EPA 430/K94/022
MONTREAL PROTOCOL
ON SUBSTANCES THAT DEPLETE
THE OZONE LAYER
UNEP
1994 Report of the
Economics Options Committee
1995 Assessment
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UNEP
1994 Report of the
Economics Options Committee
1995 Assessment
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Montreal Protocol
On Substances that Deplete the Ozone Layer
UNEP
1994 Report of the
Economics Options Committee
1995 Assessment
The text of this report is composed in Times Roman.
Composition and co-ordination: Robert van Slooten (Chair TOC)
Layout: Robert van Slooten
Reprinting: UNEP Nairobi, Ozone Secretariat
Date: 30 November 1994
No copyright involved.
Printed in Kenya; 1994.
ISBN 92-807-1452-X
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1994 Report of the
Economics Options Committee
for the
1995 Assessment
of the
U N E P
MONTREAL PROTOCOL
ON SUBSTANCES THAT DEPLETE
THE OZONE LAYER
pursuant to
Article 6
of the Montreal Protocol;
Decision IV/13 (1993)
by the Parties to the Montreal Protocol
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DISCLAIMER
The United Nations Environment Programme (UNEP), the Technology and Economic
Assessment Panel co-chairs and members, the Technology and Economic Options Committee
chairs and members and the companies and organisations that employ them do not endorse
the performance, worker safety, or environmental acceptability of any of the technical options
.discussed. Every industrial operation requires consideration of worker safety and proper
disposal of contaminants and waste products. Moreover, as work continues - including
additional toxicity testing and evaluation - more information on health, environmental and
safety effects of alternatives and replacements will become available for use in selecting
among the options discussed in this document.
UNEP, the Technology and Economic Assessment Panel co-chairs and members, and the
Technology and Economic Options Committee chairs and members, in furnishing or
distributing this information, do not make any warranty or representation, either express or
implied, with respect to the accuracy, completeness, or utility; nor do they assume any
liability of any kind whatsoever resulting from the use or reliance upon, any information,
material, or procedure contained herein, including but not limited to any claims regarding
health, safety, environmental effects or fate, efficacy, or performance, made by source of
information.
Mention of any company, association, or product in this document is for information purposes
only and does not constitute a recommendation of any such company, association, or product,
either express or implied, by UNEP, the Technology and Economic Assessment Panel co-
chairs or members, the Technology and Economic Options Committee chairs or members or
the companies and organizations that employ them.
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ACKNOWLEDGEMENTS
The Chair acknowledges the commitment and effort of the members of the UNEP Economic
Options Committee in the preparing the 1994 Report. Special thanks goes to those members
who volunteered to take on the responsibility of being lead authors for the individual chapters.
Discussions of their draft chapters were the major agenda items for the meetings of the
Economic Options Committee. The development of each chapter owes much to the
determination of all members to contribute their own expertise and judgment to a Committee
process of critical appraisal directed towards producing guidance for the drafting efforts of
the lead authors.
The lead authors for each chapter were as follows: Professor Stephen J. DeCanio (Chapter 1);
Dr Ahmed Amin Ibrahim and Mr Sergio Oxman (Chapter 2); Dr Anil Markandya and Mr
Peter Landymore (Chapter 3); Dr David O'Connor (Chapter 4); Professor Penelope Canan
(Chapter 5); Dr Anil Markandya (Chapter 6); Professor Stephen J. DeCanio and Associate
Professor Jeffrey Williams (Chapter 7); and Dr Yusuf J. Ahmad (Chapter 8). The lead author
for the Executive Summary and the Addendum was Dr Robert Van Slooten.
The Chair also acknowledges the comments and advice provided by those who participated
in the Peer Review process. Their contributions were essential to the work of the Committee
and were very much welcomed by Members.
Finally, the Chair acknowledges the contributions of the many individuals and organizations
who facilitated the work of the 1994 Economic Options Committee.
Dr Robert Van Slooten
Chair,
UNEP Economic Options Committee
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1994 REPORT OF THE UNEP ECONOMIC OPTIONS COMMITTEE
TABLE OF CONTENTS
DISCLAIMER
FOREWORD
EXECUTIVE SUMMARY
ES.l
ES.2
ES.3
ES.4
ES.5
ES.6
INTRODUCTION
ACHIEVEMENTS
IMPROVEMENTS ARE NECESSARY
CONCERNS REGARDING CONTINUED PROGRESS
ADDRESSING THE CONCERNS OF THE ARTICLE 5(1)
COUNTRIES
TRANSFERABUJTY
CHAPTER 1
1.1
l.D
1JV
THE DYNAMICS OF THE PHASEOUT PROCESS UNDER THE
MONTREAL PROTOCOL
INTRODUCTION
RECENT ODS REPLACEMENT EXPERIENCE
A. Absence of Insurmountable Technical Barriers
B. Recent Experience in Non-Article 5(1) Countries
C. Experiences of the Article 5(1) Countries
D. The Case of Methyl Bromide
EXPLANATORY FRAMEWORK
A. ODS Replacement Can Have Multiple Benefits
B. Differences Across Sectors
C. Analogies to Other Large-Scale Technological Initiatives
CONCLUSIONS AND GENERAL OBSERVATIONS
CHAPTER 2 THE IMPLEMENTATION OF THE MONTREAL PROTOCOL
2.1 INTRODUCTION
A. Background on the Multilateral Fund
B. Evolution of the Multilateral Fund Process
C. The Multilateral Fund as a Model
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2.n
2.ra
2.IV
TECHNOLOGY TRANSFER
A. Diffusion
B. Channels
C. Joint ventures
D. Categories
E. Selection of Technologies
F. Special Circumstances of Article 5(1) Countries
ISSUES ENCOUNTERED
Priorities of Article 5(1) Countries
B. Monitoring
C. Technology
D. Information
E. Training •
F. Non-Governmental Organisations
G. Non-Parties
CONCLUSIONS
CHAPTERS
3.1
3.D
3.m
3.IV
3.V
ECONOMIC EFFICIENCY OF THE IMPLEMENTATION
PROCESS IN ARTICLE 5(1) COUNTRIES
INTRODUCTION
ECONOMIC EFFICIENCY AND THE DESIGN OF A PHASEOUT
STRATEGY
MEASURES OF EFFICIENCY IN IMPLEMENTING ODS
PHASEOUTS
ALTERNATIVE INSTITUTIONAL ARRANGEMENTS
A. Coordination and Duplication in the Work of the Implementing
Agencies and the Multilateral Fund
B. Efficiency and Administrative Expenses
C. Measures of Efficiency of Operation
CONCLUSIONS
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CHAPTER 4
4.1
4.n
4.ffl
4.IV
4.V
4.VI
POLICY REGIMES FOR PHASEOUT OF OZONE DEPLETING
SUBSTANCES
ELEMENTS OF THE POLICY FRAMEWORK
A. Monitoring and Reporting of ODS Production and Consumption
B. Permitting and Licensing of Controlled Substances
COMMAND-AND-CONTROL MEASURES
A. The Phaseout Schedule
B. Quantitative Restrictions
C. Prohibition of Specific Uses and of Production
D. Product Labelling Requirements
E. Recycling Requirements
f-
ECONOMIC INSTRUMENTS FOR ODS PHASEOUT
A. Excise Taxes on Ozone Depleting Chemicals
B. Duty Exemptions and Investment Subsidies
Incentives for Recovery, Recycling and Banking of ODS
D. Permit Trades and Auctions
E. Summary
VOLUNTARY AGREEMENTS
BROAD DIRECTIONS FOR ODS POLICY FORMULATION IN
ARTICLE 5(1) COUNTRIES
A. Country Characteristics Bearing on Policy Choices
B. Guidelines for the Design of ODS Phaseout Policy
CHAPTER SUMMARY
CHAPTER 5 INFORMATION, INNOVATION AND THE MONTREAL
PROTOCOL
5.1 INTRODUCTION
5.D BACKGROUND
5.ffl FOUR INFORMATION EXCHANGE NETWORKS IN ONE
SYSTEM COORDINATED^ BY AN EPISTEMIC COMMUNITY
A. The Global Ozone Community:
a "Clan"
B. The Ozone Policy Network
C. The Ozone Program Network
D. The Ozone Project Network
E. The Ozone Product Network
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5.IV
EVALUATION OF THE NETWORKS IN THE ODS PHASEOUT:
LESSONS LEARNED
CHAPTER 6 INTERNATIONAL TRADE ISSUES
6.1 BVTRODUCTION
6.H TRADE RESTRICTIONS BETWEEN PARTIES AND NON-
PARTIES
A. Challenging the Applicability of Trade Restrictions
B. Extending Trade Restrictions to Products "Made With But Not
Containing" ODSs
C. Trade in Controlled Substances and the Basel Convention on the
Transboundary Movement of Hazardous Wastes and their
Disposal •
D. Recycling of Controlled Substances and Illegal Trade
6.m
6.IV
TRADE AND CAPITAL MOVEMENTS RELATED TO ODSs
A. International Trade and Phaseout of ODSs
CONCLUSIONS
CHAPTER 7 CFC AND HALON BANKING
7.1 INTRODUCTION
7.H THE EVOLUTION OF ODS BANKING
A. Halon Banking
B. CFC Banking
7.HI INCENTIVES AND BARRIERS TO BANKING
A. Taxes
B. Uncertainties Regarding Destruction
C. Standardisation and Quality Control
7.IV
CONCLUSIONS AND POLICY RECOMMENDATIONS
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CHAPTER 8 TRANSFERAB1IJTY OF THE MONTREAL PROTOCOL
EXPERIENCE TO OTHER INTERNATIONAL
ENVIRONMENTAL AGREEMENTS
8.1 INTRODUCTION
8.H GENERAL LESSONS
8.m SPECIFIC LESSONS
8.IV CONCLUDING REMARKS
ADDENDUM:
APPENDIX A:
APPENDIX B:
APPENDIX C:
METHYL BROMIDE AS A CONTROLLED SUBSTANCE
UNDER THE MONTREAL PROTOCOL: ECONOMIC ISSUES
MEMBERS OF THE 1994 UNEP ECONOMIC OPTIONS PANEL
LIST OF PEER REVIEWERS
GLOSSARY OF ABBREVIATIONS
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ES-1
1994 REPORT OF THE UNEP ECONOMIC OPTIONS COMMITTEE
EXECUTIVE SUMMARY
INTRODUCTION
ES.l The EOC Report describes the transition from developed country ODS phaseout
("Phase 1") to concentration on progressing the developing country phaseout ("Phase
2") under the Montreal Protocol.
ES.2 Phase 1 is defined in the EOC Report as that part of the implementation process
through to the ODS phaseout in the developed countries at the end of 1995. The focus
of Phase 1 has been on the urgency of protecting the ozone layer eg establishment of
the Protocol; building consensus and institutions; promoting development of ODS
alternatives and their use in developed countries. Phase 1 provided examples of the
critical importance of individual leadership in securing "lift-off1 for the Protocol
process. Following the launch of the institutions of the Protocol, the varying adequacy
of their performance and of the implementing agencies became increasingly apparent.
ES.3 Phase 2, in broad terms, is defined as the ODS phaseout in the Article 5(1) countries
as of the beginning of 1996 plus the continuing controls on HCFCs and methyl
bromide in the developed countries. We are now in the early stages of the transition
to Phase 2 with the approaching phaseout in the developed countries and evidence of
a review and re-thinking of priorities, mechanisms and resourcing by developed
countries. For example,
some institutional initiatives need to work better;
the increasing prominence being given to compliance issues eg trade in
newly produced ODS misrepresented as "recycled" material; and
the influence of new people and new perspectives on the evolution of
the Protocol process.
ES.4 The EOC Report develops the transition theme by (1) reminding the reader of the
remarkable achievements recorded during Phase 1; (2) identifying and substantiating
the scope for improvements in those institutions and processes that are essential to the
successful implementation of the Montreal Protocol; (3) identifying and assessing the
key concerns regarding the implementation process as it moves into Phase 2; (4)
addressing some salient aspects of these concerns; and concludes with general and
specific lessons of the Protocol process that might be transferable to the design of
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ES-2
other international environmental agreements.
ES.5 This summary does not follow the chapter sequence of the Report ie each element of
the transition theme draws on more than one chapter of the Report.
D. AC3BDEVEMENTS
ES.6 The achievements realized during Phase 1 have progressed more rapidly, and at lower
economic cost, than had been expected at the signing of the Montreal Protocol.
Economists have referred to the unexpected achievements of the Protocol given the
initial resistance of powerful economic, corporate and regulatory forces to the technical
and economic feasibility of its objectives. The ratifications of the Montreal Protocol
(1990), the London Amendment (1992), and the Copenhagen Amendment (1994) were
highly important and substantial achievements. Yet perhaps even more impressive has
been the way scarce talents and resources have been mobilised to forge the progress
that has been achieved in ODS reduction.
ES.7 The EOC Report explores possible explanations for these surprising achievements of
the Protocol during Phase 1. This is not a matter of speculative or historical interest;
it conditions the EOC's interpretation of the major risks facing the Protocol during the
transition to Phase 2.
ES.8 The success of Phase 1 was not inevitable. The first step required that the stratospheric
ozone-depletion problem be identified and credible. To do this, the scientific
community had to document both the existence and anthropogenic sources of the
problem as well as the seriousness of the potential effects: Second, industry and the
research and development community had to be mobilised. Third, the international
political and policy-making communities had to negotiate, design and implement the
Montreal Protocol; and fourth, public and private enterprises had to implement the new
technology. Without credible science neither the industrial nor the political
communities could have been mobilised; nor could this have happened without the
contribution of the policy-making community to the design of cost-effective policy
regimes created the market incentives needed to mobilize industry's resources in
support of ODS reduction. Whilst consumer responses to the use of ozone-depleting
substances, especially in aerosols, provided an early market incentive to producers,
industry's powerful contribution to the achievements of Phase 1 were firmly based on
the market incentives provided by the regulatory regimes that were designed to
implement the ODS phaseout schedules of the Montreal Protocol.
ES.9 Companies developed a-wide range of technologies ranging from non-ozone depleting
chemical substitutes to not-in-kind methods (including product redesign) to replace
ODS applications. In non-Article 5(1) countries, the need to phase out ODSs led to
both technological and organizational innovation across the industrial spectrum. In
some cases the new methods have been profitable in the narrow economic sense as
well as being beneficial for the environment. Focused innovation and increased
management attention have produced cost-saving and product-improving opportunities.
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Case studies in the refrigeration and electronics sectors attest to the success of the
conversions to non-ozone depleting methods.
ES.10 Article 5(1) countries are also contributing to the phaseout. Ozone-friendly
technologies are being developed and diffused in these countries through the transfer
of equipment and expertise by multinational corporations, individual and joint national
research programs, industry organizations (such as ICOLP, JICOP, and JEMA), and
international government-industry partnerships. The Multilateral Fund, agreed at the
London Meeting of the Parties in 1990, is playing an important role in facilitating the
transfer of ozone-friendly technologies to Article 5(1) countries.
ES.ll This record of achievement is largely the product of an informal network or
"community" amongst a broad span of experts (eg industrialists, scientists,
technologists, policy-makers, economists, NGOs) with a common interest in the
objectives of the Montreal Protocol ie the "Protocol community".
m. IMPROVEMENTS ARE NECESSARY.
ES.12 The achievements of Phase 1 have been impressive, but the "Protocol community"
should not relax its efforts during the transition to Phase 2 - there remains much
important work to be done. There are obstacles remaining. Some ODSs, such as the
pesticide methyl bromide, are not as far along in the replacement process as the ODSs
originally controlled under the Protocol. Although ODSs in some critical uses (such
as solvents in electronics manufacture) have all but been eliminated, in other
industries it is likely that the easier substitutions were undertaken first. Complete
elimination of ODSs in all sectors will continue to challenge management,
engineering, and production staffs.
ES.13 A number of policy issues also remain to be resolved. These include: matchipg the
global phaseout schedule of all significant ODSs to the most recent scientific and
environmental assessments of the risks those substances pose to the ozone layer;
ensuring the adequacy of the Multilateral Fund to fulfil its mandate of covering the
incremental costs of the phaseout to Article 5(1) countries; appropriately regulating
transitional chemicals such as HCFCs: intelligently managing the stock of already
produced ODSs to minimize premature obsolescence of existing ODS-using
equipment; and designing and implementing policies that will encourage innovation
and productivity growth while meeting the environmental imperative to protect the
ozone layer.
ES.14 Whilst seeking to overcome obstacles and to resolve key policy issues, the "Protocol
community" play important roles in bringing expertise to bear on recurrent efforts to
weaken the critical underpinnings of the commitment to implement the Montreal
Protocol eg (1) the science base; (2) the availability and cost of ODS alternatives; (3)
the net benefits of the ODS phaseout; (4) the political commitment to the Article 5(1)
countries; (5) the capacity to resolve operational shortcomings eg of non-compliance;
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inadequate institutional performance; gaps in management controls; public confidence
in and political commitment to the Protocol process. In practice, the capacity both to
resolve real uncertainties and to provide the advice needed to discriminate between
constructive criticism and "de-bunking" efforts lies within the "Protocol community".
IV. CONCERNS REGARDING CONTINUED PROGRESS.
ES.15 The successful transition from Phase 1 to Phase 2 will require continuing support for
the phaseout process in the Article 5(1) countries. Although some Article 5(1)
countries have successfully accelerated their phaseout schedules, it is not possible for
the Article 5(1) countries, as a whole, to take the full burden of responsibility for their
own phaseouts. The preparation of the HOC Report exposed a widely-based concern
over whether and to the extent to which the developed countries might reduce their
commitments to the Article 5(1) countries during the transition to Phase 2.
ES.16 The major concerns of the Article 5(1) countries brought to the attention of the EOC
were as follows:
whether political support to stratospheric ozone protection will be
sufficient to sustain the transition to Phase 2 and the subsequent phase-
out process;
the adequacy of political and financial support for the institutions of the
Montreal Protocol; and
the extent to which a cooperative approach of industry to the transfer
of technology to the Article 5(1) countries can be sustained.
ES.17 Concern was also expressed over the potential for bilateral assistance to increase
relative to multilateral assistance. Whilst bilateral assistance might bring quicker
disbursement, concern over cost-effectiveness led to suggestions that bilateral projects
should be subject to the same degree of scrutiny as that applied to multilateral
projects.
ES.18 The transition from Phase 1 to Phase 2 has revealed a perceived risk that supplies of
ODS and ODS alternatives might not be adequate to meet market demand on terms
acceptable to the Article 5(1) countries. The consequences could be unexpectedly large
increases in ODS prices and higher than expected adjustment costs during the phase-
out process.
ES.19 Chapter 6 of the Report raises concerns regarding the compatibility of the Protocol
with (1) the trade provisions of the GATT/WTO; and (2) the potential for trade
restrictions to be impcsed on recycled ODS either for reclaiming or redistribution
under the Basel Convention on the Transboundary Movement of Hazardous Wastes
and Their Disposal. It remains to be seen how the WTO Trade and Environment
Committee will review the world trade implications of the Protocol's trade measures,
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especially with respect to trade in products that are made with but not containing
ODSs. The UNEP Ozone Secretariat and the Basel Convention Secretariat are keeping
in close contact over these matters. So far, no specific cases of incompatibility
between the Montreal Protocol and the Basel Convention have been reported.
V. ADDRESSING THE CONCERNS OF THE ARTICLE 5(1) COUNTRIES.
ES.20 Success in responding to these concerns is likely to be variable. The capacity to
manage them lies, largely, with the "Protocol community". This capacity cannot be
sustained without adequate resourcing. Signals to the effect that the donor countries
are re-thinking the extent of their resource commitments to the Protocol process as the
transition from Phase 1 to Phase 2 progresses are raising raise concern over the future
capacity of the "Protocol community" to help secure the success of Phase 2 of the
implementation process.
ES.21 Concerns over the supplies of ODSs and ODS alternatives during the transition to
Phase 2 could be reduced by establishing broadly-based recovery, recycling and
banking operations. The work of the EOC indicates that the economic incentives to
recycle and reclaim CFCs, and to repair and retrofit CFC-using equipment, would
strongly influence the amount of CFCs available to service existing equipment. The
adequacy of the current stock of CFCs (including stockpiles and the material contained
in functioning equipment) for future service needs will depend on leakage rates,
retrofit rates, and recovery rates, which are all variables that are responsive to prices,
as well as on the costs of cleaning, storing, and ensuring the quality of the recycled
CFCs. With intelligent bank, management, it should be possible to avoid shortages over
the normal lifetimes of existing CFC-using equipment. The EOC Report describes
specific government policies that could increase the effectiveness of recycling and
banking operations.
ES.22 The EOC's review of policy regimes for ODS phaseouts in Chapter 4 highlights the
following key findings that could help Article 5(1) countries to increase the efficiency
of their phaseout regimes:
voluntary initiatives are more effective in generating publicity and
momentum for ODS phaseouts where there is an aware public group
or NGOs capable of monitoring progress;
most countries opt for some sort of quantitative restrictions (eg quotas)
managed through import and, in some cases, production permit or
licensing systems;
permit systems have been used as a relatively simple way of generating
efficiency gains during the phaseout; and
excise taxes have been used to discourage ODS use, reduce "excess
profits" generated by rising ODS prices due to regulatory controls, and
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to raise revenue eg to help finance ODS phaseouts.
ES.23 The EOC took note of the concerns facing the information-exchange services of the
Montreal Protocol institutions during the transition to Phase 2. The EOC takes the
view thatuser demand for these services will continue at a high level. It noted that
changing information needs and innovation in information systems will provide
opportunities to improve performance. Responses should focus on building consensus
regarding (1) the proper role of information exchange services, and (2) the capacity
to identify and meet the evolution of user demand in a cost-effective manner. The
view of the EOC is that information exchange is an essential element of the "package
of inputs" required to achieve ODS reduction.
ES.24 The supply of information regarding ODSs and the global response to their phaseout
is now overwhelming. The capacity to identify, organize, retrieve and use the most
pertinent scientific and technical information is a key resource in the ODS phaseout
process. The information exchange services provided under the Protocol are well-
placed to meet the need for an up-to-date repository and locus for dissemination of the
ever-expanding wealth of scientific, technological and organizational information
pertinent to the phaseout process. There are three particular areas of information
exchange that appear to be highly promising ie
the community of relevant "experts" from industry, government and
academia;
local or regional networks of those involved in the implementation of
the Protocol; and
"smart" global communication networks enabling the linking of
databases via eg INTERNET.
All of these areas are being addressed by the Ozone Action Information
Clearinghouse. However, the performance of these programmes has been
questioned sufficiently for EOC to suggest that a formal performance
evaluation should be undertaken of all information exchange activities carried
out by the institutions of the Montreal Protocol and their implementing
agencies.
VL TRANSFERABILITY
ES.25 The EOC concluded its Report with an attempt to identify general and specific lessons
that might be transferable to the design of other international environmental
agreements (lEAs). It addresses the structural design features of the Protocol;
performance within these structures is not addressed.
ES.26 The distinctive aspect of the Montreal Protocol is that it was the first IEA to strike a
working balance between what is politically feasible, economically acceptable
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and scientifically necessaiy. It is argued in Chapter 8 that many of the elements of the
Montreal Protocol process might usefully be incorporated in the design of new lEAs.
Even so, the selection of the specific elements to transfer must be evaluated with
respect to the experience already gained and also have regard to the specific
characteristics, needs and constraints of the new lEAs in the making. In this way,
steady progress can be made up the "learning curve" that applies to the design of IE As
and hence to more efficient instruments for managing risks to the global environment.
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1-1
CHAPTER 1
THE DYNAMICS OF THE PHASEOUT PROCESS UNDER THE
MONTREAL PROTOCOL
I. INTRODUCTION.
The international effort to protect the earth's ozone layer has entered a new phase. The
Montreal Protocol on Substances that Deplete the Ozone Layer, originally signed in 1987, has
twice been amended or adjusted (London 1990 and Copenhagen 1992). Most of the countries of
the world, including all the major producers and consumers of ozone depleting substances
(ODSs), have indicated their commitment to the ODS phaseout process through the operation of
the Protocol. The most significant of the ODSs are now listed as controlled substances under the
Protocol and all, with the exception of methyl bromide, are scheduled for phaseout. Production
of the most widely used CFCs will be terminated in the non-Article 5(1) countries1 by 1 January
1996, except for a .few "essential use" exemptions. Production of Halons in these countries
ceased as of 1 January 1994. Consumption of HCFCs is scheduled to be phased out steadily,
reaching zero by 1 January 2030 (United Nations Environment Programme (UNEP) 1993a). A
number of countries, including the European Union and the United States, have adopted even
more rapid phaseout schedules for some of the controlled substances than is specified in the
revised Protocol (Kruse 1994; MacKenzie 1992; Global Environmental Change Report 1994c).
The original Protocol provided for periodic review of the regulatory schedule as new
scientific information was developed. Both major revisions of the Protocol have increased the
stringency of the international regulatory regime. Additional ODSs have been added to the list
of controlled substances, and the target moved first from a 50% reduction (as specified in the
original Protocol) to a complete phaseout (London). The phaseout date was moved forward at
Copenhagen in 1992. The regulatory schedule and coverage have been tightened over time
because of continuing accumulation of evidence regarding the extent and adverse effects of
ozone depletion.
The current state of scientific knowledge concerning the physical and chemical processes
of stratospheric ozone depletion is presented in the Scientific Assessment of Ozone Depletion:
1994 (UNEP et al. 1994). The findings of the international scientific panel that prepared this
report include, inter alia: record low global ozone levels were measured over the last two years
(although the downward trend was exacerbated somewhat by the eruption of Mt. Pinatubo in
1. Article 5(1) countries are broadly classified as "developing" but more accurately they are those with annual per
capita consumption of ODSs of less than 0.3 kilograms at the date of entry into force or at any time thereafter, until
1 January 1999. Countries not operating under Article 5(1) will be referred to as "non-Article 5(1) countries"
throughout.
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1991); downward trends in total-column ozone continue to be observed over much of the globe,
but their magnitudes are underestimated by numerical models; the conclusion that anthropogenic
chlorine and bromine compounds (coupled with surface chemistry on natural polar stratospheric
particles) are the cause of polar ozone depletion has been further strengthened; the Antarctic
ozone holes of 1992 and 1993 were the most severe on record; the link between a decrease in
stratospheric ozone and an increase in surface ultraviolet (UV) radiation has been further
strengthened; and methyl bromide continues to be viewed as a significant ozone-depleting
compound.
Scientific understanding of the range and severity of the effects of stratospheric ozone
depletion is reviewed and summarized in Environmental Effects of Ozone Depletion: 1994
Assessment (UNEP 1994b). This assessment confirms earlier findings that ozone depletion has
adverse effects on human and animal health (including morbidity and/or mortality from eye
diseases, skin cancer, and infectious diseases), terrestrial plant productivity, aquatic ecosystems,
air quality, and materials.2
Ozone depletion also interacts with global climate change and biogeochemical cycles.
The direct global warming effect of CFCs and other anthropogenic greenhouse gases is partly
offset by the CFC-induced destruction of the stratospheric ozone (UNEP 1991a; Stratospheric
Ozone Review Group 1993; UNEP et al. 1994). However, the negative effect of increased UV-
B coming through die Antarctic ozone hole on the growth of phytoplankton in the southern
oceans may increase the rate of global warming, because the phytoplankton are a major carbon
sink (UNEP 1992a; Committee for the National Institute for the Environment 1992; UNEP
1994b).3
The Parties to the Montreal Protocol have established a variety of internal regulatory
mechanisms to accomplish the objectives of the Protocol. In addition, international institutions,
such as the Ozone Secretariat, the Multilateral Fund, and the UNEP Industry and Environment
Programme Activity Centre (UNEP IE/PAC), are working to achieve the Protocol's goals. These
efforts have been matched by the contributions of private sector business firms, academic
researchers, and non-governmental organizations (NGOs). The seriousness of the danger has
made it all the more important that actions to protect the ozone be carried out as efficiently as
possible, and that all the lessons that have been learned from the world's experience to date be
assimilated and internalized.
2. Other negative effects of ozone depletion have been suggested by recent research. One study found that for
small ozone losses (less than 5%), the biological damage caused by associated increases in UV-B radiation increases
linearly with the amount of depletion, but that the biological consequences increase non-linearly at greater ozone
loss levels such as those already experienced in the Antarctic ozone hole (Lloyd 1993). Heightened ultraviolet
radiation caused by thinning of the ozone layer has been implicated as a possible contributory factor in the
previously unexplained decline of frog and toad populations worldwide (Yoon 1994; Blaustein et al. 1994; see also
Yoffe 1992).
3. The emissions causing global wanning may also indirectly damage the ozone layer. Increased atmospheric
carbon dioxide concentrations are expected to cause a cooling of the lower stratosphere, creating in the Arctic region
the preconditions for formation of the polar stratospheric clouds that play a key role in causing the Antarctic ozone
hole. Thus, carbon dioxide and other greenhouse gas emissions could lead to further ozone depletion over the
northern hemisphere (Austin et al. 1992; Abbatt and Molina 1993).
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H. RECENT ODS REPLACEMENT EXPERIENCE.
A. Absence of Insurmountable Technical Bottlenecks.
The conclusions of the 1991 Report of the Economic Options Committee (UNEP 1991b)
have been confirmed by developments since that Report was written. ODS replacement has
been more rapid, less expensive, and more innovative than had been anticipated at the beginning
of the substitution process. The alternative technologies already adopted have been effective and
inexpensive enough that consumers have not yet felt any noticeable impact (except for an
increase in automobile air conditioning service costs) from the more than 50% reduction in CFC
use in the non-Article 5(1) countries that has already been accomplished.
At the Copenhagen meeting of the Parties in 1992, a procedure was adopted that would
enable Protocol signatories to nominate "essential use exemptions" for CFCs or Halons. Such
exemptions, for specific uses over limited time periods, would authorize small amounts of
production to continue after the phaseout deadlines for these compounds. Halon production was
phased out on 1 January 1994, so the first round of exemption applications covered Halon
production only. Although a number of users in various signatory countries applied for
exemptions, none of the applications referred to the Technical and Economic Assessment Panel
(TEAP) were recommended to the Parties, and the one application submitted to the Parties was
eventually withdrawn (UNEP 1993). Plans for judicious use of the existing stock of Halons
contributed to the Parties' decision (See Chapter 7 below). Even if applications for exemptions
are submitted in the future, the denial or withdrawal of essential use nominations for Halons in
1994 is strong evidence that, given rational Halon bank management, continued production of
these compounds for critical applications is not needed. The military in Russia, Sweden, the
United Kingdom, and the United States did not request exemptions, nor did the United States
National Aeronautics and Space Administration. No manufacturer of civilian or military aircraft
requested an exemption (UNEP 1993b).
The 1994 Technical and Economic Assessment Panel (TEAP) has recommended only
three essential use exemptions to allow CFC production in non-Article 5(1) countries after 1
January 1996: aerosol metered dose inhalers, specific cleaning, bonding, and surface activation
procedures for the NASA Space Shuttle's solid rocket motor, and global laboratory/analytical
uses. Although some other uses were nominated, including aircraft maintenance, foam standard-
of-reference, fire fighting, furniture adhesives, membrane manufacturing, navigation and
guidance devices, topical anesthetics, and uranium enrichment, none of these exemptions was
recommended by the TEAP. Nor were exemptions granted for servicing of refrigeration and air
conditioning equipment. Even in the case of metered dose inhalers, the TEAP recommended a
major push by governments, medical associations, and industry to educate doctors and patients
about alternatives, and programs to recapture and destroy the CFCs in inhalers whose shelf-life
has expired or that will be replaced by substitute delivery systems (Global Environmental
Change Report 1994d).
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Of course, in some applications the substitutes may be more expensive than the ODS
technologies they replace. It is likely that the least costly substitution opportunities have been
among the first ones taken. There remain design problems to be overcome and choices to be
made where alternative substitution approaches are feasible. Technology transfer to Article 5(1)
countries must be completed in a cost-effective manner that does not hold back their
development progress. Nevertheless, it is clear that enormous advances have been made in the
effort to find ODS alternatives. Phaseout measures have begun to have a measurable impact on
CFC concentrations in the atmosphere (UNEP et al. 1994; Elkins et al. 1993), and many
countries and companies arc eliminating ODSs faster than the schedule specified in the amended
Protocol. It will also be clear from the discussion and examples presented below that many of
the replacements are superior to the ozone depleting technologies they supersede, even in the
narrow sense of being economically profitable without taking account of the monetary and
environmental benefits of ozone layer preservation.
B. Recent Experience in Non-Article 5(1) Countries.
industrial response to the challenge of ODS replacement in the non-Article 5(1) countries
continues to gain momentum. Companies and governments are still beating the regulatory
deadlines for phaseout. By May 1993, over 60 manufacturers from Canada, Germany, Japan,
Sweden, and the United States had ended the use of CFC-113 in their global operations
(OzonAction 1993a). Particular examples of successful changeover from ozone-depleting
technologies are now too numerous to mention individually, and any partial listing would risk
doing an injustice to the multitude of other enterprises large and small that have made or are
making the transition away from ODSs.
Therefore, rather than merely highlighting a few selected examples of successful
changeovers, this Report will take a different approach. Enough experience has been
accumulated to begin to allow tentative generalizations about the underlying dynamics of ODS
replacement. Development of an overview of the substitution process can provide valuable
information both to the Parties and to business firms. In many cases, the organizational
adaptations and innovations associated with ODS replacement are as interesting and important as
the specific technological innovations.
1. Lessons from the Refrigeration Industry.
Refrigeration is the application for which CFCs originally were invented (Cagin and
Dray 1993). This large and important sector faces difficult obstacles in finding substances
and/or technologies to replace CFCs. According to one estimate, 112,000 industrial chillers and
2,000,000 commercial refrigeration units are installed globally (Vogelsberg 1993, citing UNEP
1991c). To these must be added the tens of millions of domestic refrigerators in use throughout
the world. As recently as 1992, the appliance industry in the United States feared it would be in
deep trouble without an exemption from the CFC ban. Yet the industry now "believes it has
solved some thorny conversion problems" (Zurer 1992,1993b).
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In mobile air conditioning, it is now apparent that HFC-134a will be the replacement
technology of choice. Five major automobile manufacturers convened from CFC-12 to HFC-
134a systems in 1993; most automobile manufacturers will have made the shift worldwide by the
beginning of 1995 (UNEP 1993b). Servicing and/or retrofitting the existing automobile fleet
remains a problem, but some CFC stockpiles are being held for this purpose. Work also
continues on retrofit technologies. Fleet field trials have shown promising results. ICI Australia
reported similar levels of consumer satisfaction with retrofitted 134a systems as with CFC-12
systems (Dekleva et al. 1993), and two small fleet tests of retrofitted systems in the United States
conducted by Elf Atochem N.A., Inc. found that drivers felt no noticeable difference between
their "old" and "new" systems (Rolotti and Leonard 1994). A recent review of retrofit trials
around the world concluded that "HFC-134a retrofits seem to be less complicated and less costly
than once thought" (Colmery and Lindley 1994).
The U.S. Environmental Protection Agency has compiled a set of ten case studies of
firms that have completed or are in the process of completing the changeover of their
refrigeration applications. These firms used CFCs in comfort coolers, industrial processes, and
commercial refrigeration. The companies profiled were engaged both in retrofitting and the
installation of new refrigeration systems. For the companies carrying out retrofits, the most
common experience was that capacity and energy efficiency losses were either negative (i.e.,
systems performance improved) or smaller than anticipated. Even in the cases where there was
no gain (or a loss) in energy efficiency, productivity gains could be realized through a
combination of tightening the equipment to reduce leakage and implementation of inventory
systems to keep track of refrigerant. As one company spokesperson put it, "monitoring and
reducing refrigerant consumption is not only sound environmental practice, it makes economic
sense."
One reason firms initiated their retrofit programs was their desire to avoid future
interruptions in service as CFC supplies become scarce. In addition, even the immediate cost
and disruptions associated with the retrofits have been smaller than originally imagined.
Companies have found that their own ability to manage the conversions (as well as the capability
of outside contractors when they have been used) has improved as experience accumulates. The
CFCs recovered through conversions can either be held for servicing unconverted equipment or
sold to a reclaimer to help defray retrofit costs.
In cases involving the purchase of new equipment, additional opportunities for profitable
investment are available. It is possible to buy new equipment flexible enough to accommodate
the eventual phaseout of HCFCs. Replacement of CFC-using machinery with new equipment
offers the chance to modernize maintenance and institute remote monitoring (e.g., via modem) to
reduce costs. New equipment can be of more energy-efficient design.
Successful conversion operations tend to be ones that have a designated team and a team
leader with responsibility, a budget, and accountability. The best strategy appears to be to
proceed on an empirical basis, with test conversions preceding company-wide conversion.
Taking a hard look at managing the transition away from CFCs provides a chance to revamp
management and control methods. As one food chain executive said, "the CFC issue is really
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making supermarkets manage in a whole new way, and that's not necessarily bad" (U.S. EPA
1993a).
2. Lessons from the Electronics Industry.
Use of CFC solvents in the electronics industry has been a critical application.
Manufacture of electronic components is complicated and difficult, and these assemblies are
used in some of the most demanding environments imaginable, including military hardware.
Tough military specifications reflect the high levels of quality and reliability required of these
components. CFCs and related compounds were long thought to be ideal solvents because they
are so nonreactive. Nevertheless, the electronics industry has pioneered both technologies and
organizational models for replacement of CFCs. In a number of instances, the substitute
technologies have saved money and improved quality over the CFC technologies they replaced.
A number of major electronics companies have reported competitive advantages deriving
from their elimination of CFCs. Examples are widespread. "In December 1991, Northern
Telecom became the first multi-national company to completely halt the use of CFC
solvents....Many companies with successful ODS phase out programs developed new cleaning
methods, or eliminated the need to clean altogether, while maintaining their competitive edge.
Electronics companies report cost savings, simplified manufacturing, and higher reliability by
switching to new technologies. For example, Ford, Honeywell, Hughes, Motorola, and Texas
Instruments are now manufacturing printed circuit boards that are cleaner than boards produced
with CFCs, and meet the most demanding military specifications" (Andersen and Zoi 1993).
Semi-aqueous solvents, currently accepted "across the board for Mil-Spec applications," exhibit
"cleaning levels consistently higher than previously achieved with CFC-based solvents"
(Amoukhteh 1993).
One of the techniques being implemented is "no-clean soldering," which offers obvious
cost advantages over soldering processes requiring cleaning. No-clean soldering "costs less than
most other processes....[and] eliminates the costs and environmental impacts associated with the
manufacture, use, maintenance, and disposal of cleaning equipment....The potential savings in
energy and waste from using the no-clean process is significant" (Iman and Lichtenberg 1993).
A recent study of PCB corrosion has shown that "the reliability of CFC-cleaned PCBs and no-
clean PCBs are similar....[T]he no-clean process displayed no significant reliability differences
compared with the CFC-cleaned board" (Amoukhteh 1993).
IBM, after surveying the manufacturing locations that were responsible for about half of
the company's use of CFC-113, devised a strategy in which the phaseout "was framed as a design
problem for process and development engineers that would require innovation and invention for
success." The IBM San Jose operation had the highest industrial emissions of CFCs in the
United States in 1987 (1.5 million pounds). Yet this facility was able to eliminate CFCs entirely
by 1993, moving to aqueous cleaning and high temperature drying. The San Jose experience
became a model for other IBM facilities. According to company assessment, "while the overall
dollar value is difficult to assess, many of the projects have been highly cost effective....[T]he
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break-even point for site-wide CFC replacement occurred in the third quarter of 1991....[T]he
site will save a potential $3 million annually by eliminating CFCs" (Pruett et al. 1993).
Researchers around the world continue to push out the frontier of possibilities for
replacing CFCs in solvent applications. A recent article by Lu and Aoyagi (1994), while
conservative in avoiding claims that these new technologies are economically comparable to
CFC cleaning, lists multiple references in the technical and scientific literature to aqueous
cleaning, CC«2 snow (micro particle) cleaning, plasma cleaning, UV ozone cleaning, thermal
cleaning in high vacuum, chemical gas cleaning, ion cleaning, UV light cleaning, electrolytic
cleaning, electrostatic cleaning, and even surface cleaning by synchrotron light source, in
addition to their own work on laser-induced dry cleaning in air.
The experience of the electronics industry demonstrates that phasing out of ODSs can be
profitable and technologically progressive. While not all CFC replacement investments have
been cost-saving, the creativity shown, by this industry as the CFC phaseout date approaches is
encouraging. The electronics industry has pioneered the development of institutions for sharing
information on ODS replacement, such as the Industry Cooperative for Ozone Layer Protection
(ICOLP). Its effort in finding substitutes for ozone depleting substances represents one facet of
the industry's worldwide leadership in innovation.
C. Experiences of the Article 5(1) Countries.
Progress continues to be made by Article 5(1) countries in phasing out CFC use. There
is, however, some cause for concern because of the expansion of CFC consumption in some
rapidly-growing developing countries. According to the Ozone Secretariat, based on data
available as of 9 May 1994, consumption of CFCs in 16 Article 5(1) Parties for 1992 had
increased 45% since 1986. Consumption of other fully halogenated CFCs, methyl chloroform,
and carbon tetrachloride was also up, but consumption of Halons had fallen by 18% (OzonAction
1994). It should be noted that this estimate is based on incomplete information, because
reporting of data on ODS production, consumption, and trade is a problem that has resisted a
quick or easy solution, in part because of the strains already placed on the customs and statistical
services of Article 5(1) countries. (Data reporting continues to be a problem for some non-
Article 5(1) countries as well.) With country programs now being required by the Multilateral
Fund, data reporting will improve because data is required as part of the country programs. It
may also be that some of the apparent increase in Article 5(1) countries' consumption is merely a
statistical artifact, because some uses of CFCs were not included in countries' original
inventories and as data collection has improved these previously uncounted uses have been
measured. Some developing countries may also be increasing the amounts of CFC stored in
anticipation of future shortages, and such an accumulation of stocks would be distinct from an
increase in the rate of consumption.
A number of companies in Article 5(1) countries are acting on their own initiative to
phase out ODSs, without assistance from the Multilateral Fund or any other source. Egyptian
firms have replaced CFCs in aerosol applications. Manufacturers of flexible foams in Ghana and
Brazil have phased out ODSs entirely. The Republic of Korea's Samsung Electronics has
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become one of the world's first producers of a CFC-ftee refrigerator. Samsung's refrigerator has
a high-efficiency compressor that boosts overall energy efficiency. "[DJuty came foremost in
Samsung Electronics' motivations. [According to a Samsung spokesperson], The most
important reason is that Samsung recognized that its products were destroying the ozone layer,
which harms the health of the Korean people'—Another key factor was the world trend toward
the environmentally-conscious manufacture of products. Finally, Samsung saw an opportunity
to improve its competitiveness by being one of the most advanced initial producers of CFC-free
products" (Chai 1993).
Both China and India have active research programs to develop and commercialize ODS
substitute technologies. In India, the six major refrigerator makers are redesigning their products
to use CFC alternatives and increase energy efficiency at the same time. The project is being
advanced through the efforts of the Tata Energy Research Institute (TERI) and the U.S.-based
International Institute for Energy Conservation (EEC) Three refrigerator manufacturers (Godrej,
Voltas, and Kelvinator), with the participation of the German refrigerator maker Foron, have
begun a project with the Indian Institute of Technology and the National Chemicals Laboratory
to develop hydrocarbon refrigerators. In China, the U.S.-Sino Refrigerator Project, a joint effort
between the U.S. Environmental Protection Agency, the Chinese National Environmental
Protection Agency, and the Chinese National Council of Light Industry, is developing a non-
CFC refrigerator. Production is scheduled to begin in late 1995 or early 1996, and the new
refrigerator is expected to be over 50% more energy-efficient than the standard Chinese model,
in addition to having zero ozone depletion potential (Global Environmental Change Report
1994b, 1994e).
Multinational corporations operating in Article 5(1) countries have been an important
channel for technology transfer to facilitate the ODS phaseout. The globalization of production
has the effect of shifting production activities to areas outside of traditional locales, and with the
shift of production'has come the diffusion of ODS-free techniques. The technology transfer
across a multinational corporation's different operating units is one of the chief ways capital,
expertise, and operating procedures can move past national boundaries. In some cases, the
transfer has received the institutional support of governments (as in the trilateral agreement
between Thailand, Japan Mm, and the U.S. EPA, or the case of the cooperation between the
Government of Mexico, the U.S. EPA, and Northern Telecom).
Industry organizations such as ICOLP, JICOP, and JEMA have been influential in
securing a proactive response by multinationals operating joint ventures in developing countries.
ICOLP has begun a Technology Cooperation Project to work in partnership with Article 5(1)
countries in switching away from CFCs and other ozone depleters. Individual ICOLP members
will be teamed with each participating country to serve as technical advisors. The U.S.
