M o n t r e a l P r o t o c o l O E W G m e e t i n g, J u l y , P a r i s 1 TEAP Replenishment Task Force Report Assessment of the Funding Requirement for the Replenishment of the Multilateral Fund for the Period

M o n t r e a l P r o t o c o l O E W G m e e t i n g, J u l y , P a r i s 2 Mandate - Decision XXV/8 TEAP to prepare a report on the appropriate level of the replenishment of the Multilateral Fund for the triennium TEAP established a Replenishment Task Force (RTF) Prior to preparation of the report all Parties were invited to provide their views to the Task Force via interviews and written submissions. After thorough review the report was adopted by the TEAP on 30 May 2014.

M o n t r e a l P r o t o c o l O E W G m e e t i n g, J u l y , P a r i s 3 Task Force membership  Lambert Kuijpers (The Netherlands, co-chair TEAP, co-chair RTOC);  Shiqiu Zhang (China, senior expert member TEAP);  Richard Abrokwa-Ampadu (Ghana, former UNMLF Secretariat Officer)  Marco Gonzalez (Costa Rica, former Ozone Secretariat Executive Secretary);  Tony Hetherington (Canada, former UNMLF Secretariat Deputy Chief Officer);  Alistair McGlone (UK, consultant);  Erik Pedersen (Denmark, member HTOC);  7 consulting members from the RTOC and FTOC.

M o n t r e a l P r o t o c o l O E W G m e e t i n g, J u l y , P a r i s 4 Decision XXV/8 2(c)….. allocate resources to enable Article 5 parties to maintain or meet 2013, 2015 and 2020 compliance obligations in respect of Articles 2F and 2H of the Protocol 2(d)….. dividing the funding related to the 2020 HCFC targets for consumption and production in an appropriate manner including but not limited to one scenario that divides the funding related to the 2020 consumption target equally between the and replenishments 2(f)….. allocation of sufficient resources to the activities in the servicing sector in stage II HPMPs through technical assistance such as recovery, training and other necessary activities

M o n t r e a l P r o t o c o l O E W G m e e t i n g, J u l y , P a r i s 5 Decision XXV/8 (2) 3.….. as a separate element the Panel should provide indicative figures for additional resources that would be needed to enable Article 5 parties to gradually avoid high-GWP alternatives to ODS taking into account the availability of safe, environmentally friendly, technically proven and economically viable technologies; 6.….. provide indicative figures for the periods 2018–2020 and 2021 ‑ 2023 to support a stable and sufficient level of funding.

M o n t r e a l P r o t o c o l O E W G m e e t i n g, J u l y , P a r i s 6 Total funding requirement The estimated total funding requirement for the triennium (and subsequent triennia) is: Total requirement for replenishment of the Multilateral Fund (US$ millions) Case 1 (commitment-based phase-out) Case 2 (unfunded phase-out)

M o n t r e a l P r o t o c o l O E W G m e e t i n g, J u l y , P a r i s 7 Method of assessment The total funding requirement was obtained by adding:  funding for HCFC consumption phase-out activities based on: existing commitments for stage I HPMPs obtained from MLF Secretariat data estimated costs for new activities for stage II and later HPMPs developed by the Task Force  funding for production phase-out  funding for supporting activities costs were based on historical data from the MLF Secretariat and the assumption that current activity levels would be continued.

M o n t r e a l P r o t o c o l O E W G m e e t i n g, J u l y , P a r i s 8 HCFC consumption phase-out LVC countries Most LVC countries have a stage I HPMP for a 35% reduction by the year New commitments for these countries will be needed for a 67.5% reduction by The funding required for LVCs for the next stage of their HPMPs has been calculated on the same basis as their stage I HPMP. The funding has been calculated in such a manner that a first tranche for the next stage HPMPs for LVCs will be disbursed in 2020.

M o n t r e a l P r o t o c o l O E W G m e e t i n g, J u l y , P a r i s 9 HCFC consumption phase-out non LVC countries Many stage I HPMPs planned for completion in 2015 Some have committed to reductions greater than 10%, with completion in later years Assumptions: a stage II HPMP will enable countries to meet the 35% HCFC phase- out obligation by funding is required for the difference between the 35% reduction level and the phase-out already provided for in each stage I HPMP.

