Doors Wide Open. Part 2

April 12, 2019

On April 9, the Environmental Investigation Agency released a new Climate report and wanted to give you first sight of its findings.

Part 1 is here.

Illegal trade

Information from industry stakeholders alongside media reports and trade data analysis suggests a growing prevalence of illegal HFC trade across the EU.

HFCs are coming into Europe from China directly and via EU-border countries, in particular via Russia, Ukraine, Turkey and Albania. Customs data discrepancies indicate key entry points are likely Denmark, Greece, Latvia, Poland and Malta, however all member states need to take steps to examine customs data in relation to company data in the HFC Registry.

Multiple industry sources reported that illegal refrigerants constituted 50-80% of the Greek, Bulgarian and Romanian markets.

In Italy, ~5-10% of the mobile air-conditioning HFC market is estimated to be illegal while in Poland the number is estimated at 30%.

There is an urgent need to immediately improve enforcement of the F-Gas Regulation, particularly at the EU border level. Member states need to seize, prosecute and apply sufficiently high penalties. Penalties that have been determined by member states are generally not high enough to deter HFC smuggling and are rarely applied.

Methods of illegal trade

There are two distinct mechanisms with respect to the illegal trade of HFCs in the EU. The first is where companies import non-quota HFCs though the normal customs channels. EIA’s analysis of 2018 customs data suggests that as much as 16.3 MtCO₂e of bulk HFCs were illegally placed on the market in this way in 2018 and more than 14.8 MtCO₂e in 2017.

The second mechanism, which is much harder to quantify, is the more traditional smuggling of HFCs across borders. This can occur outside customs channels altogether, or where HFCs are concealed either physically or through fraudulent documentation (e.g. mislabelling the type, purpose or destination of the HFC shipment). The significant discrepancies between Chinese export and European import data could be an indication of fraudulent import declarations.

Regulatory loopholes and tools

Currently the European Commission is not generally obliged to cross check self-declared data reported to the HFC Registry with EU customs data.

Customs officials have access to the HFC Registry where they can check whether or not an importer is registered and access the importer’s annual quota allocation or authorisation. However, there is no access to information that can tell customs how much a company has already imported. Even if an importer is clearly importing an amount in excess of the company’s annual quota (e.g. in one shipment), customs are still not able to determine that the shipment is in contravention of the F-gas Regulation since the importer could claim (legitimately or otherwise) that part of the shipment is for re-export outside the Union.

The current system is inadequate to confirm the legitimacy of new entrants and to prevent them from importing in excess of quota. Companies can simply shut down to avoid repercussions, or mis-declare data to the HFC Registry.

Lost Profits Due to Illegal HFC Trade

Governments are losing considerable tax revenues due to the illegal HFC trade, through direct loss of VAT and import duty, but also through the indirect impact that illegal trade has to lower the price of legal refrigerants. A recent report from Polish NGO PROZON estimated that Poland’s treasury lost €7 million in 2018 due to illegal refrigerant imports valued at €55 million. Losses to the Lithuanian and Greek exchequers have been estimated at €5 million and €20 million respectively.

Recommendations

European Commission and EU member states

• Implement a fully functional per shipment HFC licensing system which allows customs officials to obtain necessary real-time information to determine if HFC imports are within the specified quota for a particular company. A first step towards this could be through a real-time quota system connecting the HFC Registry to the Single Window environment for customs and requiring the tCO₂e of any bulk or equipment import to be noted on the SAD. The real-time per shipment licensing system must ensure that a company stays within its quota at all times. For example, if a company wishes to export HFCs it can only receive that credit back on its quota once the export has occurred
• Explore ways to improve reporting and monitoring of HFC trade with exporting countries, given that many of these countries are also ratifying the Kigali Amendment and will be implementing licensing systems. The iPIC system could be used to help monitor, record and collate all the data on HFC imports and exports even before controls come into force. The ICS could help provide export data to be cross-checked with import data at customs
• Make the HFC Registry more transparent in order to improve accountability. Names of new entrants and data on quotas allocated to individual companies should be publicly available
• Allocate HFC quotas at cost to reduce the pressure on customs from the rapid rise in new incumbents and to help fund the HFC licensing system
• Revise the ban on non-refillable cylinders to prohibit the use of all disposable cylinders
• Remove the exemption from the phase-down under Article 15(2) for producers or importers of less than 100 tCO₂e of HFCs per year.

EU member states

• Ensure capacity-building, training and support for customs, including ensuring adequate refrigerant identifiers are available that are adaptable to test large containers
• Carry out regular risk profiling (especially of bulk imports) and customs inspections
• Set up a system to systematically compare reported data under the F-gas Regulation with customs data and investigate discrepancies
• Provide greater resources to investigate illegal HFC trade, carry out regular market surveillance and inspections including online marketplaces
• Increase penalties for Regulation infractions and ensure they are regularly applied and communicated through industry and media channels
• Carry out regular targeted awareness raising and training and ensure effective dialogue between customs and environment ministries; for example, through workshops, webinars, production of customs handbooks etc. Consider formal information sharing agreements between customs, industry and regulators
• Promote low-GWP energy efficient technologies through incentives, such as tax rebates, and additional bans on HFC-containing equipment
• Invest in the installation and servicing sector, ensuring contractors are trained and equipped to work with flammable refrigerants and to ensure the efficient recycling and reclamation of HFCs
• Reduce further demand for illegal HFCs by increasing incentives and reducing barriers to HFC reclamation.