Environmental Protection Agency and Japan's Ministry of International Trade and Industry will
also be involved. One example of this type of project is Motorola's cooperation with Malaysian
electronics and metal-cleaning companies to implement the latest aqueous and "no-clean"
techniques to eliminate ozone-depleting solvents. ICOLP members will share then* technology
and the time and talent of their experts, while travel and lodging expenses are underwritten by
the World Bank (Environment Today 1993a, 1993b). (See also Chapter 5 below.)
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The Multilateral Fund is a complementary source of financial support for Article 5(1)
countries striving to eliminate ODSs. The Fund has been distributing grants since 1991, and as
of July, 1994, has more than 600 projects totaling about $210 million in 73 countries. These
projects range from small grants in the $25,000 to $60,000 range for country program
preparation, to large projects of over $4,000,000 ID convert production lines to ODS-frce
technologies (Multilateral Fund 1994). At the 5th Meeting of the Parties, held in Bangkok in
November 1993, the budget of the Fund was increased to $510 million over the next three years
(1994-1996), more than double the budget for the previous three years (OzonAction 1993b). As
the Fund is augmented, its contribution to the ultimate elimination of ODSs will become even
more notable.
A continuing challenge to the Multilateral Fund is to increase the speed with which its
resources are deployed, without sacrificing project quality. Developing countries face
substantial transactions costs in eliminating ODSs—there is a need for educating industry and
the public to the seriousness of the ozone depletion problem, and difficulty identifying the
enterprises (which are often very small) that use ODSs. Engineering staffs are stretched thin,
and funds for investment tight. Once the effort has been made successfully to bring an ODS user
to the point of contemplating a changeover, it is essential that funding be available with a
minimum of red tape. The effectiveness of the Multilateral Fund in assisting developing country
phaseouts depends on its ability to reduce the transactions costs, not add to them.
The Multilateral Fund should continue to be able to fund research related to refinements
needed for the adaptation of existing technologies to developing country circumstances. This is
particularly important, as such refinements are often needed to optimize new technologies that
are being transplanted into new environments. However, given the limited resources available to
the Multilateral' Fund to achieve ODS reductions, it may not prove cost effective to divert
resources to such areas as bench research on new alternatives, as this type of research is likely to
be costly, duplicative of ongoing private sector efforts in other countries, and have little near
term impact on ODS reductions..
A strong motivation for developing countries' governments and enterprises to phase out
ODSs is their desire to produce exports that can be sold in developed countries. Globalization of
markets provides great opportunities for developing country manufacturers. The rapid economic
growth many developing countries have experienced recently, especially around the Pacific Rim,
is due in large measure to the ability of these economies to sell to consumers around the world.
In the case of products previously dependent on ODSs (such as refrigeration and air conditioning
equipment, vehicles, and electronics), continuation of this export success will require elimination
of ODSs on a schedule equivalent to that being followed in the non-Article 5(1) countries.
Already, the United States has labeling requirements that have stimulated ODS replacement in
Mexico, Thailand, and Turkey (UNEP 1994a).
D. The Case of Methyl Bromide.
Methyl bromide is used by field crop growers as a soil fumigant to control nematodes,
root rot, weed seeds, and various micro-pests that depress yields, and as a pesticide for
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commodity shipments and structures. This chemical accounts for between one-twentieth and
one-tenth of currently observed global ozone depletion, a fraction that could rise to as much as
one-sixth of predicted ozone loss by the year 2000 if methyl bromide emissions were to grow at
historical rates (UNEP 1992b). In addition to its ozone-depleting potential, it has been identified
as an acute toxin and has been implicated in pesticide poisoning of workers (Grobe and
Buchanan 1993).
Beginning 1 January 1995, methyl bromide will be controlled under the Montreal
Protocol to a level of production and consumption not to exceed 1991 levels. (For Article 5(1)
countries, production may exceed the 1991 level by no more than 10%.) (UNEP 1993a, p. 12).
The United States will freeze methyl bromide production and consumption at 1991 levels
beginning in 1994, and will phase out methyl bromide completely as of 1 January 2001 (U.S.
EPA 1993b).
The situation with respect to replacement of methyl bromide is analogous to conditions
that prevailed in the early stages of the process of replacing other ODSs. Some users and
producers of methyl bromide can now see no way the chemical can be replaced without causing
serious damage to their operations. Industry representatives question the scientific basis of the
concern that methyl bromide applied to the soil has an effect on the atmosphere and ozone layer.
Countries with significant agricultural exports that are currently treated with methyl bromide are
particularly sensitive (Zurer 1993a).
At the same time, a number of alternatives to chemical pesticides are already in use, or
are under development. For stored food products, these include biological controls, pheromones,
insect growth regulators, regulation of temperature, microbial controls, and trapping techniques.
As in the case of CFC and Halon replacement, the widespread use of some of these alternative
technologies has been hampered by cumbersome and inflexible regulation. For example, the
U.S. Food and Drug Administration appears in some cases to apply more stringent standards to
"contamination" of grain shipments by beneficial insect pest predators than it does to the pests
themselves. The present registration process "is hampering the development of many less-toxic
pesticides such as microbial insecticides, pheromones...and botanicals" (Olkowski 1988, 1989).
The United States Department of Agriculture "requires...that citrus fruit from Mexico and
grapes, apricots, peaches, nectarines, and avocados from Chile be fumigated [with methyl
bromide] before they enter the U.S." (Zurer 1993a). Regulations specifying a performance
standard, rather than requiring particular procedures (such as methyl bromide fumigation), would
ease the transition away from methyl bromide. Analogous is how the change in military
specifications from mandating CFC solvents in electronics manufacture to a performance
standard has helped electronics makers reduce their dependence on CFCs (Certo 1992,1993).
In soil treatment applications, researchers have shown that "active soil microbes can help
control root pathogens, and organic matter inputs supply nutrients, energy, and physical habitat
for microbes." As one strawberry grower put it, "methyl bromide has been a 'silver bullet' [i.e.,
an effective weapon against specific pests] for field crop growers, and as it is phased out, farmers
will transition to more sustainable methods of soil management, based on controlling soil pests
by encouraging establishment of beneficial organisms" (Grobe and Buchanan 1993).
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It is likely that the views and practices of the methyl bromide users will evolve in a
manner similar to those of other ODS users. Once the industry accepts that methyl bromide does
in fact pose a threat to the ozone layer, opposition to its phaseout will diminish. The executive
secretary of the North American Strawberry Growers Association has stated, "evaporation [of
methyl bromide] from the oceans is a greater source [than agricultural use]. But if it is proven
that methyl bromide is harmful, then we would not want to use it" (Zurer 1993a). Interim
measures for controlling emissions, such as better housekeeping, will be available for the short
run, while the search for, screening, and adoption of substitute technologies proceeds.
International experience and technology transfer will speed the process. Agriculturalists and
researchers in Australia, Mexico, The Netherlands, and Nigeria are among those already gaining
experience in relying on biologically complex, healthy soils rather than methyl bromide or soil
fumigation to control pests (O'Brien 1992). Alternative fumigation procedures are also
promising (Mueller 1994).
It is possible that some .of the innovation prompted by the regulation of methyl bromide
will yield processes that are cheaper and better on narrow economic grounds, just as has been the
case for many ODS solvent and aerosol applications. Even if the best alternative technologies
are more expensive than methyl bromide, Article 5(1) country users will be eligible for
assistance from the Multilateral Fund to meet the incremental cost of replacement
HI. EXPLANATORY FRAMEWORK.
A. ODS Replacement Can Have Multiple Benefits.
Economic theory and management science have been challenged to predict or even
understand the breakthroughs in ODS replacement that have already taken place. Most
conventional discussions of the impact of environmental regulations on productivity and
economic activity hold that the regulatory impact is, except for the benefits realized through
control of adverse environmental externalities, negative (Gray and Shadbegian 1993; Simpson
and Bradford 1993). On the other hand, there is a growing recognition in the literature that
pursuit of environmental protection goals can produce collateral benefits in productivity,
innovation, and competitiveness (Moore and Miller 1994; Porter 1991). To those actually
involved in the ODS phaseout process it is apparent that significant productivity and product
quality advantages frequently have accompanied the adoption of ozone-friendly technologies.
Partly this is the result simply of putting new equipment and methods in place. Any new
technology would have represented an improvement over the old, regardless of why the
innovation was adopted. Environmental regulation is only one of many stimuli for change.
It is notoriously difficult to evaluate the exact profitability of a new investment. Whole
firms or operating units can be observed to generate positive or negative cash flows, but when
changes are made within an organization, it is often not easy to quantify the costs and benefits
associated with the change. Innumerable factors that impinge on the overall performance of the
organization may be affected in complex ways by a change, and influences external to the
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organization may affect performance for reasons unrelated to the change. Elimination of ODSs
is mandated under law, so that conventional profitability criteria are not decisive in the decision
to go ahead with the investments.
Nevertheless, there is evidence that ODS replacement may be one of those instances in
which environmental regulatory pressure can have a positive net impact on organizational
performance. This possibility was discussed in the 1991 Report of the Economic Options
Committee, and the evidence that has accumulated since that time has not contradicted that
assessment Companies continue to report that the installation of new, ozone-friendly
technologies has improved quality and productivity, and that these investments "pay for
themselves" (UNEP 1991b and references cited therein; U.S. EPA 1993a; Kenward 1992).
It would be no simple matter to quantify the positive effects on morale, employee
motivation, and the firm's public image of the ODS replacement effort, or to weigh these factors
against the possible diversion of capital and managerial attention from other investment
opportunities. Regulatory pressure to eliminate ODSs can have the effect of inducing
management to re-engineer outmoded practices; it may also create additional burdens for
management already struggling with the tasks of downsizing or the imperatives of global
competition. It is difficult or impossible to know the returns that might have been earned on
projects not undertaken because resources were expended to convert to ozone-friendly
technologies.
Recognizing the difficulties of exact measurement, it is nevertheless possible to see both
theoretical and empirical reasons why the push to eliminate ODSs might offer firms direct
economic benefits. A sizeable literature documents that companies often do not take advantage
of all the profitable pollution-prevention opportunities available to them (Maize 1993/94;
DeCanio 1993; Cebon 1992). As a general proposition, this is not surprising; it would be
extraordinary if the large, complex modem business organization, spread as it typically is over
multiple locations and markets, were able to achieve maximum economic efficiency in all its
endeavors. If optimization of productive resources were easy to achieve, the task of
management would not be so difficult, nor would it attract the talent it does. Statistical
benchmarking studies show considerable room for improvement in input utilization (Button and
Weyman-Jones 1992).
Furthermore, if "organizational slack" is present (where slack is defined as "the excess of
resources allocated over the minimum necessary to accomplish the tasks assigned" (Antle and
Eppen 1985, citing Cyert and March 1963)), then external pressure can be a force driving the
firm to greater efficiency. This is, after all, one of the classical arguments in favor of markets—
competitive pressures lead firms to get the most out of their personnel and material resources.
The same can be true of regulatory pressure. If the externally determined need to eliminate
ODSs focuses managerial attention, stimulates technological creativity, and elicits innovative
responses from all levels of the organization, then it is quite possible that the regulation has
provided a gain to society that goes beyond the primary benefit of protecting the ozone layer.
National regulations to accomplish the phaseout of ODSs have generally involved the
setting of performance standards. That is, the regulatory requirement has been to eliminate the
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use of ODSs, regardless of the technological route followed to achieve that goal. This approach
stands in contrast to the type of "command and control" environmental regulation that specifies
particular technologies that must be grafted onto an existing industrial facility. There is usually
more room for innovation if environmental regulation takes the performance standard form.
Setting performance targets makes it possible to achieve compliance through technologically
progressive means, whereas mandating specific technologies often means simply adding a layer
of cost to the production process. Allowing technological flexibility enables manufacturers to
rethink design issues and approach production processes with a fresh perspective, if such
changes can achieve the environmental goal most efficiently. The ODS elimination case
provides concrete examples of the economic justification for this approach.
Despite these potential collateral benefits, the changeover to ozone-friendly technologies
in many instances will be costly on net to firms and consumers. Some non-ODS methods will
have higher operating expenses, and in most cases investments must be made to effect the
transition. The relative smoothness of the phaseout up until now may reflect the likelihood that
the easiest substitutions were the oines that were made first. Certainly for firms in some
countries, the cost or unavailability of capital to implement alternative technologies looms large.
The Multilateral Fund, of course, is intended to compensate for incremental costs in Article 5(1)
countries when the substitute technologies are more expensive than the ODS technologies they
replace.
It is not the purpose of this Report to make a final determination of the degree to which
the global drive to replace ODSs has increased or decreased the productivity of industry at large.
We can only note the phenomena alluded to above, and maintain that the data on industrial
change provided by this "natural experiment" should be examined more deeply for underlying
patterns. What is clear is that the ODS phaseout experience proves that it is possible for a major
environmental concern to be thoroughly assimilated into corporate, governmental, and popular
cultures.
B. Differences Across Sectors.
One way of classifying ODSs is by their applications—as solvents, aerosol propellants,
foam-blowing agents, refrigeration working fluids, etc. This is the scheme that has been used by
the UNEP Technical and Economic Options Panels in the past, and it has the advantage of
grouping ODS applications in a way that makes the engineering knowledge generated through
the substitution process more easily available across firms. Another way of looking at the ODS
applications is by the product markets in which the ODS-using firms operate. This is already
recognized to some extent by, for example, splitting mobile air conditioning applications from
industrial chillers within the "refrigeration sector."
Technical considerations are one determinant of the speed at which ODS substitution
takes place. It is relatively easy to replace CFCs as aerosol propellants, because the engineering
problems that must be solved (finding a propellant that does not contaminate the active agent,
that can store sufficient energy in compressed form, and that can be incorporated into the
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manufacturing process at low cost) are not too demanding. In other cases, however, the
applications appeared to be technically difficult, yet substitution proceeded at a rapid pace.
The leading example of this apparent paradox has been the replacement of CFCs
(especially 113) as solvents in electronics manufacture. The electronics industry is very far
along in the phaseout of ODS solvents as of the time of this Report. This is despite the fact that
113 was thought to be so essential to high-tech electronics at the time the original Protocol was
negotiated that there was discussion of excluding it from the list of controlled substances
(Benedick 1991). The success of the electronics industry in eliminating ODS solvents is due in
part to the industry's research orientation and the fact that its products' lifetimes are short, as well
as to the strategic importance of the industry. The electronics industry is built on innovation and
rapid replacement of established lines. These characteristics gave electronics equipment
manufacturers a foundation for the kind of response needed to phase out ODSs quickly.
Other industries are less research-intensive, and have products with lifetime's measured in
decades rather than years. For example, household refrigerators are designed to last 20 to 30
years with very low maintenance. Premature introduction of a technology for which the bugs
have not all been worked out can be very costly, as a major U.S. refrigerator maker found when
it incurred a $450 million pre-tax loss in 1988 because of having to recall models built with a
compressor that had not been adequately field tested (Holusha 1992). Refrigeration is a
"mature" industry, in that (at least in the developed countries) the market consists largely of
replacement of existing equipment, with some growth associated with new residential
construction. In such an industry, the rapid phaseout of CFCs has presented a challenge
requiring a new approach to product development.
The refrigeration industry has responded innovatively. For example, in the United States
a consortium of 24 electric power utilities sponsored a competition for design and marketing of a
super-efficient refrigerator, one that would be up to 50% more energy-efficient than existing
comparable models (and at least 25% better than 1993 federal energy efficiency standards), and
would be entirely CFC-free. The prize was $30 million, awarded on a winner-take-all basis.
The Super-Efficient Refrigerator Program (SERP) contest was won by Whirlpool, which
succeeded in producing a model that exceeded the energy-efficiency target. The Whirlpool
SERP refrigerator is approximately 30% more efficient than the current government standard.
The refrigerator incorporates only "conventional" components (i.e., no fundamental change in
compressor technology or cooling cycle) and uses HFC-134a as its working fluid. At current
electricity rates, the refrigerator will save its owner $15-20 each year in electric bills (hundreds
of dollars over the product's lifetime), and will cost no more initially than a conventional
refrigerator of the same capacity. Whirlpool plans to market a few hundred thousand units over
the next three and a half years (Langreth 1994; Global Environmental Change Report 1992).
Stimulated by the imminent elimination of CFC production, the refrigeration industry has
a number of other CFC-free and energy-efficient technologies either in early marketing or under
development. For heating, ventilation, and air conditioning (HVAC) systems, desiccant cooling,
in which heat is exchanged through evaporation and the energy is supplied by combustion (of
natural gas, for example) is a potentially attractive alternative to compressor-based cooling
cycles (Wald 1992). For appliances, other technologies are being considered, ranging from
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vacuum insulating panels (already introduced in a large-capacity refrigerator model in Japan by
Sharp Corporation (Global Environmental Change Report 1994a)) to thermo-acoustic
refrigeration in which a standing sound wave produces the compression/expansion cycle
(Restaurants & Institutions 1993; Browne 1992; Scientific American 1992). Sizeable efficiency
gains have been achieved experimentally using hydrocarbon mixtures in a two-evaporator
modified Lorenz-Meutzner cycle refrigerator (Liu et al. 1994). Even without fundamentally
changing the compression cycle, it appears possible to achieve energy savings through the use of
alternative cooling fluids (Zurer 1993b; Liu et al. 1994). Most large German refrigerator
manufacturers have launched a hydrocarbon refrigerator or are planning to do so, in addition to
offering models that use HFC-134a. Bosch-Siemens recently announced that by the start of
1995, more than 80 percent of its production will use hydrocarbons only, and the German
manufacturer Liebherr is likely to follow Bosch's lead (Knight 1994; MacKenzie 1994). United
States manufacturers' reluctance to pursue technologies involving flammable working fluids may
be linked more to flaws in the U.S. ton liability system than to rational risk or cost/benefit
calculations.
Product cycle considerations are important elsewhere within the refrigeration "sector."
Automobile manufacturers worldwide are on the brink of changing over completely to HFC-
134a in the air conditioning systems of their new models. To accomplish this, the time for
redesign of the automobile air conditioner was cut to three years or less. The design cycle for
United States automobile producers historically has been five years or more (Dertouzos et al.
1989), although it has been less in other countries. Acceleration of the mobile air conditioner
design schedule can be seen as part of a general move in automobile manufacturing towards
faster response to changing consumer preferences, and the annual model changeover in this
industry offers a natural opportunity for rapid adaptation.
C. Analogies to Other Large-Scale Technological Initiatives.
The, global ODS phaseout effort is a policy-driven technological initiative with few
historical precedents. Large-scale projects at the frontiers of technology have been attempted
before, with mixed success. No one knew whether it would be possible to land humans on the
moon by 1970 when President Kennedy announced the Apollo program in 1961. The rockets
that eventually would carry astronauts to the lunar surface and back had not been built, although
their underlying design and principles were known. It was not clear that humans could function
at the requisite level of efficiency under prolonged weightlessness, and the configuration of the
Lunar Excursion Module (LEM) was untested in practice. The Apollo project met its timetable,
but it was a risky enterprise and one of the lunar voyages (Apollo 13) very nearly ended in loss
of the entire crew after an oxygen tank explosion in space (Sagan 1994; Cooper 1973).
NASA's subsequent woes suggest that there are dangers to overcentralization in
attempting to implement massive technology programs. The advantages of simultaneous pursuit
of parallel strategies, and the difficulties large bureaucracies have in nurturing creativity, bear on
the advisability of attempting to accomplish ambitious technological goals through huge
government investments. Unlike Apollo, the ODS replacement problem has had the advantage
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that the optimal scale of substitute technologies has been within the reach of existing business
units.
Another example of a goal-oriented innovation drive is the Fifth Generation Project
sponsored by Japan's MTTI to create Artificial Intelligence (AI) hardware and software.
Although this project produced a substantial body of useful results, especially in the
development of parallel processing, it did not achieve its more ambitious AI goals (Sims 1993).
It should also be borne in mind that not all technological and scientific challenges are equally
tractable. Substantial resources have been and are being invested in the search for a vaccine or
effective treatment for AIDS, but so far this problem has resisted solution.
Of course, neither the Fifth Generation, the Apollo Project, nor the search for a cure for
AIDS is entirely akin to ODS phaseouL Unlike the Apollo Project, protection of the
stratospheric ozone layer has been a global rather than a national effort. Unlike Apollo and the
Fifth Generation, ODS replacement has been very widely diffused across industrial sectors and
applications, rather than being concentrated in single big push or a small number of industries.
The drive to find replacements for ozone depleting substances has had no linkage to the
development of weapons systems (although the military has contributed in a major way to the
substitution effort). Apollo was a federal program paid for out of government revenues, while
ODS replacement, except for those activities supported by the Multilateral Fund, has been
financed largely within the private sector.
One feature of the ozone protection effort that is similar to scientific research is the spirit
of cooperation that has suffused the community of people devoted to the task. Although
elements of commercial rivalry have not been entirely absent, the depth and extent of
cooperation has been remarkable. ODS replacement technologies that might, in other
circumstances, have been closely guarded as industrial secrets instead have been shared widely
and published in trade and scientific journals. Typical of this openness is the annual
International Conference on CFC and Halon Replacement. Since the first such conference was
held in 1991, attendance has risen to over 2100 participants from more than 50 countries at the
third annual Conference in 1993 (Environment Today 1993c). These conferences, organized by
the Alliance for Responsible CFC Policy (which recently changed its name to Alliance for
Responsible Atmospheric Policy) in cooperation with the U.S. Environmental Protection
Agency, Environment Canada, and UNEP, are conducted in the style and format, of a scientific
meeting. The Conference Proceedings are published, and the sessions are open to the public.
Perhaps it is fitting that the ozone protection effort, which originated with scientific hypotheses
advanced during the mid-1970s and which has been fueled by the accumulation of scientific
evidence on the extent and effects of ozone depletion since then, should resemble the process of
scientific discovery as much or more than it does the ordinary course of industrial development.
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IV. CONCLUSIONS AND GENERAL OBSERVATIONS.
ODS replacement is proceeding at a rapid pace, but continued work will be needed to
complete the job with a minimum of cost and industrial disruption. Every effort should be made
to manage intelligently the existing stock of ODSs so that otherwise useful capital and durable
goods are not rendered prematurely obsolete (see Chapter 7 below). The Parties individually and
collectively must recognize that regulatory uncertainty and indecision creates confusion in the
minds of consumers and manufacturers, thereby prolonging the use of ODSs and increasing the
cost of their phaseout. Judicious use of transitional chemicals such as HCFCs can help speed the
elimination of CFCs, without overburdening the atmosphere with chlorine during the transition.
The best should not become the enemy of the good; uncertainty regarding the regulatory future
of transitional substances can have the perverse unintended consequence of prolonging
attachment to CFC technologies, especially in Article 5(1) countries.
The situation of the developing countries remains a critical element in the global effort
Transfer of ozone-friendly technologies to Article 5(1) countries by multinational firms and
through government-business partnerships should be encouraged by all reasonable means. The
pipeline of assistance through the Multilateral Fund to compensate Article 5(1) countries for the
incremental costs of avoiding ODS use must remain filled. Resources of the Multilateral Fund
should be maintained at a level adequate to carry out its mandate.
Enterprises around the world should view the elimination of ODSs as an opportunity for
technological and organizational innovation. Given that new investments have to be made to
replace older technologies, private firms and state enterprises can take advantage of the situation
by (a) implementing up-to-date methods, (b) rethinking their design and production processes to
gain the maximum collateral benefits from the required new investments, and (c) examining
whether the experience gained in ODS replacement can be applied to other aspects of then-
operations. Even if innovation driven by overriding environmental concern (such as protection
of the stratospheric ozone layer) is not narrowly profitable, it should be possible for
organizations to draw useful lessons for improving then- overall efficiency.
Government regulators should notice the advantages of a cooperative and "user-friendly"
approach to the industries engaged in ODS replacement. A great deal has been accomplished to
date through the exchange of information, facilitation of technology transfer, and focusing the
attention of top management on the ozone depletion problem. In part, the high degree of
cooperation between industry and government rests on the scientific foundation of our growing
understanding of the causes and effects of ozone loss. Rational individuals, whether members of
environmental NGOs, government regulatory agencies, or local or multinational corporations,
have a strong interest in avoiding the planetary disasters that would have accompanied
unchecked growth in ODS emissions.
At the same time, we should not lose sight of the fact that the ozone protection movement
has been built upon appeals to the social responsibility of individuals, firms, and governments, as
well as to their self-interest. It is one of the tasks of policy-makers to give tangible institutional
form to the shared values and commonalities that unite diverse groups. When, as in the case of
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ozone layer protection, the underlying values are deeply and widely held, responsible authorities
in government and the private sector have a unique opportunity to maximize agreement among
all concerned. The ozone protection effort has demonstrated just how far such a process of
consensus-building can extend.
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CHAPTER 2
THE IMPLEMENTATION OF THE MONTREAL PROTOCOL
L INTRODUCTION
There is a learning process embedded in the accumulating experience with
implementing the Montreal Protocol. It is clear that the main actors are moving up the
"learning curve". Key examples are as follows:
(a) both donors and recipients of financial assistance under the Protocol are
learning how to work together to achieve a common global environmental
objective;
(b) the evolving policies and operational guidelines of the Multilateral Fund
demonstrate a deepening understanding of how to make effective use of the
incremental cost concept;
(c) the Implementing Agencies are streamlining their responses to the evolving
performance requirements of the Multilateral Fund;
(d) industry's creative responses to the technological challenges posed by the ODS
phaseout schedules demonstrates the power of its cumulative effort to deliver
cost-effective solutions to a global environmental problem;
(e) developing countries, operating under Article 5(1), are taking advantage of the
Multilateral Fund to strengthened their institutional capacities to manage ODS
phaseouts; and
(f) other non-governmental organizations are finding new ways to use their
environmental commitment and resources to influence the implementation
process.
This mutual learning process has nurtured an atmosphere of trust and confidence
between the main actors that must be brought to bear on the resolution of the remaining
challenges facing the implementation process.
A. Background on the Multilateral Fund.
The Montreal Protocol (MP) was agreed in 1987. At that time, the Protocol did not
include explicit provisions for technical assistance to developing countries.
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In 1990 the Parties agreed the London Amendment to the Protocol; it established the
Multilateral Fund (MF) to assist the developing countries, operating under Article 5(1), to
achieve compliance with the Protocol. A list of activities eligible for Multilateral Fund
assistance was also negotiated during the London Meeting of the Parties (Indicative List of
Categories of Incremental Costs, 1990).
The activities of the Multilateral Fund are managed by an Executive Committee
(ExCom) assisted by its Secretariat. It determines the policies and operating procedures, and
approves all financing undertaken by the Multilateral Fund. The Executive Committee has
approved operating guidelines for the Fund (Multilateral Fund Information Package:
"Procedures, Policies, Guidelines, and Criteria", 1993).
The Parties agreed to an initial funding level of US$240 million during 1991-1993.
At the 5th Meeting of the Parties in Bangkok (November 1993), the Parties agreed to a
second tranche of US$510 million for the period 1994-1996.
The Fund invests in projects on a "first-come, first-served" basis ie there are no pre-set
allocations of the Fund for each Article 5(1) Party. These projects are carried out by the
Implementing Agencies (lAs). The Fund engaged three lAs to assist the Article 5(1) countries
in developing projects for ODS elimination ie the United Nations Environment Programme
(UNEP); the United Nations Development Programme (UNDP); and the World Bank (WB).
UNEP, as an implementing agency of the Fund, takes the lead role in the scientific assessment
of ozone layer depletion, technology and economic assessment of ODS alternatives, and the
special IE/PAC program for the dissemination of technical information. UNDP is responsible
for developing and implementing technical assistance programs whereas the World Bank is
responsible for the investment projects of the Fund. The specific roles of the three lAs were
assigned in recognition of their respective expertise. Subsequently, the United Nations
Industrial Development Organization (UNIDO) became a fourth implementing agency.
This attempt to exploit the existing expertise of established international institutions
as implementing agents for the Executive Committee has revealed some coordination
problems; these are being addressed by the Executive Committee. In particular, the lAs have
been competing with each other for investment projects on behalf of the Article 5(1) countries
with results that, whilst not without benefit, have raised questions about the efficiency
implications of these practices.
On the country level, the lAs have concentrated on preparing Country Programs (CP)-
including data collection on ODS uses - and on investment project identification and
preparation. These efforts have sometimes produced confusion and duplication of effort which
reflects both the weak institutional capacities of the Article 5(1) countries and the competitive
behaviour of the lAs in seeking "ownership" of specific project proposals. The creation and
strengthening of the National Ozone Units (NOUs) in the Article 5(1) countries and the
endeavors of the Multilateral Fund and the Implementing Agencies have been important in
progressing the resolution of these operational inefficiencies.
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Further efforts are required to accelerate the implementation process, especially to raise
the efficiency of technical assistance activities and project financing. Progress is being made
through the work of the Executive Committee and the Secretariat, in cooperation with the
Implementing Agencies, in clarifying policy issues, operational procedures and the respective
roles of the lAs in the implementation process to resolve remaining inefficiencies..
Nevertheless, the Multilateral Fund has approved over 600 activities costing US$191
million in over 73 Article 5(1) countries; and a further US$6.9 millions has been provided by
seven donor countries for bilateral projects. Once fully implemented, these projects are
expected to phase out over 40,000 ODP tonnes of ODSs; total ODS use for all Article 5(1)
countries in 1993 is estimated at 235,000 tonnes (UNEP 1994).
The World Bank is the Implementing Agency for 197 projects amounting to 53.3 per
cent of disbursed MF funds; UNDP is implementing 223 projects amounting to 27.1 per cent
of disbursed funds.
In terms of sectoral allocations, Table 1 shows that the largest shares have been
allocated to the refrigeration (US$70.37 millions) and the foam sectors (US$48.79 millions).
Projects affecting several sectors at once were allocated US$36.76 millions eg preparation of
country programs, investment projects and global conversion projects (MF 1994).
The data in Table 1 do not include (1) the funds provided by governments and
companies in the Article 5(1) countries to phase out ODS uses for commercial reasons eg
competitiveness in export markets; (2) funding provided by donor countries to support other
activities related to ozone layer protection eg meteorological network systems to monitor
ozone depletion in Article 5(1) countries; or (3) in-kind contributions from companies or other
institutions in the donor countries to support technical assistance in the Article 5(1) countries
eg International Cooperation for Ozone Layer Protection (ICOLP).
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TABLE 1:
PROJECT ALLOCATIONS BY IMPLEMENTING AGENCY AND SECTOR (AS AT JULY 1994)
(INTHOUSANDUSS)
Sector
Aerosol
Foam
Fumigant
Halon
Multi-sec.
Other
Production
Refrig.
Solvent
Several
Total
IBRD
9,180
20,919
3,203
5,386
4,720
240
37,477
8,373
16,272
105,770
UNDP
384
25,666
87
2,046
13,061
4,111
8,444
53,799
UNEP
130
280
856
9,768
11,034
UNIDO
2,110
17,187
684
944
20,925
Bilateral
6
91
2,568
1,787
1,207
1,330
6,989
Total
9,700
48,786
87
8,097
5,386
4,720
240
70,368
14,375
36,758
198,517
Source: Multilaterial Fund, consolidated Progress Report (September 1994)
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B.
Evolution of die Multilateral Fund
The Multilateral Fund began operating in 1991. It is a unique endeavor in global
environmental cooperation for which there were no operating models to emulate. In its first
year of operation, The Executive Committee set up the Secretariat and recruited its
professional staff. It also initiated policy guidelines and operational procedures as well as
taking decisions on those issues that arose out of the reviews of the project proposals
presented by the Implementing Agencies. The benefits of these efforts can be seen in the
increasing efficiency with which decisions on subsequent project proposals have been taken.
Following their service agreements with the Executive Committee, the Implementing
Agencies have been refining their operational procedures to meet the specific needs of the
Multilateral Fund. Some of their procedures have had to be redesigned and new policy, and
new operational issues resolved eg negotiating "the letter of agreement" ; identifying "focal
points" in the Article 5(1) countries; providing technical support; and creating appropriate
reporting systems to manage these new activities. In practice, the process of identifying and
responding to the needs encountered in the Article 5(1) countries and in presenting their
findings to the Executive Committee has been a time-consuming task. It involves putting
technical missions in the field, preparing submissions to the Executive Committee and dealing
with a range of new policy issues the resolution of which can make it necessary to
reformulate individual project proposals. As part of this process, the Implementing Agencies
are required to prepare full reports three or four times each year on their respective activities -
current and prospective - and to submit their work programs. Most of the operational
difficulties have been resolved and, more recently, the Article 5(1) countries have been
receiving more active and effective support - and faster results - with their project proposals.
Following the progress made in establishing the National Ozone Units and in the
preparation of country programs, these Units are reporting a lack of support from the
Implementing Agencies - and their consultants - in taking the implementation process beyond
the gaining of Multilateral Fund approval for their respective country programs.
There have also been difficulties in selecting ODS alternatives. Over time, however,
the identification of effective ODS alternatives gradually has become much clearer, the main
actors in the implementation process have moved up the "learning curve" and the Multilateral
Fund is enhanced its capacity to accelerate progress. Even so, it is important that any
remaining sources of delay in the implementation process should be dealt with as quickly as
possible.
So far, the most rapid progress has been achieved in the aerosol and solvent sectors
where cost-effective solutions have been readily available. Yet, even in these sectors, the
solutions range from
(a) those of a generic nature for a small number of readily identifiable users to
(b) those of a specific nature for large numbers of individual small users that can
be hard to reach through technical assistance programs.
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Most of the research and technical assistance effort has been concentrated on the
refrigeration and foam sectors. These sectors represent the major share of ODS use, but also
face substantial uncertainly over the selection of the most appropriate ODS alternatives. The
economic implications are also very large given the risk of triggering early replacement or
obsolescence of large stocks of equipment by committing to existing alternatives prematurely.
Tactically, the large ODS using industries are targeted first as they offer cost-effective
opportunities for ODS reduction. Subsequently, however, the challenge moves on to the small
and medium enterprises (SMEs) which tend to be locationally dispersed, difficult to reach, and
lack the skills required to prepare projects or to understand the available technical options and
their implications. Also, SMEs tend to lack the formal organizational structures or regular
supplier networks that would otherwise be well-placed to help them to select and implement
ODS alternatives.
In most Article 5(1) countries, the SMEs sector accounts for major shares of industry's
output and employment, and it is growing faster than the economy as a whole. The
management skills, financial resources and technical expertise of SMEs tend to be low,
thereby increasing the cost of assisting them. Specific proposals to deal with these problems
are being developed eg UNEP lE/PAC's support to National Ozone Units; and the World
Bank's proposed "umbrella agreements" to provide more cost effective financial support for
a group of small, but related, individual investment projects.
Whilst these initiatives will help the implementation process in the Article 5(1)
countries, the need to develop user-friendly guidelines for investment project submissions
remains a top priority. Securing agreement could prove difficult to achieve, but the
Implementing Agencies and the Article 5(1) countries require guidelines that minimise.the risk
that project applications will fail to gain Executive Committee approval on procedural
grounds. Their successful negotiation could substantially reduce the cost of the
implementation process.
The existence of the Multilateral Fund provides a signal to ODS producers and users
in the Article 5(1) countries that financial support is possible for an early ODS phaseout. If
the governments are convinced that the technical and financial assistance is available and that
the guidelines and procedures necessary to acquire it are fully understood, then industry is
much more likely to pursue early ODS phaseouts.
C The Multilateral Fund as a Model.
The structure of the Executive Committee of the Multilateral Fund and its procedures
are innovative in several important aspects.
It was established with equal voting rights for the donor and Article 5(1) countries.
The Executive Committee has 14 Parties as members; 7 are donor countries and 7 are Article
5(1) countries. It has become established practice for Parties to share the seats thereby
increasing the number of Parties involved in the decision-making process. The voting
procedure is based on a double majority system ie decisions require a simple majority in both
the donor group and the Article 5(1) group of Parties. So far, all decisions have been by
consensus; there has been no need to use the voting mechanism. These procedures and
practices have contributed to a high .degree of consensus and understanding between the
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Parties.
The Executive Committee has itlso transformed the incremental cost concept into an
operational tool for guiding the allocation of financial resources. The Multilateral Fund,
established under the Montreal Protocol, is intended to meet all agreed incremental costs of
eligible Parties to enable them to comply with the control measures of the Protocol. The
Protocol provides an Indicative List of Categories of Incremental Costs (ILCIC). While the
ILCIC remains the guiding principle for defining what constitutes incremental costs, the
experience of the Implementing Agencies and the Executive Committee in dealing with
projects has helped to the transform indicative categories into operational procedures.
Incremental cost is broken down into the four categories; baseline costs, project costs, the
economic life of the project, and the discount rate. To calculate the incremental cost of a
project, the costs of each of these components must first be estimated. To improve the
consistency in the decision-making process, the Executive Committee has negotiated mutually
accepted interpretations of a number of policy issues and operational procedures of importance
to taking decisions on investment project submissions by the Implementing Agencies.
Both the voting mechanism and the incremental cost concept of the Montreal Protocol
were brought into the discussion of the recent restructuring of the Global Environmental
Facility (GEF). The GEF has not adopted the Protocol's voting mechanism nor an indicative
list of categories of incremental costs. However, it does provide for the financing of "agreed
full incremental costs". These differences in operating procedures have a bearing on the
implementation of the Protocol to the extent that the GEF funds the incremental costs of the
"transitional economies" of Central and Eastern Europe; they do not meet the criteria for
Parties operating under Article 5(1) and therefore do not have access to the Multilateral Fund.
However, it is thought unlikely that there will be any significant differences between the
operating procedures of the GEF and the Multilateral Fund with respect to the implementation
of the Montreal Protocol.
IL TECHNOLOGY TRANSFER
t
A. Diffusion.
The successful implementation of the ODS phaseout in the Article 5(1) countries
depends largely on the transfer of technology from the industrialized countries. Their
technological responses to accelerated ODS phaseout schedules
have generated leadership in the development of ODS alternatives. The technical "know-
how", equipment and ODS substitutes mat they have developed are resources that the Article
5(1) countries need to draw upon in meeting their commitments under the Protocol.
The Parties to the Protocol have emphasized the importance of using the best
available technologies. They have agreed, in Article 10A, that technology transfer to the
Article 5(1) countries should be transacted under "fair and most favorable conditions". It
should include production methods, equipment, instruments, and supporting services of
information, training, and management. It is important that such transfers are consistent with
sustainable development criteria and respect intellectual property rights.
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Examples of successful diffusion can be readily identified. Most are the result of
normal commercial transactions. Others originate in the collaborative efforts of companies in
pursuit of their mutual interests in the implementation process. Good examples are provided
by consortia such as PAFT, AFEAS and ICOLP. They are making important contributions to
the ODS phaseout process through the transfer of information, "know-how" and technologies,
and through the testing of the efficiency and suitability of newly developed ODS alternatives.
B.
Channels.
Technology flows from stake-holders to users through various channels. In practice,
the channel used depends on the following factors:
(a) industrial, trading, technological and financial relationships between
countries and commercial enterprises;
(b) the quality of the recipient's economic, political and social
infrastructure;
(c) regulations and practices regarding investment and the protection of
intellectual property rights (IPRs);
(d) the availability of appropriate technical and management skills;
(e) the availability of finance; and
(f) the services of institutions with the capacity to facilitate technology
transfer.
, It is in the interests of the Article 5(1) countries to direct their investment towards
proven technologies. Faced with tight resource constraints, it is important for them to
minimize the risks of investing in technologies that have not yet been fully tested or are still
in the research stage.
Firms in Article 5(1) countries operating under licenses or as subsidiaries of multi-
national corporations can have prompt access to new ODS alternative technologies through
the commercial interests and resources of their parent corporations. Such corporations can
ensure effective technology transfer through their management controls over policy, personnel,
training, technology and financial resources.
For most firms in the Article 5(1) countries, the transfer of ODS alternative
technologies is more problematic. Typically, these are small or medium-sized enterprises
(SMEs) with limited capacities to switch to ODS alternative technologies on their own. They
have to make use of the services of several independent organizations - some domestic and
others international - with different and often competing managements.
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The Multilateral Fund is the main channel under the Protocol for facilitating
technology transfer to the Article 5(1) countries. It does so largely through its Implementing
Agencies. This operating structure offers advantages through taking advantage of the expertise
of established international institutions, but it also has inherent potential to generate problems
of coordination.
The Protocol also accommodates bilateral technology transfer programmes. Up to 20
per cent of a donor's assessed contribution to the Multilateral Fund can be allocated to
bilateral assistance programmes. Where effective, bilateral assistance is well-received by the
Article 5(1) countries.
In the Article 5(1) countries, the National Ozone Units are facing practical difficulties
in coordinating the activities of the multifarious groups that have interests in the
implementation process. Given the complexity of the process and the limitations on their
resources and powers, the National Ozone Units face a demanding task.
C Joint Ventures.
Joint ventures between local firms in the Article 5(1) countries and the stakeholders
in the industrialized countries have been successful in a number of sectors, but they are not
yet prominent in ODS phaseout activities. Their potential contribution suggests that they
should be encouraged.
The opportunities for joint ventures in Article 5(1) countries is improving as they
move towards more open, free market economies. As privatisation of public sector industries
proceeds, the responsibility for technology transfer is shifting from public authorities to
private enterprises. These firms are bound to encounter constraints on the availability of
technical information, equipment, technical and management skills, and finance in their efforts
to introduce ODS alternative technologies. Joint ventures offer the possibility of easing these
constraints. Of course, resources do not come free. There is a price to be paid in terms of
.management control and profit-sharing.
Making progress with joint ventures requires more intensive efforts to match up
potential partners. Trading relationships developed through normal commercial channels can
be a promising way of identifying potential partners. For example, the efforts of UNEP
IE/PAC to disseminate technical information regarding ODS alternative technologies and their
suppliers, as well as providing access to a database on national ODS phaseout activities, may
also provide opportunities for bringing together potential partners.
D. Categories.
Three categories of technology transfer to the Article 5(1) countries can be identified.
(a) The transfer of production technology for phasing out high ODS
consumption. These tend to be Article 5(1) countries with large
domestic markets eg China; India; Brazil.
(b) Technology transfer to countries with moderate ODS consumption used
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largely in the production of manufactured goods for export eg Thailand
and Egypt.
(c) The transfer of recycling technologies to provide ODSs for the
recharging of existing equipment eg The Cameroons.
The cost-effectiveness of implementation programmes in Article 5(1) countries could
be improved by encouraging the National Ozone Units to focus on giving priority to relatively
large ODS usages for which their are readily available ODS alternatives that make possible
ODS reductions at relatively low cost per ODP tonne. Management information of this kind
is important to identifying phaseout strategies to guide the implementation process -including
the submission of project proposals to the Multilateral Fund.
E. Selection of Technologies.
The selection of ODS alternative technologies should be made with respect to explicit
criteria. Specifying the criteria and of evaluating performance helps to clarify the respective
contributions of alternative technologies to the national ODS phaseout strategy. In particular,
these procedures would help those take decisions on the proposals of competing suppliers eg
commercial managers and the members of the National Ozone Units.
Appropriate criteria might include the following:
(a) technical feasibility, commercial availability and performance
characteristics;
(b) economic efficiency, taking into account all incremental costs and
benefits eg investment costs; recurrent costs; dislocation costs;
infrastructure costs; market prospects for the relevant products;
calculated present value; and calculated incremental cost;
(c) human health and safety aspects;
(d) implications for other environmental objectives eg water quality;
atmospheric emissions;
(e) local capacity to manage the technical, economic financial, and political
dimensions of specific
projects; and
(f) the implications for wider economic, social and political objectives over
and above the net benefits of ODS phaseout itself.
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F. Special Circumstances of Developing Countries.
Particular attention must be given to the special circumstances of the Article 5(1)
countries with respect to their influence on the technology transfer process.
The economies of the Article 5(1) countries have relatively large, though under-resourced,
small and medium-sized enterprise sectors (SMEs). They contribute substantially to national
output and have relatively high rates of growth. However, their technical and management
skills are not well-developed and they are handicapped in the technology transfer process by
their limited knowledge of the foreign languages that are needed to gain access to new
technologies, management practices and the services of international organizations.
Furthermore, they tend not to have ready access to the services of local trade associations or
of similar institutions.
These special circumstances need to be taken into account in efforts to facilitate
technology transfer to Article 5(1) countries. In particular, it is recommended that:
(a) only commercially available, proven and widely-used equipment that
is matched to local skills and supply infrastructures should be
considered;
(b). capital and skill limitations should be recognized;
(c) administrative procedures should be simplified;
(d) implementation though official agencies should not distort competition
in local markets unnecessarily; and
(e) institution-building for local industry should be encouraged (eg
strengthening the services provided through local trade associations).
