The introduction of Australia’s carbon tax on July 1, 2012, has huge ramifications for the refrigeration and air conditioning industry. In preparation for the tax, which includes a levy on hydrofluorocarbons (HFCs), CCN has prepared this special feature with contributions covering both sides of the debate.
Industry viewpoint: Refrigerants Australia
Refrigerants Australia’s Stephen Anderson says the tax will raise in excess of $270 million in 2012.
“This figure is a multiple of the current industry turnover, and represents a price increase on these substances in the order of 500 per cent,” he says.
Not surprisingly, industry is fiercely opposed to the tax, claiming it is not the most effective way to reduce emissions.
“There has been no consultation with the industry on the design and effectiveness of this tax, and no examination of alternative ways to minimise emissions in the sector,” he said.
Here, Anderson explains in his own words why industry is opposed to the tax.
In May 2011, the industry supplied detailed submissions to the public consultation on the Multi-Party Committee on Climate Change document ‘Architecture and Implementation Arrangements for a Carbon Pricing Mechanism’, although this document provided no detail in regard to HFCs. There was no response to these submissions, which were obviously ignored.
As part of the Clean Energy Future Package, the government released a regulatory impact statement (RIS).
The synthetic greenhouse gas (SGG) section of the RIS meets none of the criteria set out in the government’s own Best Practice Regulation Handbook.
In fact, the RIS dispenses with SGGs in 503 words. It does not go into any substantive issues, and certainly does not examine ‘the likely impact of proposed regulations or alternative options which could meet the government’s policy objectives.’
It contains no analysis, does not examine alternative options, does not outline the intended outcomes, and provides no evidence of stakeholder consultation.
Questions put to the Department of Climate Change indicate that there has been no analysis of the additional abatement that the tax is intended to achieve. The government has taken a one size fits all approach. Whatever happened to evidence-based policy?
The introduction of the tax is intended to reduce emissions of SGGs, which largely take the form of HFC refrigerant gases.
While there is no detail available outlining how this would work, or indeed what reductions could be expected, this policy ignores the fact the there has been a mandatory prohibition of preventable emissions of these substances set out in
the OPSGGMA since 2003.
Any technician or business allowing a preventable emission could lose their licence to purchase these substances, effectively excluding them from the industry.
In addition to its environmental impact, a preventable emission is also bad business – these substances already cost money, and any business allowing them to escape to atmosphere will not remain viable for long.
The imposition of this tax will drive a number of perverse outcomes.
In particular, it should be noted that the environmental impact of an item of air conditioning and refrigeration equipment goes well beyond the GWP of the refrigerant. A much more significant impact comes from the electricity used by the equipment over its working life, hence the focus on energy efficiency.
In domestic air conditioning, R22, an ozone-depleting and relatively inefficient refrigerant, has been replaced by R410a, a non-ozone-depleting, highly efficient refrigerant.
Without the application of this refrigerant, recent increases in Minimum Energy Performance Standards for air conditioners would have been impossible to achieve.
Yet under the new tax, R410a will face a very significant tax penalty – its price will more than triple.
However, this is likely to have little impact on the use of this refrigerant, especially as there is currently no energy-efficient alternative available at this time.
Nevertheless, the costs will have to be borne by the industry, for negligible environmental benefit.
The effect of a carbon pricing mechanism on refrigerant choice in Australia is severely limited.
In new equipment, refrigerant choice is made by global equipment manufacturers; Australia is a technology taker in this area.
With existing equipment, the choice has already been made. It is important to understand that different refrigerants cannot be substituted for each other. Much like diesel and petrol, they can only be safely used in equipment specifically designed for the use of that particular refrigerant.
While some retrofitting can be undertaken, its capacity to deliver significant emission reductions across the board will be limited.
Over 90 per cent of the bulk HFC refrigerant imported into Australia is used to service existing equipment. Again, there is extremely limited capacity for a refrigerant change stimulated by a price signal.
Of course, in the selection of new equipment, refrigerant type, and cost, will play an increased role, although only in areas where lower GWP products exist, and are cost-competitive.
During the CPRS debate, it was suggested that a price signal could lead to better practices by technicians, leading to lower emissions. This suggestion overlooks the fact that for some years there has been a blanket prohibition on preventable emissions in the Ozone Protection and Synthetic Greenhouse Gas Management Act 1989.