M o n t r e a l P r o t o c o l O E W G m e e t i n g, J u l y , P a r i s 10 Cases 1 and 2 The phase-out to be addressed in a stage II HPMP can be defined in two ways Case 1 “commitment-based” phase-out the Agreement for each HPMP includes a table defining the level of HCFC phase-out to which the country has committed Case 1 funding for stage II HPMPs addresses the difference between the phase-down or reduction ‘committed to’ in the stage I agreement (in %) and the 35% reduction level

M o n t r e a l P r o t o c o l O E W G m e e t i n g, J u l y , P a r i s 11 Cases 1 and 2 (cont’d) Case 2 “unfunded” phase-out Total funding in many stage I HPMPs was based on funding assessments for subsectoral reductions in consumption that, in total, exceeded the aggregate reductions committed to in the Agreements Case 2 funding for stage II HPMPs addresses the difference between the total of the phase-out in each subsector on which stage I funding was based and the 35% reduction level

M o n t r e a l P r o t o c o l O E W G m e e t i n g, J u l y , P a r i s 12 Cases 1 and 2 (cont’d) For many non-LVC Article 5 Parties the stage II HPMP consumption to be addressed in Case 2 is significantly lower than that to be addressed in Case 1 -- because additional phase-out was funded in the stage I HPMP All other funding components including existing funding obligations, LVC requirements, production and supporting activities remain the same for both Case 1 and Case 2

M o n t r e a l P r o t o c o l O E W G m e e t i n g, J u l y , P a r i s 13 Consumption analysis To facilitate the analysis of consumption and the determination of cost effectiveness, countries were divided into four groups: Group 1, containing only China, due to its high share of the total Article 5 HCFC consumption, Group 2, containing 34 non-LVC countries that have both manufacturing and servicing in the RAC sector Group 3, containing 22 non-LVC countries that have only consumption in the servicing sector Group 4, containing the LVC countries, which have a consumption level lower than 360 tonnes of HCFCs.

M o n t r e a l P r o t o c o l O E W G m e e t i n g, J u l y , P a r i s 14 Consumption analysis (2) Using Article 7 data, the baseline consumption of each country was determined in metric tonnes for each HCFC chemical consumed For each non-LVC country with a manufacturing sector, that is, countries in Groups 1 and 2, the remaining amounts of each chemical, in tonnes, for which additional funding will be eligible in stage II HPMPs to meet the 35% Protocol aggregate reduction target was calculated for funding Case1 and funding Case 2

M o n t r e a l P r o t o c o l O E W G m e e t i n g, J u l y , P a r i s 15 Consumption analysis (3) A spreadsheet analysis was conducted addressing each of the 57 countries in Group 1, 2 and 3, using the following key assumptions: eligible consumption as determined above a sectoral combination of 50% foam and 50% refrigeration/air conditioning (RAC), in metric tonnes, where there was sufficient consumption in each sector noting that because of differing ODP values this amounted to about 60-70% foam and 30-40% RAC in ODP tonnes the inclusion of funding for phase-out of reported consumption in pre- blended polyols in the first two triennia (although not part of baseline consumption) HPMP disbursement schedules of 45% - 25% - 25% - 10% over 4 years based on disbursement experience from approved stage I HPMPs

M o n t r e a l P r o t o c o l O E W G m e e t i n g, J u l y , P a r i s 16 Consumption analysis (4) Cost effectiveness factors have been applied in the calculations for all countries in Groups 1, 2 and 3 For foam and RAC, cost effectiveness was derived from the large number of approved projects RAC was further divided into manufacturing versus servicing (on-site installation) based on data obtained from the MLF Secretariat resulting in three typical scenarios, being ratios for manufacturing and servicing: 60 vs 40%, 40 vs 60% and 20 vs 80% Group 3 countries have only refrigeration servicing at a cost effectiveness of US$ 4.5/kg

M o n t r e a l P r o t o c o l O E W G m e e t i n g, J u l y , P a r i s 17 Total funding requirement consumption sector

M o n t r e a l P r o t o c o l O E W G m e e t i n g, J u l y , P a r i s 18 Funding for production phase-out Production sector funding has been derived directly from decisions 69/28/(e)(ii) and 70/26(b) of the Executive Committee regarding HCFC production facilities in China Funding in the first triennium has been assessed according to the 2014 business plan of the Multilateral Fund Amounts for subsequent triennia correspond to equal amounts of US$ million including support costs, over a 14-year period from 2016 onwards

M o n t r e a l P r o t o c o l O E W G m e e t i n g, J u l y , P a r i s 19 Funding for production phase-out (2) The only HCFC produced in Article 5 countries other than China is HCFC-22, production facilities for which exist in 5 other Article 5 countries. However these facilities are all swing plants (except for a plant with a (small) capacity of 500 tonnes in DPR Korea) New guidelines have not yet been addressed and there has been no decision to date to include funding for swing plant projects or project preparation in business plans. Accordingly, no provision for funding for cessation of production in these plants has been incorporated in the estimates

