Are You Ready for the EPA’s New Hydrofluorocarbons Report Requirement?

As part of the fight against the effects of climate change, a global effort has been kickstarted to reduce the use and production of hydrofluorocarbons (HFCs) due to their high global warming potential (GWP). For their part in this HFC phasedown, the Environmental Protection Agency (EPA) is asking organizations to report their HFC allowance, and the deadline to do so is May 31, 2024.

So, are you ready to submit? Are you even subject to this new EPA HFC allowance allocation report? Being at the forefront of the shifting Environmental, Social, and Governance (ESG) landscape, we’re here to help clarify things.

In this blog post, we’ll provide an overview of hydrofluorocarbons, how and why we got to this point in their regulation, and what organizations must comply with the EPA’s new reporting requirement so that as the deadline rapidly approaches, you’re able to get everything done that you need to do.

What are Hydrofluorocarbons?

First, why do HFCs warrant such specific scrutiny?

Made up of hydrogen, fluoride, and carbon, hydrofluorocarbons are man-made chemical gases at room temperature and pressure.

As of today, their main industrial use is as a coolant, whether in air conditioning, refrigeration, or other applications, though HFCs are also used in the manufacturing of semiconductors (that are mostly used for etching / water cleaning).

The Montreal Protocol and the Introduction of HFCs

HFCs were introduced as a better alternative to the ozone-depleting substances chlorofluorocarbons (CFCs) and hydrochlorofluorocarbons (HCFCs) back in the 1980s when a global environmental urgency emerged to stop the growth of the hole in our planet’s ozone layer.

For those who don’t already know, the ozone layer is a thin layer of gas high up in the earth’s atmosphere that absorbs some of the sun’s most harmful radiation, which allows life to exist as it does on the planet. Yes, without the ozone layer, rates of human and animal skin cancer would increase equally dramatically, and unfortunately, scientists in the 1970s discovered it was on a path of alarming depletion.

That led to the signing and global ratification of the Montreal Protocol in 1987. Often referred to as the most successful global environmental agreement ever signed, the Protocol called for the phaseout of the man-made gases causing the ozone hole—or, chlorofluorocarbons (CFCs), as well as its interim replacement hydrochlorofluorocarbons (HCFCs).

(CFCs were huge in consumer aerosol sprays, so if you’re old enough to remember, it may have seemed like all hairspray products suddenly had a label saying “No CFCs” seemingly overnight.)

But it wasn’t just decided that CFCs were unnecessary and thereby removed from all industrial use after 1987—rather, CFC gases were replaced by HFCs because, as the latter lacked chlorine, they were not considered to be contributing to ozone depletion.

The Effect of HFCs on Climate Change

Back then, these gases were only being considered in terms of their “Ozone Depleting Potential,” which is why HFCs were embraced as a replacement for CFCs. That being said, in a bit of an ironic and unfortunate twist, HFCs still affect climate change—it’s just due to their high global warming potential rather than ozone depletion.

Global warming—or the increase of the Earth’s surface temperature—is accelerated by human activities that release greenhouse gases (GHGs) that trap heat in our atmosphere. More heat in the atmosphere could increasingly and significantly impact our planet in several ways, including negatively affected climate patterns, ecosystems, sea levels, weather events, and even human health.

When determining GWP, it’s a measurement of how much heat a greenhouse gas traps in the atmosphere over a specific period. There are seven main greenhouse gases, of which carbon dioxide (CO2) is the most common. Because CO2 is the most common greenhouse gas, all of the other seven gases are measured as to how much more global warming potential they have compared to CO2.

HFCs are between 2,623 and 4,144 times as potent as CO2, meaning they have a similar effect on climate change as CFCs. As such, an amendment was made to the Montreal Protocol in 2016—during at a meeting in Kigali, Rwanda, it was agreed that a global push would be made to enforce a reduction or phasedown of 85% of HFC production in industrialized countries.

What are the EPA’s HFC Allocation Report Requirements?

With specific targets and schedules now set for reducing the production and consumption of HFCs, the global phasedown of these gases is considered a critical method to avoid catastrophic climate change impacts, and in 2020, the United States passed the American Innovation and Manufacturing (AIM) Act to ensure the country does its part.

Through its establishment of an allocation system for HFC production and consumption allowances, this new law requires companies that produce or import HFCs to report those quantities to the EPA, as—under 40 CFR part 84—those involved in the HFC chain of custody are now only allocated limited allowances of HFCs.

To comply with these new requirements, companies must not only submit reports and records of their allowances but also have an independent audit of those numbers.

Regarding those third-party audits, the EPA’s additional guidance stipulates that they must be conducted under agreed-upon procedure engagements and performed by an independent CPA that meets the requirements of the HFC Allocation Framework Rule. As the cut-off date for submission of these audit reports from the CPA to the EPA is May 31, 2024, organizations subject to the AIM Act and HFC allocations must get moving.

Next Steps for Your HFC Allowance Audit

In one of the latest moves to help mitigate the effects of climate change, this EPA reporting process will help track and manage HFC emissions, but for those that qualify as needing to satisfy the requirements, there aren’t a lot of CPA firm options out there that can perform such an audit.

However, Schellman does qualify as a third-party auditor under the EPA guidance—you can contact the Agency to confirm that—and as part of our dedicated ESG practice, we’ve developed a formal audit program that can help you complete your reporting and recordkeeping compliance requirements. Using our integrated approach to GHG reporting, you can both achieve compliance with the EPA and gain insight into the bigger picture of climate change and the increase of assurance requirements from capital markets, clients, and regulators alike.

To learn more about our methodology, submit a contact request or email our ESG Assurance Services at esg@schellman.com so that you can determine whether we’re the right HFC allocation auditor for your organization.