We can soon add air conditioning to the long list of products contributing to inflation, thanks to a new Environmental Protection Agency (EPA) rule, issued on September 23, that sets limits on future production of hydrofluorocarbons (HFCs), a widely used class of refrigerants, on the grounds that they contribute to climate change.
Most people have never heard of HFCs, but they are literally all around the house. HFCs are likely the refrigerants circulating in your home air conditioner, vehicle air conditioner, and refrigerator. They are used in the air conditioning and refrigeration equipment owned by millions of businesses both large and small. Leak repairs for existing equipment will become more expensive as supplies of HFCs dwindle and prices rise. New equipment will also get costlier as it will have to be redesigned to use one of the substitute refrigerants, several of which carry a considerable price premium.
The Competitive Enterprise Institute and other organizations detailed these costs in regulatory comments submitted to the agency. We also noted that some of the new and supposedly climate-friendlier refrigerants are classified as flammable, thus introducing added risks, along with the added costs.
The statutory provisions cracking down on HFCs were slipped into the massive spending/COVID-19 bill signed into law during the lame duck session last December. The EPA’s new rule is the first one implementing these provisions, and it sends a signal that the agency will target HFCs as aggressively and expensively as possible.
For example, the rule sets out the baselines for historic HFC production upon which future quotas are based, beginning with a 10 percent reduction beginning January 1, 2022
and ending with an 85 percent reduction by 2036. As we noted in our comment, the EPA used every trick in the book to lowball those historical baselines, which will lead to extra-tight HFC production limits in the years ahead.
In addition, the rule sets out a red tape-laden process by which the controlled supply of HFCs can be produced and transported, ostensibly to catch illegal sales but also likely to further boost prices of legal supplies.
In its rule, the EPA downplays the costs and makes the far-fetched claim that consumers will save money in the long run. But reality may already be intruding on that rosy scenario. HFC prices have risen sharply since the law restricting them was enacted, and although some blame COVID-related logistical problems and other factors, it is likely that the anticipated EPA restrictions have also been a contributor.
The economics are even worse with many of the new refrigerants, several of which are under patent protection and cost several times more than the HFCs they were designed to replace. The biggest beneficiaries are chemical giants Honeywell and Chemours, both of which see the demise of HFCs in favor of their pricey substitutes as a potential multi-billion dollar windfall, and lobbied hard for the restrictions.
It could get worse. The EPA is considering follow-up measures, such as product specific HFC bans, that would add to costs. And the Biden administration has promised to entangle the U.S. in the Kigali Amendment, a United Nations treaty provision that also cracks down on HFCs. The Kigali Amendment must be submitted to the Senate for the Constitutionally required ratification vote, which may be the next battlefront in the war on affordable air conditioning.