BO. ISSUES ENCOUNTERED DURING IMPLEMENTATION
The establishment of the Multilateral Fund in 1990 was a important step for the
Montreal Protocol. Since that time, many policy and operational issues have been addressed,
and much has been learned about the special problems facing the Article 5(1) countries. This
section identifies some current implementation issues and discusses options that might be
taken to address them.
A. Priorities of the Article 5(1) Countries.
Article 5(1) countries have many pressing economic, social and political problems that
compete for resources against demands for environmental protection eg protecting the ozone
layer. In some Article 5(1) countries there is no governmental organisation specifically
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responsible for environmental protection; and in cases where one does exist, the responsibility
for ozone layer protection is often divided amongst several governmental organizations such
as Foreign Affairs, Meteorology, Health, Housing, Agriculture, etc.
In recognition of these circumstances, the Executive Committee of the Multilateral
Fund is resourcing the establishment of National Ozone Units (NOUs). To date, the Fund has
helped to establish 42 NOUs. Typically, they are staffed by 1 to 3 full time professionals,
perhaps with additional support staff, to work with NGOs, industry associations, ODS users
and suppliers, academic experts and individual ODS users. The Multilateral Fund resources
are devoted exclusively to ODS elimination activities. It is in the best interests of the Article
5(1) countries to recruit personnel of high quality to manage these activities. Also, the NOUs
must be given sufficient powers and resources to ensure that they can make substantial
contributions to the development of ODS phaseout policy.
B. Monitoring.
The capacity of the customs authorities in the Article 5(1) countries to monitor imports
of ODSs has been an area of particular concern. There is scope for the Parties to facilitate the
introduction of cost effective mechanisms to ensure improved reporting in the Article 5(1)
countries. In response to these concerns, Decision VI/14A was adopted by the Parties in
October 1994. It requests each Party operating under Article 5(1) that requires controlled
substances referred to in Articles 2A and 2E from another Party to furnish, with effect from
1 January 1995, to the Government of the supplying Party within 60 days of such imports a
letter specifying the quantity of the substances imported and stating that the substances are
to be used for the purposes of meeting domestic needs.
C. Technology.
Technological advances in ODS alternatives are accelerating. The Article 5(1)
countries do not want to become increasingly dependent on "yesterday's technologies",
especially as they are seeking to expand their export markets. However, they need more help
in selecting the most appropriate ODS alternative technologies - and to ensure that they are
not used as "testing grounds" for unproven transitional technologies.
D. Information.
Information is a key resource. However, it must be well-targeted, adapted to specific
requirements, and cost-effective. Firms in the Article 5(1) countries need to understand their
commitments and opportunities as Parties eg the timing and implications of ODS phaseouts
and how to make full use of the assistance available to them as Parties. Expertise must be
more fully exploited whether from local sources or from experts working on behalf of the
implementing agencies of the Multilateral Fund.
Experience shows that many Article 5(1) countries do not fully understand how to
satisfy the requirements of the Multilateral Fund when seeking approvals for their investment
projects. They require ready access to information regarding the role, policies and operating
procedures of the Multilateral Fund and its implementing agencies. They would also benefit
from up to date case studies of approved and implemented investment projects. These and
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other ways of ensuring that the Article 5(1) countries have clear and specific guidance
regarding the Fund's criteria for project approval would help to improve the efficiency of the
implementation process.
E. Training.
Successful technology transfer is unlikely without structured training programs to
ensure that the recipients can make effective use of the technology. Group training in the form
of highly focused workshops has proved effective. However, experience shows that it is
necessary to integrate such workshops within the technology transfer process itself to ensure
success.
F. Non-governmental organization:;.
Non-governmental organizations (NGOs) have been influential in the ODS phaseout
in the developed countries, and could also play a significant role in the Article 5(1) countries.
The NGOs have a broad base which reaches into academia, industry associations, voluntary
groups and various individuals committed to protecting their environment.
G. Non-Parties.
There are currently over 130 Parties to the Montreal Protocol. However, there remain
about 30 or so developing countries that have yet to ratiiy the Montreal Protocol. It is
important to continue the efforts to persuade them to into comply with the Protocol. These
countries are small users of ODSs - none are ODS producers - mainly for the recharging of
existing refrigeration equipment. The only way in which they can ensure future supplies of
ODSs is by becoming Parties. The Ozone Secretariat is charged with promoting the Protocol
and, through its outreach activities, it is well-placed to make these countries aware of the
benefits of becoming Parties to the Protocol.
IV. CONCLUSIONS
There is evidence to demonstrate that the main actors in the implementation process
are moving up the "learning curve". The unique nature of the Protocol has required the
forging of new ways to gain the necessary widespread international commitment to its global
environmental objectives. New mechanisms have been designed and implemented to facilitate
this process, some of which could be transferable to the design of other international
environmental agreements. Much has already been achieved, especially in the accelerated
ODS phaseouts in the industrialized countries.
The action is moving increasingly towards the implementation process in the Article
5(1) countries. Their success is being greatly aided by the technical innovation, "know-how",
equipment, ODS substitutes, management practices and cooperative technology transfer
initiatives of industry in the industrialised countries. To further assist the Article 5(1)
countries, the Parties have established the Multilateral Fund to help them to strengthen their
institutional capacities, to finance information and training programs, and to fund the
incremental costs of ODS phaseouts.
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The implementation process in the Article 5(1) countries is at an early stage. It is not
surprising that the Multilateral Fund and its Implementing Agencies have faced many
challenges in establishing their policy guidelines and operational procedures. Progress in
achieving ODS reduction in the Article 5(1) countries through the Multilateral Fund has yet
to gather pace. However, good progress has been made in establishing the foundations of a
process that is expected to deliver a sharp acceleration in its contribution to the phaseout
process as projects in the "pipeline" move through from disbursements to the implementing
agencies to completed ODS reduction projects in the Article 5(1) countries.
Many challenges to the success of the Montreal Protocol have already been overcome;
others are being addressed by the Parties and by other main actors in the implementation
process. Perhaps the most testing of these challenges are those that must be overcome to
ensure that the resources of the Multilateral Fund will be both adequate to the task and
efficiently used as the implementation process gathers pace amongst the Parties operating
under Article 5(1).
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CHAPTERS
ECONOMIC EFFICIENCY OF THE IMPLEMENTATION PROCESS
IN THE ARTICLE 5(1) COUNTRIES
L INTRODUCTION
This chapter evaluates the economic efficiency of the implementation of the Montreal
Protocol, as it applies to Article 5(1) countries. The question of efficiency is clearly
important. The Fifth Meeting of the Parties to the Protocol agreed an amount of $510
millions, for the period 1994-1996 as a replenishment of the budget for meeting the
incremental costs of Article 5(1) countries in phasing out ozone depleting substances (ODSs).
By any standards this is a large amount and it is in all parties' interests that the funds are used
in a cost effective manner. Unfortunately, given the complexities of the institutional
arrangements associated with the phaseout, it is not easy to assess this cost effectiveness.
This chapter looks at the evidence, draws some limited conclusions from that evidence, and
makes a number of recommendations regarding future implementation procedures.
The instrument that is potentially most helpful in ensuring efficiency and cost
effectiveness is the country program or phaseout strategy for ODSs. These are undertaken
by the countries concerned, with the assistance of the implementing agencies (World Bank,
UNDP, UNIDO and UNEP), or bilateral donors (i.a. USEPA, UKODA). Ideally they should
identify the least cost options within each country for the phaseout of ODSs. These options
should influence the work programs of the implementing agencies in their selection of projects
to submit to the Multilateral Fund for funding approvals.
While the country programs have been found to be useful exercises, they still leave
gaps to be filled. The main difficult is to relate them to specific actions undertaken in the
short term to phaseout ODSs. Although, as stated above, the strategy should lay out a series
of measures that need to be undertaken as part of an efficient phase out program, in practice
the activities of the Bank, UNIDO, UNDP and UNEP are only partly guided by the strategy.
A discussion of the country strategies is given in Section 2 of this chapter.
Section 3 looks at measures of efficiency based on what has actually been achieved
and what the Secretariat of the Multilateral Fund has in its pipeline of activities. These are
partly based on costs of phaseout, including administrative costs. There is not that much to
go on, and there are major problems of consistency in the reporting of data. However, the
section summarizes what is available. From this it is possible to identify certain measures
that should be taken to increase the efficiency of the investments and other activities planned
by the implementing agencies.
Section 4 reviews a number of areas of broader institutional reform, through which
increased efficiency can be realized. These include (a) the roles of the Ozone Operations
Resources Group (OORG) of the World Bank as a consultative body, and the Technology and
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Assessment Panel of the Montreal Protocol Secretariat; and (b) the possible interactions of the
Multilateral Fund with the Global Environment Fund (GEF).
The chapter draws on various documents put out by the implementing agencies, as
well as the Fund's secretariat. It has not, however, been able to evaluate the GEF's own
ozone projects and compare them with those carried out under the Multilateral Fund. Hence
any views on the relative strengths and weaknesses of the two institutions are limited.
IL ECONOMIC EFFICIENCY AND THE DESIGN OF A PHASEOUT STRATEGY
At the early stages of setting up a Multilateral Fund to assist the Article S.I countries,
a good deal of attention was devoted to the question of the incremental cost of phasing out
ODSs in those countries. Estimates of these costs were made for a number of countries, and
some global estimates also arrived at. Since then the implementation of the Protocol requires
countries to prepare phaseout strategies (country programs) which have to be submitted to the
Multilateral Fund for approval. Approval of the program, however, does not constitute
approval of its estimated total cost as a budget; nor of any projects that might be mentioned
therein. The Multilateral Fund can only make financial commitments to implementation
projects, which are approved individually.
As of September 1993, 44 country programmes had been initiated, of which 27 had
been approved. Their estimated unit cost of phasing out ODSs in US dollars per ton are:
Algeria
Burkina Faso
Cameroon
Chile
China
Costa Rica
Cuba
Ecuador
Egypt
Fiji
Ghana
Guatemala
India
Iran
( 1,921)
( 7,017)
(34,073)
(-1,822)
( 38,203)
( 2,804)
( 4,293)
( 8,196)
( 24,250)
( N.A.)
( N.A.)
( 3,400)
(150,380)
( 10,225)
Jordan
Malaysia
Maldives
Mauritius
Mexico
Panama
Philippines
Senegal
Syrian Arab
Republic
Thailand
Turkey
Uruguay
Zambia
( 16,688)
( 60,915)
( N.A.)
(112,573)
( 8,929)
( 5,812)
( 9,146)
( N.A.)
( 55,618)
( N.A.)
( 35,201)
( N.A. )
(233,636)
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The data are from the Multilateral Fund, November 1993. An "n.a." indicates that
insufficient information was given to calculate the unit cost of phaseout. The figure reported
is the unit cost of phaseout over a given period (which varies from as little as three years to
as much as 17), of a certain amount of the present consumption of ODSs. Thus if a country
is proposing to eliminate 35 percent of ODSs in the next three years and gives a unit cost for
that period, the unit cost is calculated by dividing the cost by the amount eliminated.
While there are many reasons why these figures should differ, there are also some why
they should be of similar orders of magnitude, at least for countries at similar levels of
development and with similar technologies. Thus a unit cost for India that is four times that
of China; or a unit cost for Zambia that is seven times mat of Cameroon need explanation.
No such explanation appears to be available.
Although the guidelines for preparing the country programs are set by the Multilateral
Fund, it is very likely, given the varying levels of internal capacity for such work, the
different agencies assisting them, and the range of possible underlying assumptions, that the
strategies are not fully comparable. The costs of phaseout represented by these countries vary
enormously and it is difficult to see how the underlying strategies could be the basis of an
overall international cost efficient strategy1. Further investigation of these differences would
be instructive, and might yield valuable information for the review and refinement of country
programs.
The process of arriving at a country strategy is a complex one, in which present and
future costs have to be traded off. A large investment in phasing out ODS use now may
result in higher costs in the immediate future but would save even more in the longer term,
when industry has expanded its use of ODSs. The World Bank has been refining the process
of creating these strategies, and of estimating the incremental costs. Its work in this area is
summarized in the papers by King and Munasinghe, 1993; Bendtsen, 1993; Mason 1993-
Widge, 1993; and Catanach, 1993.
The summary discussion by King and Munasinghe provides a conceptual framework
for estimating incremental costs and designing phase out strategies. In principle what they
are proposing accords with a common sense approach. The following steps are involved:
(a) Scenarios need to be identified for rates of growth of demand for the relevant
products as well as the costs and availability of substitutes.
(b) A baseline calculation of the use of ODSs as well as the costs associated with their
use has to be made.
(c) A review of the technical options for substitution has to be carried out and a
series of alternative strategies that meet the phaseout requirement has to be defined.
Ideally one should compare the costs of the different countries in phasing out ODSs over
the same period. Unfortunately the information for such a comparison was not available. It
should also be noted that the costs of phaseout in the text are undiscounted.
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(d) The costs associated with the alternative strategies have to be calculated.
(e) The benefits associated with both the baseline scenario as well as the alternative
scenarios have to be calculated. Usually these are simply the value of the production
of the final goods in each case.
(f) The incremental costs are the difference between the baseline costs and the
alternative strategy costs; less the difference between the baseline benefits and the
alternative strategy benefits.
Guidance in designing a strategy is provided by the Bank documents. The following advice
is given:
(a) Three scenarios should be examined; a reference growth scenario, a high growth
scenario and a low growth scenario. Costs of substitutes and their availability should
be agreed to in an international context.
(b) The definition of the baseline is problematic as has been recognized from the
earliest stages of the discussions of the Multilateral Fund. A "Business As Usual"
baseline is taken in preference to an optimal development path because the Protocol
stipulates that the baseline include existing economic and industrial policy. However,
the Protocol also stipulates that only domestic needs be included. This has been
interpreted to mean that production of ODS-dependent goods for export cannot be
included in the baseline; nor should the growth in "demand for ODS dependent goods
beyond the point where additional capacity is required" (King and Munasinghe, op.
cit.).
(c) The alternative options should provide the same amount of final goods and
services. Strategies being considered are: allowable (actions are delayed to the last
possible moment); accelerated (actions are taken as soon as technically possible); and
optimal (actions are taken to give the lowest incremental cost). A National Ozone
policy that supports each strategy should also be designed.
(d) The costs required for each strategy are the economic costs, which include
adjustment costs and costs of information etc. Adjustments have to be made for non-
efficient prices and care has to be taken not to double count costs (eg the costs of the
substitutes as well as the higher costs of manufacturing the goods that use the
substitutes as inputs).
(e) There is no clear guidance on how domestic benefits should be calculated.
Generally it is assumed that the benefits in the baseline and the alternative scenario
are the same. This does not allow for gains from the adoption of more efficient
technology, or from the increased potential for exports of the new products. It is
mentioned, for example, that one benefit could be the provision of testing facilities for
non-ODS equipment that will prove to be useful in general testing. Such benefits are
not estimated. It should also be noted that we are not referring here to global benefits
— i.e. those associated with the phaseout of ODSs. Such benefits are never calculated
in any of the case studies.
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If the country programs described above had been carried out using these guidelines
(as supplementary to the Multilateral Fund's Guidelines), it is inconceivable that such large
differences in costs of phaseout between countries could emerge.
The World Bank also conducted a number of case studies on the design of the country
strategies, using these guidelines. These are reported in the papers referred to above and
cover: Egypt, Jordan, India, Turkey, Thailand, Tunisia and Zimbabwe. It is not clear how.
if at all, the World Bank's Case Studies relate to the Country Programmes for Egypt. India
- and Turkey. From an assessment of the data available it would appear that they have very
little in common. Table 3.1 below summarizes the findings of these country case studies.
Nothing is reported for Jordan, Turkey and Zimbabwe as mere are very few numbers for those
countries. In each case the unconstrained demand for ODSs was calculated as were the
incremental costs of phasing out the use of the controlled substances over the period 1991-
2010. Unlike the Country Programmes, the denominator is the total amount of ODSs that
would have been used in the phaseout period had there been no Protocol. The case studies
show some variation in the cost per ton of ODS removed, but nothing like the variation in
the Country Programmes. Part of the difference in the case study figures is due to differences
of coverage (eg if costs of information, publicity etc are included); and part to different
discount rates. It may also be explained by the fact that some countries have economically
inefficient industrial strategies, in which case the costs of making changes could be much
larger.
The other point to note about the case studies is that an optimum scenario, by which
is meant one that minimizes the incremental cost given the present industrial policies, is
anything between 20 percent to 78 percent less than the typical or allowable scenario.
Generally the optimum scenario involves a combination of early action in introducing
substitutes in the refrigeration sector and developing a strong recycling program to maintain
the life of existing equipment that uses ODSs2. The clear message from these calculations
therefore is: (a) the differences between allowable and least cost scenarios can be very large,
(b) differences between countries in costs per ton removed can be very large and (c) strategies
adopting recycling and early substitution in key sectors can be very effective.
How useful or efficient has the policy of requiring Country Phase Out Programs been?
It is difficult to say conclusively but, from the evidence so far, it appears that the programs
have had little impact. As of January 1994, a total of $3.8 mn has been disbursed for 56
country programmes, at an average cost of $64,000 per country. As the Multilateral Fund's
own Report on the Operation of the Financial Mechanism states, projects may be developed
by the countries concerned, by implementing agencies etc., independent of the country
program (UNEP, 1993). The Secretariat for the Multilateral Fund has concluded, correctly,
that tying all phaseout activities to the country program would be unnecessarily restrictive.
But there is a strong case fro reviewing country programs , perhaps after a 3 or 4 year
interval, to establish a better link between the strategies and the actual implementation
projects: making full use of the better information arising from the first actual project
outcomes as to costs and effectiveness, to revise regulatory and incentive frameworks as well
as unit cost estimates, production, consumption and trade data, and phaseout schedules.
2The Thailand study is an exception to the early phaseout being less costly.
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Table 3.1
Costs of Country Strategies for the Phase-out of ODSs: 1991-2010
Country
ODS Phased Out
Tons/
Incremental Cost
S/Ton
'Typical Scenario"
Incremental
Cost S/Ton
"optimum
Scenario"
Disc3-8ount
Rate(%)
Comments
Egypt
72,495
1,796
928
10
Optimum
scenario has
phase out.
Costs
include all
indirect
costs such
as for
awareness
etc.
India
653,804
804
428
8
Typical
scenario
assumes
early action.
With
delayed
action costs
are more
than double.
Optimum
scenario has
maximum
recycling
Thailand
605,000
321
971
5
Optimum
scenario
involves a
delay in
action.
Recommend:
a faster
phase out
scenario.
Tunisia
413,000
1,189
618
10
Optimum
scenario
involves a
faster shift
to non-
CFC
refrigerator
s.
I/
This is the amount of ODSs that would be used under the unconstrained
dem: : in the absence of a Protocol
Sources:
See text.
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There is also some evidence that the material from the country programmes is not
being widely circulated to the implementing agencies. When they come to prepare a project,
they are consequently repeating some of the data gathering and analysis that was done as part
of the country program. A case in Egypt was cited to the Economics Options Committee
where UNDP, in preparing its projects in the country was duplicating much of the work
carried out by the World Bank in the country program.
While a poor country program has little value, a good one can be a major contributor
to an efficient strategy, as the World Bank's case studies reveal. From what can be observed,
however, this has not been fully exploited and the present country programmes have not
added as much as they might to the overall goal of phasing out ODSs. It is therefore
recommended that the country programs be re-examined and reviewed, after a suitable (3 or
4 year) interval, to make them more relevant to cost-efficient phaseout strategies.
m. MEASURES OF EFFICIENCY IN IMPLEMENTING ODS PHASEOUT
In the final analysis, of course, one should look at how effective the institutions
responsible for phasing out ODSs have been. Where actual data on phaseout are available,
it should be possible to estimate the costs per ton of ODSs removed. Wide variations in such
costs could indicate relative inefficiency. One should also look at the administrative costs as
a percentage of the costs of the investment programs themselves. The Secretariat of the
Multilateral Fund prepared an interim report in February 1994 (UNEP, 1994) showing what
had been achieved'from the time formal operations began in January 1991 up to the end of
1993.
(a).Over 400 activities in 56 Article 5(1) countries have been approved, as well as 43
global activities
(b) 328 investment and demonstration projects (i.e. those costing less than $500,000)
have been approved at a total cost of $121.8 millions. These were expected to result
in a reduction of 115,000 tons of ODS, representing a cost of $1060/ton removed.3
(c) Actual disbursements, however are picking up more slowly. In the first two years
(1991-1992), UNEP-managed activities had spent $1.8 mn, UNDP $1.3 mn, and the
World Bank $3.3mn (No figure was given for UNIDO). At that stage (i.e. end 1992)
the total amount approved and allocated to the agencies was nearly $50 mn. Thus
disbursements were only 12% of the amounts allocated to the implementing agencies,
and by far the largest amounts approved were still to be disbursed. (UNEP, 1993)
3The calculation of cost per ton cannot be compared directly with Table 1 figures because
the former represents the annual consumption, whereas the latter is based on total ODS use over
the planning period that is eliminated. The report does not say how long the annual use would
have continued.
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Performance improved considerably during 1993 and 1994. Table 3.2 gives the amounts
disbursed by the four implementing agencies (UNDP, UNIDO, the World Bank and UNEP)
in 1993. It also gives the proposed expenditures for 1994. There are significant increases in
allocations from 1993 to 1994: UNIDO (38%), UNDP (94%), World Bank (78%) and UNEP
(89%).4
Table 3.2
Allocations and Disbmsements of Funds by Implementing Agencies
1993-1994
Agency
UNIDO
UNDP
World
Bank
UNEP
1993
ODS
Removed
(Tons)
n.a.
1424
n.a.
n.app.
Funds
Allocated
($mn.)
6.9
23.1
45.3
1.8(?)
Funds
Disbursed
($mn.)
0.8
9.8
19.3
1.8
1994 (Proposed)
ODS
Removed
n.a
n.a.
n.a.
n.app
Funds
Allocated
($ mn.)
44.7
80.6
3.4
n.a. not available
n.app. not applicable
Source: Progress Reports and Work Programmes from Implementing Agencies, UNEP, 1994 b.
It should be noted that the figures for 1994 are provisional and have not been fully
approved.
The rates of disbursement are also increasing for the main implementing agencies. In
1992 UNDP spent only 9% of its allocation and the World Bank spent 8.6%. In 1993 the
comparable figures were 42% for both agencies.
4lt is noteworthy that the World Bank nor UNIDO attempt to calculate the ODSs
eliminated. This is a useful indicator of efficiency and it would be desirable if the data were to be
collected for it.
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In terms of administrative costs, UNIDO and UNDP work to a charge rate of 13% of
the budget as overhead costs. From the 1994 budget proposal UNEP has a figure of 11.5%
for the overhead costs. The World Bank makes no charge to the Multilateral Fund for
administrative costs: hence comparable figures are not available from all of the implementing
agencies, an issue that has been raised by the Secretariat of the Multilateral Fund.
Comparable costs are needed from the Bank if the costs of operations are to be monitored on
a consistent basis for all the implementing agencies.
Given that the Multilateral Fund's own administrative costs have to be added to those
of the implementing agencies, and these run at about 7-8% of total disbursements by the
Fund, one is arriving at a total administrative cost of around 20%, which is considerable. It
is important therefore for the Fund and the agencies to try and reduce costs as much as
possible, for example by improving coordination and avoiding duplication. These two issues
are discussed further below.
A. Coordination and Duplication! in (he Work of the Implementing Agencies and the
Multilateral Fund.
All parties involved in the management of Montreal Protocol activities in Article 5(1)
countries are aware of the costs arising from the lack of coordination among the implementing
agencies themselves and between these agencies and the Fund. In its Report on the Operation
of the Financial Mechanism Since January 1991, the Executive Committee of the Multilateral
Fund notes that such concerns have been voiced and that, as a result, the work programmes
of the different agencies should be integrated into one document with the Secretariat of the
Multilateral Fund playing a leading role in developing such a document. The Secretariat has
done that, and it is a positive step but the issue will not be resolved so easily. There are
several examples of two agencies doing the same thing in the same place. The case of Egypt
and duplication between the country program and the UNDP funded program has already been
cited. In Brazil there were two workshops on ODS substitution in the foam sector — one
organized by UNIDO and one by UNDP. Another example, noted by the Multilateral Fund
Secretariat is that of the preparation of a computerized monitoring system. One is being
prepared by UNDP/UNIDO and the other by the World Bank. If the two are developed it
will only create more confusion as inconsistent reporting will result.
\
Because the ultimate responsibility for the overall program lies with the Executive
Committee, it should ensure that the programmes it approves do not allow for the possibility
for duplication of effort. In this regard it is not enough to publish a work program that
consists of simply combining the separate work programmes of the four agencies that have
been approved. The approval process needs to take account of the potential for duplication.
A special case of duplication of effort is with regard to the appraisal of investment
projects. At present the World Bank has an "Ozone Operations Resources Group" (OORG)
that reviews all projects in a rigorous way. The Multilateral Fund, however, also uses the
UNEP Technology and Economic Assessment Panel (TEAP) to evaluate the same projects.
The World Bank needs its projects to be properly appraised and for this purpose draws on a
wide range of consultants. Whether these are called the Ozone Operations Resources Group
or simply Bank consultants is not important. The World Bank also calls on TEAP members,
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when appropriate, as consultants. However, what is a matter of concern is that simple
projects are being scrutinised both by the World Bank and the Multilateral Fund, thus at least
potentially duplicating effort and misallocating resources.
In some cases the issue is not one of duplication but of coordinating the activities of the
different agencies to ensure that each component works satisfactorily. If UNDP is to do
demonstration projects for a certain sector it would helpful if a workshop on that sector had
been organized before by UNEP. Or if a World Bank project has a major recycling
component, the capacity to monitor and administer that component should be in place. In the
documentation available to the Economic Options Committee, there is little evidence of such
coordination.
Not surprisingly, the larger, better organized companies are able to draw on the funds
whereas the smaller producers/users cannot prepare the relevant documentation to satisfy the
World Bank documentation needs. This may have implications for industrial competition
inside the countries. Equally unsurprising is the fact that the recycling activities, which are
shown to be so important from the least cost strategy, are among the slowest to get off the
ground.
B. Efficiency and Administration Costs
It was noted that the administration costs of the whole operation are significant. The
administrative procedures are also time consuming, thus slowing down the disbursement of
funds. Simplifying procedures can help reduce both the time taken and the cost of
administration. Again the parties involved are aware of this and are taking steps to improve
matters. For example, the World Bank, found that its normal procedures for appraising,
implementing and supervising projects were not suitable for this area of activity, which
involves a number of small projects and a many different enterprises. At the Tenth Meeting
of the Executive Committee of the Multilateral Fund (28 June/1 st July 1994) it acknowledged
that disbursements to date had been small, but that there were real prospects for
improvement. One change that it is making is to modify the procedures for a grant agreement
between the borrowing country and the World Bank, making an "umbrella agreement"
wherever • possible. Once this has been put in place future legal procedures should be
minimized. Such an agreement has been signed in Brazil and others are being planned. The
Bank is also trying to reduce costs by putting a number of projects into one "umbrella
project" as well as making other procedural simplifications. The results are now emerging.
Whereas in 1991 it took the Bank over 16 months to complete an grant agreement, it only
took 10 months for those projects that were approved in January 1994. Although there are
merits in such simplification procedures, they can result in monitoring problems. The
Multilateral Fund Secretariat needs to know what the status of each project is — completion
of contract, initiation of construction, project commissioning, etc. The World Bank
"umbrella" approach makes that difficult to provide. However, some compromise between
detailed monitoring and simplification of procedures should be possible.
The Secretariat of the Fund might also be able to simplify its administrative procedures
further, without impairing project quality. Many of the projects fall into broad categories,
within which the various projects are very similar. If reputable agencies such as UNDP,
UNIDO and the World Bank have reviewed them and approved them, is it necessary to have
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3-n
another detailed review? Perhaps a checklist could be developed, which would apply to all
projects, with only a sample being subjected to a detailed review. The World Bank has
complied a list of "benchmark unit abatement costs" which provides a wide range of cases
of ODS substitution, with quantitative information on capital and operating costs, ODS
substituted, and incremental cost. Could these not be reviewed (added to, if necessary) and
used more widely in appraising projects?
C Measures of Efficiency of Operation.
Efficiency in the operation of each implementing agency is very hard to estimate. It is most
difficult for technical assistance agencies such as UNEP and UNDP. UNEP is involved in
a large number of activities, including the Ozone Action Information Clearinghouse (OAIC),
aimed at institutional strengthening and information exchange as well as other activities such
as training, networking and preparation of country programs. It has instituted feedback
procedures in relation to these activities but, as of February 1994, the results of these were
not available. In 1993 the OAIC program had a budget of $1.58 million, which accounted for
88% of the UNEP budget for ODS phaseout programs5.
Clearly it would be desirable to have some measures of the effectiveness of this expenditure.
It is not enough to report the number of meeting held or modules of information delivered,
useful though such information can be. At the same time one cannot measure the direct
contribution to the removal of ODSs. It is difficult to separate out the contribution of OAIC
from that of other activities, which have a more direct bearing on ODS removal.6
The only way immediately available for collecting the relevant information on the
effectiveness of the networking and training programmes is to carry out a detailed evaluations
including asking participants for their assessments of the services provided and what use they
have made of them. Some such surveys have been attempted. In 1992 the representatives
from Canada, Australia and New Zealand responsible for the Interim Fund's operations,
undertook a survey in Brazil, Colombia, Ecuador, Ghana, China, Malaysia, Philippines, Sri
Lanka and Egypt. They asked participants from these countries involved in the ODS phaseout
process about "the quality and appropriateness of technical information provided, the quality
5In some respects the networking and information exchange activities are similar to those
associated with the launch of a new product, where consumers needs to be informed about'the
product and its characteristics. Ways in which such programmes are assessed could be a useful
pointer for these activities in-the ODS phaseout program. From the comparison, one would expect
that the budgets for information would rise in the early years and then decline over time. This
does not, however, appear to be happening as far as the OAIC is concerned.
eOne suggestion that has been made is to estimate a "production function", in which the
"output" is ODS removal, by sector and region, and the inputs are investment activities,
information activities, training activities etc, generally measures in money terms. By using
econometric techniques it may be possible to ascertain what the marginal contribution of each of
the activities to ODS removal has been. But it would not provide a detailed evaluation of the
different components of the networking and training programmes.
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of the international expertise made available to them and the usefulness of the assistance
received at different stages in the program" (UNEP, October, 1992).
The main findings are that:
(a) on the technical information provided all respondents rated the it as of very high
quality and that is distributed in a timely fashion. One or two respondents noted that
the experts were not as knowledgeable of local conditions as they might have been;
(b) the training received was highly praised as relevant and well presented; and
(c) the technical and financial assistance received was generally considered to be
satisfactory.
The main criticisms were that:
(a) there was not enough effort to increase local capacity. The lack of support for
institutional strengthening was particularly commented on; and
(b) the investment programmes were regarded by some respondents as being too slow
and too bureaucratic.
Similarly, in 1994, management consultants Touche Ross reviewed the UNEP/SIDA
network program on ODSs in South East Asia (Touche Ross, 1994). The program involved
the creation of a network of government ODS officers who would be trained in designing and
implementing effective phaseout strategies. This attempt at institution building seems to have
been very successful, if measured in terms of the views of the participants. Touche Ross
propose the use of a measure based on expenditures on training divided by the total ODS
output to be phased out in the region. At least this would indicate when one region was
receiving a disproportionate share of the training resources.
It appears that this kind of review is essential to the design of an efficient phaseout
strategy. The following performance criteria could be derived for the agencies involved in
training, networking and information dissemination:
: Summary statistics from feedback surveys for each of its activities: information
exchange (number of contacts made, response from the contacts, views of users); and
training (participants feedback, both immediately after the workshops and 6 months
after, to see how useful the information has been).
UNDP/LTNTDO: Post project appraisals should be carried out for institutional
strengthening (to see whether they achieved what they set out to achieve). Where
specific technical assistance is provided reports on its usefulness and effectiveness can
be made in a similar manner.
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For implementing agencies involved in investments, it is important to estimate the
amount of current ODS eliminated and the cost per ton eliminated. There are some summary
statistics of this kind but they are not. regular, consistent and are not available for all agencies.
The Executive Committee of the Multilateral Fund should consider instructing the
implementing agencies to collect such information. This also implies a need for the
Multilateral Fund to consider how best to review and evaluate project implementation in order
to confirm from actual experience the least-cost methods of ODS replacement. It would be
useful if the Secretariat prepared a note indicating how data should be reported, how it should
be calculated and with what frequency it should be reported. This would ensure consistency
and provide a basis for estimating the efficiency of different organizations.
Finally, the Secretariat should carry out a review of the program in each country every
3-5 years, to see how the country program has been implemented, what slippages there have
been and how effective the different components of the program have been.
In all this, there is clearly a need to balance the monitoring requirements against the
imperative to keep administrative costs low. At the present time, however, there is very little
to go on in terms of overall efficiency measures for the implementing agencies. At the same
time, the Multilateral Fund feels that it should not be judged by cost effectiveness alone and
has argued that account should also be taken of the "benefits". It is understandable that the
Fund has to operate within political constraints and so cannot, for example, allocate resources
only to those countries with the lowest cost of abatement. At least part of the high
administrative cost reflects the political need to provide some equity in the disbursement of
funds and assistance. However, that does not mean that information on the cost effectiveness
of the funds is not important or useful. Where the reasons for low effectiveness are those
identified above this should be made clear, so that the Parties can see the price they are
paying for the political dimension. As to the possibility of taking account of "benefits" this
does not appear to lend itself to measurement. There are benefits in the sense that ODSs are
phased out, but the Protocol has never attempted to estimate them in a benefit cost framework
and it would not be desirable to attempt that now. If by "benefits" is meant that the political
benefits, or benefits in terms of having an international accord, these are not quantifiable. It
may be possible, for example, to estimate a minimum cost of removing a given amount of
ODSs, subject to the constraint that each country received a minimum amount of the
Multilateral Fund's disbursements. The actual cost per ton removed could be compared with
that. Such an exercise might be useful in directing resources and in assessing where
improvements might be made in future allocations.
IV. ALTERNATIVE INSTITUTIONAL ARRANGEMENTS.
In assessing the efficiency of the current arrangements for ODS phaseout, it is
important to note that substantial work is currently (September 1994) in hand or about to
begin to review the operation of the institutions established for the purpose. These review
include a study of the operations of the Multilateral Fund, commissioned by the Executive
Committee on behalf of the Parties; and an internal review - which will be widely distributed
- by the World Bank of its operations for ODS replacement in the first years of the Montreal
Fund's operations. The Terms of Reference of the former appear at Annex A to this chapter.
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Within the wider scope of these reviews, it would be useful to address two sets of
issues in the common interest of quicker and less costly project approval procedures. The first
set is to review
(1) the respective roles of the UNEP TEAP and of the World Bank's OORG and the
scope for their closer coordination;
(2) the scope for increased reliance on the appraisal procedures and judgement of the
implementing agencies, supported by the advice of a common external experts panel;
and
(3) whether the Multilateral Fund Secretariat meet its responsibilities by relying on &
checklist approach based on benchmark costs for and proven procedures for dealing
with generic projects.
The second set of questions concerns the possibility of establishing closer coordination
between the Secretariats of the Multilateral Fund and the Global Environment Fund in
facilitating ODS phaseouts in the Article 5(1) countries and "in the countries in transition to
market economies", respectively. Given that they will deal with similar projects, there might
be scope for resource savings and efficiency gains through closer coordination. It is
recognized that enhanced coordination would have to be reconciled with the different
constituencies and voting structures of the two Funds.
V. CONCLUSIONS.
Given the large amount of resources involved, the efficiency aspects of the
implementation of the Montreal Protocol are important and need to be addressed. In this
Chapter the framework used for designing phaseout strategies has been examined.
One of the key components of the strategy is the preparation of the country program, which
is supposed to ensure cost effectiveness and as well as efficiency in the phaseout process.
However, from this review the country programs do not appear to have played a major role.
The ones approved have very wide differences in phaseout costs per ton of ODS removed.
The World Bank has carried out a limited number of case studies of phaseout strategies which
show a much narrower range of phaseout costs and are suggest lessons for developing cost
efficient strategies. This review of the evidence on the economic efficiency of the
implementation process in Article 5(1) countries suggests that all country programs should be
reviewed at 3 or 4 year intervals. Such reviews could make use of the evidence of generated
by actual project implementation to update and improve (1) production, consumption and
trade information, (2) regulatory and incentive frameworks, (3) and phaseout strategies.
The Chapter has also looked at the activities of the implementing agencies. The first
two years of their programmes (1991-1992) were very slow in terms of actual disbursements,
but performance has picked up considerably in the last 21 months. Disbursements as a
percentage of substantially increased allocations went up from 12% in 1991-92 to 42%.
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The administrative costs remain a matter of concern, although they are expected to fall
in relation to actual project expenditures as implementation accelerates. For UNEP, UNIDO,
UNDP, and the World Bank they currently range between 11% and 29%. If the Secretariat
costs are added, they average 35% of total expenditures, which is high. They should be
reduced if it is possible to do so impairing the quality of the project approval process.
However, the justification for the costs incurred is expected to be found in the sharp decline
of the administrative cost ratio as the implementation of approved projects and new project
approvals accelerate with the progress of the implementation process up its learning curve.
The efficiency of the different agencies needs to be monitored. For those involved
with training, networking and institutional strengthening, there is a need to carry out
independent surveys of the programmes, especially asking the participants and users of the
services for their assessments of the services provided. The initial evidence is positive but
much more evaluation work needs to be done.
One suggestion is that a "production function" approach could be taken to the CDS
phaseout experience with the different activities being treated as inputs. Econometric
techniques might be useful in estimating the marginal benefits of the different inputs.
The estimated costs of phaseouts vary enormously among countries. Further
investigation of these differences would be instructive and might yield information of value
in the effort to improve country programs for ODS phaseouts.
For investment projects, estimates of ODSs phased out should be provided using a
consistent methodology set out by the Secretariat of the Multilateral Fund. These figures
should be reviewed to determine their implications for future project approvals It is
recognized, however, that the Multilateral Fund cannot be guided by efficiency considerations
alone, but that is not an valid argument for minimizing the monitoring of cost efficiency.
Finally, two institutional issues are raised. First, three is the coordination of effort
between the World Bank's Ozone Operations Resources Group and UNEP's Technology and
Economic Assessment Panel. There may be scope for rationalization. Second, there is the
question of whether the Multilateral Fund and the Global Environmental Fund (GEF) should
be more closely coordinated.
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Annex A
JL Review under Article 5. para 8 of the Protocol
A meeting of the Parties shall review, no later than 1995, the situation of the Parties operating
under paragraph 1 of this Article, including the effective implementation of financial co-
operation and transfer of technology to them, and adopt such revisions that may be deemed
necessary regarding the schedule of control measures applicable to those Parties.
2.. Review under Decision IV/18 of the Parties, section n para 4
To evaluate and review, by 1995, the Financial Mechanism established by Article 10 of the
Protocol and Section I of the present Decision, with a view to ensuring its continued
effectiveness, taking into account Chapters 9, 33 and 34, and all other relevant Chapters, of
Agenda 21 as adopted by UNCED in Rio in 1992.
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Bendtsen, U.B., 1993. Project on Incremental Costs of ODS Phaseout.se Study: Tunisa
Czechoslovakia, World Bank.
Catanach, C., 1993. Egypt - Case Study, World Bank.
King, K. and M. Munasinghe, 1993. Country Level Increment?! Costs of Phasing Out Ozone-
Depleting Substances. World Bank Environment Division
Mason, C., 1993. World Bank Project: Evaluation. of Incremental Cost Methodologies for
ODS Phaseout Case Studies: India, Turkey, Jordcm and Zimbabwe, World Bank.
Widge, V., M. Radka and T. Dillon, 1993. 'Evaluating Incremental Costs of Complying with
the Montreal Protocol: Discussion of a Framework for Thailand, World Bank.
UNEP, July 1993. Montreal Protocol: Executive Summary of the 1993 Report of the
Technology and Economic Assessment Panel.
UNEP, July 1992. Open-Ended Working Group of the Parties :o the Montreal Protocol:
Seventh Meeting.
UNEP, July 1993. Report of the Tenth Meeting of the Executive Committee of the
Multilateral Fund for the Implementation of the Montreal Protocol.
UNEP, November 1992. Report of the Fourth Meeting of the Parties to the Montreal Protocol
on Substances that deplete" the Ozone Layer.
UNEP, September 1993. Report of the Ninth Meeting of the Open-Ended Working Group of
the Parties to the Montreal Protocol.
UNEP, November 1993. Report of the Fifth Meeting of the Parties to the Montreal Protocol
on Substances that Deplete the Ozone Layer.
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4-1
CHAPTER 4
POLICY REGIMES FOR PHASEOUT
OF OZONE DEPLETING SUBSTANCES
I.
ELEMENTS OF THE POLICY FRAMEWORK
Governments must bear ultimate responsibility for ensuring that their countries comply
with commitments made in signing the Montreal Protocol. Above all, this means adhering
to the agreed timetable for phaseout of different categories of ozone depleting substances
(ODS) and reporting to the Parties on progress in meeting phaseout requirements. This
chapter discusses elements of the policy regime which individual countries need to put in
place if ODS phaseout is to occur in a timely and cost effective manner. There is no single
policy regime suitable to all countries. Yet, there are certain elements common to many of
the regimes already in place in both developed countries and Article 5(1) countries. Those
elements can be broadly grouped into three categories:
o command and control measures, involving the establishment of a statutory and
regulatory framework which penalises non-compliance;
o market mechanisms, or economic instruments, which provide financial
incentives to encourage compliance;
o voluntary approaches, which may include measures to raise public awareness
and alter consumer preferences, or agreements negotiated between government
and the private sector specifying agreed measures to reduce ODS consumption
and production.
These categories are not mutually exclusive. In practice, policy regimes normally combine
more than one - e.g., relying on voluntary agreements with certain large ODS suppliers or
users to achieve initial reductions while a legal and regulatory framework is being constructed
for broader application. Moreover, in those Article 5(1) countries which make use of the
resources of the Multilateral Fund, financial incentives for ODS reduction are an integral part
of the policy framework. Each government must decide on the appropriate mix of policy
instruments given its own legislative and fiscal culture, local industry circumstances, the speed
at which ODS phaseout is to be achieved, feasibility of enforcement and cost-effectiveness.
For the government to be able to design a policy regime suited to its own national
circumstances, it needs to have a clear picture of the characteristics of the local ODS supplier
and user industries. The country study normally undertaken in preparation of a national ODS
strategy should provide valuable information which can inform policy formulation, including
baseline estimates of production and consumption of controlled substances by sector. Among
the questions such a study should seek to answer are the following:
What quantities of different controlled substances are being produced or
imported, and by whom?
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In which sectors and by which firms are those substances being used? Is use
highly concentrated sectorally and/or within specific enterprises?
Are the major ODS users foreign or local firms? Do they have ready access
to alternative technologies? Have any firms already switched to alternatives?
r Are ODS users exporting products containing these chemicals? If so, where?
The policy approach chosen may be very different depending on answers to these and
other questions. For instance, if a high percentage of ODS 'use is accounted for by a handful
of aerosol product manufacturers, a ban on ODS use in non-essential aerosol applications,
together with a targetted program of technical assistance to those firms, could be the main
focus of an effective policy response. If, however, ODS use is widely dispersed among many
small firms operating in different sectors, a subtler and more variegated approach may be
required. Given the difficulties of monitoring large numbers of small, widely dispersed ODS
users, command-and-control measures alone may be difficult to enforce. Thus, governments
may need to combine them with economic instruments, awareness raising, and perhaps broad-
based technical assistance and training programs (e.g., for mobile air conditioning mechanics
or industrial chiller maintenance personnel).
The process of policy formulation can have a major bearing on the degree of
acceptance and compliance by supplier and user industries. In particular, experience suggests
that close consultation with industry and involvement of industry groups in the design of the
phaseout strategy increases the probability of willing co-operation during the implementation
phase. In Norway, for example, a CFC-users committee was established in 1988; it organises
annual seminars for information exchange between the government and industry. The
Norwegian government attributes its success in achieving an accelerated ODS phaseout in
large measure to the high degree of industry involvement in policy formulation.
Malaysia is another country where industry has been deeply involved in strategy and
policy formulation from the outset. Six working groups were formed covering the major user
sectors; they have been instrumental in providing inputs into formulation of specific sectoral
elements of a national strategy. In a number of sectors (e.g., aerosols, fire extinguishers and
foams), the working groups proposed accelerated phaseout schedules, which have been
incorporated in the national strategy.
A. Monitoring and Reporting of ODS Production and Consumption
Irrespective of the weight given to different categories of policy instruments, any
policy regime must be based on sound information on ODS production and consumption
(defined as production less exports plus imports less destruction with approved technologies).
