users of air conditioning and refrigeration equipment to resist retrofit today in favor of the hope that there will be no penalty tomorrow is causing some observers to predict a state of near-chaos in late 1995 and the first several years after the CFC production phaseout is complete. Some service contractors, reclaimers, and distributors will have stocks of CFCs as CFCs. Hundreds of companies will have stocks of CFCs in equipment scheduled for replacement plus stocks of CFCs built up in anticipation of their own needs. But thousands of building operators, tens of thousands of businesses and industrial companies, and millions of auto owners will have no stocks of CFCs but will have equipment needing service and for which there may be no drop-in replacements. EPA is hopeful that there will be drop-in replacements available and cite some industry claims to that effect. Some industrial sources claim that the candidate drop-in substitutes all have serious problems such as reduced energy efficiency, reduced cooling capability, or inadequate lubricants, while others claim that most of these problems will be behind us by 1995.

Two consequences can be foreseen. One is that those holding CFCs will be able to raise prices significantly (Figure 3). The other is that there will be a move toward retrofit, a move that will increase in intensity toward a rush as time goes on, CFC-using equipment gets older, and CFCs get more scarce. Whether the demand for retrofit becomes greater than the ability of the retrofit industry to supply it is unpredictable at this time. But the retrofit industry, like the CFC holders, will be able to raise prices -- maybe even name their own prices almost without restraint, particularly if the potential drop-in substitute refrigerants do not perform well.

EPA estimates for the cumulative costs to the United States for the accelerated CFC phase-out schedule are in the $5 to $10 billion range. These estimates assume a retrofit schedule following closely the normal life cycle of existing CFC-using equipment and are made up mostly of the higher cost of the substitute refrigerants, amortized redesign and retooling costs for equipment, and some accelerated retirements of existing equipment in special circumstances.

However, should the supplies of CFCs for servicing of existing equipment fall short of demand, and the fact that there is no overall national program to ensure that they don't, the costs of refrigerants, of retrofits, and of failure to provide refrigeration or space conditioning would rise much higher. Should that happen, cries of price gouging will resound across the land. Some of those cries would be well-founded -- to the extent that this situation would allow some opportunists to raise prices well beyond those which would yield a reasonable return. But most would be the result of normal market forces responding to decreases in supply mandated to occur at a rate faster than the private sectors and individuals involved have been willing to respond optimally to.

EPA believes that "the federal government has an important role to play in ensuring that the phaseout occurs with a minimum of disruption." (9) EPA and the relevant trade associations are working hard to inform individuals and organizations likely to be affected and to work with them to accelerate retrofit or replacement of CFC-using equipment. These are clearly good faith efforts.

But the evidence available today indicates that the economic and psychological forces leading equipment owners to either not face the possible future problem or to postpone their decisions to retrofit in the hope that not acting today will be their least costly path may well be stronger than the combined efforts of EPA and the CFC-related trade associations to overcome them.

CFC Phaseout: Future Problem for Air Conditioning Equipment?

SUMMARY

CONTENTS