There are no practicable behavioural changes technicians could introduce that are not already required of them by law.
This lack of elasticity relates to the fact that in existing equipment there are no direct alternatives.
In new equipment there are currently few alternatives and overall, the price of refrigerant comprises a very small part of the total cost of a piece of equipment.
The air conditioning and refrigeration industry is moving towards the adoption of low-GWP refrigerants, but this process has been driven by regulation, particularly the EU F-Gas regulations.
Due to the global nature of the industry, low GWP technology developed to comply with these regulations will be introduced into Australia irrespective of a carbon price.
For example, EU Directives ban the use of high GWP refrigerants in vehicle air conditioning systems after 2017.
The US Environmental Protection Agency (EPA) has recently announced its intentions to introduce similar controls.
The world vehicle industry is in the process of adopting a low-GWP HFC refrigerant in vehicle air conditioning for new vehicles from 2017, and inevitably Australian domestic manufacturers will follow suit.
This change alone, driven by the European F-Gas regulations, is likely to result in a 12 per cent reduction in Australian HFC refrigerant emissions over 2010 levels by 2017/18.
The carbon tax will lead to significant financial disruption for minimal results.
The carbon intensity of HFC refrigerants means any carbon pricing mechanism will have a considerable impact on price.
Estimates made during the CPRS process indicate that prices could rise by up to 500 per cent for the most commonly used refrigerant based on a carbon price of $20 per tonne.
While this will generate considerable financial stress at a number of levels within the industry, perversely it is likely to have very little effect on consumer behaviour.
At the top of the refrigerant commerce chain there are a number of importer/distributor companies with turnovers in the $20 million region.
The imposition of a $23 per tonne carbon price will mean that these companies will need to acquire additional working capital of $80 to $100 million. In total, the industry will need to find an additional $250m to $300m a year.
Perversely, by the time these costs work their way down to the consumer, the impact will be minor, meaning the price signal to the consumer is likely to be weak. For example, a carbon price of $23 per tonne would increase the price of a car, in terms of its air conditioning system, by less than $20.
A good quality 7.4kW domestic split system air conditioner will see a price increase of less than $100 on a unit that retails for $2600 – well within the margins of a competitive retail environment.
The lack of responsiveness to price was clearly demonstrated in the US in the late 1980s, when a large tax was placed on CFCs, on the supposition that such a tax would serve as a disincentive to their use.
However, the tax did not depress demand; rather it created an enormous market for refrigerant smugglers. For a time, CFCs were one of the most smuggled items into the United States.
So far Australia has avoided significant difficulties with smuggled refrigerant.
However, the carbon tax will provide a very attractive incentive. Why bother with people-smuggling when there’s much more money to be made smuggling HFCs?
It is telling that when the US EPA moved to control HCFCs in the early 1990s, the tax was not included in the control regime, due to the perverse outcomes it produced on the CFC market.
Similarly, in the white paper on the CPRS, mention was made of a Norwegian study looking at the introduction of a HFC tax in that country.
It found that a significant tax increase ‘seems to have resulted in a flattened growth in imports’, thus demonstrating a degree of elasticity.
The study looked at the effects of a tax introduced in 2003, based on data that
only extended to 2005. Industry criticised the conclusions drawn, pointing out that
the study was severely compromised by the short time frame, and the effects of stockpiling which naturally led to a short-term reduction in imports.
The Norwegian tax was introduced in 2003 when the 2004 HFC refrigerant imports were 187mt. However, the most recent data available from the Norwegian Pollution Control Authority shows that by 2008 imports had risen to 268mt, a growth rate of more than 40 per cent.
As an emissions reduction measure, this would not win any prizes.
Industry has been on a 20-year journey moving to better (non-ozone depleting, lower global warming, more energy-efficient) refrigerants.
There is a solid track record in this area, with Australia currently well in advance of
its international obligations in terms of HCFC phase-out.
Current proposals under consideration internationally offer the most sustainable path to significant and meaningful refrigerant emission reductions over the medium term.
This approach involves managing HFCs under the framework of the Montreal Protocol, which has a successful track record of managing fluorocarbons.
