This submission is made by. Clifton Madgwick Kylie Farrelley. on behalf of. Chemiplas (NZ) Ltd & Arkema

Transcription

1 `j C 2 ~ 6,~~ (,, ) Submission to the Ministry for the Environment on New Zealand's phase down of hydroflurocarbons to ratify the Kigali Amendment to the Montreal Protocol and associated supporting measures This submission is made by Clifton Madgwick Kylie Farrelley on behalf of Chemiplas (NZ) Ltd & Arkema Arkema is the second largest producer of refrigerants globally and a leader in the development of low GWP refrigerant alternatives to the current HFCs in use in New Zealand. Arkema has been present in the New Zealand market for 24 years..31(z)(1 )( II')

2 Chemiplas is a New Zealand owned company which has been supplying specialty chemicals to the NZ market for 40 years..sip)( 6)Gt) s9(a)(6) (0

3 Both Arkema and Chemiplas largely support the proposals for the HFC phase down and believe that well considered policy which allows for competition, reduces barriers and offers companies security will see a reduction in high GWP products and support the smooth transition to lower GWP products. We have, however, identified some aspects of the proposal that will not result in equitable / fair outcomes which may impact negatively on the primary objective of Kigali to support the shift to alternatives as fast as possible. The current proposal creates an anti-competitive outcome, whereby new importers from 2016, which includes Chemiplas, will receive zero permit via the grandfather option forcing them to rely on special permit, thus removing business certainty. Given the quantum of special permit available, these new importers would not gain sufficient volume to justify ongoing investment into lower GWP alternatives to the HFCs in use. S10)(6)(i ) Arlcema and Chemiplas would appreciate the opportunity to present our submission in person at a location convenient to the Ministry team. We will also of course be available anytime via telephone should any questions arise during the review of our submission.

4 1. How would you characterise the use of HFCs in NZ in different sectors? $ 9(z)( ()( ;%) The primary use of the HFCs imported is for the refrigeration and air-conditioning sectors, as highlighted in the consultation document, along other applications such as foam, aerosols, solvents and fire protection. Sectors not listed in the consultation document include: domestic heat pump hot water cylinders heat & cooling heat pumps blood and plasma storage reefers dehumidifiers clothes drying heat pumps ice making equipment ice skating rinks freeze drying equipment air drying systems (for compressed air) ~;~ (~~C6)(~')

5 2. Are there alternatives to HFCs available in your business sector? S 9 (~2 )(b )(+%), yes there are. Availability to NZ will be determined by: 1. Attractiveness of the New Zealand market to refrigerant manufacturers The New Zealand market mal<es up a very small percentage of the total world demand for refrigerants. With limited plant production capacity for low GWP molecules, coupled with strong demand in Europe, as a result of F-Gas and America with SNAP, gaining access to refrigerant innovation is growing in difficulty. This has been compounded further due to recent supply shortages resulting in a significant increase in cost of HFC molecules, which are an integral part in the low GWP blends designed to replace the likes of 404A.

6 I (::P--)(0 0%) With easier high-volume sales available in other markets, it is critical that New Zealand importers keep innovative companies such as Arkema, Honeywell and Chemours engaged in the New Zealand market to ensure availability and support to convert to low GWP alternatives. Maintaining innovative refrigerant manufacturer engagement is not simply about sending them an order number and they will supply - in many instances they will not. 2. Ability to import To maintain market attractiveness, a degree of scale is needed for importers. Many refrigerant manufacturers require minimum orders of a full shipping container to encourage engagement. S9 (a) 06) (~,)

7 3. Refrigerant manufacturer representation in New Zealand o Many of the new refrigerant innovations coming onto the market have comprehensive Intellectual Property behind them resulting in a molecule or blend being exclusive to the manufacturer of the refrigerant. Typically, a manufacturer of refrigerant will have an exclusive channel to the NZ market, which has sole responsibility for supporting the NZ market (eg Chemiplas is appointed as sole representative for Arkema in NZ). 0 ISI0.)(k) (il) A major problem arising from the preferred method of grandfathering (to be addressed further in a later question) is that a number of these refrigerant innovators may be precluded/have insufficient access to the market due to dependence on special permits, which will likely be insufficient compared to for example, Chemiplas current share of the market.,s9 Ca) (b)(

