EPA 430/K94/022
         THE  OZONE  LAYER
            1994  Report of the
       Economics  Options Committee
             1995  Assessment


          1994  Report of the
Economics Options Committee
            1995  Assessment

 Montreal Protocol
 On Substances that Deplete the Ozone Layer

 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

         1994 Report of the
    Economics Options Committee
               for the
           1995 Assessment
               of the
         U N E P
             pursuant to
              Article 6
         of the Montreal Protocol;
         Decision IV/13  (1993)
    by the Parties to the Montreal Protocol


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

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.


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
UNEP Economic Options Committee



                      TABLE OF CONTENTS








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

A. ODS Replacement Can Have Multiple Benefits
B. Differences Across Sectors
C. Analogies to Other Large-Scale Technological Initiatives


     2.1         INTRODUCTION
                A. Background on the Multilateral Fund
                B. Evolution of the Multilateral Fund Process
                C. The Multilateral Fund as a Model

  A. Diffusion
  B. Channels
  C. Joint ventures
  D. Categories
  E. Selection of Technologies
  F. Special Circumstances of Article 5(1) Countries

 Priorities of Article 5(1) Countries
 B. Monitoring
 C. Technology
 D. Information
 E. Training                          •
 F. Non-Governmental Organisations
 G. Non-Parties









 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




A. Monitoring and Reporting of ODS Production and Consumption
B. Permitting and Licensing of Controlled Substances

A. The Phaseout Schedule
B. Quantitative Restrictions
C. Prohibition of Specific Uses and of Production
D. Product Labelling Requirements
E. Recycling Requirements
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


A. Country Characteristics Bearing on Policy Choices
B. Guidelines for the Design of ODS Phaseout Policy


      5.1         INTRODUCTION

      5.D        BACKGROUND

                 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


      6.1          BVTRODUCTION

                  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
A. International Trade and Phaseout of ODSs


      7.1         INTRODUCTION

                 A. Halon Banking
                 B. CFC Banking

                 A. Taxes
                 B. Uncertainties Regarding Destruction
                 C. Standardisation and Quality Control


     8.1        INTRODUCTION

     8.H        GENERAL LESSONS

     8.m       SPECIFIC LESSONS











                           EXECUTIVE SUMMARY

 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


       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.


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.


        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".


 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;


        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".


 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

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,


       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.


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


                    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

                    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

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


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.


                                    CHAPTER 1

                            MONTREAL PROTOCOL
       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"

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

       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

       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).

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).

       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).

       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

       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

 making supermarkets manage in a whole new way, and that's not necessarily bad" (U.S. EPA
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

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

 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.)


       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

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).

       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
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

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

       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


 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

       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
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

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

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

       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

 that the optimal scale of substitute technologies has been within the reach of existing business

       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.

       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

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



       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

       (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

       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.


       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.


       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).











Source: Multilaterial Fund, consolidated Progress Report (September 1994)

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

       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.


       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

       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.
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.


        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.
       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

              (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

    ,   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.


        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


                    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

             (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.

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
              (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).

       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


 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


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

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.

       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.


       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).




                           IN THE ARTICLE 5(1) COUNTRIES

       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

 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.


       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:
Burkina Faso
Costa Rica
( 1,921)
( 7,017)
( 38,203)
(  2,804)
(  4,293)
(  8,196)
( 24,250)
(   N.A.)
(   N.A.)
(   3,400)
( 10,225)
Syrian Arab
( 16,688)
( 60,915)
( N.A.)
( 8,929)
( 5,812)
( 9,146)
( N.A.)

( 55,618)
( N.A.)
( 35,201)
( N.A. )

        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

       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.


       (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.

       (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.


         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

        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.

                                     Table 3.1
           Costs of Country Strategies for the Phase-out of ODSs: 1991-2010
ODS Phased Out
Incremental Cost
'Typical Scenario"
Cost S/Ton





scenario has
phase out.
include all
costs such
as for





early action.
action costs
are more
than double.
scenario has




involves a
delay in
a faster
phase out





involves a
faster shift
to non-

This is the  amount  of ODSs that  would be  used  under the  unconstrained
dem:  : in the absence of a Protocol
See text.


        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.


       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

       (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.


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
                                       Table 3.2

           Allocations and Disbmsements of Funds by Implementing Agencies

1994 (Proposed)
($ mn.)

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

       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.


       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,


 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

       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

 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


 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.


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

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.


       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.


       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.


        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;

        (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.


       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%.


        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.


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.


 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.