Tracking the quantities of different controlled substances which are being produced, imported,
and exported requires a system of registration and recording of ODS transactions. For those
many Article 5(1) countries which are dependent exclusively on imports to satisfy their ODS
demand, the logical focus for monitoring ODS shipments is at the border - through customs
declaration.
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The code used for customs declaration in most countries is based on the Harmonized
Commodity Description and Coding System (HS), which describes chemicals according to
their function rather than their chemical properties. Thus, to keep track of trade in controlled
substances, a modification to the customs code is usually required. The Customs Co-
operation Council (CCC) established for the purpose has recommended the addition of new
sub-headings to the national statistical nomenclature for the purpose of monitoring ozone
depleting substances. The modified HS tariff codes contain a separate number for each
controlled substance. Customs authorities need to record shipments using this nomenclature
and then transfer that information to the government agency responsible for ODS monitoring.
The process of recording ODS imports can be complicated by such factors as mis-reporting
by importers (especially once import controls have been introduced) and mis-recording by
customs authorities (possibly because substances are imported in blends under unfamiliar
brand names).
Even though Article 5(1) countries have a grace period before they must begin their
actual phaseout, monitoring and reporting of ODS production and consumption should begin
as soon as possible after a country becomes a Party to the Protocol. Within three months of
becoming a Party, the government must report baseline production, import, and export data
for controlled substances to the Ozone Secretariat. Moreover, most Article 5(1) countries
will choose to begin their phaseout of ODS long before the end of the 10-year grace period.
To be able to gauge the effectiveness of the phaseout effort, they will therefore need to put
in place a system for collecting reliable data on ODS shipments. Data on ODS production
and consumption is also needed to support requests for assistance from the Multilateral Fund.
While customs data play a critical role in an effective monitoring system, they can be
supplemented by and cross-checked against data from other sources. Moreover, for historical
consumption it may be difficult to reconstruct estimates from customs data which at the time
were not collected in accordance with the relevant classifications. Thus, other sources may
be needed to provide baseline estimates to the Ozone Secretariat, the two most common being
ODS suppliers and ODS users. Since the number of ODS importers/suppliers is generally
much smaller than the number of ODS users, a survey of suppliers can be a cost-effective
means of obtaining consumption data. Where ODS use is highly concentrated among a small
number of firms, requiring those ODS users to report their consumption to the government
can also yield useful information on approximate overall consumption levels. If, however,
the number of ODS users is large, a comprehensive user survey becomes more difficult and
costly. For surveying user industries, a more cost effective approach may be to work with
chambers of commerce or industry associations, which maintain regular contact with their
members.
B.
Permitting and licensing of Controlled Substances
Once a customs data collection system is in place, it should facilitate the introduction
of quantitative controls on ODS imports, which for countries without their own production
capacity are likely to be the principal feature of a regulatory regime. Many countries now
require that all firms intending to import ODS register with a designated government
ministry/agency and apply for an import permit. Normally the volume of ODS a firm is
permitted to import is pro rated based on its recent import levels, though there are other ways
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by which the permits can be allocated - for example, through an auction or tender (discussed
below). With a pennit system, the government is in a position to regulate the overall supply
of ODS in the country. Initially it may simply choose to freeze the total volume of imports
or limit mem to some target growth rate. Eventually, as the phaseout proceeds, the volume
of permitted imports can be reduced according to schedule, with the diminished supply still
allocated as before. The permit or license to import ODS may be subject to conditions, e.g.,
specifying the applications for which specific controlled substances may be used, reporting
requirements, etc.
One example of an import pennit system is that of New Zealand. Import permits are
granted in relation to the applicants' 1986 use of ODS (or in the case of 1,1,1-trichloroethane
and carbon tetrachloride, 1989 usage), but those permits can be sold or transferred to other
users. Imports of ODS are recorded initially by the Customs Department at the wharf using
the modified HS system tariff codes and then the data is passed on to the Statistics
Department where it is entered into the computer database before being passed on to Ministry
of Environment. When deemed necessary, the Ministry cross-checks the figures by requesting
the three major importers to supply information on their own imports as well as estimates of
the total market.
H. COMMAND-AND-CONTROL MEASURES
Many countries already possess legislation dealing with the control of environmentally
hazardous substances. In such cases, it is usually possible to utilise existing statutes to justify
control measures for ozone depleting substances. In the case of the United States, the Clean
Air Act, as amended in 1990, provides authority for implementing regulations to control ODS.
In the case of Thailand, CFCs and halons have been added to the list of chemicals subject to
regulation under the country's Hazardous Substances Act of 1992. Since passage of
legislation can be a time-consuming process, where it is not already on the books an interim
solution may be the issuance of an administrative order which provides government with the
authority to take ODS control measures.
A.
The Phaseout Schedule
The most basic decision governments must make regards the phaseout schedule to
adopt. The issue of timing and its implications for costs of phaseout is discussed elsewhere
in this report (see Chapter 3). The principal requirement is that the chosen phaseout schedule
conforms to requirements of Parties to the Protocol. Beyond that, a country has the option
to accelerate the phaseout and several Article 5(1) countries have chosen to do so. Various
reasons have been invoked for accelerated phaseout, including: (a) the rising costs of waiting
as ODS supplies become scarcer and more expensive; (b) preempting the expansion of the
stock of refrigeration and other equipment dependent on ODS; (c) the need to maintain access
to export markets which are becoming more restricted to ODS containing products. Against
these considerations a government must weigh the feasibility of achieving an accelerated
phaseout and the possible damage to the credibility of the phaseout effort of announcing a
schedule which is overly ambitious. Governments may choose to adopt different phaseout
schedules for different user sectors in recognition of varying technical and economic
feasibility.
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A calculation for Ghana of the cost implications of an accelerated phaseout suggests
scope for sizeable cost savings, deriving largely from the avoidance of the build-up of an
ODS-using stock of refrigeration and other equipment which would then need to be scrapped
prematurely. The total incremental costs of phaseout are estimated to be some three-and-a-
half times higher in the case of a phaseout according to the Protocol timetable than in the case
of an accelerated phaseout.
B. Quantitative Restrictions
Commitment of government to a certain phaseout schedule implies commitment - at
least as a last resort - to enforcing quantitative restrictions (or quotas) on ODS supply.
Assuming effective enforcement, there should be little uncertainty about a country's ability
to meet its obligations under the Montreal Protocol. Indeed, one of the principal attractions
of an ODS quota system is the predictability of outcomes. Effective enforcement remains,
however, a formidable challenge in many Article 5(1) countries. Another important
consideration is the method of allocating the (constrained) supply of ODS among
importers/users. A strict pro rated allocation (without the possibility of trading or other
means of eliciting firms' willingness to pay for the right to import/use ODS) can prove a
relatively costly way of phasing out ODS. This is because it forces proportional ODS
cutbacks by all firms even though some may be able to achieve reductions at substantially
lower marginal cost than others. It could be argued that, given the expected environmental
benefits of ensuring ODS phaseout according to schedule, the additional costs should not
weigh heavily in governments' decisions about instrument choice. Fortunately, even with a
system based on quantitative restrictions, it is normally possible to build in a degree of
flexibility so as to reduce the phaseout costs. Moreover, once the government imposes
quantitative restrictions, in the short-run the resulting scarcity is likely to create opportunities
for importers to reap windfall profits from their control over ODS supply. Thus, measures
may also be needed to reallocate those profits. There are economic instruments which can
serve this purpose as well (see next section).
C. Prohibition of Specific Uses and of Production
Besides quota restrictions, there are other CAC measures governments may choose to
use. Perhaps the most familiar are outright bans of ODS in specific uses — e.g., CFCs in non-
medical aerosols or rigid foams, and halons in new installations. Such bans are most easily
enforced where alternatives not only exist but have been proven cost-effective. In some cases,
countries have imposed bans on imports of products containing ODS. Where domestic
producers of similar products have been required to phase out ODS use, such an import ban
may be the only way to ensure that domestically produced ODS-using products are not simply
replaced by imports of the same. This could occur if the domestically produced alternative
is more costly than the imported ODS-using product. An import ban may also be appropriate
when a product could be expected to generate replacement demand for ODS during after-sales
servicing — the clearest instance being mobile air conditioning (MAC). Thus, some countries
require that all newly imported automobiles contain non-CFC using air conditioners.
Since Article 5(1) countries not presently producing ODS could still become
production bases before their required phaseout, some governments have chosen explicitly to
prohibit such production. Thus, an international CFC producing company seeking to export
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its production technology to a particular Article 5(1) country would be prevented from doing
so. Malaysia, for one, has instituted such a production ban. Similarly, a number of countries
have chosen not to issue licenses for investment in new facilities that propose to employ ODS
in their production processes or to incorporate them in their products.
The issuance or modification of product or process standards can be another CAC
measure aimed at discouraging ODS use. One instance is the US Defense Department's
modification of its military specifications to permit the use of alternatives to CFC-113 for
solvent cleaning purposes. China has revised design standards for cold stores to promote
substitution away from CFC refrigerants. The United States requires certification not only
of equipment used in the servicing of motor vehicle air conditioners but also of service
technicians.
D. Product Labelling Requirements
Mandatory product labelling is another CAC measure employed in some countries.
Under 1990 amendments to the Clean Air Act, the US government requires mandatory
labelling of Class I and n substances, and products containing or manufactured with such
substances (with a few exceptions). The German Ordinance on the Prohibition of Certain
Ozone-Depleting Halogenated Hydrocarbons also contains a labelling requirement for CFC-
containing products, including refrigerants, insulating material, and cleansing agents and
solvents. (The label must read: "Contains ozone-depleting CFC.") Labelling is likely to
prove an effective deterrent to ODS use only when consumers are well-informed of the ozone
depletion problem and their product preferences are significantly influenced by environmental
concerns. As a positive marketing device, many products now contain labels informing
customers that they are "ozone-friendly."
£. Recycling Requirements
Finally, mandatory recovery and recycling of ODS in certain applications may be
considered. A ban on the intentional venting of ODS during servicing or disposal of ODS-
using equipment is another way of trying to promote recovery — one used by the United
States. Enforcing such a ban may not be easy, since proving intent could be difficult, as
could monitoring the large number of small and widely dispersed service shops engaged in
automobile or appliance maintenance. Whether the market itself will ensure a high
recovery/recycling rate depends to a significant degree on the price of virgin CFCs and
halons. As long as there is a plentiful supply of these substances and prices remain low, there
is little incentive for firms voluntarily to recycle their ODS. In the event, governments might
need to subsidize investments in recycling equipment. In Thailand, for instance, while the
government is requiring all MAC service stations with an operating capital above $40,000 to
install recovery and recycling equipment, it is also acquiring low-cost equipment for
dissemination to smaller operators. Ghana has applied to the Multilateral Fund for financing
of 32 recycling machines to be made available to refrigerator maintenance shops. Mexico has
also proposed a demonstration project involving a large, centralised MAC recycling facility
in Mexico City and the provision of recycling equipment and training to operators of smaller
facilities. (Certain economic instruments may provide an incentive to recycle ODS while at
the same time helping to finance the costs, as discussed in the next section.)
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Pre-tax prices of the major controlled CFCs (CFC-11, CFC-12, and CFC-113) have
been rising steeply in the United States market; combined with the escalation of the excise
tax, incentives to CFC recycling and to substitution away from CFCs should be getting
noticeably stronger, though the recycling business has been somewhat slow to respond.
Meanwhile, there is concern in certain other countries that CFC prices have been rising more
slowly than anticipated, thereby incentives to switch to HFCs and HCFCs. However, with
an end to CFC production and the depletion of stockpiles in non-Article 5(1) countries, the
price picture could change rather quickly in the future.
m. ECONOMIC INSTRUMENTS FOR ODS PHASEOUT
Economic instruments are measures which operate directly on or through markets to
influence levels and patterns of supply of and/or demand for ODS. Those instruments
potentially applicable to ODS phaseout include: excise taxes on controlled substances; tariffs
on imports of ODS or ODS-containing products; tariff concessions on non-ODS using
technologies; deposit-refund schemes; tradeable permits and permit auctions. Such
instruments are increasingly widely used by Parties to the Protocol, though their use is almost
always in conjunction with rather than in place of regulatory (or CAC) measures.
A. Excise Taxes on Ozone Depleting Chemicals
An excise tax on ozone depleting chemicals is a form of pollution charge. It has been
used since 1990 in the United States; Denmark also employs an excise tax on ODS and
Thailand's country program contains a recommendation for introducing such a tax. The US
tax is described here in some detail.
The US excise tax is not the only economic instrument employed as part of its national
ODS phaseout program. In addition, it has introduced a system of tradeable ODS permits (or
allowances). The ozone-depleting chemical tax was introduced on 1 January 1990 and
extended effective 1 January 1991. It is levied on each pound (Ib) of ODS at a rate which
depends on a particular chemical's ozone depleting potential (ODP). The overall rate structure
has been adjusted upward since the tax was first introduced, and each year the per unit tax
increases. The tax rates for various controlled substances in 1994 and 1995 are shown in
Table 4.1. In 1996 and subsequent years the base tax rate is scheduled to increase by $0.45
per year.
The US excise tax scheme includes a floor tax on ODS inventories held for eventual
sale to deter tax avoidance through stockpiling1. That tax is equal to the amount by which
the excise tax on virgin ODS increases each year. This eliminates the advantage of holding
stocks in anticipation of future tax increases. It could, however, discourage suppliers in non-
Article 5(1) countries from stockpiling ODS from their last few years' production (1994-95
for major CFCs) to meet future equipment servicing demand. At the same time, there is no
'Since stockpiling for use is not subject to the floor lax. the lax structure provides an incentive for stockpiling among large users.
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TABLE 4 1- EXCISE TAX RATES ON OZONE DEPLETING SUBSTANCES,
UNITED STATES (1994-95)
Controlled
substance
CFC-11
CFC-12
CFC-113
CFC-114
CFC-11 5
HALON-1211
HALON-1301
Halon-2402
Carbon
Tetrachloride
Methyl
Chloroform
1994 Tax
4.35
4.35
3.48
4.35
2.61
13.05
43.50
26.10
4.79
0.44
1994 Floor
1.00
1.00
0.80
1.00
0.60
12.80
43.25
25.85
1.10
0.22
1995 Tax
5.35
5.35
4.28
5.35
3.21
16.05
53.50
32.10
5.89
0.54
1995 Floor
1.00
1.00
0.80
1.00
0.60
3.00
10.00
6.00
1.10
0.10
SOURCE: US Environmental Protection Agency (EPA), Washington, D.C., 1994.
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tax imposed on domestically recycled ODS, which should provide an incentive to invest in
recovery and recycling2.
While the taxes are generally levied on specific controlled substances, there are also
a few application-specific taxes - e.g., for rigid foam, sterilants and inhalers. In the first two
applications, the tax rates were lower through 1993, but in 1994 they were rapidly escalated
to bring them into line with the overall tax rate on CFC-11, CFC-12, and CFC-114. In the
case of inhalers, the tax rate remains at the low 1993 level, reflecting the fact that this is still
an essential use for which satisfactory substitutes have yet to be developed.
Another important feature of the US excise tax is that it applies not only to bulk
production or imports of the controlled chemicals but also to products made with or
containing them. Thus, when a product manufactured abroad with CFCs is imported into the
United States, it is subject to tax on «he CFC content. This has contributed to an accelerated
phaseout within the foreign manufacturing subsidiaries of certain US multinationals (notably
in the electronics industry) as well as inducing the parent companies to assist their
independent overseas suppliers to phase out their own CFC use (see O'Connor 1991).
The fact that the US ODS tax has been superimposed on a system of quantitative
restrictions introduces an element of redundancy. For, either the quantitative restrictions are
binding, in which case the tax has no incentive effect, or the tax is so high as to reduce
demand below the level permitted by the quantitative restrictions, in which case there is no
need for the latter (see Oates 1994).
The excise tax could be viewed as a way of realizing economic efficiency gains over
the situation of quantitative restrictions alone, but those gains are already made possible by
the fact that ODS allowances are transferable between firms. Thus, a firm for which the costs
of marginal reductions in ODS use are high can purchase allowances from a firm able to
achieve such reductions at relatively low cost. The tax, then, seems designed primarily to
serve a revenue raising function: it enables the government (and by implication the general
public) to capture some of the above-normal profits which would otherwise accrue to firms
selling the scarce supply of ozone-depleting chemicals.
Most Article 5(1) countries already charge excise duties on a variety of products, so
the institutional apparatus to collect such a tax on ODS would not need to be set up from
scratch. Assuming that an Article 5(1) country has not yet introduced binding quantitative
restrictions on ODS consumption, then an excise tax set at a sufficiently high rate might have
the desired incentive effect of dampening ODS demand. Even where quantitative restrictions
have already been introduced, an excise tax could provide a convenient source of revenue to
help finance government's expenditures on the ODS phaseout effort3. The determination of
an appropriate rate is likely to be in part a matter of trial and error. Ideally, the government
could utilise estimates of the elasticities of ODS demand as a basis for calculating tax rates,
In the case of imported ODS the situation is less clear cut: the US Internal Revenue Service (IRS) has suggested that the excise tax
applies to all imported product, including recycled.
3ln the United States. ODS excise tax revenues have not been explicitly earmarked for this purpose.
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but where domestic estimates are not available those from other countries with similar user
industry characteristics may provide a rough guide.
B. Duty Exemptions and Investment Subsidies
Many Article 5(1) countries charge duties on imports of capital equipment and
consumer durables. The level of such duties can vary quite widely from one country to
another. In general, however, their effect is to dampen import demand — the higher the duty
the greater the dampening effect. Normally, duties do not discriminate between different
environmental properties of equipment in a given category — say, between CFC-containing
and non-CFC-containing refrigerator compressors, or between automobiles with CFC-using
air conditioners and those without. Tariff differentiation based on whether a product contains
ODS or not may be one way of encouraging a switchover to non-ODS-using equipment.
(Similarly, where bulk chemicals are subject to import duties, tariff preferences for non-ozone-
depleting chemicals could encourage a faster switchover.) As average tariff levels decline
with trade liberalisation in many Article 5(1) countries, the incentive effect attainable through
differential tariff rates diminishes. Moreover, the attractiveness of offering preferential tariff
treatment to non-ODS-using equipment depends in part on whether the country is itself a
potential manufacturer of such equipment. If so, import duty reduction may conflict with
another policy objective, namely, to offer transitional protection to domestic manufacturers
as they convert from production of ODS-using to non-ODS-using equipment (e.g., refrigerator
compressors). Malaysia currently waives the normal duty on technology imports in the case
of ODS recycling equipment. Similarly, Ghana offers duty exemptions on ODS-free
technologies and ODS recovery and recycling technologies. The Thai government has
reduced the duty on imports of ODS recycling equipment from 30 per cent to 10 per cent, but
this is part of a broader tariff reduction on capital equipment.
Investment subsidies are another type of economic instrument used to encourage a
change over to non-ODS-using technologies. These often take the form of tax incentives.
Malaysia, for example, grants a deduction from corporate tax for investment in new
manufacturing capacity using non-ODS technology. Likewise in Singapore, firms investing
in ODS-reducing technologies can deduct up to 50 per cent of equipment cost from taxable
income as compared with only 30 per cent for other types of equipment investment. Small
firms can qualify for an additional incentive in the form of a 50-per cent reimbursement of
consultancy fees for hiring experts on alternative technologies. In many countries, subsidies
are directed specifically at small-scale enterprises, which often lack the financial and technical
resources to undertake ODS phaseout without some outside support. The Multilateral Fund
itself provides financial subsidies to investment in non-ODS-using technologies. The risk of
reliance on investment subsidies is that it can encourage overinvestment or excessive risk-
taking, though the benefits of encouraging a rapid switchover are normally assumed to justify
the risk.
C. Incentives for Recovery, Recycling and Banking of ODS
As the global supply of ODS tightens, governments in Article 5(1) countries will need
to consider measures to promote recovery and recycling of existing ODS supplies. While a
continued steep rise in world prices for virgin ODS would strengthen incentives for recycling,
a government may choose to reinforce those incentives with a levy on virgin ODS supplies.
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This has been done in Australia, for example, where a tax of AS1.00 per kg is levied on
virgin ODS, with revenues used to defray the costs of its national recovery and recycling
scheme.
A related approach designed to encourage recycling is a deposit-refund scheme. The
concept is essentially the same as in the relatively familiar deposit-refund schemes used for
beverage containers and other packaging materials. The US Environmental Protection Agency
studied such a scheme in connection with a planned national CFC recycling program proposed
in 1990 (see US Government 1990). Under such a system, a deposit fee would be added to
the purchase price of the controlled substance at the appropriate point of sale. These fees
would be refunded to persons or firms that returned used ODS to designated collection points
for recycling. Alternatively, a recycling firm could arrange for the collection of ODS from
user industries for central recycling. A deposit-refund scheme for ODS can be costly to
administer, however. Moreover, centralised recycling is rendered more complicated where
users are employing a variety of blended products and where the nature of impurities mixed
with the ODS varies from user to user.
Recovery and recycling of ODS are likely to play a vital role in ensuring continued
ODS supplies for maintenance of installed equipment in Article 5(1) countries once ODS
production ceases in non-Article 5(1) countries. Banking of ODS stocks (whether virgin or
recycled), which has already begun in the case of halons, could be expected to expand to
CFCs in the future. ODS banking (discussed at greater length in Chapter 7) is analogous in
some respects to a tradeable permit system, with the major difference that banking involves
intertemporal trades - i.e., saving a portion of current ODS stocks for future consumption.
As recovery and recycling become more widespread, then the ODS inventories available to
supply future demand should include not only stockpiles of virgin ODS carried over from the
final years of production in non-Article 5(1) countries but also the quantities installed in
refrigeration and other equipment. A loan market for "banked" CFCs appears to be emerging,
though it is still in its infancy (see Chapter 7). Governments may be able to facilitate the
development of such a market, for example, through accreditation schemes for recyclers and
provision of common testing and quality assurance facilities for recycled and banked ODS.
D.
Permit Trades and Auctions
As noted above, quantitative restrictions on production and consumption of ODS are
an integral part of most if not all countries' ODS phaseout strategies, and pro rating based on
historic production/imports is the most common means of allocating the available supply. The
main drawback of a straight pro rated allocation is its lack of flexibility. • It does not allow
for changing composition of ODS demand as different firms phase out at different rates.
Thus, several countries have modified their allocation systems to enhance flexibility and cost
effectiveness. There are a number of ways by which this can be done. One is simply to
allow trading of the permits among registered firms, with the initial allocation still pro rated.
Another is to auction off the available supply of production or import allowances to the
highest bidder(s). A variation of this approach is a sealed bid tender. The main difference
between a permit trading scheme and an auction is that in the former the enterprises selling
their permits derive the financial rewards from ODS scarcity while in the latter the
government captures the rents accruing to ownership of claims on the scarce ODS supply.
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Singapore has pioneered the use of the permit, or quota, auction as a means of
allocating its national ODS supply (see O'Connor 1991). Each quarter, ODS import permits
are allocated among importers and users, half on the basis of historic demand (known as
'grandfathering,' this is intended to avoid sudden disruption of supplies to existing
importers/users) and half through a tender. Each registered importer or user may submit a
sealed bid specifying the quantity of ODS the bidder would like to purchase and its offer
price. Bids are then ranked by price and the lowest winning offer price (i.e., the one which
clears the market) becomes the permit price for all ODS import permits, including the pro
rated half. While successful bidders must accept their auctioned allocation, firms have the
right to forfeit their pro rated allocation. During the first few tenders after the system was
introduced, there was a steep increase in permit prices (helped along by stockpiling).
Consequently, user firms faced a strong incentive to adopt conservation measures and
substitute technologies, which has contributed to a sharp reduction in ODS demand. By 1992,
CFC and halon consumption had fallen to 37 per cent of its 1986 level. Moreover, the
auction process has enabled the government to capture a sizeable portion of the quota rents,
which it has used to subsidize recycling services and the dissemination of information on
alternative technologies. The government has subsequently accelerated reductions in the
national ODS quota in order to maintain upward pressure on the tender price.
As elsewhere, in Singapore the market-based approach has been combined with various
command-and-control measures. For instance, in 1991 the government banned the import and
manufacture of non-pharmaceutical aerosols and polystyrene sheets; in 1992 it prohibited the .
use of Halon-1301 for new installations and the import of Halon-2402; in 1993 it prohibited
the use of CFCs in new industrial air conditioners and refrigerators (Toh et aH. 1994).
New Zealand has introduced a simple permit trading system. To import CFCs, methyl
chloroform or carbon tetrachloride a firm must possess a permit issued by the Ministry of
Commerce. The amount each applicant is permitted to import is based on 1986 levels.
Permit holders are free to sell or otherwise transfer their permits as long as they do so within
the same user sector. In this way, the government is able to set different phaseout targets for
each sector, depending on its evaluation of technical and economic feasibility.
Mexico is planning to introduce a tradeable permit scheme as well. The allocation
of permits is to be done annually and any company possessing a permit is free to sell it to
any other company. When a trade occurs, the selling company must notify the government
in writing and the records are checked to ensure that the trade is in line with the permit; if
so, a notification is sent to buyer and seller approving the trade. Permit trades may be only
for a single year, or they may be permanent. In the latter case, in all years from the trade
until ultimate phaseout, the company purchasing the permits is entitled to the seller's baseline
quota allocation, whose value could be expected to appreciate as the ODS supply constraint
becomes more binding. As substitution proceeds, that value should decline and when the
phaseout is complete the quota allocation (or permit) has zero value.
E. Summary
Economic instruments can be, and usually are, employed as adjuncts to command-and-
control measures. They are generally designed to achieve one or another sort of improvement
over a straight CAC approach:. (i) to improve the economic efficiency of ODS phaseout; (ii)
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to achieve certain equity objectives. Taxes on ozone-depleting chemicals and tradeable permit
schemes both possess efficiency-enhancing properties. They differ in other respects, however.
A tax can also be used on equity grounds, to redistribute the windfall profits arising from
increasing ODS scarcity. The drawback of a simple tax is the uncertainty of what rate will
achieve the desired reduction in ODS demand. The marketable permit approach eliminates
the uncertainty, but whether it can achieve equity objectives depends on the allocation rule
for the permits. If the government simply allocates all the permits on the basis of historic
consumption, it leaves the importers and users to share the scarcity rents. Those companies
which happen to have had large historic consumption benefit inordinately from such a system.
By contrast, an auction-type allocation enables the government to capture a sizeable share of
the rents; if, as in Singapore, this is combined with the grandfathering of a portion of the
permits, equity concerns of smaller and less wealthy consumers can also be addressed.
Alternatively, as in-the United States, an excise tax could be superimposed on the tradeable
permit scheme to tax away some of the windfall profits, though as noted earlier the tax could
prove redundant on incentive and efficiency grounds.
IV. VOLUNTARY AGREEMENTS
A few countries have relied extensively on voluntary agreements between government
and industry as a key element of their ODS phaseout strategies. Such voluntary agreements
have a long history in the field of environmental protection. One of their principal advantages
is that they can be put into place fairly quickly, avoiding legislative or bureaucratic delays.
Thus, they can serve as a useful interim measure while more comprehensive ones are put in
place. In addition, the fact of their being voluntary implies that governments must first build
support for ODS phaseout through consultations with industry, which enhances the prospects
for industry compliance with any future regulatory measures. The example set by the
participants in the voluntary agreements may also have a positive demonstration effect on
other firms in a particular sector. A further feature of voluntary agreements is their flexibility;
in the limit, a separate agreement could be negotiated with each ODS supplier and user, which
would permit the tailoring of phaseout measures to individual enterprise capabilities. On the
other hand, a firm-by-firm approach can involve high transaction costs if there are many ODS
suppliers and users. One way of reducing such costs is for government to negotiate an
agreement with an industry association rather than with individual firms. The process of
consultation leading up to an agreement should help government to assess how rapid a
phaseout is technically and economically feasible in a particular sector, given current and
soon-to-be- available technologies. By working with an industry association, the government
can also shift most of the burden of monitoring compliance with the agreement from its
shoulders to industry's.
In Germany, voluntary agreements have been an important complement to regulations
in the ODS phaseout effort. For instance, the government concluded a voluntary agreement
with the aerosol industry that resulted in a reduction in CFC aerosol use from 53,000 tonnes
in 1976 to 21,000 tonnes in 1987 and 2,000 tonnes in 1990 (the targeted date for achieving
that level had been 1991); since then, this use of CFCs has been completely phased out
(OECD 1993a).
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Other non-Article 5(1) countries that make use of voluntary agreements include the
Netherlands, Belgium and Norway. In the case of the Netherlands, in 1988 an agreement
similar to that in Germany was concluded with manufacturers of aerosols. The effect of this
agreement was that, since 1991, all aerosols destined for the consumer market are now filled
with propellents that do not harm the ozone layer. Similarly, the government negotiated
agreements with rigid foam producers, represented by the Dutch Association of Rigid
Polyurethane Manufacturers (NVPU), to phase out their CFC consumption by 1 January 1993.
In Belgium, voluntary agreements were concluded with industry on reduction of CFC use in
foams (March 1989), aerosols (November 1989), and refrigerants (March 1991). In Norway,
which depends entirely on imports of ozone-depleting chemicals, a voluntary agreement with
industry played a significant role in reducing CFC imports from 1,411 tonnes in 1986 to 990
tonnes in 1989, 478 tonnes in 1991, and 255 tonnes in 1993. A total ban on CFC use comes
into effect in 1995 (OECD 1993b).
A few Article 5(1) countries have also adopted voluntary agreements as a central plank
of their ODS reduction programs. Mexico and Thailand are especially noteworthy. In Mexico,
between 1989 and 1991, the government worked closely with industry associations to inform
relevant industries of the requirements of the Montreal Protocol and to encourage adoption
of voluntary agreements. During that period, 12 voluntary agreements were signed with two
CFC producers and seven ODS users, setting out timetables for reductions. Several of the
users were industry associations, including the Mexican Polyurethane Institute, Mexican
Aerosol Institute, National Chamber of Industries, Chamber of Perfume and Cosmetics
Industries, and National Board of In-Bond (Maquiladora) Industries. Industry representatives
have supported an accelerated phaseout in line with the developed country timetable in
anticipation of tightening ODS supplies and in order to keep abreast of the latest technology
developments and thereby safeguard the international competitiveness of Mexican industry.
In Thailand, a tripartite arrangement has been forged involving the Thai Ministry of
Industry and the relevant government agencies and industry groups of Japan and the United
States, whose multinational corporate subsidiaries in Thailand were found to account for a
very high percentage of ODS use, especially in the solvent cleaning sector. At a tripartite
meeting in March 1992, some 33 Japanese companies and 11 US companies committed
themselves to an accelerated ODS phaseout within their Thai operations. The arrangement
is also meant to facilitate technology transfer from US and Japanese multinationals to Thai
firms which act as suppliers, subcontractors, or joint venture partners. In a follow-up
conference in early 1994, it was announced that Japanese companies would reduce CFC-113
and methyl chloroform use in their solvent cleaning operations by 43 per cent by 1995 and
90 per cent by 1997, while CFC-11 and CFC-12 use in the refrigeration sector was scheduled
for a 95-per cent reduction by 1996. Some 7 Japanese domestic refrigerator manufacturers
have plans to mass produce models which use HFC-134a refrigerant by early that year
(Vicharangsan 1994).
Malaysia is utilising a cross between a voluntary approach and a regulatory one in
setting industry phaseout targets. At the individual firm level, the government has reached
agreement with each locally-based affiliate of a multinational corporation on an ODS phaseout
date. At the sectoral level, as noted above, the government has required each user industry
(organised into six working groups under the National Steering Committee for the Montreal
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Protocol) to draft its own timetable for ODS phaseout, indicating major problems, the
measures proposed to deal with them, and the estimated costs of the phaseout.
Finally, New Zealand has adopted a policy which involves the drafting by industry
groups (at government's behest) of codes of practice for ODS control. The first such code
was called for by the Minister of the Environment from the automobile air-conditioning
industry; a second code covers the plastic foam industry, a third the refrigeration/air
conditioning industry, and a fourth the fire protection industry (Kraemer and Kdhne 1992).
The level of public awareness of the stratospheric ozone problem can affect the
willingness of ODS suppliers and users to undertake voluntary control measures. Where the
public is sensitive to the environmental implications of consumption choices, industry may
perceive opportunities to enhance consumer good will by introducing and advertising non-
ODS-using products and processes and by announcing their active co-operation with
government in achieving a rapid ODS phaseout.
In summary, voluntary agreements have a few advantages which can make them
attractive as elements of an ODS phaseout strategy. They can be negotiated and implemented
with a minimum of delay, since they do not require new legislation or regulations. They are
highly flexible instruments: though it is possible to negotiate individual agreements, it is
probably more economical to deal with industry associations since, in any case, firms within
a given industry are likely to encounter similar technical and economic problems. A
common agreement with an industry association can reduce government's monitoring costs
and facilitate information dissemination concerning non-ODS-using technologies. Experience
suggests that firms are more likely to enter into voluntary agreements when the alternative is
likely to be a government-mandated reduction program, or when they perceive a commercial
benefit in the form of increased customer good will. Normally, voluntary agreements will
constitute just one small component of a larger strategy - their principal function being to
accelerate the phaseout among major ODS users and in the process to demonstrate that an
accelerated phaseout is not only feasible but possibly even profitable.
V. BROAD DIRECTIONS FOR ODS POLICY FORMULATION IN ARTICLE 5(1)
COUNTRIES
As the country experience described thus far suggests, the policy regime for ODS
phaseout is likely to consist of a "cocktail" involving a mix of regulatory, economic and
voluntary measures. The particular mix will depend on characteristics of the individual
country and its level and pattern of ODS production and use. Some of the relevant factors
which will affect policy design are identified below; then broad guidelines are proposed which
are intended to assist policy makers in Article 5(1) countries, particularly those which are still
at an early stage in ODS policy formulation.
A. Country Characteristics Bearing on Policy Choices
A number of Article 5(1) countries have already made substantial progress in
designing and implementing ODS phaseout strategies and policies. Others stand to learn
valuable lessons from them as well perhaps as from the experiences of non-Article 5(1)
countries. There is a considerable heterogeneity in the characteristics of the ODS sectors of
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different Article 5(1) countries, not to mention in the broader legal, institutional and policy
framework. Relevant considerations in defining an appropriate policy regime include the
following:
the extent of development of market institutions in general and of markets for
ODS and ODS-using products in particular;
the capacity of government to monitor compliance and to enforce laws and
regulations;
the fiscal culture, including the capacity of government to collect taxes and the
public acceptance of new tax measures;
the level of education of the population and the potential for raising public
awareness of the stratospheric ozone problem.
1.' The Degree of Development of Market Institutions
The degree of familiarity with a market system of resource allocation varies widely
among Article 5(1) countries, though economic reforms in certain of the centrally planned
economies have greatly expanded the degree of reliance on markets. It may take some time,
however, for governments to become adept at employing market-based instruments; moreover,
other elements of the policy regime may render such instruments ineffectual. For instance,
excise taxes levied on ODS production or imports would have little incentive effect where
ODS producers or importers (e.g., state enterprises) can avail of government subsidies to
cover their higher costs.
Apart from the general level of market development, it is also important to consider
the structure and functioning of ODS markets. A common structure in many countries is one
in which supply of ODS is highly concentrated in a few firms - whether producers or
importers - while use is much more widely dispersed. Where only a few firms are involved,
direct regulation is relatively simple, while a large number of dispersed firms creates
monitoring and enforcement problems. At the same time, a concentrated upstream industry
structure makes it difficult to establish competitive market conditions, while the larger number
of downstream ODS users fosters greater competition. For these reasons, it may be
appropriate to utilise a combination of direct regulation on upstream suppliers (e.g., import
controls where a country has no domestic production) and market allocation to domestic
downstream users (see Munasinghe and King 1992). As the quantitative restrictions will tend
to raise prices, downstream users will face incentives to economize on ODS use. If an
oligopolistic supplier sector is not to reap unusual profits from this situation, government may
need to impose an excise (or windfall profits) tax on that sector. While a quota auction might
attain the same objective, there is a risk of collusive bidding where numbers of participants
are very small.
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2. Government Monitoring and Enforcement Capacity
Weak government capacity to enforce laws and regulations is a common problem in
many Article 5(1) countries. This is apt to be especially true in an area like ODS phaseout
where the required expertise is likely to be in scarce supply. Moreover, within many Article
5(1) countries, there are serious conflicts of interest between different ministries: those
charged with enforcing environmental standards and policies may not only receive little
budgetary support but may actually encounter strong political resistance from those charged
with promoting economic development. Where there is as yet a limited public constituency
for environmental protection, the environmental administrator is likely to labor at a
competitive disadvantage. However, such a conflict is likely to be somewhat muted in the
case of ODS phaseout, since external financial and technical resources should be available
from the Multilateral Fund.
A common complication of monitoring and enforcement in many developing countries
is the large number of small enterprises operating outside the formal economy or, in other
words, without the permission or often even the knowledge of the government. To the extent
that this is the case in ODS using sectors, government could be expected to have difficulty
monitoring and control their activities. If the supply of ODS can be effectively controlled at
the border, then both formal and informal sector ODS users will be affected by the tightening
supply. Still, if for whatever reasons informal sector firms prefer to remain anonymous, they
would not be in the same position as formal sector ones to avail of the financial resources of
the Multilateral Fund to help them adjust to the ODS supply constraint. Moreover, it is a fact
that in many Article 5(1) countries, borders are porous and supplies of ODS may be difficult
to exclude when the incentive to smuggling is high.
3.
Fiscal Culture
Many Article 5(1) countries rely on indirect taxes for a sizeable portion of government
revenue generation. Trade taxes have historically made up a large portion of such revenues
but with trade liberalisation the emphasis has tended to shift to domestic taxes, in particular
value-added taxes. Excise taxes are also a common feature of many countries' tax structure.
Thus, the capacity to administer an ODS excise tax may well already exist. However, tax
evasion remains a pervasive phenomenon in many countries, so the mere imposition of a tax
does not assure its collection. Where all ODS are imported, then a border tax may be the
most effective means of diminishing scope for evasion. Still, misdeclaration of imports is
commonplace, as is bribery of customs officers. A particular dilemma arises as trade in
recycled ODS expands: a government which taxes ODS imports might choose to exempt
recycled ODS so as not to discourage recycling, but this may encourage the mislabelling of
virgin ODS as recycled ODS. A global system of reporting and information sharing which
would enable Parties to track movements of recycled ODS could help guard against such
abuse.
A government considering the introduction of an ODS tax can expect to encounter
resistance from ODS industry participants, who may well argue that the tax would undermine
their competitiveness. Even without such resistance, it may still be time-consuming to
introduce a new tax measure if it must be passed by the legislature. Thus, governments may
find reliance on regulatory measures more politically appealing. The effect of strict
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quantitative controls would still be to raise prices to users, but government may not be
perceived as directly responsible for the price increases. Nevertheless, against this presumed
political benefit government needs to weigh the possible political cost of allowing a few
private firms to capture windfall profits from the policy-induced ODS scarcity. Moreover,
there is the foregone revenue which might have been used towards financing the ODS
phaseout effort, includingperhaps rebates to enterprises undertaking investments in alternative
technologies. Thus, if equity concerns need to be addressed but an excise tax proves
politically infeasible, a permit auction may be the preferred solution.
The most politically attractive policy approach is likely to be one based on voluntary
undertakings by ODS suppliers and users to meet certain phaseout targets. If compliance is
indeed voluntary, then such an approach will almost certainly have to involve accelerated
phaseout, since the government will need to leave some time for implementing CAC measures
if industry exhibits bad faith. Thus, a system of voluntary agreements will in general need
to be backed up by the threat of eventual sanctions for non-compliance. Alternatively,
government must ensure that industry is sufficiently convinced it is in its self-interest to
follow its agreed phaseout schedule that little policing is required.
4. Industry and Public Awareness
Whether industry sees advantages to voluntary phaseout of ODS depends to a
significant degree on its own level of awareness of the issue and that of the consuming public.
It has been pointed out elsewhere that in some countries (notably Mexico) industry has indeed
been persuaded of the advantages of an accelerated ODS phaseout. Loss of competitive
position in both domestic and export markets to non-ODS-using technologies is among the
most persuasive commercial arguments. That in turn is a function of two interrelated factors -
the shift in consumer preferences away from ODS-using products and the declining costs of
non-ODS-using alternatives as their production expands to meet the growing demand. If an
ODS user industry is primarily export oriented, then the attitudes of consumers in major
foreign markets are critical. In the case of domestic market oriented industries, public
awareness raising and educational campaigns can be important forces shaping demand for
non-ODS-using products. While government can provide valuable support to such
campaigns, often non-governmental organisations (NGOs) will prove eqfually or more effective
in conducting them.
B. Guidelines for die Design of ODS Phaseout Policy
t
Based on the preceding discussion, it is possible to identify a number of general
pointers to which governments may choose to refer when designing their ODS phaseout
strategy and policy regime. Any set of policies must strike a balance among several at times
conflicting objectives: effectiveness in achieving timely phaseout, economic efficiency,
equity, political feasibility and ease of implementation.
1. The simpler the policy regime, the easier it is to implement. As a general rule,
govemments'should aim for as simple a policy regime as is consistent with the achieving their
phaseout timetable and meeting other priority objectives. Neither complex regulations nor
sophisticated economic incentive schemes are very useful if the institutional capacity to
administer them effectively is lacking. Since institutional capacity is apt to be weakest early
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in the phaseout effort, simplicity of design is especially important at the outset. - If
subsequently there is a perceived need for more sophisticated measures, then these can be
introduced as the institutional capacity to implement them develops.
2. A mixed policy regime is normally to be preferred over a pure one. A regime
combining regulations, economic incentives and/or voluntary agreements is almost inevitably
somewhat more complicated than one based on a single type of instrument. Nevertheless,
within limits the advantages from added complexity - namely, allowing attainment of multiple
objectives - should outweigh any disadvantages. Corhmand-and-control measures can reduce
substantially any uncertainty that phaseout targets will be met; economic instruments can
reduce compliance costs of firms with a given phaseout schedule; voluntary agreements can
reduce the administrative burden on government and increase the political acceptability of the
phaseout program.
3. ODS supply controls should be targetted where they can be enforced most effectively.
Normally, for the majority of Article 5(1) countries which depend on imports for their ODS
supply, border measures are the most appropriate. Moreover, suppliers and importers are
generally far fewer in number - and hence easier to monitor - than users. This does not imply
that the user sectors can be ignored: they will normally require technical and financial
assistance in adjusting their operations as ODS supplies become scarcer and more expensive.
4. Sector-specific measures may be useful to encourage accelerated phaseout -where
technologies permit. Where cost-effective alternatives have already been developed, it may
be advisable to force the adoption of those technologies by imposing sectoral bans on ODS
use. This has been done extensively in the aerosol sector and with rigid foams. While one
would expect the forces of competition alone to force ODS users in such sectors to switch to
more cost-effective alternatives, the introduction of a sectoral ban can still act as an effective
catalyst. The use of a sectoral ban in such circumstances carries few costs, since user firms
should actually enjoy improved profitability after the switch over.
5. Whatever the mix of policy instruments, close consultation with affected industries
should enhance cooperation, hence lower monitoring and enforcement (M&E) costs. An ODS
phaseout program not enjoying the support (even if at times reluctant) of affected industries
is likely to be costly if not impossible to implement effectively. Governments in many
Article 5(1) countries have only very limited in-house monitoring and enforcement
capabilities. To economize on M&E effort, governments therefore need to enlist other social
actors, including the affected industries themselves. Those industries are more likely to co-
operate when they have been consulted in advance and been allowed to make an input into
the policy formulation process. Environmental NGOs can also be valuable participants in the
design and implementation of the ODS phaseout program.
6. Control measures should not unduly penalize small ODS users; special measures may
be needed to assist their adoption of alternative technologies. For a number of reasons, small-
scale enterprises, especially those operating in the informal sector, may operate at a
competitive disadvantage in adapting to policy initiatives for ODS phaseout. They may have
limited access to information on alternative technologies, limited financial resources to acquire
them, and limited technical competence to master them. For all these reasons, government
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may need to devise special outreach programs to reach such firms and offer special financial
incentives for hiring technical expertise and investing in new technologies.
7. Voluntary agreements should be encouraged wherever possible as they involve little
cost to government and have a number of potential benefits; they are especially useful as an
early policy initiative. Voluntary agreements may well appeal to some of the bigger ODS
suppliers and users, which may also be among me larger companies operating in the country.
Where those companies have a brand image to uphold and are concerned about consumer
good will, being seen as an environmentally responsible corporate citizen has its commercial
advantages as well. Thus, if successful, the voluntary approach can yield significant early
reductions in ODS consumption and thereby lend credibility to the government's phaseout
efforts.
