November 15, 2018

The Mexichem Decision: Uncertainty during Uncertain Times

Shannon Martin Dilley

As countries work toward complying with their international environmental treaty obligations, emissions of hydrofluorocarbons (HFCs) continue to rise in the aerosol, air conditioning, refrigeration, and foam sectors, trading one environmental problem for another. In the face of this dilemma, some countries have enacted laws regulating HFCs. Yet a recent court decision in the United States shows how relying solely on one mechanism to control HFCs has potential pitfalls. Not only does the decision in Mexichem Fluor Inc. v. Environmental Protection Agency, 866 F.3d 451 (D.C. Cir. 2017) [hereinafter Mexichem], change how HFCs are regulated in the United States, it also changes how the United States is perceived in the international community, and leaves industry and advocacy groups wondering how the federal and state governments will address the climate impacts of these substances.

The story of the Mexichem decision begins in the early 1980s, when scientists discovered a great hole in the upper atmosphere’s ozone layer. That layer is responsible for absorbing ultraviolet radiation and thus shielding the earth from harmful sunrays. Responding to this threat, the international community unanimously ratified the Montreal Protocol on Substances that Deplete the Ozone Layer (Jan. 1, 1987) (Montreal Protocol). The Montreal Protocol imposed a phasedown on the consumption and production of ozone depleting substances (ODSs) such as chlorofluorocarbons (CFCs) and hydrochlorofluorocarbons (HCFCs). Under the agreement, the member countries had different phasedown time lines, along with different baseline years and baseline calculations. It also placed restrictions on import and export.

In the wake of the Montreal Protocol limits for CFCs and HCFCs, many manufacturers switched to HFCs as a substitute. But HFCs are powerful climate forcers––they cause the atmosphere and oceans to warm, snow and ice to melt, species to migrate, and sea levels to rise. See Intergovernmental Panel on Climate Change (IPCC), Climate Change 2014: Synthesis Report. Contribution of Working Groups, I, II, and III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change, at 2. HFCs are such powerful climate forcers because they can have a very high global warming potential (GWP), a scale of cumulative warming over a time period (usually 100 years) relative to an equivalent emission of carbon dioxide, which is defined to have a GWP of 1. GWPs range from 0 for some natural refrigerants all the way up to 14,800. See California Air Resources Board (CARB), Short-Lived Climate Pollutant Reduction Strategy (Mar. 2017); CARB, High-GWP Refrigerants, available at www.arb.ca.gov/cc/rmp/rmprefrigerants.htm (last visited September 5, 2018).

Adding to the problem is that a significant amount of the equipment containing HFCs remains operational for 20 years or more, and many systems leak. Therefore, long-term demand for these high-GWP HFCs must be considered. Indeed, 60 percent of HFC production globally will be used to service existing equipment. CARB, Potential Impact of the Kigali Amendment on California HFC Emissions: Estimates and Methodology Used to Model Potential Greenhouse Gas Emissions Reduction in California from the Global Hydrofluorocarbon (HFC) Phase-down Agreement of October 15, 2016, in Kigali Rwanda (Kigali Amendment), at 122 (Dec. 15, 2017).

Global HFCs Reduction Measures

Realizing that HFCs created a new environmental problem, the parties to the Montreal Protocol began discussing how to include HFCs under the Protocol. On October 15, 2016, at the Twenty-Eighth Meeting of the Parties to the Montreal Protocol in Kigali, Rwanda, parties, including the United States, reached an agreement to phase down HFC production and consumption. Under the Kigali Amendment to the Montreal Protocol, countries have different time lines to phase down HFCs, along with different baseline years and baseline calculations. Decision XXVIII/1:2016. The Kigali Amendment has been ratified by 38 parties to the Montreal Protocol, which means it will enter into force on January 1, 2019. United Nations Treaty Collection, Status of Treaties, Chapter XXVII 2.f, Amendment to the Montreal Protocol. The United States has not ratified the Kigali Amendment despite overwhelming industry support.