M o n t r e a l P r o t o c o l O E W G m e e t i n g, J u l y , P a r i s 20 Funding for production phase-out (3)

M o n t r e a l P r o t o c o l O E W G m e e t i n g, J u l y , P a r i s 21 Funding for non-investment and supporting activities

M o n t r e a l P r o t o c o l O E W G m e e t i n g, J u l y , P a r i s 22 Total funding requirement The estimated total funding requirement for the triennium (and subsequent triennia) is: Total requirement for replenishment of the Multilateral Fund (US$ millions) Case 1 (commitment-based phase-out) Case 2 (unfunded phase-out)

M o n t r e a l P r o t o c o l O E W G m e e t i n g, J u l y , P a r i s 23 The funding profile The results of dividing the total HCFC consumption funding requirement equally between the and periods are shown below. In each case, the funding required for the third triennium remains at US$ 636 million.

M o n t r e a l P r o t o c o l O E W G m e e t i n g, J u l y , P a r i s 24 The funding profile (2) If funding for HCFC consumption in the first and second triennia addressed the 2020 reduction target only (as referenced in para 2(d) of the TOR) and the first two triennia were apportioned equally: initial funding for stage III HPMPs would be deferred until 2021 funding requirements for and would each decrease by around US$ 90 million funding for the third triennium would exceed the funding for the second triennium by US$ 319 and US$ 408 million for Cases 1 and 2, respectively.

M o n t r e a l P r o t o c o l O E W G m e e t i n g, J u l y , P a r i s 25 The funding profile (3)

M o n t r e a l P r o t o c o l O E W G m e e t i n g, J u l y , P a r i s 26 Additional resources to gradually phase out high GWP alternatives In order to determine an indicative amount for a gradual conversion to low-GWP from ODS, three elements have been considered.

M o n t r e a l P r o t o c o l O E W G m e e t i n g, J u l y , P a r i s 27 Additional resources to gradually phase out high GWP alternatives (2) 1.Funding a second conversion to hydrocarbons for domestic and commercial refrigeration units and MAC equipment, which have already been converted to HFC-134a under the Multilateral Fund. For the units, cost could be around US$ 40 million at US$ 6.4 per kg. Production capacity of nearly 1 million MAC units was also converted. Using the same CE value, the cost of second conversions for MAC equipment could be US$ 6.4 million. The total cost estimate for second conversions in refrigeration could therefore be around US$ 46.4 million, which is equivalent to some US$ 8 million per year (during two triennia).

M o n t r e a l P r o t o c o l O E W G m e e t i n g, J u l y , P a r i s 28 Additional resources to gradually phase out high GWP alternatives (3) 2Increasing the funding available for the servicing sector from US$ 4.5 to US$ 6.5/ kg has been considered to assist with management of refrigerants with varying levels of flammability and the requisite lubricants. Applying this increase to non-LVC countries would imply additional funding of about US$ 4 million per year. For LVC countries, as an indicative figure, based on a 40% increase in servicing funding, this would be an additional US $3 million per year.

M o n t r e a l P r o t o c o l O E W G m e e t i n g, J u l y , P a r i s 29 Additional resources to gradually phase out high GWP alternatives (4) 3The additional costs of HPMPs have been estimated for countries with air conditioning manufacture, if all conversions were to low- GWP refrigerants. Dependent on the percentages of servicing and manufacturing in the country the average cost effectiveness might increase by about 25% to some US$ 9.81/kg. The total cost to the Fund would then be around US$ 8 million per year.

M o n t r e a l P r o t o c o l O E W G m e e t i n g, J u l y , P a r i s 30 Additional resources to gradually phase out high GWP alternatives (5) In total, the (additional) funding amounts involved in the three activities mentioned above would be about US$ 23 million per year over at least two triennia, equivalent to a total of some US$ 138 million. This would be a first indicative amount for gradually phasing out high-GWP alternatives to ODS. Via this amount of funding one could address avoiding the consumption of about 10,000 tonnes of high-GWP alternatives.

M o n t r e a l P r o t o c o l O E W G m e e t i n g, J u l y , P a r i s 31 Additional resources to gradually phase out high GWP alternatives (6) The Task Force has given broad consideration to the funding requirements for a gradual phase-down of all high-GWP alternatives, taking into account the report by the TEAP on Decision XXV/5 The report has the following assumptions: (1) the consumption of high-GWP substances for manufacturing products may be in excess of 180,000 tonnes per year (2014) (2) a cost effectiveness of US$ 6-18 per kg and (3) no consideration of any multinational operations Conversion of this manufacturing sector to low-GWP alternatives (over the timeframe concerned) yields an estimate for the total funding in the range of US$ 1,080-3,240 million