8. As ODS supplies become tighter in coming years, governments need to give greater
emphasis to policies to promote recovery, recycling, and banking. In the transition to the
next phase of implementation of the Montreal Protocol, when ODS production has effectively
ceased in non-Article 5(1) countries, effective management of existing stocks of the chemicals
will be critical to ensuring that installed ODS-using equipment can be maintained for the
remainder of its useful life. Since the stock of such equipment may well continue to grow
in many Article 5(1) countries for a number of years still, the question of ensuring adequate
ODS supplies for servicing takes on added urgency. While a high price for virgin ODS is
itself an incentive for recovery and recycling, governments may need to consider other
measures to encourage greater recovery and recycling. One approach already being applied
in a number of countries is to subsidize investment in recycling equipment, whether by
individual firms or by a common recycling facility servicing many small users. Resources
from the Multilateral Fund have been made available for a number of recycling projects in
Article 5(1) countries.
Measures to encourage ODS banking operations may also be called for; some policy
initiatives in this area are discussed in Chapter 7.
VI. CHAPTER SUMMARY
Information dissemination and public and industry awareness raising are important
preconditions of an effective phaseout strategy. Voluntary agreements for ODS reduction by
industry can generate publicity and momentum for the broader phaseout effort. Governments
may want to-promote such agreements, perhaps involving industry associations as a way to
encourage collective self-policing by industry; non-governmental organisations (NGOs) may
also be a party to such agreements, providing an independent monitoring capacity. Such
agreements can be put in place quickly since they do not require legislation or regulations;
they can thus buy time while regulatory and other instruments are developed and
implemented. Most countries will opt for some sort of quantitative restrictions (quotas),
normally managed through an import and (in some instances) production permit/license
system. Permit trading can be a relatively simple means of generating efficiency gains,
though the extent of gains depends on how widely phaseout costs vary across sectors and
individual users. By means of a permit auction or the levying of an excise tax on ODS
supplies, governments can capture some of the windfall profits (or scarcity rents) which
otherwise would have been enjoyed by the ODS suppliers; those revenues could be put
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towards building up an ODS recovery/recycling capacity, providing financial support to small
and medium enterprises for ODS phaseout, etc. Clearly, recycled ODS need to be exempted
from any tax if it is to have the desired incentive effect and careful consideration needs to be
given to the risk of tax avoidance behavior. In the end, a mixed strategy combining legal and
regulatory measures, economic incentives, public awareness raising and voluntary agreements
with industry is apt to be best suited to reconciling the multiple objectives of phaseout
timeliness, cost effectiveness, equity and political feasibility.
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REFERENCES
KRAEMER, R. A. and A. KOHNE (1992), Regulations for the Protection of the Ozone Layer
in Industrialised Countries, Institut fur Europaische Umweltpolitik e.V., Bonn, February.
MUNASINGHE, M. and K. KING (1992), "Accelerating Ozone Layer Protection in
Developing Countries," World Development, Vol. 20, No. 2, pp.609-618.
DATES, W.E. (1994), "Environment and Taxation: The Case of the United States", in
Environment and Taxation: The Cases of the Netherlands, Sweden, and the United States,
OECD Documents, Paris.
O'CONNOR, D.C. (1991), "Policy and Entrepreneurial Responses to the Montreal Protocol:
Some Evidence from the Dynamic Asian Economies", OECD Development Centre Technical
Paper No. 51, OECD, Paris.
OECD (1993a), OECD Environmental Performance Review: Germany, Paris.
OECD (1993b), OECD Environmental Performance Reviews: Norway, Paris.
TOH, K.C., Y.W. WONG, and G.Q. LU (1994), "Energy and Environmental Protection for
Sustainable Development in Singapore," Journal of Environment & Development, 3:2,
Summer, pp.123-138.
UNITED STATES GOVERNMENT (1990), Federal Register, Part III: Environmental
Protection Agency, 40 CFR Part 82, Protection of Stratospheric Ozone; Advance Notice of
Proposed Rulemaking; Vol. 55, No. 84, May 1, pp. 18256-18273.
VICHARANGSAN, T.-N. (1994), "Thailand's Efforts in Phasing Out Ozone Depleting
Substances: Progress Made Since ODSONET/SEAP 1993 Workshop," presented at
ODSONET/SEAP 1994 Workshop, Hanoi, 23-27 August.
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CHAPTERS
INFORMATION, INNOVATION AND THE MONTREAL PROTOCOL
L INTRODUCTION
A common problem of individuals and organizations is the effective communication
of ideas, knowledge and information. Even more problematic is the communication of new
ideas since change itself is challenging. Altering practices that deplete the ozone layer
requires changing behavior patterns deeply embedded in the routine meanings and behaviors
of cultures, nations, organizations, industries, and individual consumers across the globe.
The types of information pertinent to global change of ODS practices span the full
range of human communication forms, from the theoretical and scientific, through the
technical and procedural, to the interpersonal and emotional. The channels that carry ODS
information range from formal mass media to interpersonal conversations. The message forms
include formal ones, like scientific journals and government regulations, less formal ones like
industry manuals and association newsletters, to very informal ones like conversations over
dinner or during a workshop. Communication channels and messages are organized into
socially-based communication systems; the way these social meaning systems operate affects
their ability to get new ideas adopted. One can even think of a social system as going
through a gradual learning process regarding an innovation, as the aggregated experiences of
the individuals with the new idea builds up and is shared among them through interpersonal
networks (Rogers 1983:293;.
The past five years, which may be considered Phase 1 of the Montreal Protocol
implementation process, have been ones of experimentation, evolution and progress in the
creation of a functioning communication system for ODS phaseout. While the system has not
been perfected, its creation is a major accomplishment of Phase 1. We now have the
opportunity to reflect on the lessons learned from the experiences of this system of
information exchange so that the future may hold an even smoother and swifter transition.
During Phase 1, information needs were identified, problems were articulated, and
communication structures were created. The Protocol's implementing agencies built their
internal capacities to support phaseout activities and began to carve out their roles vis-a-vis
each other and the Article 5(1) countries. For example, the World Bank, reports "substantial
investment—in building streamlined procedures and in establishing sustainable ...[ODS]
phaseout mechanisms in major ODS consuming countries over the period of 1991-1993"
(World Bank, 1994: Executive Summary, p. 1, italics supplied).
Four major information sharing networks have emerged during Phase 1; each is
organized around a different focus. These four networks are linked via bridging individuals
and their institutional positions. They are also connected via a broader, boundary spanning
global ozone community.
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IL BACKGROUND
In its 1991 report, UNEP's Technology and Economic Assessment Panel (TEAP)
emphasized that the barriers to rapid ODS phaseout were largely informational and
administrative rather than technical and economic. Two years later this sentiment was
repeated at the International CFC and Halon Alternative Conference: "Sharing of information
on technology, products, services and policies is the key to cost-effective and expeditious
phaseout of ODS" (UNEP IE/PAC 1993). The complexity and changing nature of the
scientific and technical issues involved in protecting the earth's ozone layer require a process
by which new information can be produced, shared, and, where appropriate behavior modified
or changed.
While the Protocol technically obligates nation-states and provides for a global
governmental information infrastructure (see Article 9), it also encourages the creation of
innovative partnerships that share technology, information, and organizational resources. That
is, it is the Montreal Protocol itself that encourages the emergence of networks of information
exchange -- it supports creative partnerships and links the fate of developed and developing
countries. (See Canan & Reichman 1993.)
DDL FOUR INFORMATION EXCHANGE NETWORKS IN ONE SYSTEM
COORDINATED BY A COMMUNITY
During Phase 1 of the implementation, four ODS information exchange networks
emerged under conditions of urgency rather than methodical planning. Overlapping in
purpose and in membership, these networks operate as a communication system that facilitates
the ODS phaseout process. Redundancies and inefficiencies have existed, as should be
expected in the early experimental phase of implementation. Now we may anticipate that the
near future will be both calmer and more turbulent. It will be calmer in that networks have
been built, procedures have been established and implementing roles have been defined, and
more systematic procedures have been created. The future will be more turbulent in that more
Article 5(1) nations are poised to act and thus will place heavier demands on the networks
and their resources to assist in the phaseout. Approaching deadlines will also add to a
heightened sense of urgency to identify and surmount existing barriers to complete phaseout.
The four ODS networks range along a continuum of orientation, with continuum points
depending on focus: Policy, Program, Project, and Product. (See Table 5.1.) And despite
natural overlaps along the continuum, there are significantly different foci that give each
network a particular kind of social organization. Furthermore, the success of this system of
four networks is primarily a function of the effective bridging activities across all networks
accomplished by a public/private Protocol community that spans scientific, industrial, national,
and ministerial institutions around the world. (See Haas 1990; Lee 1994.)
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A. Hie Global Ozone Community; A "Clan"
The "Global Ozone Community " is a community in the sense of sharing common ties,
being bonded by a set of common meanings, active in social interaction (Bernard 1973) and
consciously aware of itself as a community, or a "clan."1 This clan is not a common or
typical network, but an "epistemic community'* of actors who participate in a diverse set of
capacities, and who share the ability to test the often assumed desirability of linking discipline
with organizational virtue (Clegg 1989). Through their interactions, the members of the
"Global Ozone Community" give meaning to the "rules of the game," define what is possible,
define what is success and failure, and determine where to go from here. Essentially this
community creates the meaning of regulation in this global environmental regime.3
'Over the last five years the author has frequently overheard people involved in ODS
phaseout policy, program and project activities speak of themselves as members of an
ozone "clan," "club," "global team," "family" with "generations," and "club of
confidence."
'Holzner and Marx (1979: 108) define epistemic communities as "those knowledge-
oriented work communities in which cultural standards and social arrangements
interpenetrate around a primary commitment to epistemic criteria in knowledge production
and application."
3Some examples of agreement worked out within the Global Ozone Community are a
preference for substitution chemicals and production processes rather than drastic
alterations of lifestyle or consumption patterns; a working definition of big, medium and
small ODS consumption economies for program work; the naming of refrigeration as the
"big problem" as of 1994; and an understanding that cultural factors combine with
scientific facts in defining risk regarding technology.
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Table 5.1
OVERLAPPING NETWORKS
IN THE GLOBAL ODS INFORMATION EXCHANGE SYSTEM
NETWORK
FOCUS
Policy
Program
Project
Product
NETWORK ACTORS
"Global Ozone
Community"
Executive Committee of
the Montreal Protocol
Secretariat of the
Montreal Protocol
Fund Secretariat of the
Montreal Protocol
Nation-state Parties
Implementing Agencies
of the Montreal Protocol
Non-Governmental
Organizations
National Government
Agencies
Country Programs and
National Ozone Offices
Industry Associations
Regional ODS Networks
f Multinational Corporations
Large Corporations
Individual Companies
Consumers
EXAMPLE OF NETWORK ACTORS
Annual International CFC &. Halon Alternatives
Conference: UNEP Technical Options Panels
7 Non-Article 5(1) Countries
7 Article 5(1) Countries
UNEP, Nairobi. KENYA
UNEP. Montreal. CANADA
Brazil. Germany. Sweden. Malaysia. Egypt
UNEP. World Bank
UNDP.UNIDO
Greenpeace. Friends of the Earth
World Wildlife Federation
Environmental Protection Agency (USA). FINEP
(Brazil). MTTI (Japan). Turkish Ministry of
the Environment. Environment Canada
Egypt's National ODS Phase Out Program
China's National Ozone Office
Industry Cooperative for Ozone Layer Protection
(ICOLP). Mobile Air Conditioning Society (MACS).
Association for Fluorocarbon Consumers and
Manufacturers (AFCAM)
South-East Asia ODS Network
AT&T. Mitsubishi Electric. ICI
Ontario Hydro. US Navy. Northern Telecom
Thai Airlines: XYZ Refrigerator Shop
Mv fanulv and vours
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The members of the Global Ozone Community are formally employed in powerful
associations, multinational corporations, and national governments. It is common for these
actors to negotiate "deals" that cross typical occupational, professional and institutional
boundaries. (See Canan and Reichman 1993.) Narrow allegiances have been expanded by
the shared strong commitment to eliminate ODS, by intense personal interaction, and by the
trust that has been built upon repeated, shared ODS-problem experiences. Creative mold
breakers are recruited to this community, and "vets" speak of "back in the old days" and now
having to socialize "the new generation." Such experiences as roll-up-your-sleeves committee
work, a series of back-to-back international workshops, or a successful, though episodic, team
effort on a specific phaseout project work to bind members closely together. (See Granovetter
1973 on the "strength of weak ties.") The effective action, camaraderie, and mutual
understandings forged by this community are largely responsible for the implementation
progress to date.
There are a number of fairly loosely coordinated mini-networks and key actors who
are "network spanners" in the Global Ozone Community. Thus, the Global Ozone
Community binds other primary, overlapping ODS information exchange networks through
expertise, resolve and, especially, self-awareness as a community. A good representation of
the community's membership and network overlaps may be found by looking at the Program
of the 1994 International CFC and Halon Alternatives Conference held in Washington, DC
October 24-26. The meeting, sponsored by the Alliance for Responsible Atmospheric Policy
in cooperation with the US. Environmental Protection Agency, Environment Canada and the
United Nations Environment Programme, was hailed as "the most important event in the
world which brings people together to solve this environmental problem" (Conference
Brochure 1994).
The Conference was officially endorsed by a cross section of industry associations and
research institutes.4 Program chairs represented industry, government and research
laboratories, and heads of industry consortia. Sessions covered advances ,in technology,
commercial material compatibility, not-in-kind alternatives, risk taking and safety, recycling,
reclaiming, redistribution and disposition of chemicals, regulatory frameworks, current issues
like halon banking and "essential uses," technology transfer, the nature of knowledge sharing
networks, and successful stories of phaseout cooperation. Informal gatherings at the
4The Conference "endorsing associations" are Air Conditioning Contractors of America,
Aerospace Industry Association, Association of Home Appliance Manufacturers, American
Automobile Manufacturers Association, American Frozen Foods Institute, Association of
Electronics Manufacturers, Association of Professional Energy Managers, Building Official
and Code Administrators, Center for Emissions Control, Commercial Refrigerator
Manufacturers Association, Food Marketing Institute, General Aviation Manufacturers
Association, halon Alternatives Research Corporation, Halong Recycling Corporation,
Heating, Refrigerating, and Air Conditioning Institute of Canada, Institute of International
Container Lessors, International Association of Refrigerated Warehouses, Mobile Air
Conditioning Society, Mechanical Service Contractors Association, Ontario Refrigeration
and Air Conditioning Contractors Association, Polyisocyanurate Insulation Manufacturers
Association, Refrigeration Service Engineers Society, Southern Building Code Congress
International and the Society of the Plastics Industry.
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conference were occasions of swapping stories and memories of the "old days of ODS work,"
trading stories of experiments, successes, and failures, and sharing photos of family and
snapshots taken of "ozone buddies" at previous conferences, workshops, or ODS project sites.
B. Hie Ozone Policy Netwoik
At the heart of the Ozone Policy Network are the Parties to the Protocol, the
Protocol's Executive Committee, its Secretariat in Nairobi and the Secretariat of Multilateral
Fund in Montreal. The Policy Network aim has been to create the global organizational
infrastructure to make visible, workable links across public sector actors and to support the
Protocol's encouragement of international public-private partnerships for ODS phaseout. The
Policy Network is naturally driven by political concerns and by norms of universality and
transparency in its support for technology and information transfer and its expenditure of
financial resources. It has successfully established a common global commitment to specific
transitional substitute chemicals and agreed upon many workable alterations of implicated
productions processes. It has also ironed out responsibility, procedures, and guidelines to be
followed by decision makers in the Ozone Program Network. While not overly contentious,
the past few years* * experience portends a period of relative routine evaluation and
streamlining.
Primary members of the Policy Network are the Implementing Agencies (UNEP,
World Bank, UNDP and UNIDO), individual national governments and their
ministries/agencies (for example, the US EPA) and global non-governmental organizations
(NGOs)5 Independent consultants may serve multiple implementing agencies and participate
in the groups that comprise the Global Ozone Community (GOC), as do, for example,
members of the World Bank's Ozone Operations Resource Group (OORG) and UNEP's
Technical and Economic Options Committee (TEAC) which act to connect the Policy
Network to the larger GOC.
C The Ozone Program Netwoik
The Implementing Agencies act as a tie between policy and program foci in the overall
implementation system. The Ozone Program Network is primarily concerned at the
operational level. In May 1991 the Executive Committee invited the original three
implementing agencies (UNIDO was not so designated until 1993) to assume the following
roles (UNEP 1991).
"The Agencies will accept the invitation of the Parties to co-operate and assist them
within the respective areas of expertise of the Agencies as follows:
"(a) The United Nations Environment Programme shall be invited by the Executive
Committee to co-operate and assist in the political promotion of the objectives of the
Protocol, as well as in research, data gathering and the clearing-house functions, which
are identified as follows:
'Examples of NGOs in the Ozone Policy Network are Greenpeace, the World Wildlife
Federation, and Friends of the Earth.
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"(i) assist [Article 5(1)] Parties-through country specific studies and other
technical co-operation, to identify their needs for co-operation,
"(ii) facilitate technical co-operation to meet these identified needs,
"(iii) distribute—information and relevant materials, and hold workshops,
training sessions, and other related activities, for the benefit of Parties that are
developing countries, and
"(iv) facilitate and monitor other multilateral, regional and bilateral co-
operation available to parties that are developing countries;
"(b) The United Nations Development Programme shall be invited by the Executive
Committee to co-operate and assist in feasibility and pre-investment studies and other
technical assistance measures; and
"(c) The World Bank shall be invited by the Executive Committee to co-operate and
assist in administering and managing the programme to finance the agreed incremental
costs."
Since 1991 the agencies' responsibilities have blurred as each agency, and some individual
countries under bilateral arrangements,6 have conducted training workshops, and worked on
"country programs" for Article 5(1) countries, the central focus of this network during Phase
1 of the implementation.7 An example of the expansion of agency purview may be found in
UNDP, with its ..report of currently "assisting 30 governments in planning, preparation and
implementation of country programmes, projects and sectoral activities...through technical
assistance/training, feasibility and pre-investment studies, national capacity building,
demonstration projects and technology transfer investment projects" (UNDP Montreal Protocol
Unit 1994).
The Country Program has been defined as presenting "a commitment by the
government to take appropriate actions to ensure compliance with the control measures of the
Protocol" (UNEP 1991b). The Ozone Policy Network through the Executive Committee has
provided the Program Network with policies for preparing county programs. Each country
program should have the components listed in Table 5.2. The guidelines promote research,
discovery, and action planning8 They support the identification of individual projects and the
assignment of priority rankings according to the national government's commitment to the
phaseout. In so doing, the Policy Network asks the Program Network to give direction to the
individual phaseout projects conducted by the Ozone Project Network.
6See for example US EPA, 1994.
'Writing a "Country Program" to the Fund's Executive Committee has become a first step
toward obtaining assistance from the Fund. (See Paragraph 10(g) of Appendix II of
Annex IV to the Report of the Second Meeting of the Parties.)
8The guidelines for format and content of a Country Program are contained in
UNEP/OzL.Pro/ExCom/5/16, Annex m, pp. 24-40. ,
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Members of the Ozone Program Network range from representatives of the
Implementing Agencies to government agencies (e.g.. US EPA) and industry associations
(e.g.. ICOLP) within and across member countries that together form an identifiable horizontal
layer of assistance within the Program Network. The assistance layer is connected to the
assisted layer of Article 5(1) countries through links made by technical and administrative
consultants, who themselves may be government employees, employees of industries making
changes in their production or consumption patterns, or who may be self-employed
consultants.
Concerned as well about effective communication with national governments, and
about supporting information flows between individual nations and the assistance layer, the
Program Network has supported the creation of formal channels of information flaw. By
1994 the national governments in 84 Article 5(1) countries had designated official
responsibility for ozone layer activity at the national level. Some countries have created
National Ozone Offices; other countries have identified existing officials/agencies to act as
"Focal Points" for information transfer. National Ozone Units were conceived as primary
conduits for information exchange, with routine distribution of UNEP IE/PAC general and
technical information products. In most cases nations have identified a local organization (in
the Country Program) that will act as the national link to the international effort. These
national offices are supported with institutional strengthening funds. Regional offices within
the pre-existing United Nations structure are also used for disseminating information where
national ozone offices have not been established. (See Appendix 5.1 for a list of National
Ozone Offices/Focal Points.) UNEP has also begun creating regional networks for sharing
ODS program goals, obstacles, and lessons under this same rationale.
One of the first activities of the Program Network was creating a formal information
clearinghouse designed to be a "pointer system." UNEP established the OzonAction
Information Clearinghouse (OAIC) August 1992 to transfer information on policy and
technical options for the phaseout of controlled ODS. Available through regular telephone
line, as well as through national packet switching networks, it contains descriptions of
alternative technologies; a database of ODS-reduction products and services; national and
corporate program summaries; a calendar of ODS-reduction events; an international directory
of ODS-reduction experts; abstracts of ODS-reduction documents; a message centre; and news
bulletins describing the latest worldwide developments in ODS-reduction.9
9OAIC responded to more than 500 queries in 1992; 626 queries in 1993, and 500 queries
in the first six months of 1994. Article 5(1) countries have increasingly made use of the
OAIC, facilitated in part by Multilateral Fund support for institutional strengthening.
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Table S.2
Infonnation Contained in a County Program: Executive Committee Guidelines
Puipoie
Government's commitment, basis of Action Plan; framework for assistance;
consistency between specific projects and overall Country Program; basis for
monitoring
Status
Description of the preparation of the Country Program, agency that prepared it,
costs of preparation, government agency endorsing it
Assistance Received
Sources and nature of all assistance received in preparing the Country Program.
Current Consumption of ODS
Data or estimates of the current consumption of all controlled substances in tons,
analyzed by substance, and analyzed by each substance by source, user sector,
applications, and recovery activity. Source refers to production, imports and
exports. Uses include refrigeration, air conditioning, foams, aerosols, cleaning,
fire fighting, and process solvents. Applications include recharging, chemical or
manufacturing processes and feedstock. Recovered and recycled ODS should be
reported by type or application.
Forecast Consumption
Forecasts for period 2010-2015 of the use of each substance in tons and in tons x
ODP, by product type or industrial user, under two scenarios
Industiy Structure
Structure and ownership of the industries producing, importing and using ODSs
Institutional Frame wo ik
Government departments and agencies, non-governmental organizations,
industry/trade associations and consumer groups relevant to implementing the
commitment to phase out of consumption of ODSs
Policy Fnmewoik
Description of relevant policy framework within which the phase out of ODSs will
be managed, addressing governmental policy orientation to regulation, laws and
regulations available to empower actions; policies relevant to industrial
development including ownership of companies in particular economic sectors,
sectoral preferences for indigenous production/manufacturing versus imports;
powers held by government to implement industrial development policies
Government and Industry Responses to the Protocol
Significant actions already taken by government or by the producer and user
industries in response to the Protocol
Strategy Statement by Government
Statement of the strategic objectives and constraints on which the preferred Action
Plan is based, the phase out schedule for each group of substances, with planned
consumption by year, and year when zero consumption is achieved
Action Plan
All actions the government intends to initiate in order to implement the phaseout
of ODS
Projects
A prioritized listing and description of each project expected to be undertaken within
producer and user industries in response to the government's commitment to phase
out consumption of ODS
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OAIC requires collecting, verifying, organizing, formatting and retrieving information.
These activities are constant staff demands as information must be kept up-to-date and it
forms the basis of such information products as pamphlets, brochures, and newsletters, the
Sectoral Data Collection, the OzonAction Library,10
Listings of ODS trade names, and the IRHBMIC (International Recycled Halon Bank
Management Information Clearinghouse). One experiment, the creation of the solvents
industry database (known as OZONET) that was donated to UNEP JE/PAC by ICOLP, has
not been up-dated since 1992.
DE/PAC's newsletter OzonA ction that has been produced quarterly since March 1992
and published in Arabic, Chinese, English, French and Spanish. In the last two years the
newsletter has improved in content, quality, accuracy, and timeliness. Readers are
complimentary on the whole, having suggested that greater technical rigor, longer issues and
more frequent mailings would be ideal (Rowcliffe 1993). Two alternative technology
catalogues -- one for the aerosol and sterilant sector and one for solvents — were published.
in 1994 through the collaboration of UNEP IE/PAC and technical experts from around the
world (OzonA ction. July 1994). Currently an "Information Kit" to be used for general public
awareness campaigns in individual countries is being created.
D. The Ozone Project Networtt
Projects that translate policy and programs into action are the focus of the Ozone
Project Network. This network has a more clearly private sector flavor. Typically the
network relies on industry associations and routine business structures (e.g.. relationships as
suppliers, vendors, subsidiaries e.g.) to carry suggestions for industrial transformation. ODS
information can be spontaneously, even informally, exchanged as firms engage in their daily
business activities, e.g.. introduce new product lines, alter production processes in branch
plants, train new workers on site. Information cooperation within the Project Network is
exemplified by the refrigeration industry. It has established two clearinghouses and databases
specializing in alternative refrigerants and related information. These are the Air-Conditioning
and Refrigeration Technology Institute (ART!) Refrigerant Database funded by the US
Department of Energy and the American air conditioning and refrigeration industry and the
International Institute of Refrigeration's (IIR) FRIGINTER and FRIGDOC. (For more
information on these services, see UNEP 1994c.)
10Materials include OAIC Document Abstracts, OAIC Halon Sector Document Abstracts;
OAIC Methyl Bromide Document Abstracts; World Wide List of producers of Controlled
Substances and ODS Alternatives; Alternative Technologies Approved by the IMOF; Case
Studies on Retrofitting; Success Stories in Phasing Out; and many UNEP IE/PAC
publications.
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Some industry associations are committed to Article 5(1) country phaseout activities
and have become involved in phaseout projects as an association per se." For example,
ICOLP, the solvent industry's "Industry Cooperative for Ozone Layer Protection" was
established in 1989 to coordinate the open, worldwide exchange of non-proprietary
information on substitute technologies, substances and processes for CFCs in the electronics
industry. Today its corporate members span Canadian, Japanese, American, and British
industry and its affiliate members cover academic, governmental and industrial actors from
around the world including Sweden, Korea, Japan, Taiwan, Turkey, Russia, Mexico, USA.12
By 1994 four of ICOLP's original members - Boeing, Compaq Computer, Digital
Equipment and General Electric — had dropped out of the cooperative. Currently the 12
corporate members of ICOLP are AT&T, British Aerospace Defense, Ford Motor Company,
Hitachi, Ltd.,13 Honeywell, Inc., IBM Corporation, Mitsubishi Electric Corporation,14 Motorola
Corporation, Ontario Hydro, Northern Telecom, Ltd, Texas Instruments, and Toshiba
Corporation.1516 Member companies are satisfied with their own phaseout progress. Thus
''Examples of industry associations are the Air-Conditioning and Refrigeration Institute
(ARI), the Air-Conditioning.and Refrigeration Technology Institute (ARTI), Alternative
Fluorocarbons Environmental Acceptability Study (AFEAS), UV Monitoring and
Assessment Program/Panel (UMAPP); the Association of Fluorocarbon Consumers and
Manufacturers (AFCAM), the European Phenolic Foam Association (EPFA), the Halon
Alternatives Research Corporation (HARC), the Industry Cooperative for Ozone Layer
Protection (ICOLP), the Program for Alternative Fluorocarbon Toxicity Testing (PAFT),
and the Swedish Refrigeration Foundation.
13Also a member of JICOLP, the Japanese industry cooperative.
"Also a member of JICOLP, the Japanese industry cooperative.
15Also a member of JICOLP, the Japanese industry cooperative.
16Affiliate members are American Electronics Association, the Association for Research
and Development of Industrial Processes, CANACINTRA (Mexico), Center for Global
Change, Electronic Industries Association, Halogenated Solvents Industry Alliance, ITRI
(Taiwan), the City of Irvine, California, the Japan Electrical Manufacturers Association
(JEMA), Korea Anti-Pollution Movement, the Korea Specialty Chemical Industry
Association, the National Academy of Engineering, the Research Triangle Institute, the
Russian Institute of Applied Chemistry, the Russian Ministry of Environmental Protection
& Natural Resources, the Swedish EPA (Naturvardsverket), the Technology Development,
Building Official and Code Administrators, Center for Emissions Control, Commercial
Refrigerator Manufacturers Association, Food Marketing Institute, General Aviation
Manufacturers Association, halon Alternatives Research Corporation, Halong Recycling
Corporation, Heating, Refrigerating, and Air Conditioning Institute of Canada, Institute of
International Container Lessors, International Association of Refrigerated Warehouses,
Mobile Air Conditioning Society, Mechanical Service Contractors Association, Ontario
Refrigeration and Air Conditioning Contractors Association, Polyisocyanurate Insulation
Manufacturers Association, Refrigeration Service Engineers Society, Southern Building
Code Congress International and the Society of the Plastics Industry.
16Examples of NGOs in the Ozone Policy Network are Greenpeace, the World Wildlife
Federation, and Friends of the Earth.16 Formal offices set up within this network include
the two Secretariat offices (Nairobi, Montreal), regional ODS offices within the
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their current contribution to the global problem reportedly stems from "good will" as the
association members conduct technical ODS reduction projects in selected Article 5(1)
countries (Morrill 1994). ICOLP Projects in Mexico, Malaysia, Turkey, Thailand have been
completed; programs in India and China are scheduled for the end of 1994 (with Canadian
bilateral contribution funds); and plans for a project in Brazil are being formulated. Most
project funding derives from members' in-kind contributions; additional funds include a
$260,000 grant from the Multilateral Fund via the World Bank, and funds from Canadian and
American bilateral contributions.
E. The Ozone Product Netwoik
The Ozone Product Network is more likely driven by commercial dealings and a focus
on technical matters and specific industrial interests. Members are individual companies,
essentially substitute and technology consumers, and households as consumers of ODS
friendly products. Within the manufacturing and service companies diversity abounds. For
example within the refrigerant sector three tiers, each having different information needs, have
been recognized:
Many individual manufacturers are impacted by informationrelating to the replacement
of CFCs. Some companies may not even be aware that they are affected. The obvious
companies are those directly involved in manufacturing refrigerant and equipment, and
those that provide components to these industries. These companies have many ways
of obtaining the data they need. A second tier of companies is associated with
industries that incorporate refrigeration, air conditioning, and heat pump equipment into
their product line including vehicle manufacturers, residential, commercial, and
industrial builders, process designers in all major industries, stores and transport
companies. A third tier of companies is represented by the service industry that
repairs, maintains, and replaces equipment. Information flow to these second and third
tier companies is not always straightforward and extra efforts have to be made to
ensure that they receive the information that they need" (UNEP 1994c: pp. 14: 20-21).
F. Evaluation of Four Networits in the ODS Phaseout: Lessons Learned
The four networks that have been briefly described here and the overarching Global
Ozone Community are, of course, more rich, and more complex in reality than this brief
description can capture. Members bridge networks, cross industrial sectors, and span global
regions. Over time the complexity increases. In other words, these comprise a growing,
dynamic, emergent social system of communication and information exchange that changes
in its capacity to share information and in the types of information it needs to share. Each
network has made a contribution to solving the ODS problem, even though a major part of
the past few years has been spent in institution building.17 Now that an information
Foundation of Turkey, the Turkish Ministry of Environment, the United Nations
Environment Programme, the United States Air Force and the US Environmental
Protection Agency.
"The Executive Committee reports that 37 Article 5(1) countries have received
institutional strengthening funds ranging from US $41,250 to US $450,000. Institutional
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infrastructure has been created, improvements in the social organization of information
exchange are possible.
In order to improve the system of information exchange, better stock needs to be taken
to evaluate what has worked and what hasn't. Better coordination within and among each
of these networks would be ideal, especially since, as described earlier, the original
implementing agency mandates have shifted over time. The first step in evaluating the
production and delivery of information helpful to the phaseout may be for the Ozone Program
Network to organize the wealth of information now available, reinforce the original idea of
a clearinghouse for information flow, determine the variety of information needs and
appropriate responses, and agree on directions for information exchange in the future. Toward
that end the following observations are made:
Actors have been so pressed to act quickly that reflection, evaluation, and
communication of results have often been left to chance. All four networks should
be encouraged to share experiences, knowledge, procedures through an ozone
information clearinghouse as originally conceived by the Ozone Policy Network. Now
that the communication infrastructure has been built, improvements in the
clearinghouse function can be designed.
There is a problem of awareness of the information materials that have been prepared.
That is, even when experiences have been documented and would be helpful to others,
potential users may be unaware that such documents and reports are available.
Comprehensive, up-to-date, accessible lists of agency and industry publications need
to be made available in a timely and user-friendly fashion.
The types of information that are helpful vary widely and change constantly. There
is information embedded in particular products or technologies, general technical
manuals, reports of scientific and technological breakthroughs; and descriptions of
organizational procedures. The information needs of various actors throughout the
industries and governments united in the phaseout process are also diversifying
Information messages and channels must keep pace with the changing information
needs of relevant actors. The amount of information available regarding ODS and the
global response is now overwhelming. The ability to identify, organize, retrieve and
use pertinent scientific and technical information is critical for effective and speedy
behavior change.
Capacity to access the mounting information also varies. The Ozone Program
Network must work for users with electronic sophistication and technology as well as
for those without. Getting on Internet18 and having Internet carry titles and abstracts
strengthening refers to projects for collecting and processing data and information "to
fulfil [sic] the national information exchange obligations as a Party to the Protocol." (See
UNEP 1994: UNEP/OzL.Pro/ExCom/13/43, p. 5).
'"Internet is a global system of electronic communication carried by telephone lines and
satellite connections and accessed through computer linkages. INFOTERRA is an
information node established by the United Nations to carry environmental information.
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of pertinent "gray" information (as opposed to peer reviewed journal articles e^g.) and
successful phaseout stories may be one possibility. Linking databases via Internet
(perhaps INFOTERRA) should be part of the province of the OzonAction Information
Clearinghouse. Yet, the great variance in country capacity for computer networking
suggests that hard copy materials and diskettes (and listings of their existence *) are
still very important.
The information clearinghouse function assigned to UNEP EE/PAC is extremely
important in principle. In practice, the office needs greater support for data base
combination and translation if it is to accomplish the goal of being an up-to-date
repository and locus of dissemination of the ever-expanding wealth of scientific,
technological and organizational information.20 Problems of inaccurate, false, or
misleading information have to be surmounted; here increased reliance on an expert
editorial board is encouraged.
The needs of Article 5(1) countries regarding the nature and volume of ODS
information remain especially acute as they compete with other pressing national
problems and with fewer resources. Resource inequalities, language differences and
cultural chasms must be bridged. So too must the tendency for unidirectional
information flows. Instead regional linkages with local expertise need creative
support.
One information exchange mandate, Article 7*s requirement that Parties report
production, consumption, and trade of controlled substances to the Secretariat has not
been less than adequately fulfilled. This has been difficult for many countries, partly
due to the changes required in the Harmonized Commodity System and partly due to
the lack of trained personnel and logistical support to monitor the flow of substances.21
Despite an increasing amount of information relating to ODS, incomplete reporting of
19See for example UNEP's "Protecting the Ozone Layer Publications Available from the
OzonAction Programme.
Regarding information exchange, UNEP reports learning that there is a wide range of
queries that come from very broad-user sectors, that necessary up-to-date data are difficult
to collect, dissemination costs are very high; information providers are generally product
or service providers so there is a need for quality review of the information provided; and
hands-on experience regarding available information is desirable. As for its training and
networking activities UNEP has learned that it needs to develop an integrated and
comprehensive training strategy. In addition smaller compatible groups allow easier
identification of needs and difficulties in implementation and training courses that last a
minimum of 4 days and that include practical training are ideal (see UNEP 1993a).
21The Ozone Secretariat reviewed the reporting of data by the Parties at the 8th Meeting of
the Implementation Committee. It reported that as of May 1994, there are significant
problems with underreporting. Seven non-Article-5(l) parties and 35 Article 5(1) parties
had not reported baseline data for 1986; six non-Article 5(1) parties and 17 Article 5(1)
parties had not reported baseline data for 1989 and only 44 out of 88 parties had reported
data for 1992 (OzonAction. July 1994).
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production and trade data is particularly frustrating to the implementation process.
The Ozone Policy Network has taken up this problem to determine reporting barriers
and to discuss actions that will encourage full compliance. (See for example, UNEP
1994b.)
Local or regional exchange via face-to-face communication between socially similar
people dedicated to ODS phaseout should be encouraged. In such exchanges
meanings can be more easily shared, the trust that facilitates acceptance of change is
likely to grow, and mutual learning is likely to occur (Rogers 1983). Identifying and
sponsoring particularly effective local actors is recommended. It has not always been
the case that National Ozone Offices have been effective in supporting these
relationships at the local level. This is a critical task of the National Ozone Units.
Their other important task is to provide the link with the global information structure,
coordinated through an improved UNEP EE/PAC. Hopefully as the Ozone Program
Network evaluates itself and builds consensus on information responsibilities, the role
of the National Ozone Units will be better articulated for more effective cooperation.
Public awareness programs will continue to be important partly to provide individuals
with information to change their own behaviors22 and partly to create the public
support for industrial responsibility and government accountability.
22 A standard stage model of the relationship between information and behavior change
begins with general knowledge that changing behavior is desirable. The stages are pre-
contemplation; information reception; contemplation; set for action; action; maintenance.
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VL REFERENCES
Bernard, Jessie, 1974. The Sociology of Community. Glenview, IL: Scott, Foresman.
Canan, Penelope and Nancy Reichman, 1993. "Ozone Partnerships, the Construction of
Regulatory Communities, and the Future of Global Regulatory Power," Law & Policy, Vol.
15, No. 1 (January): 61-74.
Clegg, Stewart R., 1989. Frameworks of Power. London: Sage Publications.
Conference Brochure, 1994. "1994 International CFC and Halon Alternatives Conference:
Stratospheric Ozone Protection for the '90s" October 24-26, Washington, DC. Sponsored by
The Alliance for Responsible Atmospheric Policy.
Granovetter, Mark S., 1973. "The Strength of Weak Ties," American Journal of Sociology,
Vol. 78: 1360-1380.
Haas, Ernst B., 1990. When Knowledge is Power: Three Models of Change in International
Organizations (Berkeley, CA: University of California Press).
Holzner, Burkhart and John H. Marx, 1979. Knowledge Application. Boston, MA: Allyn &
Bacon.
Lee, Kai, 1993. Compass and Gyroscope: Integrating Science and Politics for the
Environment. Washington, DC: Island Press.
Morrill, Allison, 1994. Telephone interview by P. Canan, September 7.
Everett M. Rogers, 1983. Diffusion of Innovations (3rd ed.) New York: Free Press.
Executive Committee of the Montreal Protocol, 19 " Report of the Second Meeting of the
Parties; Appendix JJ of Annex IV.
Rowcliffe, Nick, 1993. "Industry and Environment Reader Survey," prepared for UNEP
JJE/PAC.
Touche Ross, 1994. United Nations Environment Programme Evaluation of the UNEP/SIDA
Network Project on Ozone Depleting Substances in South-East Asia" (January).
UNDP Montreal Protocol Unit, 1994. "UNDP Assists Developing Countries Phaseout Ozone-
Depleting Substances Under the Montreal Protocol," a Presentation at the Panel on
Technology Transfer to Developing Countries Under the Multilateral Fund of the Protocol,
1994 International CFC and Halon Alternatives Conference, Washington, DC, 25 October.
UNEP, 1991. "Procedural Arrangements Among The International Bank for Reconstruction
and Development ("World Bank"), the United Nations Environment Programme ("UNEP"),
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and the United Nations Development Programme ("UNDP") for Co-operation and Assistance
in Protecting the Ozone Layer in the Context of the Vienna Convention for the Protection of
the Ozone Layer and Its Montreal Protocol on Substances that Deplete the Ozone Layer"
UNEP/OzL.Pro/ExCom/4/Inf.2, 31 May.
UNEP, 1993. Concepts and Principles in International Law: An Introduction [draft only:
September, p. 19].
UNEP, 1994a. "Comments on Draft OAIC Diskette Version," IE/PAC Document No. 020
in NUD*IST Evaluation.
UNEP, 1994b. "Fact Sheet, Information Exchange Activities," IE/PAC, 24 March.
UNEP, 1993. "IE/PAC Final Report: Round Table Discussions on Knowledge Sharing
Networks for ODS-Phaseout," a panel convened on the occasion of the International CFC and
Halon Alternative Conference, 22 October, Washington, DC.
.UNEP, 1994a, "Progress Report" UNEP/OzL.Pro/ExCom/9/6, 10 February 1993.
UNEP, 1994b, "Data Collection and Data Reporting Draft," UNEP/OzL.Pro/ExCom/13/43.
UNEP, 1994c, Refrigeration Sector Technical Options Report.
US EPA, 1994. "O3 Partnerships Progress Report: U.S. Bilateral Activities Under the
Multilateral Fund" (Office of Air and Radiation, Stratospheric Protection Division EPA 430-
R-94-008, May).
World Bank, 1994. "Work Program: Bank-Implemented Montreal Protocol Operations,"
World Bank, Global Environmental Coordination Division, Environment Department,
February.
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CHAPTER 6
INTERNATIONAL TRADE ISSUES
L INTRODUCTION
Trade issues arise in relation to the Montreal Protocol because of: (a) specific
restrictions in trade between signatories and non-signatories and (b) differences in phaseout
provision between Article 5(1) countries1 and other signatories.
This chapter examines both sets of concerns. Section 2 looks at the trade restrictions
as embodied in Article 4 of the Protocol, which regulates trade between Parties and non-
Parties. It begins by examining the rationale for placing such restrictions and evaluates the
success they have had in meeting their intended role. The compatibility of the restrictions,
however, is being discussed in the GATT; hence issues of GATT compatibility are also
reviewed. The restrictions under the Protocol are being implemented progressively. From
bans on imports of controlled substances from non-Parties, the Protocol went on to ban
exports from Parties to non-Parties and is now reviewing the feasibility of banning trade
between Parties and non-Parties in goods "produced with but not containing" controlled
substances. The practicability of such a ban, as well as its desirability are discussed in this
section.
Section 3 examines the effects of a slower phaseout for Article 5(1) countries on the
production and trade between such countries and other countries. In particular there is a
concern over the possible shift in production to Article 5(1) countries from the developed
countries required to phaseout most ODSs by 1995. How valid is this concern, and what
measures, if any, should be undertaken to limit such movements of capital are discussed in
this section. Finally, Section 4 concludes the chapter.
EL TRADE RESTRICTIONS BETWEEN PARTIES AND NON-PARTIES
Under Article 4 of the Montreal Protocol, trade between Parties and non-Parties is
heavily restricted. The Article instructs Parties to ban the import of the controlled substances
in Annexes A and B2 from non-Parties within a year of entry into force of the Protocol (1st
January 1990). Similarly, exports from Parties to non-Parties are required to be banned after
1st January 1993. The restrictions apply not only to trade in ODSs but also to trade in
commodities containing ODSs. A list of such products was to have been prepared within three
years of entry into force of the Protocol, and a list was presented at the Bangkok Meeting in
November 1993.
1 These are countries broadly classified as "developing" but more accurately they are those with
a per capita consumption of ozone depleting substances (ODSs) of less that 0.3kg at the date of entry
into force or at any time thereafter, until January 1 1999.
2
:A list of the substances under each annex is given in Appendix One to this chapter.
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The exceptions to these rules are those non-Party states which have demonstrated
compliance with the regulations laid down in Articles 2, 2A to £, 2G and Article 4, by
providing data as specified in Article 7. These Articles are the ones that effectively specify
the phaseout schedule for the different controlled substances. Hence the exception is basically
to allow for the possibility that some countries are not signatories but are in compliance with
the terms of the Protocol3.
In November 1992, at Copenhagen, the Fourth Meeting of the parties made some
further amendments to article 4. These were as follows: Within a year of the entry into force
of the Copenhagen Amendment, Parties are required to ban the imports or exports of
controlled substances in Group II of Annex C (Hydrobromoflourocarbons) from or to any state
not party to the Protocol.
In the 1991 version of the Handbook to the Montreal Protocol, there is an addition
made to Article 4, with reference to trade in goods "produced with but not containing" the
controlled substances in Annexes A and B. No clear cut rules were laid down, as of the 1991
meeting, but it was recognized that this was an issue to be dealt with.
"By 1 January 1994, the Parties shall determine the feasibility of banning or
restricting, from states not party to this Protocol, the import of products
produces with, but not containing, controlled substances in Annex A. If
determined feasible, the Parties shall, following the procedures in Article 10
of the Convention, elaborate in an annex, a list of such products. Parties that
have not objected to the annex, in accordance with those procedures shall ban,
within one year of the annex having become effective, the import of those
products from any state not party to this Protocol." (UNEP, 1991).