                                   CHAPTER 4

                        POLICY REGIMES FOR PHASEOUT
                      OF OZONE DEPLETING  SUBSTANCES
       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?


               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


       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
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


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.


       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.
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


       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


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

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.)


       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.


       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.

                       UNITED STATES (1994-95)
CFC-11 5
1994 Tax
1994 Floor
1995 Tax
1995 Floor
SOURCE:   US Environmental Protection Agency (EPA), Washington, D.C., 1994.


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.


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.


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

       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.
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.


       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)


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.


       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).


       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


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.


       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


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

             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

             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.

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.
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

       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


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
       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


 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


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

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.


       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


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.



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.




        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.


      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.)


      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.)


 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
'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.

                                           Table 5.1
                                  OVERLAPPING NETWORKS

   "Global Ozone
   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


   National Government
               Country Programs and
               National Ozone Offices

               Industry Associations
   Regional ODS Networks

f  Multinational Corporations

   Large Corporations

   Individual Companies

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

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


       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.


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

      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.


              "(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
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. ,


       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

       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.


                                        Table S.2
         Infonnation Contained in a County Program: Executive Committee Guidelines
         Government's commitment, basis of Action Plan; framework for assistance;
         consistency between specific projects and overall Country Program; basis for
      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
        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


       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

        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


 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


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.


      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

      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).


       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

       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.


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 &

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

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"),


 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,



                                    CHAPTER 6

                         INTERNATIONAL TRADE ISSUES

       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 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.


       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.
    :A list of  the substances under each annex is given in Appendix One to this chapter.

        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


 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


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


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.


       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


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

       "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


       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

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.


       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


 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


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


       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

       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.


                                             Annex A

                                 CONTROLLED SUBSTANCES
Group I
Group U
• Substance


Ozone Depleting Potential*/


           Theseozonedepleangpotentialsarassuniates based on existing knowledgeand willbereviewedandrevised

                                          Annex B

                                   Controlled substances
Ozone-depleting potential
        Group I


Group n

CCI«      carbon tetrachloride

Group in

QHjCIj*  1,14-trichloroethane
           (methyl chloroform)
         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.


                  Annex C
           Transitional substances


Appendix 2


      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.

 Appendix 3



 Cape Verde
 Cayman Islands
 Cook Islands



 Falkland Islands
 Faroe Islands
 French Guiana



 Korea, North



 New Caledonia


 Puerto Rico



 Saint Helena
 Saint Pierre
 Saint Vincent
Sao Tome and Principe
Serbia and Montenegro
Sierra Leone

Turks and Caicos Islands

Virgin Islands

Western Sahara


Taiwan (*)
acts de facto as a member


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

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.


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.




                          CFC AND HALON BANKING
       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

       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).

       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.
       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


 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

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.

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

       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






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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.

 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

 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).

       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

       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

       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.

        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

       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).

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.
 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).

       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.

                                      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
See also:

EPA (1994).
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,

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

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).


  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.

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


 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.
       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

       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

  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.
 (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.

 (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.


                                   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
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

      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.

       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
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.)

      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.




             (Authors' estimate)

             (Authors' estimate)

             (Authors' estimate)

Domestic Refrigerators
    (15-20 years)

Mobile Air Conditioning

Commercial Refrigerators

Commercial Chillers

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

       assumed in Table 7.2, partially to account for longer service lives of automobiles
Initial Stocks (Worldwide):
      (Vogelsberg, p.908)
                                        265,000,000 (Autos & Trucks)
                                            250,000 (Buses)
                                             75,000 (Pas. Rail Cars)
                                        +    33,000 (Ships)
                                        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



    (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

      (rounded to)
                                       = 1,194 pounds/unit

                                         1,200 pounds/unit


   (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)
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


      (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

 Leakage rates:

Commercial Refrigeration
Commercial Chillers
Domestic Refrigeration
Auto Air Conditioning
       (rounded to)   Commercial Refrigeration
                    Commercial Chillers
                    Domestic Refrigeration
                    Auto Air Conditioning

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.

             (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.

 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.

 Deam, R. T., and I. A. Vit, 1992.  "Waste Destruction Using Plascon," CISRO Report No.

 DeCanio, Stephen J., 1988.  "Allocated Quotas and Regulatory Fees: A Mixed Strategy for
       CFC and Halon Control," (Santa Barbara, CA: The Economics Group, Inc.).

Environment Watch:  Western Europe, 1994.  "EU Importing 'Massive' Amounts of CFCs
       Illegally, Customs Data Show," (7 October): 9-10.

