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Driven by environmental concerns, legislation is pushing for a massive change in the refrigerants market, phasing out traditional refrigerants in favor of alternatives with lower global warming potential.
Key points
Forty years after continuous depletion of the stratospheric ozone led to the discovery of the ozone hole, new regulation to limit the global warming potential (GWP) of today’s refrigerants is about to transform the industry once again. This regulation change is expected to increase the use of low- to zero-GWP refrigerants,1 with applications such as transcritical CO2 systems expected to grow from USD 48.5 billion in 2023 to USD 140.9 billion in 2030.2
The rise of chlorofluorocarbons
From the first known artificial refrigeration demonstrated by William Cullen at the University of Glasgow in 17483 to the launch of General Electrics' “Monitor-Top” in 1927,4 significant progress has been made in the development and use of refrigerants. Yet until 1929, refrigeration systems commonly used toxic gasses such as ammonia, sulphur dioxide, and methyl chloride as coolant, with the latter being a cause of fatal accidents due to leakage.5
A collaborative effort between General Motors, Du Pont, and Frigidaire to find safer refrigerant led Thomas Midgley Jr. to the discovery of Freon® in 1928, a type of chlorofluorocarbon (CFC),6 whose adoption in cooling systems soon became widespread.
The Montreal Protocol and the Kigali Amendment
While CFCs are safe to use in most applications and inert in the lower atmosphere, they decompose in the upper atmosphere or stratosphere. In 1974,8 Professor F. Sherwood Rowland and Dr. Mario Molina proved that CFCs could be a major source of inorganic chlorine in the stratosphere, with some of the released chlorine actively destroying ozone in the stratosphere. The depletion of the protective ozone layer in the atmosphere caused by CFCs became known as the ozone hole.7 This set up the context for the Montreal Protocol signed in 1987, with the overall goal of controlling the production of ozone-depleting substances, particularly the production of CFCs.
The harmfulness of CFCs and the Montreal Protocol requirement to stop their production by the year 2000 meant that substitute substances were required, which came in the form of hydrochlorofluorocarbons (HCFCs), later substituted by hydrofluorocarbons (HFCs).
While the adoption of CFCs in the 1930s was a reaction to safety concerns, the adoption of HCFCs and HFCs was a response to the ozone depleting potential (ODP) of CFCs. The Kigali Amendment (2016) phases down the production and consumption of HFCs with high GWP9 such as HFC-134a, a potent greenhouse gas commonly used in refrigeration and air conditioning whose warming potential is 1,470 times that of CO2.10
Natural refrigerants
Ammonia, carbon dioxide, and hydrocarbons are the most frequently used natural refrigerants, whose main advantage lies in their relatively low to non-existing environmental impact from an ODP and GWP standpoint.
In addition, these refrigerants commonly have a well-developed supply chain that enables low costs, a pre-requisite for mass adoption.
Ammonia – also known as R-717 – has been the backbone of the cold storage and food processing industry since the early 1900s, which has recently made in-roads into applications in non-industrial settings.11 Ammonia compares well in terms of operating performance; however, it carries the risk of toxic leaks, thus limiting the settings in which the application is socially accepted.
Carbon dioxide (CO2) – or R-744 – was first used in a refrigeration system in 1879. Despite the system’s popularity in military and shipping applications, it was largely abandoned due to technical issues and heavy promotion of CFCs by the chemical industry.12
Dynamic growth of CO2-based cooling systems
One of the key barriers to a wider adoption of CO2 refrigeration systems is the concern around the efficiency of these systems in warm climates. Given the relevance of energy costs in industrial and commercial refrigeration, we believe that removing this barrier might be a significant catalyst for the growth of CO2 refrigeration systems.
Innovations in CO2 refrigeration systems are believed to be able to deliver double-digit energy efficiency improvements,13 a significant figure in applications such as supermarkets where refrigeration systems typically represent 40% of supermarket’s energy consumption.14
CO2-based systems can also benefit from the sustainability targets of retailers, especially in under-penetrated markets such as North America. While in Europe CO2-based systems have an estimated penetration rate of 22.9% (2022), in North America the adoption is still in a nascent stage, with a penetration rate of 4.1%. The 80% annual increase in the use of transcritical CO2-systems by food stores in North America15 clearly points to what we believe is a structural growth opportunity for natural refrigerant solutions.
CAIA, Senior portfolio manager, Thematic Equities
Holger Frey is a Senior Portfolio Manager on the Thematic Equity team and lead Portfolio Manager for the Climate Solutions Equity strategy at ۶Ƶ Asset Management. He joined the Thematic Equity team in 2021. From 2016 to 2021, he worked at RobecoSAM in Zurich as lead PM for the Circular Economy Equity and Sustainable Food Equity strategy. Holger started his career in 2004 as a financial consultant. In 2006, he moved to Deutsche Asset and Wealth Management, where in 2008 he began focusing on nutrition, water, and environmental technology sectors, becoming the lead PM for the water strategy. Holger has a Dipl.-Inf. (FH) degree in Computer Science and Media from Fulda University of Applied Sciences and a bachelor’s degree in Musicology from Goethe University Frankfurt. He is a CAIA Charterholder.
Portfolio Manager, Thematic Equity team
Bruno Azevedo is a Portfolio Manager on the Thematic Equity team at ۶Ƶ Asset Management. He focuses on bottom-up, fundamental research on equity securities, sectors, products, and technologies in connection with the team’s pure-play-related investment themes and is involved in portfolio construction and portfolio management. Before joining the team in 2021, Bruno worked in Advisory and Sales in Credit Suisse’s Wealth Management division, and in 2018, he supported the Thematic Equity team for six months as part of a training program. Bruno holds a master’s degree in Finance from the University of Neuchâtel and is a CFA Charterholder.
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