8 4. Price of the next generation refrigerant versus the New Zealand Emissions Trading Scheme o The current price of next generation refrigerants is still high due to Intellectual Property ownership, scales of economy and global market forces (such as the significant demand for such refrigerants in Europe). o Many of the next generation refrigerants also have a HFC component, which is subject to the New Zealand ETS. The introduction and commercial competitiveness of 404A retrofits such as 4496 have been delayed due to the price of carbon on 404A still being relatively low. As the 2 for 1 subsidy on carbon from the Government continues to be phased out, the ETS obligation on products like 404A will drive a natural commercially driven change to the likes of )(6')(1;) An area of concern for New Zealand is that should the carbon price drop, without Kigali there would be limited commercial reason to change to the next generation refrigerants. Conversely a higher carbon price would bring forward the adoption of next generation refrigerants.

9 5. NZIoC molecule registration o Should the new low GWP refrigerant include a molecule of hazardous nature the registration cost can be significant with limited opportunity for registor exclusivity. This is where a robust business plan needs to be in place before committing funds, taking into consideration potential volumes and returns. The ETS is of value in these payback calculations as it generates significant savings, that can be shared with the importer and the user. s 9 tx) C ~~ C )

10 3. What are the costs and benefits of the phase down on your business? Chemiplas is willing to invest in supporting conversion (to low GWP refrigerants) but it must be recognised that this requires significant cost be borne, by the company, ahead of any income being realised. S 1(9-It6) 6'%) The primary benefit of the phase down to Arkema/Chemiplas as an importer and wholesaler of bulk refrigerant, assuming sufficient permit availability to justify continuing supportive activity for the NZ market, is continuation of the drive towards lower GWP refrigerants. We have long recognised the benefits of supporting industry change and have already delivered some of this It

11 sl (a') (6)(

12 4. Do you agree with the Govt's preferred option for inclusion in the proposed importing permitting system? S. What would the impact of this approach be? 6. What other options should be considered and why? As a whole, Arkema/Chemiplas agree with a permitting system for controlling HFC imports at the border, which will be an ideal way for New Zealand to meet its requirements under Kigali. The one point we do disagree within the preferred option in the consultation document (because it is incorrect) on page 16 is the final point of "incentivising a shift to alternatives, because they would not require import permits". Many of the solutions to replacing the high GWP refrigerants, such as 134a, 410A, 404A and 507, are blends which still contain HFCs. Although a significant GWP step down is achieved from the substitution of 404A (GWP of 3,920) with a new generation product, the replacement option still has a typical GWP of 1,400, which is material. If permit is not apportioned to importers who can deliver innovation, there may be a gap in the markets ability to switch to 404A and 507 replacements. The next step alternatives to the normal replacements (the Al non-flammables such as 4496) currently being adopted internationally are flammable. A move to flammable refrigerants would require equipment replacement, which is a much longer term activity and would slow down the rate of conversion. Much like the use of R32 and more recently 1234yf in New Zealand, these are not retrofit refrigerants to replace the incumbent HFCs 410A and 134a respectively. They are for new equipment only due to their flammability making them unsuitable as a safe retrofit solution. As per the below table, many of the refrigerants designed to replace the current HFCs in equipment in use in New Zealand (which still has a legitimate plant life) are Al non-flammable.

13 Current Refrigerant FORANE 123 I, f=c>ri~ne I 134a s FORA :, O FORANF - FC7R/aNE ' - Nonflammable R-123 GWP = 79 R-1233zd (GWP = 1) R-134a GWP = 1300 R-41 OA GWP = 1924 R-404A GWP = 3943 R-4520 (GWP= 2019) R-4498 (GWP =1296) R-22 GWP = 1760 R-449B (GWP = 1296) Mildly flammable R-1234yf (GWP = 1 ) ARM = 42 (GWP =1311 R-4,59A (GWP = 46 1) R-4'57A (GWP = 139) ARM-25 (GWP - 150) R-457A (GWP = 139) ARM-20b (GWP - 250) (NB: the above table shows IPCC AR5 GWPs which are lower than that observed in New Zealand), Do note that many of the low GWP flammable solutions are blends containing HFCs. These refrigerants are designed for new equipment only and therefore it is expected they will be introduced in the latter part of Kigali and not the beginning when there is still an abundance of plant designed for non-flammable refrigerants.