Executive  Committee  of the Interim Multilateral Fund for the  Implementation of the
       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.

             _,  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.

Financial Times, 1994. 24 March edition.

Finkclstcin, Abe, 1994.  "Workshop on ODS Disposal Opportunities, 'Identifying Needs and
       Solutions,'" memorandum  from the Chief, Clean Air Technologies,  Technology
       Development Directorate, Environment Canada, 6 September.

Gabcl, H.  Landis, 1994.   "Environmental Management as Competitive Strategy," in
       Environmental and Resource Economics: A Handbook for Non-Economists (Paris:

Gilfillan, Corinna C., 1994.  "Friends of the Earth's Halon Recovery Campaign," paper
       presented at the  1994  International  CFC and Halon  Alternatives  Conference
       (Washington, DC), October 24-26.

Global Environmental Change Report,  1994a.  "CFC Imports May Evade US Tax," (27
       May): 3.

            _, 1994b. "Dutch Researchers to Test Conversion of CFCs to HFCs," (8 July):
             ., 1994c.; "Report Urges Utilities to Recover CFCs from Refrigerator Foam,"
       (8 July): 7.

          '     1994d. "US Cracks Down in Illegal CFC Imports," (11 November): 1-3.
Gushee,  1993.   "CFC Phaseout:   Future  Problem for Air Conditioning  Equipment?"
       (Washington: Congressional Research Service).

Halon Technical Options Committee, 1993. "Report of the Recommendations of the Halons
       Technical   Options   Committee  on   Nominations   for    Essential   Use
       Production/Consumption  Exemptions  and International  Bank  Management  of
       Halons" (July).

Hebert, H. Josef, 1994.  "Air conditioners rely on illegal chemicals," Associated Press story
       appearing inSantaBarbaraNews Press, 26 October: A-3.

Hubbard, Roy S., 1994.  "Convening Chillers to CFC-Free Refrigerants," Plant Engineering,
       Vol. 48, No. 2 (February): 40-44.

Jacobson, E., I. Bar, and  S. Rosenwaks, 1993.  "Neutralizing Halogenated Hydrocarbons
       (CFC and Halons)," technical paper, Spectrex Inc. (Cedar Grove, New Jersey).

 Kruse, Horst,  1994.   "European  research concerning  CFC and  HCFC  substitution,"
       International Journal of Refrigeration, Vol. 17, No. 3 (March):  149-155.

 MacKenzie, Debora, 1994.  "Loophole opens up black market in CFCs...," New Scientist
       Vol. 141, No. 1917 (19 March): 6-7.

 Ozone Secretariat, 1993. Handbook for the Montreal Protocol on Substances that Deplete
       the Ozone Layer (Montreal).

 Sekiguchi, .ffidetoshy, Takuya  Honda, and Atsushi Kanzawa, 1993.  Thermal Plasma
       Decomposition of Chlorofluorocarbons," Plasma Chemistry and Plasma Processing
       Vol. 13, No. 3:  463-478.                                                 *'

 Smithart,  Eugene L., 1993.   "Choosing a Building Chiller,"  paper presented at the 1993
       International CFC and Halon Alternatives Conference (Washington, DC) October

 United  Nations  Environment  Programme,  1991.   Report  of  the Refrigeration, Air
       Conditioning and Heat Pumps Technical Options Committee (Nairobi), December.

              .,  1992.  Ad-Hoc Technical Advisory  Committee on  ODS Destruction
       Technologies (Nairobi).
       (Nairobi), July.
              .,  1993a.  1993 Report of the Technology and Economic Assessment Panel
              ., 1993b. "The Reporting of Data by the Parties to the Montreal Protocol on
       Substances that Deplete the Ozone Layer," UNEP/OzL.Pro.5/5 (Nairobi), 24 August.

             _,  1993c.  1993  ODS Destruction Technology Update:   Technology and
      Economic Assessment Panel Workshop Proceedings (Washington, DC), October 20-

              ., 1993d. National Halon Banking Sourcebook, produced by UNEP IE/PAC
       OzonAction Programme (Paris), 4 November.

United States Environmental Protection Agency, 1993.  "Stratospheric Ozone Protection
       Final Rule Summary:  The Accelerated Phaseout of Ozone-Depleting Substances"
       (Washington).   .

	, 1994.  "Old and New Rates of Tax," photocopy.
United States Treasury, Internal Revenue Service,  1991.  "Excise Tax on Chemicals That
      Deplete the Ozone Layer and on Products Containing Such Chemicals," 26 CFR Parts
      52 and 602, Federal Register (November 4).