Products produced with, but not containing, substances from Annex B are similarly
treated, the difference being that the time frame being considered is slightly longer, namely
5 years. In the 1992 Amendment, products produced with but not containing substances from
Annex C are subjected to a similar scrutiny, the time frame being 5 years from the date of
entry force of the Amendment.
By 30th September 1991, 80 countries had either ratified or acceded to the Protocol.
The main exceptions at that stage were: Bolivia,. Botswana, Dominican Republic, El Salvador,
Iraq, Morocco, Pakistan, Paraguay, Turkey and Zimbabwe. By the Fifth Meeting of the
Parties to the Protocol in Bangkok in November 1993, Botswana, Pakistan, Turkey and
.Zimbabwe had become Parties. The Republic of Korea was still classified as not being a
parry, although according to UNEP records it became a member of the Protocol in February
1992 (perhaps it had not officially ratified the treaty by the time of the Bangkok meeting)4.
3 Thus in 1993 countries such as Malta, Jordan, Poland and Turkey requested exemption from the
trade sanctions on the grounds that they were in compliance with Articles 2 although they had not
ratified the London Amendments to the Protocol.
* See Business Korea, June 1992, Cover Story
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Thus although there are several small countries that are not Parties to the Protocol, the number
of significant consumers not within the Protocol are very few (Bolivia, Iraq, Mongolia,
Morocco and North Korea are the only exceptions; and Afghanistan, Angola, Burundi, Congo,
Eriteria, Ethiopia, Laos, Lesotho, Madagascar, Nepal, Rwanda, Somalia and Zaire are large
countries but small CFC users that have not signed). In the case of Morocco, the non
ratification was simply a legal mistake and will be corrected soon. As of June 1994 137
countries had ratified the treaty. A full list of 71 non- signatories is given in Appendix 3 of
this Chapter.
The purpose of the restrictions on trade with non-Parties was precisely to encourage
them to become Parties to the Protocol. From the evidence it appears to have been a
successful strategy, although there were other factors that played a part. Among these was
the financial package offered to the Article 5(1) countries at the London Meeting of the
Protocol in June 1990, to cover the incremental costs of meeting the terms of the Protocol,
as well as the grace period of ten years for the same countries to achieve the same degree of
phase-out as the developed countries. The relative importance of the roles of the different
inducements to countries to become Parties of the Protocol are difficult to disentangle.
Certainly the financial package played an important part, as major users and potential users
of ODSs (such as India and China) stated that they would not accede to the Protocol in the
absence of such a package. However, the trade restrictions also played a part. In the case
of a country such as The Republic of Korea signing the Protocol was delayed as long as
possible because: (a) although it might have benefitted from the financial assistance covering
the incremental costs, it believed that such assistance would not be enough (the fund was
limited in size). It estimated, for example that it would cost the Korean industry about $1.9
bn. to operate within the restricted consumption of ODSs5. Since the total fund set up to
assist Article 5.1 countries was only $260 mn for the period 1991-1993, Korea was not
expecting to meet its incremental costs from that source. In any event, the Fifth Meeting of
the Parties took the view that the Republic of Korea could not be classified as an Article 5.1
country as its consumption of ODSs was in excess of 0.3 kg per capita by that time
(November 1993).
Had countries such as The Republic of Korea stayed outside the Protocol, they could
not have acquired ODSs from Parties as of January 1993. In 1990 the country was importing
about 9300 tons of CFCs, or 48 percent of total consumption. However, that was down from
64 percent the year before. At the same time, Korea reduced its total ODS consumption
between the two years by nearly 30 per cent. Thus the country was both reducing overall
consumption at the same time as increasing domestic production in the early years of the
Protocol. There are indications that domestic production in 1991 rose even more sharply (by
44 percent from the previous year)6. If Korea could, over a short period, produce all the
ODSs it needed, why then did it decide to join the Protocol? Apart from the diplomatic
pressure, one reason could be the fact that the Protocol restricted imports of products
5 The estimate is almost certainly an exaggeration of the true cost and is based on the lost
value of production if no substitutes are available. Nevertheless it shows how large a cost Korea
perceived with entry into the Protocol would entail.
6A11 figures .are from Business Korea, June 1992
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containing ODSs from non-Parties and many of tfie commodities manufactured in Korea such
as air conditioners, refrigerators etc are exported to countries that are Parties. Another was
the prospect that the Parties might ban trade in products "made with but not containing"
ODSs. The latter would, of course, have a very major impact on a open economy such as
Koreai that relies so heavily on international trade. Thus the threat of trading restrictions
probably played an important part in Korea's decision to seek membership of the Protocol.
What about the countries that have not sought membership? There are a number of
possibilities that could explain their strategy. One is that they will seek to declare the trade
restriction illegal and thereby avoid having to pay the price of phasing out controlled
substances over the relatively short period that is available under the Protocol. However,
given that most of them are small users/producers, and such action entails significant costs,
this is unlikely to be an explanation. Another is that they are not major importers of
controlled substances, nor do they exports products containing controlled substances. With
relatively closed economies they may find it more convenient to continue using the ODSs and
phase them out when the substitutes are in fact cheaper. However, restrictions on imports will
be costly, especially if equipment such as refrigeration units, that need CFCs to service them,
cannot be made available. Furthermore, the closed economy argument is difficult to accept
if the Parties place restrictions on products made with but not containing ODSs. In that event
almost all countries would find it too costly to remain outside the Protocol. Finally, there is
the simple fact that some of these countries are in a state of transition or of poor government,
and have not realized the consequences of not signing the Protocol and its amendments. This
must be an important factor in countries such as Angola, Congo, Rwanda, Somalia and Zaire;
and of a number of former CIS states.
A. Challenging me Applicability of the Trade Restrictions.
It has been suggested that the trade restrictions such as those discussed above are
invalid under the terms of the GATT (Sorsa, 1992). A distinction has to be made between
provisions of the Montreal Protocol that apply to Parties and those that apply to non-Parties.
Parties could, in principle waive their GATT obligations in relation to the Protocol thus
making the trade restrictions consistent with the GATT. However, the same does not hold
if the restrictions are applied to non-Parties which are members of the GATT; it could be held
to violate the Most Favored Nation Principle of the GATT, by which all members of that
agreement should be treated alike with respect to trade rules. In this case there are three
options. Before considering these it should be noted, however, that to date no cases have
been brought before the GATT challenging the validity of the trade restrictions.
One justification is to invoke Article XX of the GATT, which does allow for trade
restrictions to meet public policy objectives in the environmental (or other) spheres if the
same objectives cannot be met by less distortionary policies. It also requires (a) that the
measures taken must be "necessary" for meeting the policy objective and/or "related to" the
conservation of natural resources and (b) applied in a non-discriminatory way. In relation
to the Montreal Protocol, Article XX would probably permit discrimination as a last resort
measure. However, whether the trade restrictions are necessary or whether there are less
distortionary policies available for meeting the same objectives remains unclear. It has been
argued that, as the Protocol is drafted in terms of reducing the consumption of ODSs rather
than their emissions to the atmosphere, the same reductions could be achieved at lower cost
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through the use of more efficient instruments in countries that are Parties to the Protocol than
through trade sanctions on "free riders". This is probably true ex post (because there are so
few free riders), but that may be because the threat of trade sanctions has brought so many
countries into the Protocol. It is impossible to resolve such a debate on economic grounds.
It can be argued, however, that, were a case to be brought before the GATT against the trade
restrictions component of the Montreal Protocol, the view that the sanctions were not
necessary at the present time would prevail.
A second option is for all GATT-contracting Parties to waive their rights under that
agreement on a case by case basis. However, if some countries have not been willing to sign
the Montreal Protocol, it is unlikely that they will be willing to waive their rights under the
GATT for the same Protocol
Finally there is the option that GATT be amended to address such environmental
concerns. This may appear desirable in the case of the Montreal Protocol, but could have the
effect of encouraging the use of trade policies for environmental purposes in a wide variety
of cases, and may encourage protectionism by that route (See Markandya, 1994). It has been
decided to transform the Trade and Environment Working Group of the GATT into an Interim
Committee, to be continued once the WTO is ratified. Agreement has already been reached
that its agenda include a review of the consistency of the GATT with international
environmental agreements.
B. Extending Trade Restrictions to Products "Made With But Not Containing" ODS
As described earlier, in 1991 an addition was made to Article 4 of the Protocol,
requiring Parties to "determine the feasibility of banning or restricting" the imports for
products made with but not containing controlled substances in Annexes A, B and C (see
Appendix 1 for a list). The time frame for the different substances was such that Annex A
substances were to be banned within one year of a decision that such a ban was feasible, and
Annex B and Annex C substances were to be banned within five years of such a decision.
The Technology and Economic Assessment Panel (TEAP) examined the feasibility of
sanctioning trade in products made with but not containing controlled substances. They
focused on the question of whether it was practically feasible to identify such products. If
ODSs had been used in the manufacture of a product, trace residues would be present and
could be screened for in the field using portable gas chromatography. Laboratory confirmation
could use GC-Mass spectrometry. However, there are no internationally accepted testing
protocols to detect such residues and there is no threshold value of residue that defines "made
with" (UNEP, 1993B).
Although it is possible to establish such procedures for some products there are several
for which it is not. Examples of the latter given by the TEAP include solvents in the
manufacture of electronic products, mould release agents in the manufacture of plastic
products and drugs. Even if sophisticated tests could be devised, they would not be
economically feasible to carry out. Because virtually every product in trade could have some
component that'was manufactured using a controlled substance, the range of products to be
tested would be enormous, and one could not use a product code or other simplifying practice
for customs authorities.
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These arguments appear to be very strong reasons for not attempting to control
products not containing but made with controlled substances. The economic and legal
arguments reinforce these. The first issue to be settled from an economic viewpoint is to
determine what constitutes "made with". Given the interrelationships between different
sectors of the economy (as summarized in a country's input-output matrix for example), one
could argue that all products exported from anon-Party were made using ODSs either directly
or indirectly. Thus the measure would be tantamount to banning almost all exports from non-
Parties. Given the previous discussion about the conflicts between the GATT and such trade
sanctions, a measure of this severity could not be upheld in the present GATT.7 The costs
on a non-Parry would be far in excess of the benefits in terms of reduced ODS production.
A less stringent interpretation would be to look only at the direct input of ODSs in the
production of goods. Thus far, no inventory has been prepared of products that would fall
into this category and what percentage of total exports of non-Parties they would constitute.
Particularly affected would be electronics products and others where ODSs are used for
cleaning or as solvents. Given the small amount of use of ODSs in these processes, the cost
in terms of loss of trade benefit would appear to be very high, relative to the gains in terms
of reduced productions of the controlled substances. It could be argued, for example, that a
bigger saving in consumption could be achieved by increasing the incentives for ODS
Banking (see Chapter 7), and at less cost.
One possibility that has been discussed, which would avoid the objections raised above
is for countries to provide "self-certification" about the use of ODSs in the production
processes of affected goods. Since such a procedure could result in big inter-country
differences in certification, guidelines on how each country would award the certificates
would have to be laid down and respected. However, any such guidelines would run into
precisely the problems that have been identified above. Hence this proposal faces the same
difficulties as other methods of dealing with this issue.
At the Fifth Meeting of the Parties to the Protocol, in Bangkok in November 1993,
the whole question of a ban on such products was debated. The view was taken that such a
ban was not feasible at this stage but that the Technology and Economic Assessment Panel
should review this issue at regular intervals.
C. Trade in Controlled Substances and the Basel Convention on the Transboundary
Movement of Hazardous Wastes and Their Disposal.
At the Fifth Meeting of the Parties, the implications of the Basel Convention for the
international movement of the wastes of containing substances controlled by the Protocol was
also raised. The revised Basel Convention toughens the regulations on the international
movement of hazardous wastes. Exemptions, however, are allowed for the export of those
7Ban on products made with but not containing controlled substances would be in conflict with
the GATT from another perspective as well. This is the stipulation that countries not use process
standards in allowing entry to products. Process standards specify how a product was made — in this
case using ODSs — whereas product standards define the final product only - eg. whether it contains
ODSs.
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substances where it can be shown that a superior technology for their disposal or recycling
is available in the importing country.
In the case of ODSs, the Basel Convention would allow the shipment of substances
in cases where it could be demonstrated that they were being recovered from products that
contained them, and then either being recycled or disposed of safely. Such trades could be
an important part of an efficient phaseout solution and it would be a mistake if the Basel
Convention prevented mem. It is quite likely that, in the near future, a substantial market will
develop in recycled ODSs (see Chapter 7) with demand coming from countries that decide
to maintain ODS-using equipment with remaining economic life-times and the supply of
recovered ODSs coming from countries that are switching out of ODS-using equipment. In
principle, such trades should be possible with the use in the importing country being classified
as "recycling", but the Basel Convention wording on this is vague and needs to be clarified.
One area where trade is controlled in substances which are not being recycled is
halons. The balance between supply and demand of the present stock is uneven enough for
trade to be beneficial. Again, a ban on such trade as a result of the Basel Convention would
be detrimental to achieving the goals of the Montreal Protocol at least cost. The Bangkok
Meeting agreed to submit a resolution to the Parties of the Basel Convention to mat effect.
D. Recycling of Controlled Substances and Dlegal Trade.
The validity of the above arguments is seriously weakened by the fact that there
appears to be a growing trade in illegal shipment of ODSs. Some countries have substantial
production capacity, particularly those in Eastern Europe. At the same time the demand for
ODSs from small users in developed countries (and in some developing countries) is not
declining as fast as was expected. Thus there is a market for these products as countries, such
as those in the European Union, are phasing out their production and legal importation.
For such imports to come into the country they can be disguised as materials for
recycling. False documentation makes this possible and there is a concern that this is being
practised widely, although there are no figures available. At the Tenth Meeting of the Open
Ended Working Group of the Parties to the Montreal Protocol in July 1994 the US
representative suggested that :
"consideration should be given to a decision to ensure...that substances being
imported or exported as used or recycled materials were indeed used or
recycled.... Exempting such imports or exports from the calculation of
consumption might have unwittingly created a loophole in the Protocol
Regime." (UNEP, 1994)
More recently an ICI executive, speaking at a British Association press conference said that
illegal CFCs were flooding into Europe, most likely from Eastern Europe and Asia. He stated
that:
"The big high-profile users have switched to CFC substitution not only for
public relations but because they want to be up with the new technology. The
'black market' relies on large numbers of small CFC users who do not want
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to make changes in their equipment to use the substitute chemicals. And CFCs
still cost only half as much as the substitutes." Financial Times, September 8
1994.
This is a serious issue which needs to be addressed, the first step being to verify the figures
for prices and the level of 'black market' demand. The problem can be handled partly by
tightening the checks on exports of recycled materials, but it can also be approached from the
exporters' end by monitoring production at the CFC plants more carefully. Both of these
monitoring operations should be possible. It would be a pity if trade in recycled ODSs were
to be banned because the necessary actions to control illegal trade were not implemented.
EDL TRADE AND CAPITAL MOVEMENTS RELATED TO ODS.
Because Article 5(1) countries have a longer period over which to phaseout ozone
depleting substances, it has been argued that developed countries may move their production
facilities for goods that use ODSs to these countries so as to take advantage of the less
stringent phaseout schedules. There is virtually no evidence available for such a shift in
production is taken place; moreover the lack of such evidence is consistent with most other
findings on industrial location. The decision of where to locate a production facility involves
a number of factors, including the cost of labor, access to markets, social and political
conditions in the country concerned, the infrastructure facilities in the country concerned and
the regulatory framework. The last includes environmental regulations but again they are only
part of the full set of regulations. Considerable evidence exists to the effect that investors
look not only at current regulations but also at the stability of the regulatory framework (how
frequently governments change the rules).
To evaluate whether firms locate in countries to take advantage of less stringent
environmental regulations it is necessary to assess carefully the quantitative importance of the
different factors that determine location decisions. Studies of multinational corporations have
shown that these decisions are most influenced by such factors as labor costs, access to
markets and the existence of a developed industrial base (Wheeler and Mody, 1992). Factors
such as environmental regulations and corporate tax rates emerge as less important. At a
more statistical level, an analysis has been carried out of the direct foreign investment by
pollution intensive industries in developing countries to see if such investment has been
increasing faster than direct foreign investment in general. Between 1973 and 1985 direct
investment in the chemical and mineral industries as a percentage of direct foreign investment
in all manufacturing industries rose from 25.7 percent to 26.5 percent (Leonard, 1988).
Similarly, a study of majority owned affiliates of OECD-based companies in developing
countries does show that those involved in pollution intensive industries did increase their
investment slightly faster than did all manufacturing industries (Jaffe et al, 1993). This
statistical evidence is only weak support of the pollution-migration hypothesis as it does not
point to any significant change in investment patterns. What is observed could be explained
by other factors such as the changing structural pattern of demand in the developing countries
themselves. '
More recent studies have supported these findings. Dean (1990) in a comprehensive
survey of studies published up to 1990 concludes that there is little evidence of industrial
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relocation because of differences in environmental regulations. Grossman and Krueger (1992)
analyze the maquiladora program (which permitted US firms to locate on the Mexican side
of the US-Mexico border on advantageous terms) and find that pollution abatement costs were
not a significant determinant of the trade generated by the program.
Even when pollution intensive industries do locate in developing countries, they do
not necessarily adopt a minimalist approach in terms of meeting environmental regulations.
Often corporate policy dictates the use of the same technology and pollution controls in all
foreign countries where plants are located as in the home country (subject to, of course,
meeting the local standards where the latter are more strict). This is partly in response to
their public image of which they are very conscious, and partly in recognition of the fact that
regulations are almost certain to become more strict in the developing countries, and
preemptive action may well be cost effective (Jaffe et al, 1993). Thus it would be surprising
to find that major multinationals were locating in Article 5(1) countries to take advantage of
their longer phaseout period for ODSs.
There are only two cases reported of a shift of industry as a result of differences in
the ODS phaseout schedules. One was from China (Lu et al, 1993). This case study on trade
and the environment cites the shift of a number of CFC-using enterprises from Hong Kong
to Guandon Province in China. There are now over 20 such enterprises that have moved to
Guandon Province; they use over 50 tons of CFCs. As a percentage of China's use of ODSs
this is not a large amount and the reason for the shift is not clear. Since Hong Kong is
treated as part of the United Kingdom in terms of the Protocol, it may be seeking to phaseout
ODSs before 1997 when Hong Kong reverts to China, and therefore it may be advantageous
to shift production to the mainland that has a less stringent phaseout schedule as an Article
5(1) country. However, it is also possible that the reason for the shift has more to do with
access to the China market than to the longer phaseout period for the use of ODSs.
The second case is not of a redeployment in production facilities as such but of a shift
in production between different facilities of the same enterprise. Thus, some firms may have
closed down production of ODSs in developed countries whilst increasing production in
developing or transitional countries. Evidence on this is not available on a systematic basis,
but even if it is happening, it is not something that should necessarily be a matter of concern.
Developing countries need ODSs for some time to come. A ban or restriction on such
production shifts would simply raise the cost of obtaining the ODSs and of meeting the
reduction targets on the part of the developing countries. The targets, of course, will be
respected irrespective of whether such relocation of production is permitted or not.8
Finally it should be noted that for some fast growing developing countries, they are
"The one concern that has not been addressed in the above argument is that developing or
transitional countries may succeed in exporting the increased trade of CFCs as recycled materials. The
demand for ODSs is not falling as fat as was hoped in some developed countries. Hence there is a
demand for contraband production. For the production of plants to evade the accounting of production
of ODSs it would of course be necessary for the production to be mis-recorded as well as for the
importation. The extent of this is unknown as was discussed above, but the matter needs further
investigation.
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6-10
reluctant to permit firms that use ODSs to enter and set up production in case, by doing so,
they raise total consumption to over 0.3 kg/head. If this should happen, they would lose the
benefits of being an Article 5(1) country. Malaysia, for example, has a level of consumption
close to that limit and is reluctant to admit foreign companies that may raise increase
domestic ODS consumption above the qualifying level. In this way, "industrial migration"
is being restricted.
A. International Trade and Phaseout of ODSs.
The China study also demonstrates clearly the advantage for an export oriented
economy to adopt the new non-ODS-using technologies as soon as possible. As a major
manufacturer of refrigerators, air conditioners etc., China found that its export markets for
these products collapsed after the introduction of the Montreal Protocol. The volume of
refrigerators exported declined by 58 percent between 1988 and 1991 and similar declines
were noted for other products. International buyers simply did not want to commit themselves
to the purchase of equipment that would become obsolete in a few years time (when
maintenance would become very difficult as ODS supplies become difficult to obtain)9. As
much as anything else, it was this kind of data that convinced the Chinese authorities to
accelerate their phaseout program; in fact, China committed itself to phaseout dates that are
faster than the minimum permitted under the Protocol. A number of other Article 5(1)
countries have 'done the same (e.g. Mexico). Table 1 below gives details of the accelerated
phaseout schedules adopted by some other countries that are in excess of the Protocol's
requirements.
IV. CONCLUSIONS.
This Chapter has examined the trade issues related to the Montreal Protocol. It began
by looking at the trade sanctions against non-Parties. It was argued that these played an
important part in encouraging countries to join the Protocol. Certainly, the evidence from
Korea would support such a view. However, there were other factors at play and it is not
clear what relative importance should be attributed to them (eg the financial assistance for
Article 5(1) countries and the longer phaseout period). Certainly the Protocol has proved to
be increasingly successful in getting countries to join. At the last count only a handful of
significant users had not joined; they represent only a very small fraction of the total use of
ODSs.
What can be done to bring these non-Parties into the fold? The use of stricter
sanctions, such as restricting trade in products made with and not containing ODSs would
probably be a mistake. Apart from the fact that it would be very difficult to implement, it
could also raise difficult questions in the GATT. The threat of imposing such restrictions may
have proved to be a very effective instrument, but actually trying to carry out that threat may
show it to be an empty one.
'It is also possible that the decline in exports was due to the increased domestic demand for these
goods, during a period of rapid economic growth. However, export decline of this magnitude, in a
country that placed a premium on exports, was certainly a result of a decline in demand as well.
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The most effective way of encouraging the remaining countries to join the Protocol is to
demonstrate that they would gain security of access to existing CDS supplies that are required
to service their ODS-using equipment, especially chillers and refrigeration. This argument
could be reinforced by showing that those becoming Parties have not suffered serious losses
and are in fact gaining from the adoption of the new technologies. It might be conducive to
offer non-Parties the option of signing memoranda committing them to act as de facto Parties
to the Protocol, until such time as they could ratify the Montreal Protocol. But if these
measures do not succeed, one could leave the non-Parties to their own devices without
significant consequences for the protection of the ozone layer. As long as the trade
restrictions remain in place, their use of ODSs will be small and will be phased out eventually
as the non-ODS technologies increasingly become world standards.
One area where restrictions in trade may be counterproductive is with regard to the
Basel Convention. It was pointed out that transboundary movement in ODSs between the
Parties could be important in meeting the terms of the Protocol at least cost. These could be
permitted under the Basel Convention, which restricts the movement of hazardous wastes, but
the issue needs to be clarified. The most serious complicating factor is the possibility that
such trade could be a loophole for the illegal shipment of newly produced CFCs that are
represented as recycled substances. There is some indication that this is happening and needs
to be controlled. The matter requires early attention by the Parties. However, the preferred
solution should not be to ban trade in products for recycling. Rather, it should be to enforce
more effectively the trading rules and conditions.
The question of ODS-dumping was also addressed. Although in principle the incentive
is there for a shift of production facilities between developed and developing countries, there
is hardly any evidence for it. The issue of pollution-migration, has been studied in some
depth and the evidence for such migration is very weak. Thus it would be surprising if it
were to be significant in this case.
-------
6-13
Annex A
CONTROLLED SUBSTANCES
Group
Group I
CFC1-3
CF2C12
QF3C13
CjF.Cl,
QFjCl
Group U
CF2Bra
CRBr
C,F4Br2
• Substance
(CFC-11)
(CFC-12)
(CFC-113)
(CFC-114)
CCFC-115)
(haIon-1211)
(haJon-1301)
(halon-2402)
Ozone Depleting Potential*/
1.0
1.0
0.8
1.0
0.6
3.0
10.0
6.0*
Theseozonedepleangpotentialsarassuniates based on existing knowledgeand willbereviewedandrevised
periodically.
Annex B
Controlled substances
Group
Substance
Ozone-depleting potential
Group I
CF,CI
QFC15
C,F,Cl,
'
QF.CI,
QF4CI<
C3F5C1,
QF7C1
Group n
CCI« carbon tetrachloride
Group in
QHjCIj* 1,14-trichloroethane
(methyl chloroform)
(CFC-13)
(CFC-111)
(CFC-112)
(CFC-211)
(CFC-212)
(CFC-213)
(CFC-214)
(CFC-21S)
(CFC-216)
(CFC-217)
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.1
0.1
This formula docs not refer to 1,1.2-lrichloroethane,
38. The FL-s; !
Pf til? Panje? decided in Deq.I/9 to aecepc the v«iue for the Ozone Depleting Potential (OOP) forhalon
3402. as 6.0. anc » recues: the Secreuria: to infonn the Depositary that the Parties agreed to accept this figure by consensus tc their
Fast Meeang aid that accordingly the Depositary should insert this figure to replace the words "to be determined" in Annex A to
:he Montreal Protocol.
-------
-------
6-U
Annex C
Transitional substances
CHFC1,
CHFjCl
CHjFCl
QHFCI.
C,HF3CI,
CjHF.Cl
C2H2FCI3
QH2F2C12
CJH3F2CI
QH.FCI
C3HFC14
C3HF2C1;5
C3HF3C14
C,HF4C13
C,HF,CIS
q,HF«Cl
C3H2FC1S
C3H,F2CI4
C3H2F3C13
C3H2F4CI2
QHJF3C1
C3H3FCI4
C3H3F2C13
C3H3F3CI2
C3H3F4C1
C3H4FC13
C3H4F2q,
C3H4F3C1
C3H5FC12
CjHjFjC!
C3H«FC1.
Substance
(HCFC-21)
(HCFC-22)
(HCFC-31)
(HCFC-121)
(HCFC-122)
(HCFC-123)
(HCFC-124)
(HCFC-131)
(HCFC-132)
(HCFC-133)
(HCFC-141)
(HCFC-142)
(HCFC-151)
(HCFC-221)
(HCFC-222)
(HCFC-223)
(HCFC-224)
(HCFC-225)
(HCFC-226)
(HCFC-.231)
(HCFC-232)
(HCFC-233)
(HCFC-234)
(HCFC-235)
(HCFC-241)
(HCFC-242)
(HCFC-243)
(HCFC-244)
(HCFC-251)
(HCFC-252)
(HCFC-253)'
(HCFC-261)
(HCFC-262)
(HCFC-271)
-------
6-15
Appendix 2
UPDATE OF THE PHASEOUT SCHEDULES FOR ODSs IN ARTICLE 5(1) COUNTRIES
The present phaseout schedule for consumption of ODSs in Article 5(1) countries is
as follows:
Article 2A: Concerning CFC-11, CFC-12, CFC-113, CFC-114, CFC-115:
January 1 2005: not more than 50% of 1986 level
January 1 2007: not more than 15% of 1986 level
January 1 2010: complete phaseout
Article 2B: Concerning Halons 1211, 1301, 2402
January 1 2002: not more than 1986 level
January 1 2005: not more than 50% of 1986 level
January 1 2010: complete phaseout
Article 2C: Concerning CFC-13, CFC-111, CFC-112, CFC-211, CFC-212, CFC-
213, CFC-214, CFC-215, CFC-216, CFC-217:
January 1 2003: not more than 80% of 1989 level
January 1 2007: not more than 15% of 1989 level
January 1 2010: complete phaseout
Article 2D: Concerning Carbon Tetrachloride
January 1 2005: not more than 15% of 1989 level
January 1 2010: complete phaseout
Article 2E: Concerning Methyl Chloroform
January 1 2003: not more than 1989 level
January 1 2005: not more than 70% of 1989 level
January 1 2010: not more than 30% of 1989 level
January 1 2015: complete phaseout
These schedules allow for a ten year grace period with respect to the targets applicable
for those countries not operating under Article 5(1). In addition, the non-Article 5(1)
countries are permitted exceed their production targets by 10-15% of their calculated
level of production in 1986 in order to satisfy the basic domestic needs of the Article
5(1) countries.
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6-16
Appendix 3
COUNTRIES AND TERRITORIES THAT ARE NOT SIGNATORIES TO THE
MONTREAL PROTOCOL
Afghanistan
Albania
Angola
Anguilla
Armenia
Azerbaijan
Belize
Bermuda
Bhutan
Bolivia
Burma
Burundi
Cambodia
Cape Verde
Cayman Islands
Comoros
Congo
Cook Islands
Djibouti
Eriteria
Estonia
Ethiopia
Falkland Islands
Faroe Islands
French Guiana
Georgia
Greenland
Guinea-Bissau
Haiti
Iraq
.Kazakhstan
Korea, North
Kyrgystan
Laos
Latvia
Lesotho
Liberia
Lithuania
Macau
Macedonia
Madagascar
Mali
Martinique
Micronesia
Moldova
Mongolia
Montserrat
Mozambique
Nepal
New Caledonia
Oman
Puerto Rico
Qatar
Reunion
Rwanda
Saint Helena
Saint Pierre
Saint Vincent
Sao Tome and Principe
Serbia and Montenegro
Sierra Leone
Somalia
Suriname
Tajkistan
Tonga
Turks and Caicos Islands
Vanuatu
Virgin Islands
Western Sahara
Yemen
Zaire
Taiwan (*)
acts de facto as a member
-------
6-17
References
Business Korea (1992) The O-Zone, Cover Story pp 25-28.
Dean J; (1992) "Trade and the Environment: A Survey of the Literature" in P. Low, P. (ed.)
Internationa! Trade and the Environment. World Bank Discussion Papers No. 159,
Washington DC.
Dube, Siddharth. (1991) Saving the Ozone Layer A Test of Global Will. Choices. April;
1992. UNDP.
Grossman G. and A. Krueger (1992) "Environmental Impacts of a North American Free Trade
Agreement" in P. Garber (ed.) The US-Mexico Free Trade Agreement, MIT Press, Cambridge
MA.
Jaffe A., S. Peterson, P. Portney and R. Stavins (1993) Environmental Regulations and the
Competitiveness of US Industry, Report prepared for the US Department of Commerce, The
Economic Resources Group, Cambridge MA.
Leonard H. (1988) Pollution and the Struggle for the World Product, Cambridge University
Press, Cambridge, UK.
Lu R., Y. Xia, J. Li, J. Zhang and Y. Lu (1993) A Study on Environmental and Foreign
Trade Development in China. Draft, UNCTAD, Geneva.
Markandya, Anil. (1994) Is Free Trade Compatible with Sustainable Development?, UNCTAD
Review, forthcoming.
Sorsa P. (1992) "GATT and Environment: Basic Issues and Some Developing Country
Concerns", in P. Low, (ed.) International Trade and the Environment. World Bank Discussion
Papers No. 159, Washington DC.
UNEP (1991) Handbook for the Montreal Protocol on Substances that Deplete
the Ozone Layer. Ozone Secretariat. (Second edition). UNEP.
UNEP (1992) Report of the Fourth Meeting of the Parties to the Montreal Protocol on
Substances That Deplete the Ozone Layer. Copenhagen. 23-25 November 1992.
UNEP (1993 A) Report of the Ninth Meeting of the Open-ended Working Group of the Parties
to the Montreal Protocol. Geneva. 30 August - 1 September 1993. UNEP.
UNEP (1993B) 1993 Report of the Technology and Economic Assessment Panel.
UNEP (1993C) Report of the Fifth Meeting of the Parties to the Montreal Protocol on
Substances that Deplete the Ozone Layer. Bangkok. 17-19 November 1993.
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UNEP (1994) Draft Report of the Tenth Meeting of the Open-ended Working Group of the
Parties to the Montreal Protocol, UNEP/OzL.Pro/WG.I/10/L.l/Add.3, Nairobi, 5-8 July, 1994.
Wheeler D. and A. Mody (1992) "International Investment Location Decisions: The Case of
US Firms", Journal of International Economics, 33: 57-76.
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7-1
CHAPTER?
CFC AND HALON BANKING
L INTRODUCTION.
Halon production ceased in non-Article 5(1) countries as of 1 January 1994. The current
Protocol phaseout schedule calls for CFC production to end by 1 January 1996 in the non-Article
5(1) countries that account for the bulk of the world's output These accelerated production
phaseout dates have been dictated by the accumulation of scientific information on the extent
and severity of stratospheric ozone depletion. Yet the accelerated schedule means that much
equipment that was designed to use halons and CFCs—fire prevention and containment systems,
stationary refrigeration and air conditioning equipment, automobiles, and the like—will have to
be prematurely retired, retrofitted, serviced with "drop-in" substitutes, or serviced with banked
and recycled ODSs.
The options selected in each case will be the result of a combination of economic and
regulatory factors. The technology of retrofits is evolving, and the search for drop-in substitute
chemicals continues. The outcome of this research is uncertain. It is impossible to know, for
example, what the future cost of retrofitting mobile air conditioning systems will be. Nor can the
future regulatory environment be known exactly. New evidence regarding the adverse effects of
ozone depletion may lead to further tightening of the Montreal Protocol's timetable. In addition
to these uncertainties, the Parties to the Protocol will have to decide whether to destroy the
stocks of ODSs now in existence, and if so, when and how the destruction should be
accomplished.1
The end to production of ODSs requires those in the marketing chain to change their
perspective fundamentally. Instead of dealing with a flow-dominated commodity—one whose
production is continuous and for which inventories are a minor adjunct of marketing—users and
wholesalers will deal with a stock-dominated commodity—one whose past production manifest
in current inventories is what matters. Management of a stock-dominated commodity implicitly
involves decisions about the timing of its use. A stock-dominated commodity exhibits the added
complication that uncertainties about the future can be embodied in the current price. Just as
everyone would like to buy such a commodity now to sell it for a higher price the next period, no
one wants to be caught storing a commodity that soon will be worth much less.
1. Advice about this decision is outside the. scope of the present Report. Suffice it to say that the decision will
depend on (1) how serious is the additional damage to the ozone layer that would be caused by release or leakage of
existing stocks of ODSs; (2) the cost and environmental impact of destruction technologies; and, (3) the loss in
value of equipment that would no longer be operational if it could not be serviced by ODSs. While a number of
destruction technologies have been examined (see below), "the current capacity of approved ODS destruction
technologies cannot destroy the anticipated stockpiles of ODS within a reasonable time frame" (UNEP 1993c).
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7-2
Both users and policy-makers rightly recognize that the remaining CFC production over
1994-95 would be used more sensibly if allocated over the rest of the decade rather than being
consumed disproportionately during those two years. The total stockpile will be used more
efficiently over time if the stocks go to the most valuable uses. It makes little sense for a U.S.
automobile repair shop in 1998, say, to recharge the air-conditioning system of an old car having
only a few years of useful life remaining, while a shortage of CFC inventory forces a
supermarket owner to replace at great expense a set of relatively new refrigerators. Some current
retrofits of air-conditioning systems, undertaken in part because of a worry over the future
availability of CFCs, seem to be implicitly valuing the CFC at more than ten times its current
price. A market among those holding CFCs, which gets the CFCs to the most valuable uses at
the right time, can only improve the efficiency of the phaseout. likewise, such trading will
improve the time profile of the use of the remaining halons. In general, efficient management of
stocks will, through the ordinary price mechanism, reduce the aggregate costs of the phaseout.
Besides saving the cost of premature replacement of specialized capital goods and
durable consumer goods, efficient utilization of the existing stocks of ODSs unquestionably will
reduce emissions, because users will have an incentive to avoid accidental release of a
commodity for which others will pay. If the policy decision is later made to destroy what
remains, emissions prior to that time will have been kept to a minimum. Efficient allocation
over time can also assist the Article 5(1) countries in making their transition away from ODSs.
These developing countries are concerned that they have adequate supplies of CFCs and halons
during the 10-year grace period. If they feel too insecure about supplies, they may be induced to
increase production during the interim period, thereby increasing the total amount of chlorine
and bromine that will find its way to the stratosphere. Careful use of the current stock therefore
can reduce cumulative global production and emissions of ODSs.
The efficient intertemporal allocation of stocks of ODSs has come, in some ckcles, to be
referred to as "banking." Others use the term "banking" to refer to the collective saving of some
of the remaining CFC production for use over the following years. Those working with halons
have taken the term "banking" one step further, to refer to the mechanism for trading among
users who have stored halons, such as a clearinghouse or a notice board for interested buyers and
sellers. Some wholesalers of CFCs have begun using the term "banking" in its most literal sense:
they have begun accepting deposits of CFCs from their customers, which they store together and
release again by a bookkeeping entry. All these meanings of "banking" are reasonable—provided
one is careful to be clear about which meaning is being used in a particular context. In addition,
all these meanings of "banking" emphasize that something is being held in store. Together they
make clear that the physical allocation over time of the ODS stocks depends on the particular
pricing and trading systems devised.
H. THE EVOLUTION OF ODS BANKING.
In reviewing the experiences to date with ODS stock management, it is important to
distinguish efforts involving halons from those involving CFCs. At least 13 countries have
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already set up working halon banking operations. The halon production phaseout has already
occurred in the non-Article 5(1) countries, and no "essential use" exemptions (as defined at the
1992 Copenhagen meeting of the Parties) were granted at the Fifth Meeting of the Parties in
Bangkok in 1993. Although some users may request exemptions in subsequent years, the Halon
Technical Options Committee has the view that existing stocks will be adequate, even for halon
applications for which no substitutes are currently available (UNEP 1993a). Hence halons are
already being treated like a non-renewable resource. CFCs are just beginning that transition, and
not surprisingly, the stockpiling and marketing institutions are more rudimentary. However, the
incipient marketing systems for CFC stockpiles and the resulting institutions may become more
sophisticated than those evolving for halons.
The careful management of stocks of ODSs derives first from their scarcity giving them a
higher current price. In addition to this price-level effect, there is every reason to believe that
ODS prices will show as of any one time a pattern or "spread" among different delivery dates
reflecting the market's anticipation of supplies and demand over time. Such price spreads exist
for every other stock-dominated commodity for which there are organized markets. (Futures
markets convey intertemporal signals of this type as of one moment in time, which is the main
purpose of those markets.) Just as prices at different locations or prices for various uses signal a
shipment or reassignment to the highest value application, the prices for different delivery dates
signal the best time to consume a commodity. It may well be that the relative scarcity of an ODS
increases over time, with the result that prices increase with later delivery dates. Nothing,
however, precludes prices falling with time, as would happen if equipment were retired more
quickly than the ODS is lost to the atmosphere. Such signals of the price of current or nearby
use commanding a premium over the price for later use are observed in almost every commodity
market at one time or another. It is possible that halons could follow the first pattern of
increasing prices while CFCs eventually follow the pattern of prices falling with time to
delivery. Whatever the actual pattern, either in anticipation or in the event, there is no reason to
suppose halons and CFCs will behave identically.
A. Halon Banking.
Descriptions of the various national banking systems have been laid out in the July 1993
Report of the .Technology and Economic Assessment Panel (UNEP 1993a). In addition, the
UNEP Industry and Environment Programme Activity Centre (UNEP IE/PAC) publishes (and
updates on a monthly basis) a Halon Banking Sourcebook. This reference contains a description
of UNEP lE/PACs International Recycled Halon Bank Management Information Clearinghouse,
material from the July 1993 Report referred to above, a table showing the quantity of recycled
halons available through national banking schemes, names and telephone numbers of contact
persons for the existing banks, and brochures describing the various halon banks (UNEP 1993d).
It would be redundant to repeat this material here. Instead, we can put some of these activities
into an economic perspective.
Among the countries that have already set up halon banks, namely Australia, Canada,
Denmark, France, India, Japan, Malaysia, The Netherlands, Russia, Sweden, Switzerland, the
United Kingdom, and the United States of America (UNEP 1993d), a number of different
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7-4
tendencies can be identified. Some of the countries, such as Switzerland, die United States, and
the United Kingdom, have seen the emergence of institutions that perform essentially a
clearinghouse role. (See Brunner and Covelli (1992) for Switzerland.) These halon information
centers serve the function of bringing potential buyers and sellers together, nothing more. They
do not serve as a market in the traditional sense, because price negotiations take place directly
between the buyers and sellers, outside die context of the clearinghouse. In some cases, the
larger users and holders of halon seek each other out and transact without going through the
clearinghouse at all. Organizers of the clearinghouses in both the United States and the United
Kingdom seem to be wary of running afoul of their countries' competition (anti-trust) laws. In
the United States, this fear has deterred the main clearinghouse from allowing assessment of
"critical" uses to be a mechanism to balance supply and demand, and in both the U.S. and the
U.K. the clearinghouses avoid including any pricing information (Catchpole 1993; UNEP
1993a). Although price-setting discussions might, in some circumstances, provide a mechanism
for anti-competitive collusion, it is difficult to see why such possibilities should inhibit the
market-making activity of halon clearinghouses. After all, the organized commodities and
futures markets in the United States and United Kingdom, where continuous auctions take place
in trading pits in full view of everyone, are among the most competitive markets hi the world.
Why should it be different with halons?
In some countries, including Australia and The Netherlands, the halon banks hold
physical stocks of the materials (UNEP 1993d). In the United States, the Department of Defense
(DoD) has offered to collect unwanted halons from the private sector to add to its stockpile. This
offer was motivated by the DoD's perception that it lacked sufficient halon-1301 to meet its
projected needs, and to counteract the temptation of halon distributors to vent their stocks before
the very sizeable "floor tax" (see below) went into effect on 1 January 1994 (Zurer 1993). A
number of the larger servicing companies can be considered banks in this sense, as they hold the
stocks of an entire client industry, such as the airline industry. Friends of the Earth, an NGO, has
instituted its own program of halon recovery, with an aim of establishing a "network of regional
banks throughout the country...to store the halon that is collected through this national
campaign." This program "rests upon the premise that we must make every effort to recover
halons and insure that the halons going back out into the marketplace are used for essential
purposes only" (Gilfillan 1994).
In only one or two instances do these central stockpiles keep the stocks in the names of
individual customers, using bookkeeping entries to record the deposit or to make any transfer.
Nor do these central stockpiles facilitate any arrangements by which one party can use another
party's holdings in the event of an emergency, with the promise to return at a later date the
quantity of halons withdrawn. Large organizations with their individual stockpiles let their
various subsidiaries use a central reserve for emergencies, as when a particular oil platform
needs halons to replace quickly those just used for fire suppression; the central reserve replaces
its own holdings without the urgency (and so at less cost). So far no system has emerged to
share reserves across organizations (although several large companies have tried to work out
arrangements with the U.S. Department of Defense that would permit the DoD to call on then-
stockpiles during wartime). Such fragmentation makes the whole storage system more costly
than it needs to be.
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7-5
B. CFC Banking.
1. Histoiy of CFC Prices.
With the increase in the price of CFCs (including tax) from under $ I/pound to over
$6/pound, the incentive to reclaim CFCs has increased greatly. Figure 7.1 shows pre-tax list
prices for CFC-11, CFC-12, and CFC-113 in the United States, on a monthly basis from the
beginning of 1986 (over a year before the Protocol was signed) through July 1994. Note that the
list prices including the excise tax could be calculated from the prices shown in Figure 7.1 by
adding the taxes shown in Table 7.3 below. The pattern of these prices would not change
substantially if they were converted into constant dollars using a Producer Price Index, because
inflation has been slight over this period.2
The price incentive is enhanced even more by the preferential tax treatment given to
recycled CFCs, which are not subject to either the excise or inventory taxes imposed on newly-
produced CFCs. Of course, all CFCs are supposed to be recovered if possible; releases to the
atmosphere should only occur as the result of accidents, as when a compressor on an industrial
chiller fails or a vehicle's air conditioning system develops a leak. The frequency of such
accidents, however, responds partially to price. The owner of a large commercial chiller, fearing
the leakage of $10,000 worth of CFCs should the system fail, might decide to replace a working
compressor as it nears the end of its projected life. More importantly, as the price of CFCs rises,
the incentive to detect and repair leaks increases. When CFCs were inexpensive, the rational
choice might have been to defer maintenance of a system until it failed. At the extreme of very
high prices, not much CFC would be allowed to leak.
2. CFC Availability for Servicing Depends on Economic Incentives.
The extent to which the CFCs currently held in existing equipment can be conserved (by
reducing leakage), recaptured (by retiring equipment from service or retrofitting it to use non-
ODS fluids), and recycled is critical to maintaining availability of CFCs to service the remaining
equipment. These relationships are illustrated by the calculations summarized in Tables 7.1 and
7.2. These two tables show the availability of CFC-11 and CFC-12 over time under certain
assumptions regarding leakage, retrofit, and recovery rates. (The sources, definitions,
assumptions, and calculations underlying Tables 7.1 and 7.2 are given in Appendix A to this
Chapter.)
