Fluorochemicals: so hot right now
HVAC companies are the hipsters of climate change: regulated before it was even cool
Among the many industries impacted by climate change, the heating, ventilating and air conditioning (HVAC) industry was among the first to be directly affected by international and domestic regulatory restrictions, driving step-changes in technological innovation and adoption. As a result, the industry shows both a history of innovation and a number of future challenges and opportunities. Daikin, a leading global manufacturer of HVAC equipment (with 40% market share in Japan, and smaller but still significant presences in North America, Europe and Asia) and fluorochemicals (20% of global share), is a helpful case study in this space4.
As early as the mid-1930s, fluorinated gases, including chlorofluorocarbons (CFCs), hydrochlorofluorocarbons (HCFCs) and hydrofluorocharbons (HFCs), were desirable for their low toxicity, flammability and reactivity. These qualities made them particularly valuable as refrigerants in cooling equipment (such as home and auto air conditioning systems, refrigerators, etc.), and they enjoyed widespread use for more than half a century6.
However, when ventilated or leaked into the atmosphere, CFC acts as an ozone-depleting substance through a process known as photodissociation, weakening the atmosphere’s UVB protection. HCFCs and HFCs, on the other hand, do not pose the same direct ozone threat, but are strong greenhouse gases (considered to be “high Global Warming Potential (high-GWP)”, thousands of times more potent than carbon dioxide)9. Because HCFCs and HFCs are less detrimental to the ozone (greenhouse gas regulations came after ozone depletion), HCFCs and HFCs were primarily used as substitutes for CFCs when these chemicals were phased out of developed nations by the mid-1990s, following the Montreal Protocol of 1987. Substituting HCFCs and HFCs (which must be 99.5% phased out of developed nations by 2020) in the place of more potent CFCs represented the first major regulatory adaptation faced by the industry in decades, requiring HVAC companies to shift their portfolio of products to equipment compatible with non-CFC refrigerants.5
The next technological step-change will involve replacing HCFCs and HFCs with still-more environmentally neutral compounds, such as HFOs (Hydrofluro-Olefins), which have similar greenhouse potency to carbon dioxide (orders of magnitude lower than HCFCs and HFCs). A U.S. Environmental Protection Agency administrator has said a phase-out of HFCs could avoid up to 0.5°C of global warming (HFCs were addressed in the Kyoto Protocol of 1997, which the U.S. did not agree to, and again most recently in the Montreal Protocol of 2016).2
HVAC and fluorochemicals manufacturers are responding to the need to innovate to meet future regulatory requirements for HFCs, despite significant regulatory hurdles across governments before widespread commercial adoption will be possible. For example, in January of 2015, HVAC and refrigerants competitor Honeywell announced production of four new HFO refrigerants under an environmentally-oriented brand, Solstice.1
If properly contained, fluorinated gases do not directly contribute to climate change (in fact, CFCs and HCFCs are still in use in the U.S. so long as they were produced prior to 1995 and are recycled and contained). However, another major concern is the amount of energy consumed by HVAC systems, which require burning of fossil fuels such as methane and coal to deliver energy, and indirectly contributes to global warming in this way. Increasing adoption of HVAC systems in developing nations as well as rising global temperatures exacerbate this energy-intensity challenge.8,10
Given these pressures, HVAC companies including Daikin have had to use R&D and acquisition to begin change in three areas: technological innovation in the refrigerant space (development of environmentally-neutral refrigerants), improved product design (reducing overall leakage), and improved equipment energy efficiency in their systems (to reduce indirect environmental impact). Daikin, which operates in distinct 5-year business periods, made one of the two main pillars of FY07-FY11 “expanding our environmentally-related business,” and the latest business plan (FY16-FY20) includes specific focus on improving filter technology, which has environmental implications. 4
As a result of Daikin entering new markets, focus on technological leadership, and regulatory changes requiring customers to “refresh” technologies, Daikin’s HVAC business has seen significant improvement in both revenue and margin. FY16 revenues were up 80% compared to five years ago, with net income improving by 5pp as a percent of sales.4