Some countries already have adopted laws that reduce HFCs. In the United States, for example, Congress passed the Clean Air Act Amendments of 1990, which added Title VI. 42 U.S.C. § 7471. The U.S. Environmental Protection Agency (EPA) adopted the Significant New Alternatives Policy (SNAP) program to implement Title VI. See 42 U.S.C. 7471k; 40 C.F.R. pt. 82, subpt. G; 59 Fed. Reg. 13,044 (Mar. 18, 1994). Under this program, EPA placed ODSs on one of four category lists: (1) unacceptable, (2) acceptable, (3) acceptable subject to use conditions, and (4) acceptable subject to use limits. The lists are fluid and change over time based on science and advances in technologies. Listing decisions are based on (1) impacts to human health and the environment, and (2) the availability of commercially or potentially available substitutes.

Until 2015, HFCs were the chosen substitute for many industries in the aerosol, air conditioning, refrigeration, and foam sectors. At the time of the initial acceptability listings, the impacts HFCs had on the environment were not fully understood. In 2015, EPA adopted a rule moving some HFCs from the acceptable list to the list of unacceptable substances. 40 C.F.R. pt. 82, subpt. G, apps. U and V; 80 Fed. Reg. 42,869 (July 20, 2015) (2015 Rule).

At the subnational level, many states already have authority to adopt laws regulating HFCs, and at least one state has adopted a law mandating reductions in HFC emissions. For example, in 2016, the California legislature passed Senate Bill 1383 (Lara, Stats. 2016, Ch. 395; Health & Saf. Code § 39730.5), requiring California to reduce its HFC emissions to 40 percent below 2013 levels by 2030.

In 2006, the European Union (EU) first adopted fluorinated gas (F-gas) regulations, which prohibited use of F-gases with a GWP of more than 150. EC No. 842/2006. In 2015, the EU adopted a new regulation that established rules on containment, use, recovery, and destruction of F-gases, imposing conditions on placing specific products and equipment on the market containing F-gases, imposing specific use conditions, and establishing quantitative limits for placing HFCs on the market. The regulation requires leak checks, servicing, and recovery of gases at the end of the equipment’s life. See EU No. 517/2014.

Canada first adopted its federal halocarbon regulation in 2003 and recently amended the regulation to align with U.S. SNAP provisions and the Kigali Amendment, which similarly combined a phasedown of consumption of bulk HFCs with product-specific controls on equipment and products containing HFCs. The HFC bulk phasedown begins with a 10 percent reduction to baseline levels by 2019 and ramps up to an 85 percent reduction by 2036.

Japan first adopted the Law Concerning the Recovery and Destruction of Fluorocarbons in 2001 and amended it with the Act on Rational Use and Proper Management of Fluorocarbons in 2015. The new law targets the entire life cycle of the F-gas, from production to destruction, by requiring reduction in leakage from commercial equipment, periodic checks, maintenance, reporting, recordkeeping, refill and proper recovery, and certain destruction obligations. It also promotes low-GWP and non-F-gas alternatives and requires a phasedown for manufacturers.

Industry has, to a certain extent, formulated products that meet these changing global markets, showing it is possible to regulate HFCs and meet the needs of the country. Yet the changing regulatory landscape has also become contested terrain, as shown by the Mexichem litigation.

The Mexichem Decision

Two manufacturers of high-GWP refrigerants, Mexichem Fluor Inc. and Arkema, filed petitions in the U.S. Court of Appeals for the District of Columbia Circuit, challenging EPA’s authority to change the HFC listing status and thereby require the replacement of HFCs. In a 2–1 decision, the majority held that EPA did not have the authority to require manufacturers to replace HFCs. Writing for the majority, Judge Kavanaugh found that while Title VI of the Clean Air Act requires the replacement of ODS with “alternative manufacturing processes that reduce overall risks to human health and the environment” and while “EPA may require manufacturers to use safe substitutes when the manufacturers replace [an ODS],” EPA has no authority to require manufacturers to replace HFCs because they are in fact non-ODS. Mexichem, 866 F.3d at 454. The court’s analysis focused on the word “replace”––because Title VI and the SNAP regulations do not define the word, the court turned to its dictionary meaning. Because the court found that text sufficiently clear, it did not engage in the second step of the Chevron analysis, reasoning that “after the transition has occurred, the replacement has been effectuated.” Id. at 459.