14 7. Do you agree with the proposed approach on who should have an import permit? 8. What would the impact of this approach be? 9. What other options should be considered and why? Yes, we agree with the proposed approach as it allows importers who are more connected with the world stage and the advancing low GWP refrigerant technology to start driving innovative change sooner. We do not agree with the notion of putting conditions on the importer on how the substance can be used. The concern here is as per the sectors listed on page 4 of this document, an individual refrigerant may have many applications and the supply chain can be long before the refrigerant reaches an application. This condition creates an anti-competitive outcome by restricting who can sell (ie Chemiplas would be prevented from selling to the user for a particular application forcing a longer supply chain at higher cost and likely lower support). This can be further complicated should the refrigerant end up being exported along its journey through the supply chain.

15 10. Do you agree with the proposed approach on how the baseline and phase down steps should be designed? 11. What would the impact of this approach be? 12. What other options should be considered and why? There is a level of concern the baseline may be too low. This perception is derived from the two recent requests for submissions from the Ministry for the Environment, seeking clarification on the term "bulk" in precharged equipment and polyol blends containing HFCs. If the quantities of bulk refrigerant have not been declared in these two categories correctly in the past, the data used to arrive at the proposed baseline may be too low as these quantities no doubt will eat into the quota available should they be deemed bulk by the Ministry at the conclusion of those two consultations. Assuming appropriate access to innovative refrigerant manufacturers and that the baseline has taken into consideration the total New Zealand market, the proposed baseline and ambitious phase down steps are achievable.

16 13. Do you agree with the proposed approach on how permits should be allocated? 14. What would the impact of this approach be? No, for the following reasons: 1. The period for grandfathering is not reflective of the market today The market has changed considerably recently and continues to change. 'Traditional' importers now no longer dominate the market. New Zealand enjoys a free market allowing players to enter the refrigerant market freely, creating competition and driving innovation. The graph below shows a steady increase in the number of players in the NZ market, an opportunity we have taken largely due to the absence of innovation or competitiveness from the 'traditional' importers. COMPETITION ENABLES OUR EXISTENCE NUMBER OF ETS PARTICIPANTS FOR SGGS I New Importers Issued less than representative share of permits I I i New importers excluded I from permit issuance I 9 ETS participants from 2013 remain active today There are 15 ETS participants active in Six of these will be disadvanaged by current proposal 6 2 s i-o 1 L. J IMPORTERS r] EXPORTERS

17 2. A grandfathering of the majority share of the permit will result in a loss of competitiveness to the industry Market share amongst the current importers continues to be volatile. This is a healthy sign that the market is competitive. Grandfathering a major share of the permit, whereby the majority of the refrigerant volume is controlled by a few historical importer/wholesalers, would result in a shift of market share away from new entrants back to the parties who have already lost share. This is not a fair or reasonable outcome, is anti-competitive and likely results in poorer delivery of future technology. 3. The proposed grandfathering approach removes certainty for several importers and has an elevated risk of isolating major refrigerant innovators from the market As per the chart on Page 16 of this document, 1/3 of the current importers of refrigerant into New Zealand lose business certainty due to the proposed grandfathering and two of these are the sole representatives of major refrigerant innovators. This includes Chemiplas as sole representative of Arkema. There is also real risk of a loss of competition as stated. 4. A technology monopoly may result s I (a ) (6) (;;) should the preferred grandfathering approach be adopted, there will be one primary channel to market for HFC alternatives. This creates a 'technology monopoly' into the NZ market which may make alternatives expensive and also add to the difficulties for overseas OEMs with regards to the introduction of new equipment (containing HFC alternatives) due to a lack of local support. :59(z)(1)(0 As stated earlier, there are only three main producers of next generation refrigerants with selected supply channels to the market. Two of these are disadvantaged by the proposed grandfathering system.

