In today’s Finshots, we tell you how and why powerful climate pollutant gases called HFCs (hydrofluorocarbons) are being illegally traded across Europe.
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Now, on to today's story.
The Story
Imagine Andrei is a refrigerant trader in Romania. And he just managed to hoodwink the customs authorities at the border by passing off a climate-toxic HFC (hydrofluorocarbon) consignment as a more eco-friendly gas.
And it wasn’t even hard. All he had to do was mislabel the gas cylinder carrying the HFC as an HFO (hydrofluoroolefin) ― a gas marketed as a less toxic alternative to HFC because of its lower Global Warming Potential (GWP).
But Andrei isn’t the only one engaging in such illicit HFC trade. Many like him import more HFCs than they’re allowed to by underreporting the figures. Or even export less than they say they do while diverting the rest of the gas to countries within the EU (European Union).
Now, this kind of illegal HFC trade has a serious climate impact because HFCs are strong greenhouse gases. They can linger around in the atmosphere for nearly 15 years. And just 1 tonne of illegally traded HFC can have the same GWP as that of 30 million tonnes of carbon dioxide. For context, that’s the annual emission caused by driving 6.5 million petrol cars!
But why are HFCs being smuggled into the EU, you ask?
Well, you could blame it on something called an F-Gas Regulation.
Yes! A regulation that seems to have backfired.
In 2006, the EU rolled out this regulation to control emissions from F-gases or Fluorinated gases. These are man-made gases used in a range of industrial applications including air conditioning, refrigeration and heat pumps. But because they have a high GWP, the EU wanted to start phasing them out. So it started with preventing F-gas leaks from old fridges or ACs by introducing leak-check protocols.
But the ultimate goal was to reduce and completely abandon these toxic pollutants. And that’s exactly why the EU thought that it made sense to slowly give the Regulation a makeover.
A few years later, the revised Regulation aimed to cut down HFC use by 79% by 2030 from the yearly average HFC demand of about 182 million tonnes. And the EU could only do this if they’d targeted cutting down production and supply bit by bit every year. So they said “Hey, let’s introduce restrictions on HFC traders by introducing fixed quotas for each of them. That way they can’t produce or purchase more than the limits we impose on them.”
But it seems like things didn’t go as per the EU’s expectations. Because here’s the thing. Europe’s temperatures have been rising twice as fast as the global average since the 1980s according to the UN (United Nations). And if this continues, it simply means that air conditioner use could double in the continent by 2050 to cope with rising temperatures.
So naturally, HFCs will be in demand. But restrictions on their trade, thanks to the F-Gas Regulation, simply meant that supplies became scarce. And you know what happens when the demand for anything outdoes supply, right?
Prices rise.
In fact, HFC prices began rising in anticipation of an upcoming quota cutdown. Companies that needed these gases began hoarding them. The Environmental Investigation Report (EIA) that unearthed HFC smuggling even quotes that at one point in 2018, the price of a popularly used HFC-404A soared to 1,190% of its 2014 price.
In countries like Spain, higher taxes on HFCs with a higher GWP meant that prices of some of these gases even doubled because of heavy taxes.
Another reason why HFC prices skyrocketed was the quota allocation system.
See, the F-Gas Regulation allocates quotas to companies for free. But it only prefers large producers or major distributor companies that are three years or older. This means that big companies get nearly 90% of the HFC quotas, which makes it easy for them to monopolise trade and sell HFCs at steep prices.
And this simply paved the way for HFC smuggling in the EU. Smugglers sourced HFCs from China, the world’s biggest HFC producer and sneaked them in through EU border countries like Poland, Romania or Bulgaria where customs checks were weak or could be manipulated.
Getting caught was the last thing that worried them because the fines and penalties for violating the Regulation were too low in comparison to the profits they could pocket out of selling these gases in the black market.
The end result was that illegal HFC trade was costing governments considerable tax revenues in the form of lost VAT and import duties, apart from a rise in emissions and organised crime. In 2018, for instance, Poland’s treasury lost €7 million in 2018 due to illegal refrigerant imports. Lithuania’s exchequer lost up to €5 million. And the Greek Government claimed that illegal refrigerants from Bulgaria and non-EU countries like Albania, Macedonia and Turkey cost them over €20 million in the form of lost VAT and taxes.
So the only question that remains to be asked is how can the EU salvage the effects of a Regulation that sort of blew up in its face?
Well, to begin with, the EU can invest in a real-time system that updates Customs Authorities on the HFC quotas allotted to importers. That way they can keep a close eye on who’s flouting the rules.
Tracking cylinders used to trade HFCs can also help. That’s because disposable and non-refillable cylinders have been banned in the EU for a long time now since residual gases in them can leak out into the air. But smugglers simply use refillable cylinders to transport these gases with the intention to never use them in the future. So keeping a record of cylinder trails is key. Absence of proof of a solid cylinder take-back scheme could give the authorities a tip-off that there could be an illicit HFC trade happening under their nose.
And finally, closing the transit loophole. This simply refers to the exemptions goods get when they enter the EU from non-EU regions. Some checks, taxes or duties could be suspended to allow such consignments to easily flow through the EU. But smugglers could misuse these exemptions by smartly confusing the trail of goods, because of which goods may never leave the EU borders, and end up in black markets.
So yeah, if the EU wants the F-Gas Regulation to actually work, it probably needs to close the doors that regulations themselves have kept wide open to smugglers. Will it succeed, is something we’ll have to wait and see.
Until then…
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