It should be emphasized that these Tables are designed primarily to show how CFC
availability is sensitive to economic factors determining the behavior of equipment owners and
potential reclaimer/recyclers. The estimates are not meant to be definitive forecasts; the
2. It should be noted that the first jump in the price, occurring in February 1989, may be slightly exaggerated. The
Chemical Marketing Reporter listed two prices prior to that date, and the lower of the two is the one shown in
Figure 7.1. Beginning in February of 1989, only one price for each CFC is reported. The price in February 1989
was greater than the higher of the two prices reported previously, however, so the list price did increase at that
time.
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categories are very broad and are not broken down according to the sizes of different classes of
(for example) commercial chillers; nor are the production figures for 1994 and 1995 known
exactly. The equipment categories also include machinery using blends, and the breakdown
across equipment according to CFC type (11 or 12) is not as sharp as that shown in the Tables.
In addition, the calculations do not incorporate possible continued production of CFCs in the
Article 5(1) countries during the Protocol grace period, nor do they reflect Article 5(1) demand
arising from potential new production of ODS-using equipment3 Exact forecasting of the actual
amount of the different CFCs that will be available world-wide over time is beyond the scope
and resources of this Committee.4
Despite these caveats, the calculations shown in Tables 7.1 and 7.2 are illustrative of the
critical importance of economic incentives. Depending on the leakage, retrofit, and recovery
parameters, it is possible to project either adequate supplies of CFC for servicing, or shortages.
In both tables, the amount of CFC in use is computed from estimates of the number of units of
different types of equipment installed worldwide. Depending on the lifetime of the units, a
certain percentage are retired each year. At the same time, a fraction of the CFC-using units are
retrofitted in each year. The recovery rate specifies how much of the CFC contained in the
retired and retrofitted units is reclaimed and made reusable, and this annual amount is shown as
"net recycled." Service needs are based on annual replacement of the leakage from each type of
equipment. In the case of mobile air conditioners (MACs), it is assumed that no servicing or
retrofitting of the systems is done during the last three years of their lives. Finally, the available
CFC is computed as the sum of stored production (from 1994 and 1995) plus net recycled CFC,
minus the annual service need.
The two tables show that, under plausible behavioral assumptions, there could be
sufficient CFCs to service existing equipment. But two essential points must be stressed: (1) the
availability of CFCs for service depends on successful recovery and recycling of CFCs in
existing equipment, and (2) the key parameters of the calculation—the leakage, retrofit, and
recovery rates—depend on the incentives that will prevail at the time decisions are made
regarding the disposition of equipment and the CFC it contains. A breakdown in the recovery
and recycling effort will lead to large increases in the price of CFCs or, if prices are controlled,
to shortages.
In the case of CFC-12 shown in Table 7.2, the total quantity available depends strongly
on the rate of leakage from mobile air conditioning systems and the fraction of the CFC-12 that
is recovered when vehicles are scrapped. If the leakage rate is substantially below the 0.20 value
assumed in Table 7.2, CFC-12 would be abundant over the next 25 years. The leakage
parameter indeed could be well below the 0.20 rate. Sophisticated hand-held equipment now
3. The needs and production capacities of Article 5(1) Parties are addressed by the Executive Committee of the
Interim Multilateral Fund for the Implementation of the Montreal Protocol (1992a and 1992b).
4. It should be noted that even the most detailed forecasts can rapidly be rendered obsolete by events. The 1991
Report of the Refrigeration, Air Conditioning and Heat Pumps Technical Options Committee (UNEP 1991)
prepared careful forecasts of CFC demand and availability for all the refrigeration subsectors. Yet the assumptions
underlying these projections regarding the speed of the changeover (as driven by subsequent modifications of the
Protocol) were too conservative.
-------
7-7
exists that can detect minute concentrations of CFC-12 leaking from mobile air conditioners, and
this equipment is available in certified MAC repair shops. It would be a relatively simple matter
for a check of an automobile's air conditioning system to become pan of routine maintenance.
Yet if the leakage rate from automobiles is not 0.20 but 0.25 (the high end of the range estimated
for the U.S. fleet) and the other parameters are unchanged, availability of CFC-12 runs out
beginning in the year 2003. Similarly, if the calculation is modified so that leaking CFC-12 is
replaced over the entire lifetime of the vehicles (instead of assuming that A/C systems are not
serviced during the last three years of the vehicles' lives), the margin of surplus available CFC-
12 after about 2005 becomes razor-thin Gess than 7,000 tonnes, and less than 2,000 tonnes after
2010). If there is no retrofitting or recovery of CFC-12 from MACs when vehicles are scrapped,
the CFC-12 available for servicing runs out after 2001 and the cumulative deficit is nearly
40,000 tonnes. If actual production during 1994 and 1995 were to be only 20% less than that
estimated in Table 12, the surplus of CFC-12 would turn negative after 2009.
Similarly, in the case of CFC-11 a tradeoff exists between the leakage rate and the retrofit
rate. According to Table 7.1, a deficit of CFC-11 is avoided because retrofits provide a
cumulative 15,576 tonnes, a large fraction of the initial stock of 25,000 tonnes not already in
equipment. By implication, if the leakage rate is in fact much higher than that assumed in Table
7.1, a very high number of retrofits (or retirements) will be required to keep the remaining
equipment operating. On the other hand, if investments in reducing leaks, say through improved
monitoring equipment, can reduce the leakage rate, fewer retrofits would be necessary. Such
reductions are technically possible; the question is whether they make sense given the prices for
CFC-11, retrofits, and monitoring equipment.
It would have been possible to imagine a situation in which there was so much CFC on
hand from the production occurring in 1994 and 1995 that servicing the available equipment
would be no problem. At the other extreme, it might have been obvious that servicing needs will
be so large that no amount of recovery and recycling would be adequate. The actual situation, as
demonstrated by the size of tae availability margin and by the sensitivity analysis showing that
this margin can turn positive or negative with small (and plausible) changes in the underlying
parameters, demonstrates that the economic incentives for recovery and recycling are crucial for
maintaining the existing CFC-using equipment In addition, the models that yield the estimates
of Tables 7.1 and 7.2 are based on the presumption that CFCs can flow to the sectors and
locations where they are needed, or, in other words, that trade remains free and that CFC
banking and reclaiming operations are successfully established. The economic cost of the CFC
phascout (excluding its environmental benefits) will be much larger than it needs to be if
recycling and banking are inadequate.
Another way of seeing the potential sufficiency of the CFC stock for servicing existing
equipment can be developed, in the case of the United States, from data compiled by the
Congressional Research Service (which is also relied on partially in Appendix A to construct the
•climates used in Tables 7.1 and 7.2). According to the CRS, the total amount of CFC required
for servicing in the United States between 1996 and 2005 is between 200 million and 400 million
pounds. The CRS also estimates that 1994 and 1995 U.S. production could be as high as 270
-------
7-8
million pounds (based on U.S. CFC production allowances),5 and that 410 million pounds of
CFCs arc presently contained in U.S. equipment If all existing CFC-using equipment is
retrofitted or discarded by 2005 (this allows existing automobiles to live out a 10-12 year
lifespan), the CRS estimates that 680 million pounds of CFCs would be available to meet the
servicing need of 200-400 million pounds (Gushee 1993). Under these assumptions, servicing
demand can be met if the stock is managed intelligently.
The effect of the level of prices already seems to be operating in the market for CFCs.
An increasing number of reclaimers are advising preventive maintenance. Much refrigerant is
being recycled because of regulatory stipulations as well; recovery of some types of CFCs from
junked equipment is now required by law in the United States (Global Environmental Change
Report 1994c). CFC recovery will also be influenced by the price of the material. Similarly, the
decision to retrofit a large piece of CFC-using capital equipment will depend on the price and
anticipated future availability of CFCs, as well as on the capital cost of the retrofit investment.
Both retrofitting and recycling will be encouraged by a high price for CFCs, and this price
incentive will, in turn, help assure that existing equipment will be maintainable after the CFC
production ban goes into effect. For all these reasons, the effective stock of CFCs includes all
CFCs now installed in any system. Quite apart from the advantages of an improved allocation of
the last production from 1994-95, a market in inventories would improve the intertemporal
allocation of refrigerants already installed. Policies should be put into effect that support the
normal operation of economic incentives. *>
The effect of intertemporal price spreads is harder to observe so far. For a flow-
dominated commodity, the price remains more or less steady year after year, as new production
can absorb any changes in demand. If CFCs were to continue to be produced, anyone reclaiming
them would receive roughly the same price whether the reclaiming was done this year or next.
Such conditions may not prevail under the new regime for CFCs. For one thing, CFCs will
become worthless once the installed base of equipment using them has been retired or retrofitted.
At that time, the use value of any remaining CFCs will be zero. In the year before demand
disappears, the CFCs would still bear a positive price. The intertemporal spread between the
prices at two dates is a signal to reclaim CFCs earlier rather than later. This price advantage to
earlier reclaiming may not offset other reasons for delay, but it does provide an incentive to
. speed up conversions.
5. The actual U.S. production allowance for 1994 and 1995 is larger than the production projected by the CRS. The
U.S. is allowed to produce 25% of its 1986 Protocol baseline of 328,760 metric tonnes (UNEP 1993b). This is
approximately 180 million pounds per year, or 360 million pounds for 1994 and 1995. The CRS production
estimate assumed that the U.S. would produce only 15% of its 1986 baseline in 1995 (Gushee 1993).
6. Examples of how strongly price can influence commodity recovery and recycling can be found in diverse
markets. One case is that of the silver market in early 1980. Compared to the year before, the price of silver bullion
had increased by a factor of eight. Suddenly, many dentists were investigating ways of saving their used x-ray film
to redeem the silver. Many individuals with a few coins in the back of a dresser drawer thought to take them to
dealers. Best estimates place the amount of silver "reclaimed'' for commercial use to have been on the order of 100
million troy ounces, equal to about 1/4 of commercial bullion stocks and 1/3 of annual worldwide production. This
price increase in silver lasted only a few months; had it been more permanent, the total amount reclaimed would
have been even larger. As it was, many of the procedures for reclaiming silver from x-rays became standard
practice (Williams, in press).
-------
7-9
An important implication of the idea of the' intertemporal price spread is that it is not
necessarily a problem if visible CFC inventories are consumed quickly. For example, at
currently prevailing price levels, owners of large-scale refrigerant systems such as commercial
building air conditioners and supermarket refrigerators may find it advantageous to reclaim
almost all their CFCs, recycling continuously, while a larger fraction of CFCs used to service
mobile air conditioners comes from the remaining virgin production. This pattern of usage
would correspond to a price pattern in which CFCs would be relatively expensive until the point
when the present CFC-using fleet of cars has effectively been retired, with lower CFC prices
thereafter.
Of course, the inventories held in different sectors respond to factors other than the level
and intertemporal pattern of CFC prices. In some industries, the full opportunity cost of holding
CFCs (or of a shortage) may not be observable because the firms do not conduct market
transactions in CFCs. Other motivations can be important as well. For example, automobile
manufacturers are stockpiling supplies of CFC-12 to service vehicles under warranty. Auto
makers' investments in customer loyalty and brand name capital are considerable, and part of
maintaining that investment may be the strategic decision to give car owners the choice of a
higher-priced 134a retrofit or a lower-priced CFC recharge when they have their air conditioners
serviced.
For any commodity with an organized market that has been studied, which ranges from
corn to frozen pork bellies, from shell eggs to heating oil, aggregate visible inventories respond
closely to the relevant intertemporal price differentials. (This relationship was first noticed by
Working for wheat (1933); he called it "the supply-of-storage curve" (1948,1949).) Actually, it
would be more accurate to say that the amount in inventories and the intertemporal price spread
jointly determine one another. The same should be true for CFCs were the market to become
well organized. Even as the price level influences the amount of recycling and the intertemporal
price spread influences the timing of the recycling, the quantity recycled and the timing of
recycling influence the price level and price spread. Something that would change the cost of
retrofitting or something that would change the cost of storage would alter all the quantities,
usage profiles, and prices.
3. CFC Banking and Loan Markets.
The larger the quantity of a commodity that is reclaimed or recycled, the more often
someone who buys it will later want to resell it. A purchase followed by a subsequent resale
involves two sets of transactions costs, such as brokerage fees, negotiating expenses, search
time, etc. A purchase followed by a later resale amounts to having temporary possession of the
commodity. Temporary possession can also be achieved by a loan. A loan, however, requires
only a single negotiation. If this single transaction is even slightly more convenient than the sum
of two regular buy/sell transactions, many parties in the market will prefer to arrange loans rather
than sales.
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7-10
Any number of commodities have developed formal lending arrangements. For example,
silver dealers lease, usually for one year, bullion to chemical firms, who use it as a catalyst and
so have it to return. Recently, a gold lending market has developed, based in London, involving
an amount of gold on the order of one year's worldwide production (Financial Times 24 March
1994). The lease rates on gold, which are reported daily in the Financial Times, have varied
over the last few years from 1% to 5% per annum (payable in dollars, not gold). The main
borrowers in this market have been mining firms, who need funds to develop gold deposits
They borrow gold, usually from a Central Bank, sell the gold and use the proceeds to develop the
mine, then use the mine's output to return the gold to the lender. By doing this they reduce their
risk from fluctuations in the price of gold.
An even more interesting example is uranium. Utilities operating nuclear power plants
regularly borrow and lend uranium, although less so now than in the early 1980s. A utility that
finds itself needing to replace its fuel rods earlier than expected and another utility that finds
itself needing to shut down for extended maintenance arrange for a loan over the interim (even
up to 5 years). These loans are easy to arrange, because the utilities do not store the uranium
individually but in a central depository, which transfers uranium by book entry. Sufficient
interest in these loans has existed for a brokerage firm, Nuclear Exchange Corporation
(NUEXCO), to specialize in arranging them. Pan of the negotiation is over what NUEXCO
calls the "use charge," the fee the borrower pays for the loan. The use charge for uranium has
moved up and down with the availability of loanable uranium, ranging from 1% to 10% per
annum of the value of the uranium. This use charge includes both the ordinary rate of interest
and the intertemporal price spread (Williams 1986, pp. 56-57).
Remarkably, the CFC market is showing signs of this type of commodity lending and
borrowing. Several large wholesalers and reclaimers report that they are keeping on their
premises the supplies of a number of large customers, who have recovered CFCs from some of
their operations and may have later need of the CFCs elsewhere among their facilities. (The
wholesalers and reclaimers have also purified the recovered CFCs.) The customers' inventories
are not segregated but stored together in one warehouse and recorded simply as a bookkeeping
entry. The firms involved call the customers' inventories "deposits" and the whole system
"banking," as indeed it is. So far the "banks" have not begun to practice fractional reserve
banking, which means keeping less in the warehouse than the sum of deposits outstanding,
although at least one wholesaler has thought about it.7 Nor have they begun to arrange loans'
between their customers, though that would be a natural extension of the service they are
offering.
Anything that would encourage the emerging loan market in CFCs would improve
efficiency in the use of those CFCs. Although private trade is spontaneously creating such an
institution, the success of loan markets often depends on other features such as the speed of
enforcing contracts, the contractual provisions in case one party wants to extend the loan, and the
ease of confirming that the appropriate quantities and qualities have been returned. Outside
7. Soon after grain warehouses in Chicago began in the 1850s to store grain in bulk and issue interchangeable
warehouse receipts, they discovered fractional reserve banking, which was later halted by state intervention
(Williams 1984).
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7-11
intervention, for example with the creation of a standard loan form similar to that used for some
other commodities, might speed the development of this marketing form.
The loan markets for silver, gold, platinum, and grain developed because the
commodities were fungible. Indeed, the standardization of those commodities was helpful to the
development of more conventional buy/sell markets. Fortunately, halons and CFCs are also
highly fungible. Once purified, reclaimed CFCs are essentially indistinguishable from virgin
product The presence of trace contaminants seems relatively unimportant CFCs do not need to
be distinguished by age because they do not deteriorate hi storage. Storage itself is relatively
simple and inexpensive: cylinders on pallets in a warehouse, at a fee (currently quoted) of $ 0.01
to $ 0.02 per pound per month, with little fuss in placing or taking the cylinders from storage.
(Grain warehouses, in contrast, must turn the grain frequently to prevent spoilage, and incur
costs comparable to three months' storage expenses to elevate or unload the grain.) In addition,
the costs of transporting CFCs are low as a percentage of value, which means that CFCs in a
large geographic area are interchangeable.
Considering that wholesalers and reclaimers are already holding deposits for some
customers and that the commodity is fungible, the private sector, at least in the United States, is
well on the way to having a functioning intertemporal pricing system for CFCs. The tendencies
are there for regional storage centers to develop. These centralized reserves would make
supplies much more accessible to those who might need them in an emergency, as when a large
chiller fails, and would allow a much more sensible collective allocation. The wholesalers and
reclaimers are the natural overseers of such regional storage centers, as the centers would be
adjuncts of their regular business. Indeed, their business might alter to providing an
intermediary service between customers who might want to borrow or lend, and buy or sell,
CFCs. The wholesalers could also trade on their own account, as when they have an opportunity
to buy CFCs from a building slated for retrofit or demolition, or an opportunity to sign a
guaranteed service contract for several years. Because they are unlikely ever to own more than a
small fraction of the total amount of regional CFCs in use, the wholesalers will not have market
power despite their central position. Further, the more they are encouraged to make public
information about prices and stocks, the more all parties can trade and arrange loans on
comparable terms.
. INCENTIVES AND BARRIERS TO BANKING.
A. Taxes.
Tax policies regarding ODSs must strike a delicate balance. On the one hand, given the
impending scarcity of ODSs being brought about by the Protocol's phaseout schedule, it is a
lecitimate objective of tax policy to see to it that holders of ODSs are not recipients of windfall
profits (Gabel 1994). In addition to equity concerns, the existence of large windfall profits could
blunt the incentive of ODS holders to speed the adoption of substitute technologies, particularly
if the ODS holders are also manufacturers 01 replacement chemicals (DeCanio 1988).
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7-12
On the other hand, a schedule of taxes that is too steep will have the effect of cutting
back ODS use even faster than the projected phaseout program. Taxes that are too high can
undermine the objective of promoting.a rational phaseout timetable. The problem of fixing tax
rates that will mesh with other policy instruments is further complicated by the fact that demand
for ODSs is shifting along with supply; as users make die changeover to alternative technologies,
the downward shift in demand will to some degree match the cutback in supply mandated by the
regulations. This makes price forecasting problematic. It would not have been an easy task to
forecast the price of any of the major CFCs over the past few years, because the pace of
substitution has been surprisingly fast (see Chapter 1 above). The countries that currently tax
ODSs include the United States and Denmark.
The most important impact of ODS taxes, however, is their effect on the incentive to
recover and recycle ODSs. By guaranteeing that users will have to pay a high price for newly
produced CFCs, tax policy can greatly increase the likelihood that a functioning market in
recycled material will develop. A tax on virgin ODSs, whether produced domestically or
overseas, can make recycled ODSs, which are not taxed, economically attractive to users, while
at the same time enabling reclaimers and recyclers to realize a profit despite the costs they must
incur to purify and store the ODSs they collect.
The ODS tax policies of the United States illustrate some of the ways such taxes can
interact with banking. In the U.S., the taxes on "new" ODSs increase over time. In addition, the
United States has also adopted a "floor tax." This is a tax on ODS inventories held for sale or
further manufacture that is equal to the amount by which the excise tax on new ODSs increases
each year. The floor tax has the effect of imposing the same tax on an ODS as would be in effect
in the year the ODS is sold, regardless of when it was first purchased (U.S. Treasury, Internal
Revenue Service 1991).
Table 7.3 shows the past, current, and projected rates of tax on some of the major ODSs
in the United States. For 1996 and later years, the base tax rate is scheduled to increase by $
0.45 per year. There is currently no tax on domestically recycled ODSs, although recycled
imports are being taxed in an effort to control illegally mislabeled CFCs shipped into the United
States (see below).
The differential tax treatment of new and recycled ODS is important in maintaining the
economic attractiveness of recycled material. However, as shown in Section n-B above,
efficient handling of the transition depends on careful management of the remaining production
that will take place between now and the end of 1995. It is appropriate to tax this final output in
order to establish recycling markets as rapidly as possible.
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7-13
Table 7.3
U.S. Excise and Floor Taxes on Selected ODSs, 1990-1995, $/pound
CFC-11 CFC-12 CFC-113 Halon-1211 Halon-1301
Year Excise Floor Excise Floor Excise Floor Excise Floor Excise Floor
1990
1991
1992
1993
1994
1995
Source:
See also:
1.37
1.37
1.67
3.35
4.35
5.35
1.37
0.00
0.30
1.68
1.00
1.00
U.S.
U.S.
1.37
1.37
1.67
3.35
4.35
5.35
1.37
0.00
0.30
1.68
1.00
1.00
1.096
1.096
1.336
2.68
3.48
4.28
1.096
0.00
0.24
1.344
0.80
0.80
0.00
0.2466
0.2505
0.2505
13.05
16.05
0.00
0.2466
0.00
0.00
12.7998
3.00
0.00
0.2466
0.2505
0.2512
43.50
53.50
0.00
0.2466
0.00
0.00
43.2488
10.00
EPA (1994).
Treasury
r, Internal
Revenue Service (1992).
Alliance for Responsible Atmospheric Policy (1994).
There is a risk, however, that the escalating floor tax will encourage early or inefficient
use of 1994-95 production. Rushing to use the 1994-95 output would not be advisable for two
reasons. First, if ozone depletion is worse than anticipated (so that substantial environmental
benefits would result from destruction of existing ODS stocks), and/or destruction technologies
become cheaper, it would be globally advantageous to have delayed some ODS consumption so
that more of the ODS stock can be destroyed. (See Section m-B below.) Second, early use of
the 1994-95 output caused by the escalating tax might run counter to the time profile of use that
would be dictated by efficiency considerations based on the service requirements of different
vintages and types of equipment The tax could come into conflict with the optimal
intertemporal allocation of the remaining ODSs. In addition, imposition of the floor tax on
ODSs that are held for sale but not on those that are held for use could inhibit trading that would
allocate the ODSs to their most highly-valued applications.
As the stock of ODS-using equipment is retired, the pre-tax price of ODSs would
eventually fall to zero because there would be no further demand for them. Maintaining a high
level of tax may mean that some ODS-using equipment will be retired earlier than it would have
been had the ODS not been taxed. This effect is not likely to be large, however, especially when
compared to the urgency of getting recycling equipment and markets into operation. Also,
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because not all countries are using taxes as an instrument of ODS phaseout policy, this effect
will be relatively small on a global basis.
In some Article 5(1) countries, the use of taxes to create an incentive for recycling may
be complicated by institutional barriers to altering existing tax laws and by problems of
collection. In such situations, the most effective policy may be for governments to employ direct
controls to reduce leakage rates, increase retrofitting, and encourage recycling. It is also possible
that the 10-year grace period for Article 5(1) countries has fostered unwarranted complacency
regarding the need to establish recycling infrastructure. Whatever the circumstances of
particular countries, however, an important policy goal should be to create incentives for
conservation and reuse of existing CFC stocks.
It is important that illegally imported ODSs not be allowed to undermine the recycling
and reclaiming effort. In the U.S., the concern is that CFCs are being smuggled to evade the
excise tax (Global Environmental Change Report 1994a; Hebert 1994), while in the E.U., it is
alleged that some imports are fraudulently being designated "recycled," as feedstocks, or for
"inward processing"8 (MacKenzie 1994). Such illicit trade adds to the chlorine and bromine
reaching the stratosphere, and undercuts the reclaiming and recycling efforts of firms that are
complying with the law. Efforts are being made in both Europe and the United States to address
this problem (Global Environmental Change Report 1994d; Environment Watch: Western
Europe 1994).
Good record-keeping and timely reporting of data are crucial to stopping illegal trade in
ODSs. Trade in any kind of Protocol-controlled substance is not permitted between Parties and
non-Parties. Accurate data on the ODSs that are produced by Parties is needed to detect whether
newly-produced ODSs are being falsely labeled as "used" or "recycled." Thus indirectly,
improving compliance with the reporting requirements of the Protocol would help promote
recycling and the development of ODS banking.
B. Uncertainties Regarding Destruction.
A number of destruction technologies are under development. The Montreal Protocol
Parties have designated (1) liquid injection incineration, (2) reactor cracking, (3) gaseous/flame
oxidation, (4) rotary kiln incineration, and (5) cement kilns as approved destruction technologies
(U.S. EPA 1993), but a number of other technologies are the subject of active programs of
research and development. These include plasma processes (Sekiguchi et al. 1993; Deam and
Vit 1992) and laser photolysis. Other methods that could be applied include absorbance, metals
scrubbing, pyrolysis, wet air oxidation, and supercritical water oxidation (Jacobson et al. 1993).
8. "Under the IPR [inward processing release] system, material is allowed to be brought in duty-free for a limited
period to have value added in some way (often simply through repackaging), provided that it is subsequently
reexported....Officials say the customs figures indicate that CFCs brought in ostensibly for inward processing
operations are then being officially imported. The imports show up in customs authorities' data because they are
declared, but the imports are technically illegal because they have not received an import license from the
Commission—a requirement apparently overlooked by customs officials'' (Environment Watch: Western Europe
1994).
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Canada has been researching the possibility of "transformation technologies" that would convert
ODSs into other useful chemicals, and the European Union, the Dutch Ministry of the
Environment, and AlliedSignal will sponsor construction in 1995 of a test plant for a process to
convert CFC-12 into HFC-32 (Global Environmental Change Report 1994b).9
The decision about whether ultimately to destroy ODSs (or to destroy contaminated
ODSs rather than reclaiming them) will depend on the scientific assessment of how much the
existing inventory of ODSs would contribute to ozone depletion, and the effects of that
depletion, weighted against the cost of destruction and premature obsolescence of ODS-using
equipment Enforcement costs and incentive effects will have to be factored into the calculation,
as toothless mandating of destruction could have the unintended effect of encouraging
surreptitious venting.
It should be stressed that banking of CFCs and halons will be socially valuable whether
or not a destruction decision is made. If the decision is made not to destroy existing stocks of
ODSs, then banking operations can increase the efficiency with which those stocks are used. If
destruction is chosen, then banking would be valuable because (a) some of the material would
already be collected at central locations, rninimizing the costs of gathering and transporting it to
the destruction facilities, and (b) the remainder of the material would be accounted for, so that it
could be collected at minimum cost.
It is precisely these advantages that constitute a barrier to banking. Potential ODS
bankers (both central holders and registrants) worry that making their stocks known in such a
public way increases the risk that those stocks might be confiscated by the government should
the science assessment turn worse. Banking is seen as increasing the risk of uncompensated loss
of ODSs. For this reason, data on halon holdings in the United Kingdom are kept "commercially
confidential" between the manager of the 'bank' and the owning companies (UNEP 1993a).
Presumably, the Protocol Parties would come to a decision to destroy existing stocks of
ODSs only if it became clear that the threat to the ozone layer were greater than the loss from
rendering otherwise serviceable equipment useless. But the value of the ODSs used to service
such equipment is much smaller (in monetary terms) than the total value of that equipment. This
means that if the destruction option were chosen, the additional cost of compensating ODS
bankers for the loss of their stocks would be small relative to the cost of the equipment that
would be lost through unserviceability. If governments could somehow guarantee that owners
would be compensated for confiscated ODS stocks, should destruction be the preferred option
later in time, banking would be encouraged.
There arc, of course, problems with this sort of policy. First, it is very difficult for
governments to make such long-term commitments. In democracies, administrations change as
the electoral balance shifts. There is even less expectation of policy continuity if governments
9 UNEP has set up an Ad-Hoc Technical Advisory Committee on ODS Destruction Technologies, and the
Technology and Economic Assessment Panel held a workshop in late 1993 to bring together experts to discuss the
state of the art of ODS destruction (UNEP 1992, 1993c). Another such workshop is being planned for 1995
(Fmkelstein 1995). The program for the 1994 International CFC and Halon Alternatives Conference also included
a session on the disposal and destruction of ODSs (Alliance for Responsible Atmospheric Policy et al. 1994).
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tarn over for other reasons. Second, compensating CDS bankers for their loss in the event the
destruction option is chosen raises an equity problem, because it is unlikely that owners of the
equipment rendered obsolete by ODS destruction would be compensated similarly.
™o uNevertheless' me Parties should consider some sort of insurance guarantee to compensate
ODS bankers in the event that their stocks have to be destroyed to protect the ozone layer «>
Efficient ODS banking would have social benefits greater than the gains that could be captured
by the holders of the stocks. By reducing transactions costs and promoting efficient
management of the existing quantity of ODS, banking can increase the economic security and
lower the costs of all owners of ODS-using equipment during the transition. As in other cases in
which market participants cannot capture all the gains from their activities, a subsidy is justified
particularly since in this case the subsidy need only take the form of an insurance guarantee not
a direct transfer of funds.
Just as the institution of deposit insurance strengthened national banking systems by
making them less vulnerable to runs and crises, an "ODS Deposit Insurance" system would
contribute to the establishment of ODS banking.* This, in turn, would help minimize the costs
and disruptions associated with the transition from ODS technologies to alternatives
Participants in the ODS banking system would be rewarded for their cooperation by being
insured, and ODS-using equipment owners would benefit from the lower costs and increased
liquidity of markets for recycled ODS. An ODS Deposit Insurance system is a very low cost
way the Parties to the Protocol could improve the efficiency, speed, and environmental
effectiveness of the phaseout.
C. Standardization and Quality Control.
Even though recycled ODSs with their fungibility and low transport cost have many
positive attributes for the development of a market, success is by no means assured. Seemingly
trivial decisions about the definition of the standardized commodity or the setup of the market
can matter, and the outcome can be a market that works well versus one that works not at all.
The recent experience of the mung bean market on the Zhengzhou Commodities Exchange in
central China is an example. The provincial authorities, wanting to encourage the use of
organized markets for forward contracts, spent substantial sums developing a state-of-the-art
computer trading system, accrediting local warehouses, defining rules for delivery, etc. They
followed the international standards for the commodity to be traded, which included the
stipulation of a maximum 15% moisture content. Unfortunately, the region's mung beans at
harvest time have a slightly higher moisture content, which does not truly matter because central
China's dry winters remove the excess moisture by springtime. In November 1993, when many
traders brought truckloads of mung beans from some distance to the warehouses at Zhengzhou to
deliver on their forward contracts, their mung beans were declared out of grade. These traders
were forced to default on their contract!*, for which there was a penalty, and to sell their mung
beans at a discount to better-positioned traders. Worse, the organized market as a whole was
10. Mandatory destruction expenses incurred by Article 5(1) countries would be eligible to be covered as
incremental costs by the Multilateral Fund.
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discredited, and for a while trade there reverted to private deals until die contracts' provisions
were changed (Williams 1993).
In the case of CFCs, a minor issue that might magnify into the success or failure of the
trading system as a whole is the size of the cylinders in which the CFCs are stored and
exchanged Some users want large reusable 100 pound cylinders, while others prefer the smaller
disposable 30 pound cylinders. At the moment, the large majority prefers the 30 pound
cylinders. It may be, however, that those users remaining in a few years will prefer the larger
cylinders. If so, any decision now to standardize trade in the 30 pound cylinders may discourage
organized trading in a few years. More generally, the current system of trading, if it is to be set
for all time, must forecast standards desired in the future. The wisest course may be to encourage
standards but have provisions to review and revise those standards.
More problematic than the size of cylinders is the purity of the recycled CFCs.
Individual users, unless they possess the most sophisticated testing devices, cannot determine the
exact chemical makeup of the contents of a cylinder. Indeed, some replacement refrigerants and
blends are designed to reproduce the vapor pressure gradient of the existing refrigerants,
checking of which is the main simple test. Individual users may not even be able to tell that a
chiller or air conditioning system has failed prematurely because the refrigerant most recently
installed was contaminated. There is considerable worry in the mobile air conditioning industry
that "system contamination is already occurring, and without Federal mandatory retrofit fittings
and labels, contamination of the entire fleet and the recycle programs will occur" (Atkinson
1993). Given such concerns, recycled and reclaimed CFCs may acquire a reputation that leads
most users to avoid them. Even if the consequences of impure CFCs are not tins disastrous, the
likely result is that users will gravitate towards the few servicing firms that can guarantee
quality, by length of time in the business, by some long-term servicing contract with insurance
for system failures, by formal bonding, or other such means. Any of these approaches for
ensuring quality CFCs is likely to be more expensive than a credible grading system for the
CFCs when they are placed in the cylinders. Expensive quality control guarantees will also have
the effect of making the trading in CFCs more cumbersome, which in turn makes the allocation
of the CFCs among users less efficient.
Thus, it is very important for the development of a market in stored CFCs to create a
method for grading the contents of the cylinders. Perhaps some seal for the cylinders could be
devised that if not broken would guarantee purity. Possibly reclaimers could be certified as
purifying to the standard. (Some silver recyclers are accredited, with the result that their bars of
.999 bullion are accepted without an expensive and time-consuming assay.) In the United States,
agreement on standards of purity for recycled CFC-12 led to a billion-dollar market for recycling
machines that were later mandated by law (Andersen 1994).
This area of grading and certification of grades is a logical place for government
intervention, because mere are more than private benefits to a credible grading system. Even the
Chicago Board of Trade, where the individual traders are rarely accused of acting other than in
their individual interests, first required, in the 1850s, the collective effort to establish and
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implement grain grading before grain could be traded with the ease of warehouse receipts
CLater the State of Illinois, and then the U.S. Government, took over grain grading.) None of
these grain grading systems has, been operated to make a profit, but rather to reduce the costs of
transactions. Under the circumstances for CFCs, it might well be justifiable to subsidize a
grading system.
IV. CONCLUSIONS AND POLICY RECOMMENDATIONS.
The regulatory prohibition against future production of ODSs has transformed those
commodities into the equivalent of non-renewable natural resources for which the principal
economic issue is the allocation of the remaining stock over time. Even isolated users with their
private stockpiles must make the difficult choice of using their limited reserves in the present or
saving them for the next period (again to face the decision), all the while balancing the
uncertainty of running out of supplies prematurely against the uncertainty of some inexpensive
substitute's becoming available. A market connecting isolated users can only help improve these
decisions, allowing each holder of stocks to judge the collective need for ODSs currently versus
the future. A market among those holding ODSs not only gets the substances to their most
valuable use within each period but, ideally, balances the current period with future periods. The
better such a market functions, the more sensible will be the time profile of the drawdown from
the remaining stocks of ODSs. In the extreme, lending arrangements that allow one user to take
ODSs from a central depository in an emergency while promising to return the equivalent later-
banking in its most natural sense—would enable the whole system to make do with fewer
reserves.
A well functioning market in stocks of ODSs reduces the political pressure from
individual users to relax the constraints on new production. An explicit value on ODSs will also
encourage conservation and recycling, for no one wants to waste thousands of dollars worth of
CFCs or halons in a false alarm or during the failure of poorly maintained refrigeration
equipment Because of this signal to conserve, a well functioning imertemporal market would
preserve much more ODSs, which would be desirable were an inexpensive destruction
technology to become commercially available in the future. The relative scarcity of ODSs over
time also guides, however small the incentive, the decision about the timing of replacing or
retrofitting ODS-using equipment. Indeed, the path of prices for ODSs should itself reflect the
collective result of these decisions about replacement and retrofitting. In short, the prohibition of
future production has made intertemporal price signals more important than ever before.
In the nature of markets, the more traders who use them, the lower the trading costs for
everyone and the more representative the price signals. The lower the trading costs, the more
people are inclined to use organized markets instead of relying on their own reserves. For
example, more recycling of CFCs would encourage a loan market, a loan market would
encourage recycling and maintenance, and so on. These positive feedbacks reduce the costs of
the phaseout of CFCs. Anything that would encourage the existing clearinghouses and notice
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boards for halons, and the incipient central depositories and lending facilities for CFCs would
improve the time profile of the use of those ODSs.
Regulatory uncertainty, particularly fear that it might ultimately become necessary for
environmental reasons to destroy the remaining stocks of ODSs, inhibits the evolution of
efficient CDS banking and recycling markets. Those holding stocks in highly visible locations
such as a central depository worry that their stocks will be confiscated (in effect) by a new
prohibition on use and/or they will be made to pay for the destruction. It is important to
recognize that such concerns increase the current use of ODSs and leave less that could be
destroyed in the future. Unlike the circumstances when new supplies are produced each year and
uncertainty influences only the price in that one year, uncertainty about all future periods
-manifests itself in current prices, through the connection of storage. The prohibition of future
production, which has transformed ODSs into stored commodities, has magnified the effects of
any uncertainty about future regulatory actions.
• Finally, uncertainty regarding the quality of recycled ODSs and the volume of legitimate
trade in recycled ODSs threatens to undercut the prices received by those who have stored.
Equally important, the damage to complicated equipment from impure ODSs could discredit all
reclaimed and recycled material.
Fortunately, policies are available that can address each of these concerns in a
constructive manner. The following recommendations would, in the view of the Economic
Options Committee, contribute to reduction of the global cost of the ODS phaseout by promoting
the emergence of a well-functioning system of ODS recycling and banking.
•X*
(1) Parties should reassure the operators of ODS banking operations that the evolution of
those operations in the direction of becoming full-fledged markets will not be viewed as a
violation of competition policy. ODS clearinghouses should be permitted to handle price
information and to function in ways similar to the operation of other organized commodity
markets. There should be no regulatory barriers to the development of futures markets in ODSs.
(2) The Parties to the Protocol should institute "ODS Deposit Insurance" appropriate for
their various legal and institutional frameworks. This sort of deposit insurance, which would
protect depositors in ODS banks from "crises" that might be precipitated in the future by new
scientific information on the risk to the ozone layer, would encourage recycling and the
development of high-efficiency ODS banks. The cost to taxpayers of ODS Deposit Insurance
would be zero if destruction of ODS stocks were never to become necessary; if the destruction
option must be chosen in the future, the cost of the insurance will be outweighed by the
environmental benefits of avoiding increased atmospheric chlorine loadings.
(3) If Parties choose to use taxes as one of the instruments of accomplishing the phaseout
and encouraging recycling of ODSs, then attention should be paid to making sure the taxes are
not self-defeating. That is, taxes should encourage recycling, not discourage it; taxes should not
create an unintended incentive for venting of ODSs; and taxes should be designed to produce a
minimum of distortion of the efficient intertemporal pattern of ODS use.
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(4) Data reporting should be treated as an essential component of Protocol compliance. Not
only will this focus the attention of die Parties on the tasks they must undertake to phase out
ODSs (this is one of the reasons the Multilateral Fund emphasizes the submission of a country
program as the first step in obtaining aid to meet incremental costs), it will contribute to
recycling and banking by providing information needed to prevent the mislabeling and
smuggling of newly-produced ODSs. In conjunction with bringing data reporting up to Protocol
standards, the Parties should explore ways in which their customs services can become more
adept at detecting and interdicting illegal trade in ODSs.
(5) Parties should explore ways to assure the quality and standardization of reclaimed and
recycled ODSs. Just as food inspection and grading facilitates both internal and external trade, a
system of certification of the purity of recycled ODS would make it easier for owners of ODS-
using equipment to obtain the material they need for servicing. ODSs, because of their
fungibility, low storage costs, and low transport costs are naturals for the development of
intertemporal markets, provided traders can have some assurance about quality. Regulation can
have a positive effect by providing testing and accreditation for recycled ODSs.
No doubt there are additional policies, specific to the circumstances of individual Parties
to the Protocol, that would also encourage recycling and banking of ODSs. Such local initiatives
should also be pursued. What is clear to the Economic Options Committee is that, given the
urgency of the need to phase out production of ODSs, recycling is the key to a smooth transition
to alternative technologies. ODS banking can make a substantial contribution to the recycling
effort, and should be fostered by the kinds of policies listed here. Governments have an
opportunity, by promoting the emergence of efficient ODS banking, to protect the short-term
economic interests of their citizens while enhancing the effectiveness of their participation in the
global effort to preserve the ozone layer.
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APPENDIX A
Assumptions and Calculations Underlying Tables 7.1 and 7.7,.
This Appendix lists definitions of the variables and categories used in Tables 7.1 and 7.2,
and the sources, assumptions, and calculations underlying those tables. All CFC quantities
shown in Tables 7.1 and 7.2 and in this Appendix are in metric tonnes unless otherwise
indicated.
1. Description of Categories.
In use: Tonnes of CFC in existing machinery during the given year.
Retired: Tonnes of CFC taken from machinery which has reached die end of its
estimated life cycle.
From Retrofits: Tonnes of CFC taken from machinery retrofitted for use with non-CFC
substances.
Net Recycled: Tonnes of usable CFC recycled from retrofitted and retired machinery.
Service Needs: Tonnes of CFC needed annually to refill CFC lost due to leakage.
Available: Tonnes of CFC in storage, banking, or recycling facilities.
2. Input Parameters.
O D S: Ozone depleting substance type.
Equipment type: Type of equipment using given ODS.
Initial CFC stock: Tonnes of CFC in use in equipment as of 1994.
Equipment life: Estimated lifetime of equipment in years.
Leakage rate: Fraction of CFC in use leaking to the atmosphere per year.
Retrofit rate: Annual rate at which CFC-using equipment is retrofitted for use with non-
CFC substances.
Recovery rate: Fraction of CFC taken from retired and retrofitted machinery that is
recycled and reused.
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Production (CFC-11): Estimated global production for 1994 and 1995, excluding
production in Article 5(1) countries operating under the 10-year grace period.
Net Production (CFC-12): Estimated global net production for 1994 and 1995, excluding
production in Article 5(1) countries operating under the 10-year grade period (see
below).
3. Equipment types.
Commercial Chillers: Also called Industrial Chillers by some sources.
Commercial Refrigerators: Includes grocery store refrigerators and refrigerated
compartments for transport on tracks, trains and other means of shipping
perishable goods.
Mobile A/C Systems: Includes air conditioning units in cars, trucks, buses, boats and
other means of transportation.
Domestic Refrigerators: Household refrigerators.
4. Computations.
In Use:
(a) begins as initial CFC stock;
(b) after the first year,
In Use = (previous In Use) - (previous Retired) - (previous From Retrofits)
In the case of CFC-12 each equipment type is calculated separately and the results
are then combined.
Retired = [(Initial stock) x (1-Retrofit rate)(Year-l993)]/Lifetime
In the case of CFC-12, each equipment type is calculated separately and the
results are then combined. After a number of years equal to the Lifetime has past,
all equipment of that type is considered to be retired. The base from which the
number of machines to be taken out of service is computed is reduced each year
to account for all retrofits performed to that date. (This avoids double counting
the retirement of previously retrofitted equipment.)
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From Retrofits = (In use) x (Retrofit rate)
In the case of CFC-12, the figure for each equipment type is calculated separately
and the results are then combined.
Net Recycled « (Retired + From retrofits) x (Recovery rate)
In the case of CFC-12, the figure for each equipment type is calculated separately
and the results are then combined.
Available «(Production) + (Net Recycled) - (Service Needs)
Special Case: Mobile A/C Systems
In Table 7.2, the calculations were modified to account for the plausible real-
world assumption that mobile air conditioning systems are not likely to be
serviced during the last three years of vehicles' useful lives. These modifications
change the computation of In Use, From Retrofits, and Service Needs.
CFCs In Use were disaggregated into the 14 production years (1981-1994) of cars
with CFC-using air conditioning systems. Rather than applying the retrofit,
servicing, and retirement rates to a single In Use figure, each automobile model
year is treated individually. CFCs are simply assumed to leak out without being
replaced during the last three years of a car's life; retrofit rates are applied only to
systems which are still being serviced; and all remaining CFC stocks of a given
production year are retired after 14 years of the automobile's life.
5. Derivation/Source of Input Parameters.
Lifetimes:
Source
(CRS,p.4)
(Authors' estimate)
(Authors' estimate)
(Authors' estimate)
Equipment
Domestic Refrigerators
(15-20 years)
Mobile Air Conditioning
Commercial Refrigerators
Commercial Chillers
Estimate
20 years
14 years
20 years
30 years
Note: The Congressional Research Service (CRS) estimates the lifetime of
automobiles in the U.S. to be 10-12 years. A more plausible 14 year lifetime was
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assumed in Table 7.2, partially to account for longer service lives of automobiles
globally.