The current proposal envisages an 85 per cent reduction in HFC emissions by 2033.
At the Meeting of the Parties last year, 90 countries including Australia signed a declaration indicating their intent to seek the inclusion of HFCs in the Montreal Protocol.
Domestically, HFCs are already regulated (since 2003) by the Ozone Protection and Synthetic Greenhouse Gas Management Act 1989.
Existing controls can be further developed to further reduce HFC emissions and improve compliance with these controls. In addition, any reductions introduced under the Montreal Protocol can be readily implemented under this legislation.
This solution is much more cost-effective, and would provide both government and industry with much greater certainty.
The particular price-inelastic nature of HFCs means that market-based mechanisms are likely to be ineffective, just as they were with CFCs.
The existing framework – the Montreal Protocol and the Ozone Protection and Synthetic Greenhouse Gas Management Act – has proved an excellent tool to manage fluorocarbons, reducing emissions while transitioning to alternatives.
While CFC-12 had an ODP of 0.95, we should not lose sight of the fact that it had
a GWP of 10,600.
While not initially focused on climate, successful action so far with CFCs and HCFCs means that the Montreal Protocol has delivered more than four times the emission reductions than the much larger Kyoto Protocol has been able to muster.
But the government is committed to a one-size-fits-all approach, which will impose very significant costs on the air conditioning and refrigeration industry, for very little environmental gain.
The government’s viewpoint: Department of Climate Change
In the following contribution provided by the Department of Climate Change, the federal government explains why a carbon price will play an important role in reducing greenhouse gas emissions, especially HFCs.
Applying an equivalent carbon price to HFCs provides an incentive for users to better contain HFCs in equipment, to improve their recycling rates or switch to alternative gases which have a zero or lower global warming potential.
The import, export and manufacture of HFCs are already regulated by the Ozone Protection and Synthetic Greenhouse Gas Management Act 1989.
This legal framework will be used to levy an equivalent carbon price on HFCs, in addition to the cost recovery charge applied under the Act.
HFCs have anywhere between 140 and 11,700 times the global warming potential of carbon dioxide. They can also persist in the atmosphere for many years.
The price per tonne for each HFC will therefore be calculated by multiplying the carbon dioxide equivalent of the gas by the carbon price.
The carbon price starts at $23 per tonne and from July 2015, the market will set the carbon price.
At that point, the government will set a fixed annual benchmark, based on the traded carbon price averaged over a 12-month period, to help calculate the annual equivalent carbon price for HFCs.
This approach aims to give the industry certainty and address its concerns about carbon market fluctuations from 2015.
With no synthetic greenhouse gases currently manufactured in Australia, only importers of these gases or products containing the gases will pay the equivalent carbon price.
The government acknowledges that some or all of the equivalent carbon price may be passed down the supply chain to other businesses. However, this cost should be small compared to the total price of the product, with the equivalent carbon price adding about $4 to the price of a domestic refrigerator.
For consumers, any modest cost increases have been covered in the government’s comprehensive household assistance package which will deliver tax cuts, higher family payments and increases in pensions and other benefits.
For industry, cost increases can be reduced by considering alternatives with lower global warming potential, improving installation and maintenance regimes, and improving recycling rates for those gases.
For more information on government programs to support investment in low emissions technologies, see www.cleanenergyfuture.gov.au/supporting-jobs-and-industry/
The refrigeration and air conditioning industry has already shown that it is responsive in adopting new technologies.
It phased out the use of chlorofluorocarbons in the 1990s and is well on the way to phasing out hydrochlorofluorocarbons.
It has also proven it can make recovery and disposal schemes work through its existing product stewardship program.
Under the program, the industry-backed not-for-profit organisation Refrigerant Reclaim Australia charges a levy per kilo of ozone depleting substances and synthetic greenhouse gases refrigerant imported.
It then pays a bounty to tradesmen and participating wholesalers for the recovery and return of the targeted gases for disposal.
Building on industry’s good work, the government will, for the first time, provide publicly funded incentives to destroy waste synthetic greenhouse gases and ozone-depleting substances recovered at end of life.
An example of this is when an air conditioning unit is decommissioned by a licensed technician. The government will consult closely with industry, including Refrigerant Reclaim Australia, ahead of this destruction program commencing from July 1, 2013.