18 5. The available quota through Special Permit is significantly below that required to sustain the competitive market and innovation The quantum of CO2tEq available through the Special Permit is too small to sustain active industry investment from importers such as Arkema/Chemiplas, given the current proposal results in nil grandfather allocation to Chemiplas. 'S1(z)(L)Ci,,1(2-)(6)61)

19 15. What other options should be considered and why? 1. The grandfather setting period must include Given the way the market has changed. the reference period needs to be as close to current as possible and we propose 2016 included in the assessment period. Including 2016 in the grandfathering assessment period will ensure the data, which is most current in reflecting the New Zealand market is applied. We recognise that using data beyond 2016 may result in distorted market behaviours to gain commercial advantage in light of the structure behind the New Zealand's adoption of the Kigali agreement. 2. The grandfather period must be for only As per the CRL Energy report, referred to on the Ministry website for this consultation, 2014 was a depressed year for consumption as a result of stockpiling in 2013 in the lead up to an ETS event. The inclusion of 2014 therefore will not provide a fair representation of what is normal business activity for the importer. We therefore propose that the reference period for determining grandfathering be inclusive. 3. Only 20% of the baseline should be available for grandfathering A grandfathering approach does give the market some certainty to enable appropriate business decisions. Arkema/Chemiplas would endorse a grandfathering approach to the issuing of permits but it must be reduced from the proposed 80% to allow for market dynamics and ensure sufficient competition. We propose 20% of the quota to be allocated under grandfathering to ensure these outcomes. However, if the reference period is made more current (ie 2015 and 2016) we believe appropriate market dynamics can be achieved if up to 50% grandfathered. The remaining 80% (or up to 50%) would then be made available through special permit. This approach would allow the ever-increasing number of players in the market to also have a level of certainty that allocations of permit with scale will be available, so as to ensure effective purchasing power, allowing them to remain active and grow in the New Zealand market place

20 To further illustrate that having only 20% of the quota available as special permit will diminish the number of importers and therefore competition in the New Zealand market, the current 20% available through Special Permit equates to: 20% Special Permit 267,660 CO2tEq available 410A GWP Total 410A kg allowable to be imported 410A kg/ shipping container CO2tEq 128,189kg 9,040kg Total containers allowable to be imported 14 Number of importers adversely affected by grandfather 5 Number of shipping containers available per affected importer shipping containers of 410A is not enough to drive change let alone sustain a business. Importers entitled to grandfathering will also be able to apply for special permit. Assuming they were also to be awarded with special permit, the pool of CO2tEq available to the innovators will be further diminished. 4. Quota period should be reflective of the step down period In order to offer companies certainty, eliminate confusion and reduce administrative burden, Arkema/Chemiplas believe that the quota period should match the step down period. (eg If the step down period is 2 years, quota should be allocated for this period. Should the step down period be 3 years, the quota period should also be 3 years) 5. Time frame for unused or underutilised quota should be reduced Under the current proposal, a company can game the market by reducing availability of HFCs in order to manipulate the supply/demand dynamics of the market and subsequently starve the market of product. Arkema/Chemiplas believes that the period of time a company is entitled to, before their quota allocation is revoked or reduced, should be one year instead of two as per the Ministry's preferred option.

21 6. Unintended Consequences Under the preferred method of grandfathered quota, a potential grey market for trading quota could be created by companies, who are no longer active in the market, having an entitlement to q uota This will impose unnecessary cost burden on the market as companies potentially see more value in selling quota rather than selling product, should quota be a freely tradable commodity. This is evidenced by current market behaviour in Europe. Furthermore, Arkema/Chemiplas are concerned about the condition of having to provide evidence of an applicants commitment to obtain a transfer of quota. Often quota will be held by market competitors. Including such a condition will see market competitors having to cooperate, discuss or negotiate the value of quota which is likely to create an antitrust environment resulting in companies potentially being able to manipulate market price. Therefore, we believe quota allocations and quota transfers be managed by the Ministry.