             _, 1992.  "Part 52—Environmental Taxes," 26 CFR Ch. 1 (4-1-92 Edition).
Vogelsberg,  F. A., Jr.,  1993.    "Update:   Alternative Fluorocarbon Environmental
      Acceptability Study (AFEAS)," paper presented at the  1993 International CFC and
      Halon Alternatives Conference (Washington, DC), October 20-22.

Williams, Jeffrey, 1984. "Fractional Reserve Banking in Grain," Journal of Money, Credit,
      andBanJdng, Vol. 16 (November, Part 1): 488-496.

	, 1986.  The Economic Function of Futures Markets (New York:  Cambridge
      University Press).

      	, 1993. Personal observations (December).
	, in press. Manipulation on Trial: The Hunt Silver Case and Economic
      Analysis (Cambridge:  Cambridge University Press).

Working, Holbrook, 1933. "Price Relations between July and September Wheat Futures at
      Chicago since 1885."  Wheat Studies, Vol. 9:187-237.

	,  1948.   "Theory of the Inverse  Carrying Charge in Futures Markets,"
      Journal of Farm Economics, Vol. 30: 1-28.

      	, 1949. "The Theory of Price of Storage." American Economic Review, Vol.
       39: 1254-1262.

Zurcr,  Pamela,  1993.   "Defense Department to accept unwanted halons," Chemical &
       Engineering News, Vol. 71, No. 50 (December 13).




       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.


       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.


        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)

       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,


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;

      (f)     the link between  a decrease in stratospheric ozone and an increase is surface
             ultraviolet (UV) radiation has been further  strengthened.

         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.

       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


   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


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

       (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


 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


       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

 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.

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.

  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

  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.

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

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

             (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).

  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
       Fax: (202) 338 7488
       Tel: (202) 338 2307

 3.     Dr Penelope Canan
       Sociology Department
       University of Denver
       Denver, CO 80208-0209
       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
       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
       Tel:  805 893-3130
       Fax:  805 893-8830
       Internet: decanio@econ.ucsb.edu

      Mrs Mavis Holmes-Hanek
      Ministry of Health & Environment
      PO Box N3729
      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
      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


 1.     Dean Alfred Aman, Jr.
       Law School
       Indiana University
       Bloomondale, Indiana 47405

 2.     Dr Mohamed Fathi Azouz
       Manufacturing Director
       Glaxo Egypt S.A.E.
       3 El Ghazaly  Street
       Tel:  (202) 280-7000
       Fax: (202)280-6031

 3.     Eng  Mohamed Farouk Bedewi
       Environmental Consultant
       5 Kadi Abu Sief
       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
      ICI Chemicals and Polymers
      The Heath Runcon
      P.O. Box 13
      United Kingdom
      Tel: (+44)  928-513145
      Fax:   (+44)928511418,

11.    Dr David O'Connor
      Senior Consultant
      OECD Development Centre
      94 rue Chardon - Lagache
      75016 Paris,
      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

7.     Mr Jim Crawford
       Trane/American Standard
       Government Affairs Office
       2020 North 14th Street #408
       Arlington, Virginia 22201
       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
       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
       Cairo, Egypt
       Tel:  (202) 361-359

12.    Mr Huib Jensen
      Institute for Environmental Studies
      Free University
      Box 7161
      1007 MC Amsterdam
      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
      Tel:  (202) 473-1075
      Fax: (202) 522-3245

14.    Jacqueline Aloisi de Larderel
      UNEP Industry and Environment Office
      Tour Mirabeau
      39-43, Quai Andre Citreon
      75739 Paris CEDEX 15
      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
      MA  01267
      Tel:  01 413 597 2358
      Fax: 01  413 597 4088

16.    Rev  Dr.  Wesley Gransberg Michaelson
      Church and Society Division
      World Council of Churches
      Route de Femey
      Geneva  1211

 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
       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
       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

21.    Mr S.M. Si Ahmed
       Montreal Protocol Operations
       P.O. Box 300
       A-1400 Vienna
       Tel: (+43 1) 211 31 37 82

22.   Mr David Stirpe
      Assistant Director,-
      Alliance for Responsible Atmospheric Policy
      2111 Wilson Boulevard
      Suite 850
      Arlington, Virginia 22201
      Tel: (+703) 243 03 44
      Fax: (+703) 525 03 27

23.   Mr K.M. Sarma
      Ozone Secretariat
      P.O. Box 30552
      Nairobi, Kenya
      Tel: (+252 2) 621234
      Fax: (+254 2) 226886 or (226890)

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