Notably, the court confirmed that EPA nevertheless has authority to prohibit companies from switching to substances that present risks to human health and the environment; EPA “may move HFCs from the list of safe substitutes to the list of prohibited substitutes, as it did in the 2015 Rule.” Id. at 457. Judge Kavanaugh also indicated that EPA “may prohibit a manufacturer from replacing an [ODS] substance that is covered under Title VI with a prohibited substance.” Id. Further, the court made clear that under the 2015 Rule, EPA has the authority to prohibit any manufacturers who are still using an ODS from switching to HFCs. Id. at 460.

In dissent, Judge Wilkins argued that the statutory language was ambiguous and, therefore, Chevron deference should apply to EPA’s interpretation that it could require replacement more than once. As Judge Wilkins explained, “[b]ecause the term ‘replace’ is susceptible to multiple interpretations in this context, it cannot serve as the basis for discerning clear congressional intent.” Id. at 456. Thus, Judge Wilkins found the majority should have proceeded to the second step in the Chevron analysis to decide whether EPA’s actions were reasonable. Id.

Judge Wilkins further found that the statutory text contradicts the meaning proffered by the majority because it was written in passive voice without targeted individuals; the majority ignored the intent of section 612, which is to carry out replacement of ODS; the majority incorrectly relied on EPA’s prior interpretations; conflicting legislative history cannot serve to clarify ambiguous statutory language; and EPA’s interpretation was reasonable. Id. at 469–72.

Future HFC Reduction Measures

The recent Mexichem decision shows the importance of a multifaceted approach, as one court decision can upheave years of environmental progress. Ratification of the Kigali Amendment represents an important first step to show commitment to reducing HFCs, and important emissions reductions could be achieved through this mechanism. But for the United States, it is unclear whether this will be a priority given the recent rollback in environmental regulations, and so, placing all the eggs into this basket likely will be insufficient for a substantial reduction of HFCs.

Individual countries could adopt similar SNAP laws or refrigerant management programs that prohibit high-GWP refrigerants; contain a phasedown or phaseout; require leak inspections and capture; and contain labeling, recordkeeping, reporting, disclaimer, or other requirements. Given the ratification of the Kigali Amendment, this seems very possible. But this approach also may be insufficient. In the United States, EPA has indicated it will engage in a rulemaking in response to the Mexichem decision, yet in a recently released EPA Guidance Document (83 Fed. Reg. 18,321 (Apr. 27, 2018)), EPA suggested it will not be “applying the HFC use restrictions or unacceptability listings in the 2015 Rule for any purpose.” 83 Fed. Reg. at 18,435. Not only is this an expansive reading of the D.C. Circuit’s decision, it is unclear whether EPA’s rulemaking will address HFCs at all.

Given the uncertainty at the national and international levels, states could achieve HFC emission reductions through legislative and regulatory actions. As an example, states could follow what California has already done. CARB voted to move forward with incorporating targeted provisions from the 2015 Rule into state law, which will be submitted to the Office of Administrative Law for final adoption in the fall. See Cal. Code Regs., tit. 17 § 95371–77. If approved, the regulation will become state law. CARB also previously adopted a Refrigerant Management Program. See Cal. Code Regs., tit. 17 § 95,380, et seq. Additionally, the U.S. Climate Alliance recently announced a challenge to participating states to reduce HFCs, which may inspire other states to begin adopting these types of regulations.

Lastly, industry can take steps now to transition voluntarily to refrigerants with a lower GWP. There are many options, such as ammonia, water, carbon dioxide, hydrocarbons, and hydrofluoroolefins. While these alternatives may not work in all equipment, there are many alternatives that could work for almost all equipment. Where alternatives are not yet available, industry already is investing in research to find safe alternatives.

Climate change does not pick winners or losers––the impacts are felt by all. The United States had a well-rooted program designed to address HFCs. The Mexichem decision created uncertainty and showed the vulnerability of relying solely on one mechanism to control HFCs. All is not lost though; moving forward, a multifaceted approach at the international, national, subnational, and industry levels could still achieve significant HFC emissions reductions. The current legal environment presents a unique opportunity to lead on HFCs, and those that do not act risk being left behind.

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Shannon Martin Dilley

Ms. Dilley is an attorney with the California Air Resources Board and recently served as cochair for the Committee on International Environmental and Resources Law of the ABA Section of Energy, Environment, and Resources. She may be reached at dilleyshannon@gmail.com. The views expressed in this article are solely the views of the author and do not represent the views of the agency.