Initial Stocks (Worldwide):
(Vogelsberg, p.908)
MobileA/Cs
265,000,000 (Autos & Trucks)
250,000 (Buses)
75,000 (Pas. Rail Cars)
+ 33,000 (Ships)
(computation)
265,358,000 (Total Units)
= 100 million
= 200 million pounds
= 2 pounds CFC per auto
(CRS.p.5) U.S. autos with A/C
U.S. CFC inventory in autos
(computation)
(computation)
(2 pounds/unit) x (265,358,000 units) = 530,716,000 pounds CFC in MAC
= 240,945 tonnes
(rounded to) 250,000 tonnes
The figure for initial MAC stock was rounded up considerably to account for the
larger quantities of CFCs used in non-auto mobile A/C systems as compared to
auto A/C systems.
Commercial Chillers
(Vogelsberg, p.908) 112,000 Industrial Chillers
(CRS, p. 5) U.S. Commercial Chillers = 67,000
CFC in U.S. Chillers = 80 million pounds
(computation)
(rounded to)
= 1,194 pounds/unit
1,200 pounds/unit
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(computation)
(112,000 units) x (1400 pounds/unit)
(rounded to)
134,400,000 pounds
61,018 tonnes
61,000 tonnes
Commercial Refrigeration
(Vogelsberg, p.908)
2,000,000 (Commercial Refrig.)
800 (Cargo Ships)
300,000 (Sea-Land)
1,000,000 (Large Refrig. Trucks)
75,000 (Refrig. Rail Cars)
(computation)
3,375,800 units
(CRS, p. 5) U.S. Commercial Refrig. = 2-3 million units (2.5 million)
U.S. Com. Refrig. Inventory = 50 million pounds CFC
(computation) = 20 pounds/unit
(computation)
(3,375.800 units) x (20 pounds/unit) = 67,516,000 pounds
= 30,652 tonnes
(rounded to) = 31,000 tonnes
Domestic Refrigeration
(CRS, p. 5) U.S. inventory in Refrigators = 80 million pounds CFC
(approximation) 1/4 of world total in US = 320 million pounds (world total)
= 145,283 tonnes
(rounded to) = 150,000 tonnes
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Leakage rates:
(CRS,p.5)
Commercial Refrigeration
Commercial Chillers
Domestic Refrigeration
Auto Air Conditioning
(rounded to) Commercial Refrigeration
Commercial Chillers
Domestic Refrigeration
Auto Air Conditioning
22-25%
2-4%
15-25%
.24
.08
.03
.20
Retrofit rates:
These rates are subject to economic incentives and behavioral change. For
purposes of the calculation, authors' estimates were used. One source, (Hubbard
1994) estimates that at an "accelerated" conversion rate it would be possible to
convert or replace existing CFC-11 chillers in 7 to 8 years. This would be
consistent with a maximum retrofit rate of about 13%.
Recovery rates:
These rates are subject to economic incentives and behavioral change. For
purposes of the calculation, authors' estimates were used (see text on MACs).
The 1991 Report of the Refrigeration, Air Conditioning and Heat Pumps
Technical Options Committee estimated that 33% of the refrigerant previously
lost during repair and disposal of industrial refrigeration systems will be
recovered by 1995, increasing to 67% by 2000. This same Report estimates 70%
recovery for CFCs in developing country heat pump applications (UNEP 1991,
pp. 123, 189). The Automotive Consulting Group (ACG) estimates that 0.22 kg!
of CFC-12 will be recovered from each vehicle scrapped (1993). This is
consistent with our estimate of a recovery rate of 50%, given no servicing of the
A/C over the last three years of the vehicle's life. The ACG estimates a higher
recovery rate for retrofitted automobiles. In principle, the recovery rate at
disposal can approach 100%, being less than that figure only to the extent that
scrapped equipment cannot be completely purged of CFCs and that some of the
recovered material is lost when it is purified for reuse.
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Production:
(1) Total allowable CFC production in 1994 was computed as 25% of Montreal
Protocol Baseline production (UNEP 1993b) for non-Article 5(1) countries other
than countries belonging to the E.U., and 15% of Baseline production for E.U.
countries (Kruse 1994).
(2) Total CFC production for 1995 was computed as 25% of Montreal Protocol
Baseline production for non-Article 5(1) countries other than countries belonging
to the E.U., and zero for E.U. countries (Kruse 1994).
(3) 1994 production of CFC-11 was set at 25,000 tonnes, approximately 1/8 of
total CFC production. 1995 production of CFC-11 was set at zero.
(4) Production of CFC-113 was assumed to be 10% of the 1994 allowable and 5%
of the 1995 allowable figures. CFC-113 was about 20% of 1986 Baseline
production (Ozone Secretariat 1993) and about 17% of U.S. CFC production in
1989 (Smithart 1993). .The.lower percentages of CFC-113 production in 1994
and 1995 reflect the speed at which the phaseout of this chemical is taking place.
(5) 3,000 tonnes of CFC-12 production in 1994 and 1,500 tonnes in 1995 were
assumed to go into newly-produced domestic refrigerators. The 1994 figure is
based on 5% of the existing stock (for replacement) in 1994 and half that amount
in 1995 as non-CFC new refrigerators begin to reach the market. It is assumed
that the non-Article 5(1) countries will no longer use CFC-12 in new domestic
refrigerators after 1995. All other new equipment was assumed to be CFC-free.
(6) 6,000 tonnes of CFC-12 were assumed to be used in Metered Dose Inhalers
(MDIs) in 1994 and 1995 (UNEP 1993a). The amount in MDIs after 1995 was
assumed to be exactly equal to new production allowed under essential use
exemptions granted after that date.
6. Sources.
See References at end of Chapter. CRS is the report on the CFC phaseout published by
the Congressional Research Service (Gushee 1993). Vogelsberg (1993) cites the UNEP
December 1991 Report of the Technology and Economic Assessment Panel.
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REFERENCES
Alliance for Responsible Atmospheric Policy, 1994. Ozone Protection Policies: A Briefing
Book (Arlington, VA).
Alliance for Responsible Atmospheric Policy, U.S. Environmental Protection Agency,
Environment Canada, and United Nations Environment Programme, 1994. "1994
International CFC and Halon Alternatives Conference: Stratospheric Ozone
Protection for the 90's," Program (Arlington, VA).
Andersen, Stephen O., 1994. "The Importance of Chemists in Protecting the Global
Environment," paper presented at the 14th International Symposium on Fluorine
Chemistry, Tokyo, Japan (July 31-August 5).
Atkinson, Wade, 1993. "The 1993 International CFC and Halon Alternatives Conference,"
paper presented at the Conference (Washington, DC), October 20-22.
Automotive Consulting Group, 1993. "CFC Phase-Out Analysis and the Determination of
the Required Strategic Reserve: Final Report," presented to the American
Automobile Manufacturers Association and the Association of International
Automobile Manufacturers (Ann Arbor, Michigan).
Brunner, Walter/and Bruno Covelli, 1992. "Halon Bank Management in Switzerland,"
paper presented at the 1992 International CFC and Halon Alternatives Conference
(Washington, DC), September 29-October 1.
Catchpole, David V., 1993. "The Halon Recycling Corporation: A U.S. Approach to Halon
Bank Management," paper presented at the^ 1993 International CFC and Halon
Alternatives Conference (Washington, DC), October 20-22.
Chemical Marketing Reporter, various dates, 1986-1994.
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MTM273.
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Montreal Protocol, 1992a. "Meeting of the Needs of Article 5 Parties for Controlled
Substances During the Grace and Phase-Out Periods" (Draft Report), Eighth Meeting,
Montreal, 19-21 October.
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_, 1992b. "Addendum: Meeting of the Needs of Article 5 Parties for
Controlled Substances During the Grace and Phase-Out Periods," Eighth Meeting,
Montreal, 19-21 October.
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CHAPTERS
TRANSFERABIIJTY OF THE MONTREAL PROTOCOL
TOOTHER
INTERNATIONAL
INTRODUCTION.
Although there are currently over 140 international agreements dealing with
environmental concerns, .the Vienna Convention for the Protection of the Ozone Layer (1985)
and the Montreal Protocol on Substances that Deplete the Ozone Layer (1987) and its
subsequent amendments in London (1990) and Copenhagen (1992)-hold a distinctive place
in the spectrum of international environmental agreements (ffiAs). Generally, ffiAs deal with
specific problems or regional issues of significance. The Montreal Protocol was the first
attempt to come to deal with a global problem. The Montreal Protocol process has many
lessons for those negotiating new lEAs. These lessons must necessarily be qualified to reflect
the nature and characteristics of the environmental problems under consideration if they are
to be meaningful and effective. In this chapter an attempt has been made, on the basis of a
critical appraisal of the Montreal Protocol process, to reach constructive conclusions for the
negotiation of other lEAs.
The negotiations for the Montreal Protocol brought to the surface, for the first time
in international discussions, the urgency of environmental problems. The scientific analysis
of the causes of the depletion of the ozone layer were assessed, the physical and socio-
economic consequences of the depletion were identified, and the urgent need for remedial
action on a global level accepted. The sense of urgency reflected a global unease that large
problems were emerging as a result of the mismanagement of natural resources, trans-
boundary pollution and the generation of toxic wastes, and the overloading of the assimilative
capacities of natural systems.
The international momentum for the successful completion of the Montreal Protocol
process, particularly during the period between the approval of the Protocol in 1987 and the
signing of the momentous London amendments in 1990 is not generally known or appreciated.
The Ac Hoc Working Groups established to identify, assess and negotiate contentious issues
worked hard and with united determination to produce credible results. It is to be hoped that
a similar spirit and sense of dedication will mark not only the resolution of the
implementation problems in those countries operating under Article 5(1) of the Protocol but
also those other, perhaps more complex, global environmental challenges that lie ahead.
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The Montreal Protocol process was driven by the realization that it would be
unrealistic to expect uniform responses from all Contracting Parties and thus a sophisticated
international regulatory regime was needed. Such a regime would have to take account of a
number of factors, including the legislative frameworks of those countries prepared to
implement an international environmental agreement, the policy instruments that could be
used for the purpose, the technical and organizational information systems available for ODS
phase-out, public awareness of the nature of the commitments undertaken, and, above all, the
institutional capacity to implement the measures required to comply with the commitments
that are accepted by becoming a Party to the Montreal Protocol.
Some aspects of the problems faced by the Montreal Protocol process were dealt with
more successfully than others for various reasons. But these different aspects yield valid
lessons with respect to the difficulties that arose during the negotiations and to the procedural
and substantive approaches that were employed to meet them. It is equally instructive to
examine the early recognition of critical issues and the attention paid to them from the
beginning of the negotiations.
One aspect to which insufficient attention was paid in the early stages of the Montreal
Protocol process relates to the question of the "right mix" of measures (e.g information
exchange, training, investment projects, economic incentive structures to expedite
implementation of phasing-out of ODS operations.etc) that should be tailored to the needs of
individual countries. During the Montreal Protocol process this question was indirectly and
implicitly, but not explicitly, addressed. If the issues had been addressed properly, guidelines
could have been established. In their absence, the Multilateral Fund has had to develop
operating procedures in the difficult and critically important field of implementation policy
whilst being stretched to deal with day to day management decisions. It will be seen that the
origin of this problem was "design fault" compounded by the initial difficulties of establishing
an operational Multilateral Fund Secretariat and its working arrangements with the
implementing agencies. The international community is still struggling with the consequences
of this design fault, not least with a new, small and relatively inexperienced Secretariat trying
to "manage" large, powerful and established international institutions in pursuit of the cost-
effective implementation of the Montreal Protocol in the Article 5(1) countries.
Similarly, there was a lack of early attention to implementation problems (which were
considered during the Montreal Protocol process to be a "second generation" issue). There
was, thus, no attempt made during the negotiations for the Montreal Protocol or any of its
subsequent amendments to define the key elements that should underline policy development
e.g inter-relationships between instruments to create a consistent and effective framework of
economic incentives or a typology of instrument use by country type defined in terms of ODS
production and usage or the identification of barriers to progress in information exchange,
establishment of mechanisms to evaluate progress and make recommendations in this
important field, or, for that matter, a careful analysis of certain technical issues, such as, "
destruction technologies'V'altemative disposal technologies", etc. that could be expected to
come on stream in the future. It would also have been helpful to distinguish the different
categories of Article 5(1) countries in a more explicit way. Country characteristics, such as,
status as importer versus producer of ODS, low versus high ODS consumption, export versus
domestic use of ODS and products containing ODS, etc., could have been used for the
purpose thus laying the foundations for more meaningful analyses and cross-comparisons.
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Finally, there was the neglect of remedial measures that already existed or could be
expected to emerge over time. Little attention, for example, was paid to the implications of
the Basle Convention or to the prospects of ODS banking on phaseout schedules.
There are both (a) general and (b) specific lessons from the Montreal Protocol process
that could be transferred, with benefit, to the negotiation of other EEAs.
DL General Lessons.
One general element which deserves consideration in the negotiation of other
international environmental agreements relates to the early and common acceptance of the
applicability of the experience gained by the industrialised countries to the design and
implementation of phaseout regimes in the Article 5(1) countries. This was a result of the
tapping of the "Porter hypothesis" (Porter,....) namely, that creative responses to environmental
regulatory pressures are but one example of the more broad-based capacity of successful firms
to respond to market challenges. Ultimately there is a trade-off between responding to
environmental regulations and meeting other market challenges but there was an early
awareness in UNEP, as among a number of negotiating countries, during the Montreal
Protocol process that the capacity for creative responses to ODS phaseout would eventually
lead to a reduction in compliance costs relative to initial estimates. This was, of course,
predicated on the assumption that the benefits of the environmental regulations in question
justify the costs of such actions in terms of an overall increase in economic (or social)
welfare.
At the same time, the preparatory processes as well as the actual negotiations leading
to the Montreal Protocol and its subsequent amendments highlighted the need to strike a
balance between national interests and the global well-being. It was seen that in this effort,
nations, both large and small, must take part in a common endeavour to address shared
environmental problems _ those that go beyond the borders of nations and cannot be properly
solved by any one country or group of countries.
Another consideration that was generally accepted was the need for a multi-
disciplinary and multi-faceted approach to international environmental challenges. It was
considered essential to bring together scientists, industrialists, economists, engineers,
environmental activists and political decision-makers. Science and industry, for example, have
had a pivotal role in the process of negotiating not only the Montreal Protocol but also in the
establishment of the Framework Convention on Climate Change and the Convention on the
Conservation of Bio-diversity. When UNEP began negotiations leading to the Montreal
Protocol, industry, including multi-national corporations (MNCs), were most helpful in
providing experts, detailed data on global consumption levels of different types of ODS, and
other supporting expertise.
One concern that was critical during the Montreal Protocol negotiations, and is
currently plaguing the negotiations of other international environmental agreements, is the
balance of scientific certainty on the causes and consequences of damages to natural systems.
It was, however, concluded during the negotiations that environmental issues in general, and
atmospheric conditions in particular, were rarely, if ever, blessed with scientific certainty -
doubts and substantial margins of error in quantitative estimates persisted. The wise course,
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in the circumstances,was to follow the precautionary principle. When UNEP first started to
estimate future ozone layer depletion levels in the early 1970s, estimates varied widely from
year to year. As the years went by the estimates became more sharply defined and by the
summer of 1989 had confirmed mat stratospheric ozone depletion was much worse than
previously thought Two years later, in September 1991, a scientific report prepared for UNEP
by eighty of the world's leading atmospheric scientists concluded :
(a) that the rate and scope of stratospheric ozone depletion was, indeed, far worse
than previously estimated;
(b) that depletion now covered North America, Europe, the USSR, Australia, New
Zealand and a large part of South America in both spring and summer;
(c) that thousands of people were at risk from skin cancer, eye cataracts, and a
weakened human immunity system; and furthermore,
(d) that increased UV radiation was contributing towards a stunting of plant
growth and weakening the reproduction of phytoplanktons, the very basis of
the marine food chain.
Since the 1991 international scientific assessment, a deeper understanding has evolved
of the chemical changes in the atmosphere and their relation to the Earth's stratospheric ozone
layer and the radiative balance of the climate through laboratory investigations, atmospheric
observations, and theoretical and modeling studies (UNEP, Executive Summary of the
Scientific Assessment of Ozone Depletion: August 1994). The key findings which further
strengthen the Jinks between human-influenced sources of chemical changes and stratospheric
ozone depletion were that:
(a) the atmospheric growth rates of several major ozone-depleting substances
haveslowed, demonstrating the expected impact of the Montreal Protocol;
(b) peak total chlorine loading in the stratosphere is expected during 1997-1999;
(c) record low global ozone levels were measured in 1992 and 1993 - in part due
to perturbation associated with the volcanic eruption of Mt. Pinatubo in 1991;
(d) downward trends in total-column ozone continues to be observed over much
of the globe;
(e) the Antarctic ozone "holes" of 1992 and 1993 were the most severe on record;
and
(f) the link between a decrease in stratospheric ozone and an increase is surface
ultraviolet (UV) radiation has been further strengthened.
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One issue that first arose during the negotiations for the Montreal Protocol but is now
found to be common to other international environmental agreements as well is that if we
want a global endeavour, based on global partnership, a shared global commitment is needed.
One of the first, although not unexpected, concerns expressed by the Article 5(1) countries
was that if they were expected to enter into legally binding commitments to phase out ODS
within a specified timetable they must also have in return equally binding commitments to
have the necessary technology or the financial resources made available to them.
The remedial framework for dealing with these two problems - namely, (a) the
innovation and transfer of appropriate technology and (b) the transfer of financial resources
to the Article 5(1) countries, which was considered essential for the ODS phaseout on a
global scale - is at the heart of the Montreal Protocol and particularly its London amendments
What makes the Montreal Protocol a role model for subsequent international environmental
agreements is the open and transparent way these issues were treated. The burden involved
in the transfer of resources was considered as the first real test of whether the international
community was truly prepared to enter into a global bargain designed to manage risks to the
global environmental. Nor was the flow of resources considered as additional aid or global
philanthropy; it was regarded as an investment in survival.
In January 1991, the Multilateral Ozone Fund of up to US$240 million over a three
year period paid largely by industrialised countries and intended to provide financing for and
to facilitate technology transfer to Article 5(1) countries - became operational In many ways
it constitutes a basic bargain between the developed and developing countries on which future
international environmental compacts would do well to build. For one thing it shows that
while the cost of remedial action - in terms of global emission targets, best available
technology, and comprehensive consumption strategies - could be high, it is likely to be much
less than the costs of delay or inaction.
One general concern which contributed a great deal towards the success of the
Montreal Protocol process, was that any funding mechanism set up to deal with the transfer
of resources to the Article 5(1) countries must be democratic, transparent, and not tilted in
favor of one or the other groups. The discussions, often acrimonious, that are currently in
progress in terms of the institutional arrangements, decision-making procedures, and the
allocation of resources in the prospective management of the Conventions for Climate Change
and Conservation of Bio-diversity as well as the Global Environmental Facility itself reflect
built-in conflicts that can arise when the lessons learned so painfully during the Montreal
Protocol process are ignored.
This is not to endorse all the institutional arrangements initiated by the Montreal
Protocol. A distinction must be made between what is politically viable and what is
economically efficient. Two issues arise in the consideration of economic efficiency in the
context of the implementation of the Montreal Protocol. First is the question of "benefits"
from the Multilateral Fund disbursements. Benefits were never discussed during the Montreal
Protocol negotiations except in such broad political terms as the advantages of ODS phaseout
or the successful conclusion of an international agreement (which are not quantifiable) and
certainly not estimated in a cost-benefit framework. Nor would it be desirable to do so now.
Second, political issues cannot be solved by appealing to economic arguments.
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One aspect of the Montreal Protocol institutional arrangements which is weak and
cannot be recommended for transferability relates to me Secretariat of the Multilateral Fund.
This is the result, in large part, of structural design failures; it does not constitute a reflection
on the performance of the Secretariat within the existing structures.
IEL Specific Lessons.
The international regulatory regime was based on the perception (new in 1990) that
the Montreal Protocol process would inevitably generate a set of organizational adaptations
which would be as important and effective as the technological innovations. This perception
has been found to be valid not only in industrial countries but in many Article 5(1) countries
as well. Retrofit technologies are a case in point. Without appropriate organizational back-up
the conversion from ODS would have been difficult, more costly, and prolonged. Furthermore,
anticipated changes down the time-path (and well into the future) act as powerful incentives
in this process of accelerated conversion.
In the negotiations leading to the London Amendments (1990), several developing
countries came to UNEP to express their deep concern over what they called the "indirect"
costs to their economies of compliance wiuYIhe international regulatory regime and sought
relief both in terms of technical assistance and financial support. This led to a greater
understanding of the "transaction costs " involved in eliminating ODS, notably, building up
public awareness within the country, education and training within the industry, making a
survey of who are the users of ODS and at what level, and the overcoming of delays in
project investment once a changeover has been decided. It is these considerations that lay
behind the creation of the Multilateral Fund. But although the Multilateral Fund was created
for 4he right reasons, (a) it was not given the proper level of funding to meet both the
transaction costs and the incremental costs especially when the investment barriers to the
application of new technology became higher and the crunch comes (i.e the period about to
begin) and (b) its Secretariat, as already noted, was denied effectiveness because of structural
design failures.
Generally speaking, the regulatory regime embedded in the Montreal Protocol process
is based on performance standards, that is to achieve a level of ODS elimination irrespective
of the technological means employed. There were those during the negotiations who would
have preferred "command and control" approaches that often specify the technological means
to be employed. Fortunately, this route was not taken. The Montreal Protocol provides a
regulatory framework which encourages innovation to meet phaseout targets and has a built-in
incentive to search for cost-effective technological alternatives to ODS usages.
In considering the transferability of the Montreal Protocol experience it is worthwhile
to keep in mind certain policy-driven aspects. One such aspect relates to the role played by
scientific research and technological innovations in securing breakthroughs when problems
related to products and processes had seemed at first encounter to be intractable. For instance,
it was commonly agreed, almost accepted as conventional wisdom, a few years ago that the
use of CFC 113 as a solvent in the electronic industry could not be changed and, thus, there
were grounds for its exclusion from the list of controlled substances. But further research (by
industry itself) showed that ODS solvents could be eliminated in the high-tech electronics
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industry _ especially as the life of the products was short. There is a lesson here (that is to
say the careful examination of the kind of attention paid by the industry to research and the
life-time of the products) from the Montreal Protocol experience which needs to be kept in
mind.both by governments and industry: the solutions sought should be industry and product
specific. f
There is another lesson from the Montreal Protocol experience which is equally valid-
a judicious use of carrots (higher profits through technological breakthroughs) and sticks (the
prospect of elimination of CFC production) to drive the engine of both technological
innovation and organizational efficiency. It is only necessary to review the new technologies
and management changes currently deployed in the field of ODS elimination to see the
potency of the international regulatory regime that was put in place by the Montreal Protocol
For industries that are less research-orientated or have products with longer lifelines
it becomes necessary, in terms of the Montreal Protocol experience, to pay close attention to
two aspects of the changes sought: the changes should be at minimum cost and with the least
industrial disruption. If the perception is that the international environmental agreements in
the making do not have or foster these objectives, there will be little willingness on the part
of governments or industry to co-operate. But costs and industrial disruption cover a large
canvass and require judicious attention to such problems as transitional regimes, uncertainty
and indecision m regulatory frameworks, and long-term development goals, especially for the
Article 5(1) countries.
It is equally necessary to ensure that change, innovation, and replacement of
technology are not carried out by huge government bureaucracies but by existing business
units This will, of course, not be possible in all Article 5(1) countries but a careful mix of
regulations and co-operation between the public and private sectors is in order whenever and
wherever possible.
In evaluating the Montreal Protocol experience, attention must necessarily be paid to
the role of the Multilateral Fund in providing assistance to the Article 5(1) countries Clearly
such assistance must be based on objective estimates of need arising from (a) the preparation
of phase-out strategies for the country concerned and (b) the incremental costs involved in
them. A practical way to develop such national strategies is to estimate, in terms of different
scenarios, the rates of growth of demand for the relevant products and the costs (and
availability) of ODS substitutes. These issues have been discussed in detail in Chapter 3
Incremental costs remain an imprecise concept. Estimates of incremental costs in the country
case studies undertaken so far vary widely possibly because of differences in the specification
of the baseline scenarios.
As related in Chapter 4, the great variety of procedures to deal with the phaseout of
ODSs offers many specific elements with a high prospect for transferability. It is for the
national governments to ensure that commitments made in ratifying the Montreal Protocol are
implemented. These commitments are contained in the timetable for the phaseout of different
ODSs and reporting on the action taken to the Contracting Parties. In assuming this legal
responsibility, the Contracting Parties must ensure that at least some elements of the three
main policy instruments have been put in place - namely, command and control measures
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economic instruments (i.e market mechanisms), and, finally, voluntary approaches. The
lessons learnt in the Montreal Protocol process indicate:
(a) that the different approaches are not mutually exclusive ie they could be used
jointly;
(b) that the approach must reflect the country's own legislative and fiscal culture,
local industry circumstances, the speed at which ODS phaseout is to be
achieved, the feasibility of enforcement, and the cost-effectiveness of
alternative policy approaches; and
(c) that the experience gained so far is rich in variety and content.
In a related field, the reliance placed during the negotiations on the Montreal Protocol
and its Amendments on the need and procedures for monitoring compliance means that the
Contracting Parties have accepted an obligation to report on their ODS transactions. This has
not been an easy responsibility to meet, especially for the Article 5(1) countries. It required
a modification of the Custom Code from describing chemicals according to their functions to
a description based on their chemical properties. New sub-headings had to be added to the
national statistical nomenclatures. This requires administrative regulations to check both on
misreporting by importers and misrecording by Customs authorities.
Attention must also be drawn to the information exchange activities generated by the
Montreal Protocol process. These activities are centered around UNEP IE/PAC OzonAction
Programme and comprises the query response service, the on-line and diskette OAIC, the
library, sectoral data collection projects and outreach activities. It was clear from the outset
of the negotiations for the London Amendments (1990) that it would be necessary to respond
effectively and efficiently to queries from users on both technical and policy subjects as the
process of ODS replacement gathered momentum. What was not anticipated was the level and
intensity of demand for the information services and their extensive use of mail, telephone,
fax, telex, cable as well as through the message centers of the on-line OAIC. Another area
of interest has been the demand for outreach activities to inform Article 5(1) countries of the
information services available to them. Chapter 5 details the modus operandi of these
programmes which have a significant element of transferability.
During the Montreal Protocol process certain specific problems arising from the impact
of international trade on the regulatory regime for the replacement of ODS were also
considered. Two sets of trade problems were considered during the negotiations for the
Montreal Protocol. First, those that might arise from trade in ODS between non-signatory and
signatory countries (keeping in mind the need to encourage non-Parties to become Parties to
the Protocol). Second, those that might arise from the grace period extended to the Article
5(1) countries (to obviate a concern that industrial countries required to phase out ODS by
1995 might move production to Article 5(1) countries). Both sets of problems had to be
contained in an effective manner if the ODS phaseout was to be on track. The trade strategies,
which were highly sensitive in their remit, were largely successful in the realization of their
objectives. Chapter 6 deals with the trade problems encountered in the Montreal Protocol
negotiations and the solutions put in place together with the exemptions, compatibility with
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GATT provisions, and related issues. Clearly.there are striking elements of transferability in
dealing with trade questions, especially since these questions are likely to become increasingly
important in the aftermath of the Uruguay Round, the creation of WTO, and the growing
relevance of environmental issues in trade negotiations
A realization that has grown in recent years is that international agreements -
particularly in the field of environment because of the strong inter-relationships that exist
among natural systems and the common features of the regulatory frameworks they put into
place - could be both compatible and mutually reinforcing. This opens up the possibility of
developing international environmental agreements not considered to be feasible so far.
Consider, for example, trade in ODS under the provisions of the Montreal Protocol and the
Basel Convention on the Transboundary Movement of Hazardous Wastes and their Disposal.
Clearly, the revised Basel Convention that lays down more stringent regulations on the
movement of hazardous wastes also covers the transboundary movement of wastes of
controlled substances. There are, however, as noted in Chapter 6, certain exceptions to such
applications: it would be beneficial both to the implementation of the Basel Convention and
the Montreal Protocol if such exceptions were to be maintained.
Considerable experience has now been gained, in the context of the Montreal Protocol
process, with CFC and Halon banking. The intertemporal allocation of ODS stocks, including
organizational arrangements which have strong elements of transferability both in their
conceptual and operational aspects. Chapter 7 describes the mechanism in some detail and
identifies its ramifications. The heart of the matter is that whenever we are dealing with
products, processes or chemicals that (a) impact on the environmental well- being and (b)
have become essentially non-renewable resources as a result of a phaseout of production, the
possibility of devising an effective "banking" system becomes an useful and attractive option.
Both technological and organizational breakthroughs are still needed but there is a strong
impetus to realize them in the context of the replacement of the ODSs.
It will be seen that "banking" arrangements constitute a powerful incentive to recover
ODSs in all forms except when leaked accidentally to the atmosphere. The frequency of such
accidents is, of course, in itself a function of the monetary value of the ODSs. High prices
for recycled ODSs as supply restrictions reduce virgin supplies creates an incentive for
"banking" operations leading to greater attention being paid to reducing losses to the
atmosphere through improved handling and equipment maintenance practices as well as to
ODS recovery.
IV. Concluding Remarks
The negotiation of new international environmental agreements should be viewed as part of
a cumulative learning experience in mat full use should be made of the foundations already
laid for such agreements. The distinctive aspect of the Montreal Protocol is that it was the
first IEA to strike a politically feasible working balance between the scientific, technological
and economic factors relevant to the achievement of an explicit global environmental
objective.
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The several chapters of this Report illustrate that Acre are many elements of
"transferability" in the Montreal Protocol process that could be usefully incorporated in the
design of new lEAs. Even so, the selection of which specific elements to transfer must be
evaluated with respect to the experience already gained and also have regard to the specific
characteristics, needs and constraints of the new lEAs in the making. In this way, we can
continue to make steady progress up the "learning curve" associated with the design of lEAs,
and thereby to develop progressively more efficient instruments for managing the risks to the
global environment
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ADDENDUM:
1. The decision of the Parties to list methyl bromide as a controlled substance under the
Montreal Protocol has led to a number of studies addressing the economic costs and benefits
of partial or complete phaseouts of its "consumption". The Chair of the Economic Options
Committee, in consultation with EOC members and others, has prepared this Addendum based
on critical appraisals of the studies listed as references.
2. The key issues are the economic costs and benefits of methyl bromide control options
Assumptions regarding the availability, cost, and effectiveness of alternatives to
methyl bromide uses are major determinants of the effects of the various control options on
economic welfare. Differences between national control options can influence trade flows
with significant implications for consumer and producer welfare. The economic benefits of
methyl bromide use controls are determined mainly by converting estimates
vIlurBelrage ? ^ ^'.^^^ *** »*«»» «»• depletion, into monetary
value* Both the cost and benefit estimates are subject to uncertainty. Methodologial choices
can influence the extent to which these estimates
suppress or expose inherent uncertainty.
3. The key findings of this review are as follows.
All of the identified economic studies focus on the assessment of national
costs and benefits. Some allow for the domestic effects of selected bilateral
trade flows, but none seek to determine the respective costs and benefits for
several countries engaged in multilateral trade.
In general, the assumptions used in many of thesestudies do not give
adequate attention to the dynamicso f technological change under
regulatory stimulus. Experience with other ODS controls under the
Montreal Protocol suggests that this deficiency Heads to substantial
overestimation of phaseout costs.
Most of the studies are based on phaseout scenarios that bear little or no
relation to the current or prospective control regimes under the Montreal
Protocol. In particular, studies based on assumptions of immediate phaseout
and dependence on only those alternatives currently available generate results
that have very limited relevance to likely costs and benefits of methyl bromide
controls under the Montreal Protocol.
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4. Suggested priorities for the next phase of economic studies on control options for methyl
bromide are:
the design of economically efficient control options consistent with the
Montreal Protocol;
assessment of the magnitudes and distributions of the costs and benefits
between the Parties to the Protocol associated with the respective control
options; and
assessment of the economic feasibility and cost-effectiveness of technically
feasible alternatives to specific methyl bromide uses.
5. The results of further assessment of all available relevant economic studies will contribute
to the mandated TEAPReport to the Ozone Secretariat on methyl bromide control options
scheduled for March 1995.
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LIST OF STUDIES REVIEWED
1.
2.
3.
4.
5.
6.
7.
8.
9.
11.
12.
13.
UNEP Methyl Bromide Technical Options Committee, (March 1994) "Essay for the
Multilateral Fund".
UNEP Methy Bromide Technical Options Committee", (November 1994). "1994
Report of the Methul Bromide Technical Options Committee.
Association of the Methyl Bromide Industry of Japan, (1993). "A Study of Technical
Options on Release Inhibition of Methyl Bromide Into the Atmosphere in Soil
Fumigation".
Ferguson, Walter, (April 1993). "An Economic Assessment of Banning Methyl
Bromide". The National Agricultural Pesticide Impact Assessment Program (NAPIAP)
United States Department of Agriculture.
Rostov, Will, (January 1994). "Prospering Without Methyl Bromide: A Critique of the
USDA's Analysis of a Methyl Bromide Ban". Pesticide Action Network.
United States Department of Agriculture, (Aprill993). "The Biological and Economic
Assessment of Methyl Bromide".
Dudley, Susan E. and Brian F. Mannix, (May 1993). "Comparing the Benefits and
Costs of EPA's Proposed Phaseout of Methyl Bromide".
Standing, David, Cherisa Yarkin, David Zilberman, Jerry Siebert, Alan Marco
(February 1993). "Economic Impacts of Methyl Bromide Cancellation " Department
of Agricultural and Resource Economics, University of California at Berkeley.
.Deloitte & Touche, (December 1993). "Methyl Bromide Alternatives, Substitutes and
Recovery Systems". Prepared for Agriculture and Agri-Food Canada.
10. Agriculture Canada, (February 1994). "Methyl Bromide: Alternatives, Substitutes and
Recovery Systems". Controls Workshop/Consultation", Ottawa 2-3 November 1993.
APOGEE RESEARCH, (November 1993). "A Study to Assess Alternative Economic
Options Available for the Control of Production and Consumption of Methyl Bromide
[Phase 1]". Prepared for Environment Canada.
Hassid, Nehemia and Alon Negbi, (1994?). "The Macro-Economic Effects on the
Isreali Economy of a Possible ban on the Use of Methyl Bromide". Executive
Summary only.
British Pest Control Association, (August 1994). "Methyl Bromide and the Montreal
Protocol - The Present Situation".
14. Methyl Bromide Global Coalition, Monitor. Vol.1, No.l (Spring/Summer) 1994.
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15 "Executive Summary of the International Workshops on Alternatives to Methyl
Bromide For Soil Fumigation: Rotterdam (19-21 October 1992) and Rome (22-23
October 1992).
16. Bonte, Jean-Christophe, (June 1994). "Economic and Social Effects of Banning Methyl
Bromide for Soil Fumigation in France", Comite Francais d'Etude du Bromure de
Methyle.
17. Deloitte & Touche Management Consultants, (January 1994). Estimating Economic
and Trade Impacts of Withdrawing Methvl Bromide: Final Report. Prepared for
Agriculture and Agri-Food Canada.
18. California Agriculture. (May-June 1994), Volume 48, Number 3. University of
California: Division of Agriculture and Natural Resources - "Reports on Research in
Progress".
(1) Editorial: "After Methyl Bromide: No Easy Answers" (pp 7-9).
(2) David Sudding et. al., "Methyl bromide regulation: All crops should not
be treated equally", (pp 10-15).
(3) David Sudding etal., "Cancelling methyl brmide for post-harvest use
to trigger mixed economic results", (pp 16-21).
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APPENDIX A: MEMBERS OF THE 1993 UNEP ECONOMIC OPTIONS COMMITTEE
1. Dr Robert Van Slooten (Chair)
Department of Trade and Industry
Economics Market Intelligence & Statistics Div
Room 237
151 Buckingham Palace Road
London SW1W 9SS
United Kingdom
Tel: 071 215 1829
Fax: 071 215 2909
2. Dr Yusuf J Ahmad
Environmental Consultant
2141 Wisconsin Avenue
Apartment 204
Washington D.C., 2007
U,S.A.
Fax: (202) 338 7488
Tel: (202) 338 2307
3. Dr Penelope Canan
Sociology Department
University of Denver
Denver, CO 80208-0209
U.S.A.
Tel: (303) 871 2049
Fax: (303) 871 2090
4. Dr Suely M Carvalho
Ozone Protection Coordinator
University of Sao Paulo - IEE
Institute de Electrotecnica e Energia
Av. Prof. Almeida Prado 925
05508-900 Sao Paulo
Brazil
Tel: 55-11-818-4720
Fax: 55-11-210-7750
E-Mail: Internet: suely@iee.usp.br
5. Dr Stephen J. DeCanio
Department of Economics
University of California
Santa Barbara, California 93106 USA
U.S.A.
Tel: 805 893-3130
Fax: 805 893-8830
Internet: decanio@econ.ucsb.edu
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Mrs Mavis Holmes-Hanek
Ministry of Health & Environment
PO Box N3729
Nassau
The Bahamas
Tel: 809-322-7425
Fax: 809-322-7788
7. Dr Ahmed Ibrahim
Secretary General,
Environmental Research Council
Academy of Science Research and Technology
80 Ahmed El Zayat Street
Dokky - Post No. 11211
Cairo, Egypt
Fax: (Zurich) 411-830-5665
Tel : (Zurich) 411-830-2857(2333)
Fax : (Cairo) 202-303-3581
Tel: (Cairo) 202-701-655
8, Mr Peter Landymore
Overseas Development Administration
Room V/309
94 Victoria Street
London SW1E 5JL
United Kingdom
Tel: (44) 71 917 0076
Fax: (44) 71 917 0679
9. Dr Anil Markandya
Harvard Institute for International Development
One Eliot Street
Cambridge, Massachusetts 02138
U.S.A.
Tel: (617) 495 5664
Fax: (617) 495 0527
10. Mr Masahiro Miyazaki
Director, Ozone Layer Protection Office
Basic Industries Bureau
Ministry of International Trade and Industry
1-3-1 Kasumugaseki, Chiyoda-ku
Tokyo 100, Japan
Tel: +81 3 501 4724
Fax: +81 3 580-6347
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APPENDIX B: PEER REVIEW LIST
1. Dean Alfred Aman, Jr.
Law School
Indiana University
Bloomondale, Indiana 47405
U.S.A.
2. Dr Mohamed Fathi Azouz
Manufacturing Director
Glaxo Egypt S.A.E.
3 El Ghazaly Street
Heliopolis-Cairo-Egypt
Tel: (202) 280-7000
Fax: (202)280-6031
3. Eng Mohamed Farouk Bedewi
Environmental Consultant
5 Kadi Abu Sief
Dokki-Cairo-Egypt
Tel: (202)36-11-965
Fax: (202) 34-85-167
4. Dr Scott Barrett
London Business School
••• • Sussex Place
Regents Park NW1 4SA
London, UK
Tel: (071) 262 5050
Fax: (071) 724 7875
5. Geraldine Bouchet: Greenpeace, Paris
28,rue des Petites-Ecuries
75010 Paris, France
Tel : 47 70 46 89
Fax : 47 70 46 91
S. Dr Nick Campbell
CEFIC/EFCTC
ICI Chemicals and Polymers
The Heath Runcon
P.O. Box 13
WA74LW
United Kingdom
Tel: (+44) 928-513145
Fax: (+44)928511418,
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11. Dr David O'Connor
Senior Consultant
OECD Development Centre
94 rue Chardon - Lagache
75016 Paris,
France
Tel: 010-331 4524 8287
Fax: 010-331 4524 7943
12. Mr Sergio Oxman,
Ozone Operations Co-ordinator - Latin America
Global Environment Coordination
The World Bank
1818 H Street, N.W.
Washington D.C.
U.S.A. 20433
Tel: (202) 458 9028
Fax: (202) 522 3258
13. Mr Bai Xianhong
President, China International Science Centre
No. 13 Hufang Rd
Xuanwu District
Beijing 100052
P,R. China
Fax: 86-1-304-7005
Tel: 86-1-304-6591
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7. Mr Jim Crawford
Trane/American Standard
Government Affairs Office
2020 North 14th Street #408
Arlington, Virginia 22201
U.S.A.
Tel: 703-525-4015
Fax: 703-525-0327
8. Mr John Dixon
World Bank (ENVPE)
Room S 3065
1818 H Street N.W.
Tel: (202) 473-8594
Fax: (202)-477-0968
9. Mr Roger Dower
World Resources Institute
1709 New York Ave, N.W.
Washington DC 20006
USA
Tel: (+202) 638-6300
Fax: (+202) 638-0036
10. Dr Omar E. El-Arini
Chief Officer,
Multilateral Fund
1800 McGill College Ave
Montreal Trust Blgd,
27th Floor
Montreal, Quebec
Canada H3A 3J6
Tel: (+514)282-1122
Fax: (+514) 282-0068
11. Prof. Dr. Abdel Fattah Hassan
Prof, of Organic Chemistry
Cairo University
15 Ibn El Khatab Street
Shootng Club Area
Dokki-Mohandesseen
Cairo, Egypt
Tel: (202) 361-359
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12. Mr Huib Jensen
Institute for Environmental Studies
Free University
Box 7161
1007 MC Amsterdam
Netherlands
Tel: 20 52 83 827
Fax: 20 44 50 56
13. Mr Kenneth King
World Bank (ENVGE)
Room S 3031
1818 H Street N.W.
Washington, DC
USA
Tel: (202) 473-1075
Fax: (202) 522-3245
14. Jacqueline Aloisi de Larderel
Director,
UNEP Industry and Environment Office
Tour Mirabeau
39-43, Quai Andre Citreon
75739 Paris CEDEX 15
France
Tel: (+33 1) 44-37-14-50
Fax: (+33 1) 44-37-14-74
15. Dr Kai N Lee
Center for Environmental Studies
Kellogg House
Williams College
Williamstown
MA 01267
USA
Tel: 01 413 597 2358
Fax: 01 413 597 4088
16. Rev Dr. Wesley Gransberg Michaelson
Director
Church and Society Division
World Council of Churches
Route de Femey
Geneva 1211
Switzerland
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17. Mr Alan Miller
Center for Global Change
University of Maryland
The Executive Building
Suite 401
7100 Baltimore Avenue
College Park
Maryland 20740
Tel: 301 403 4164
Fax: 301 403 4292
18. Mr Frank J.P. Pinto
Principal Technical Adviser and
Chief, Montreal Protocol Unit
UNDP
Room DC 1-2152
New York, N.Y. 10017
Tel: (+1 212) 906-5042
Fax: (+1 212) 906-6947
19. MrBillRahill
World Bank (ENVGC)
1818 H Street, N.W.
Washington, DC 20043
U.S.A.
Tel: (+202) 473-7289
Fax: (+202) 522-3258
20. Mr Rajendra M. Shende
Coordinator, OzonAction Programme
UNEP IE/PAC
Tour Mirabeau
39-43, Quai Andre Citreon
75739 Paris Cedex 15
France
21. Mr S.M. Si Ahmed
Co-ordinator,
Montreal Protocol Operations
UNIDO
P.O. Box 300
A-1400 Vienna
Austria
Tel: (+43 1) 211 31 37 82
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22. Mr David Stirpe
Assistant Director,-
Alliance for Responsible Atmospheric Policy
2111 Wilson Boulevard
Suite 850
Arlington, Virginia 22201
U.S.A.
Tel: (+703) 243 03 44
Fax: (+703) 525 03 27
23. Mr K.M. Sarma
Coordinator,
Ozone Secretariat
UNEP
P.O. Box 30552
Nairobi, Kenya
Tel: (+252 2) 621234
Fax: (+254 2) 226886 or (226890)
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APPENDIX C:
GLOSSARY OF ABBREVIATIONS
AFEAS: Alternative Fluorocarbons Environmental Acceptability Study
CAC: Command-and-control measures
CIS: Commonwealth of Independent States
HOC: Economic Options Committee (UNEP)
ExCom: Executive Committee of the Multilateral Fund of the Montreal Protocol
GATT: General Agreement on Tariffs and Trade
GEF: Global Environmental Facility
ICOLP: Industry Cooperative for Ozone Layer Protection
IEA: International Environmental Agreement
IE/PAC: UNEP Industry and Environment Programme Activity Centre (UNEP)
IPR: Intellectual Property Rights
JEMA: Japan Electrical Manufacturers Association
JICOP: Japan Industrial Conference for Ozone Layer Protection
MAC: Mobile air conditioning
MBTOC: Methyl Bromide Technical Options Committee (UNEP)
MeBr: Methyl bromide
MF: Multilateral Fund
NGOs: Non-governmental organizations
ODS: Ozone depleting substances
ODP: Ozone depletion potential
OORG: Ozone Operations Resource Group
TEAP: Technology and Economic Assessment Panel (UNEP)
UNDP: United Nations Development Programme
UNEP: United Nations Environment Programme
UNIDO: United Nations Industrial Development Organization
WB: World Bank
WTO: World Trade Organizatioon
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