Moving forward, Daikin faces many challenges, including need to innovate and differentiate, pressure to capture market share in developing nations, and significant headline risk in the case of environmentally-costly leakages or other missteps. Continuing steps to improve energy efficiency and lessen environmental impact of HVAC systems, encouraged by regulation and increasing demand by customers, is a socially-responsible path for Daikin to take, and one likely to be rewarded by business. However, marketing safe and energy-efficient technologies in high-growth developing nations will be a more difficult strategic decision, as they will be higher cost than older, less expensive technologies, and would likely need to be driven by a fundamental sense of societal and corporate responsibility rather than pure market demand or regulatory imposition. (797 words)
 Andrew Gaved, “Honeywell announces commercial launch of HFO refrigerant range,” 28 Jan 2015, https://www.racplus.com/news/-honeywell-announces-commercial-launch-of-hfo-refrigerant-range/8677688.article, accessed Nov 3, 2016
 Alec Johnson, “HFO Refrigerants – What You Need to Know,” from http://refrigeranthq.com/hfo-refrigerants-need-know/, accessed November 2016
 Congressional Fact Sheet – CFCS and Halon, Clean Air Act Amendments of 1990, Title VI, June 1991, http://infohouse.p2ric.org/ref/14/13048.pdf
 Daikin Industries, 2016 Annual Report, http://www.daikin.com/investor/library/pdf/2016/ar_16.pdf, accessed November 2016
 Elisabeth Rosenthal and Andrew Lehren, “Relief in Every Window, but Global Worry Too.” New York Times, June 2012, http://www.nytimes.com/2012/06/21/world/asia/global-demand-for-air-conditioning-forces-tough-environmental-choices.html, accessed November 2016
 Herb Woerpel, “Is the timing right for a global HFC phasedown?” ACHR News, May 2016, http://www.achrnews.com/blogs/17-opinions/post/132464-is-the-timing-right-for-a-global-hfc-phasedown, accessed November 2016
 Lundgren, K., Kjellström, T. (2013), Sustainability Challenges from Climate Change and Air Conditioning Use in Urban Areas. Sustainability, 5(7): 3116-3128, http://umu.diva-portal.org/smash/get/diva2:655373/FULLTEXT02.pdf
 Landers, Frederick Poole Jr. “The Black Market Trade in Chlorofluorocarbons: The Montreal Protocol Makes Banned Rerigerants a Hot Commodity.” Georgia Journal of International and Comparative Law 26.2 (1997): 457-486.
 Overview of Greenhouse Gases, from EPA. https://www.epa.gov/ghgemissions/overview-greenhouse-gases, accessed Nov. 2016
 Trane, “HVAC Refrigerants: A balanced approach,” Engineers Newsletter, Volume 40-2, http://www.trane.com/Commercial/Uploads/PDF/11612/Related_Literature/Refrigerant/HVAC_Refrigerants.pdf, accessed Nov 2, 2016
Student comments on Fluorochemicals: so hot right now
It’s fascinating that phasing out HFCs could eliminate up to 0.5% of climate change temperature increases. The fact that Daiken’s innovations to meet regulations are financially beneficial will motivate industry competitors to follow suit and adopt environmentally sound practices. I hope to see Daiken continuing to lead the charge in sustainability.
Isn’t it ironic that one of the industries that probably benefits the most from climate change needs to change its product technology to address climate change challenges? To me, the HVAC industry has a twisted interest in having climate change, hotter summers yielding more AC units being sold. John Staples, CEO of US Air Conditioning (California distributor) states this quite simply: “The hotter it gets, the more our business increases!”. He also states that only 60% of California homes currently have AC, and that this number is expected to increase significantly due to climate change in the near future.
While most companies see increased costs due to climate change, I think the HVAC industry in properly hedged and should not be too worried about having to innovate with regards to their technology, as demand seems to be on their side for the years to come.
I’m curious what categories the refrigerants I’m used to fall into. Do you know which of the types R-134 and R-114 are? I think these are the two that are primarily used in industrial environments. I know they are heavier than air, but do they still give off ozone depleting gases?
This is interesting! The properties required for a fluid to be used as a refrigerant are special, and so I have difficulty believing that the industry will ever develop a fully biodegradable refrigerant to fully offset the potential environmental risk — though I’m no expert and efforts might be underway. With HFOs being developed the next step for HVAC appears to be what you mentioned: finding some method of power free of fossil fuels. It seems to me that compressors needed for air conditioning could be run on a solar panel, especially with the technology developing as it has. Once solar pricing comes down, and once HFOs are commonplace, perhaps smaller AC units could be marketing in developing countries with a minimal effect on price.
Thank you for your contribution! I have never purchased an HVAC system, so I may be biased, but I wonder how much consumers truly know or care about the global warming impact of their HVAC products. I would guess that since most homes already have these systems, unless someone is installing a brand new system for some reason, they would not be attentive to this issue. I’d be interested to know if you have any thoughts about the consumer path to purchase and psychology around these products, and exactly how that might impact/put pressure on a company like Daikin.