22 16. Do you agree with the proposed approach on how imports of HFCs should be reported? 17. What would the impact of this approach be? 18. What other options should be considered and why? Arkema/Chemiplas agree that volumes should be reported. However, conditions around use will be difficult due to the variabile length of the supply chain and the possible restrictions of trade associated with imposing conditions of use. 19. Do you agree with the proposed approach on how recycled imports of HFCs should be managed? 20. What would the impact of this approach be? 21. What other options should be considered and why? Yes, Arkema/Chemiplas agrees with the proposed approach on how recycled imports of HFCs should be managed.

23 22. Do you agree with the approach on how exports of HFCs should be managed? 23. What would the impact of this approach be? Arkema/Chemiplas agrees that the exports of HFCs should be reported and monitored at the border so as to enable Kigali reporting requirements. However, we are strongly opposed to the notion that exported HFCs should not be replaced with fresh quota to import. Gl(2 )(~)C~~~

24 s9())( 6)ol) Under the proposed approach, a New Zealand importer is left with a mutually exclusive decision due to a volume limited refrigerant market when deciding whether to sell locally or to the Pacific Islands. The Pacific Islands will lose the support of NZ suppliers. The Pacific Islands buy from NZ because supply lines are the most efficient (from NZ versus other options). Removing the NZ option will force them towards more expensive and less convenient options. Given our long trading history we believe this to be out of step with our regional obligations as a trade partner. 24. What other options should be considered and why? HFC exports should be replaced with new quota to import.

25 25. Do you agree with the proposed approach on how the manufacture of HFCs should be managed? 26. What would the impact of the approach be? 27. What other options should be considered and why? Given the scale of the New Zealand market place, it is highly unlikely that a manufacturing facility will ever be commissioned in New Zealand. Therefore, we agree with the proposed approach. 28. Do you agree with the proposed approach on how non-party trade provisions should be applied? 29. What would the impact of the approach be? 30. What other options should be considered and why? Arkema/Chemiplas are in agreement with this approach in order to meet our obligations under the Kigali.

26 31. What barriers/issues do you face to move to alternative HFCs? Apart from the other items raised in this document - in particular quota allocation and access to innovators who can drive change to next generation refrigerants: o o Suitable training as New Zealand migrates towards the use of A21- refrigerants which have a mild level of flammability Storage and transport awareness for DG2.1 flammable refrigerants 32. What would reduce your demand for high GWP HFCs? Commercial incentives are always a fantastic way to drive behavioural change. The adoption of 404A replacements has been delayed as a result of a low carbon price through the ETS. Therefore, needless to say, a higher carbon price on SGGs would drive faster change to the retrofit market.

27 33. What are your suggestions for supporting measures? 34. Which problems would these measures address? 35. What would be the impact on NZ of these measures being put in place? Arkema/Chemiplas supports the move to low GWP refrigerants. To compliment this transition, industry will require support to the following areas: Appropriate industry training so as to highlight that flammable refrigerant cannot be used in systems not designed for flammable refrigerants Ensure the means are in place for environmentally safe removal of flammable refrigerants at the end of it's life in a system Provision for end use controls Countries such as Europe, US have established end use controls for reducing the demand of HFCs. For example, banning 134a in automotive or banning 410A in small heat pump applications. Whilst Australia has decided not to implement end use controls at the commencement of the HFC phase down, a provision has been made to do so through regulations should the market not be transitioning to low GWP alternatives quick enough. We believe there is merit in following Australia's model to make a provision but not enact it until such time that New Zealand market needs to transition more quickly to low GWP alternatives. Mandatory maintenance for large charge systems in line with AS/NZS ISO Mandatory maintenance for large charge systems will ensure that large systems are running efficiently and will reduce the likelihood of large scale leaks which reduce both direct and indirect emissions. Proof that you are an active business operating in the market to secure quota entitlement.

28 Appendix 1 - R32 in heat pump CO2tEq reduction calculation GWPR G W P410A 2,088 Heat pump volume charge size A 33% reduction in shift to R32 Arkema/Chemiplas R32 CY16 Imports 4,5001<g Therefore: 1kg of R32 replaces 1.5kg Of 410A based on 33% charge size reduction 4,5001<g of R32 imports in CY16 replaces 6,750kg 410A 61,750kg CO2tEq 410A = 14,094 less 4,5001<g CO2tEq R32 = 3,038 TOTAL CO2tEq SAVING = 10,952