Chemicals, Regulatory Developments

CourtWatch: D.C. Circuit Hands Trade Associations Win in HFC Case

In June 2023, the D.C. Circuit Court of Appeals issued an opinion in Heating, Air Conditioning & Refrigeration Distributors International, et al. v. EPA that eliminated the Agency’s authority to enact “complementary” implementation measures regarding the regulation of hydrofluorocarbons (HFCs) and hydrofluoroolefins (HFOs). The ruling also upheld the EPA’s authority to regulate HFCs and HFOs.

“The order vacates the agency’s rules requiring QR code labels and refillable containers for shipments of hydrofluorocarbon (HFCs),” a Beveridge & Diamond P.C. analysis of the ruling says. “These rules were designed to assist with implementing the mandatory phasedown of HFCs under both the Kigali Amendment to the Montreal Protocol and the American Innovation and Manufacturing (AIM) Act. The court rejected two additional challenges to the HFC rules: it upheld EPA’s authority to regulate HFCs used in refrigerant blends and rejected a challenge to EPA’s authority based on the non-delegation doctrine.”

Three trade associations, Heating Air-Conditioning & Refrigeration Distributors International (HARDI), Air Conditioning Contractors of America (ACCA), and Plumbing-Heating-Cooling Contractors (PHCC), along with Worthington Industries, a domestic manufacturer of refillable and disposable cylinders, filed petitions against the EPA challenging the nonrefillable cylinder ban and the requirement to track individual cylinders through the supply chain.

Background: AIM Act and the Kigali Amendment to the Montreal Protocol

HFCs and HFOs are highly potent greenhouse gases (GHGs) commonly used in refrigerators, air conditioners, and many other applications.

On December 27, 2020, the AIM Act of 2020 was enacted as Section 103 in Division S, Innovation for the Environment, of the Consolidated Appropriations Act, 2021 (H.R. 133 (116th)): Consolidated Appropriations Act. The AIM Act authorizes the EPA to address HFCs by providing new authorities in three main areas: to phase down the production and consumption of listed HFCs, manage these HFCs and their substitutes, and facilitate the transition to next-generation technologies through sector-based restrictions.

The EPA’s first proposed regulation under the AIM Act was to phase down the production and consumption of HFCs.

“Under the AIM Act, EPA created a program that limits the total amount of HFCs imported and produced in the United States, and allocates that limited amount among domestic importers and refrigerant manufacturers,” according to Beveridge & Diamond.

In October 2022, the United States consented to ratify the Kigali Amendment to the Montreal Protocol on Substances that Deplete the Ozone Layer.

In actuality, ratification of the agreement will have very little domestic industry impact “because the United States has already implemented an HFC phase down program under the American Innovation and Manufacturing Act (AIM) that mirrors the requirements of the Kigali Amendment,” an earlier Beveridge & Diamond article in Lexology says.

EPA’s HFC phasedown implementation

To prevent circumvention of the regulations to achieve a phasedown of HFCs, the EPA implemented various regulations that included the use of QR codes on HFC cylinders.

The Agency’s position is that “QR codes placed on cylinders are critical for cracking down on HFC smuggling from abroad because customs enforcement agents can track each HFC shipment and verify that they are linked to a specific party’s allocation allowances,” adds Beveridge & Diamond. “Shipments containing disposable cylinders can circumvent the allocation program because HFCs can be hidden in those vessels and imported surreptitiously.”

“However, the EPA has already demonstrated that the QR code tracking mandate and non-refillable cylinder ban are unnecessary to interdict illegal imports of HFCs,” according to a HARDI blog post. “In 2022, in partnership with Customs and Border Patrol, EPA stopped HFCs equaling 889,000 metric tons of GWP (Global Warming Potential) from entering the country without the tracking or cylinder provisions in place. EPA is already well equipped to stop illegal imports without operationally burdening the entire HVACR supply chain.”

“The D.C. Circuit’s decision holds that Congress did not expressly authorize EPA to adopt these measures,” Beveridge & Diamond continues. “The court therefore vacated the rule that requires those cylinders and QR codes. The court’s narrow interpretation of EPA’s implied implementing authorities could have significant implications for EPA’s ability to implement a host of other measures that are not expressly authorized in the parent statute.”

The next move is up to the EPA. Will it seek an en banc appeal, or will it further study the AIM Act provisions to seek additional authority to require QR codes?

The “EPA might seek to impose similar requirements through a pending rulemaking under subsection (h) of the AIM Act—which authorizes EPA to maximize reclamation and minimize releases of HFCs—to adopt refillable cartridge controls as conditions to avoid releases,” notes Beveridge & Diamond.

Side bar: Legal maneuvers

The petitioners also claimed that “Congress impermissibly delegated legislative power to the EPA by giving it unguided discretion to distribute HFC allowances.”

This challenge claimed that the HFC allocation program violated the nondelegation doctrine and the federal Constitution.

This argument was rejected by the court because the claimant “failed to make its nondelegation argument to the EPA during [the] notice and comment” rulemaking procedure.

“Therefore, the court held that any claim arising under Section 307 must be raised during the notice and comment period of a rulemaking, even if it is challenging the limits of the agency’s authority under a constitutional basis, such as the nondelegation doctrine,” according to Beveridge & Diamond. “Though the court only examined the specific exhaustion requirement contained in Section 307, its reasoning could extend to challenges under other statutes, such as the Administrative Procedure Act, that [have] similar exhaustion requirements. This holding highlights the importance of raising issues during the public comment process to preserve arguments for future rulemaking challenges. If parties fail to raise such challenges during the administrative rulemaking stage of the process, they will be unable to fully defend their interests if they choose to challenge a final rule in court.”

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