Supplemental Environmental Projects: A New Approach for EPA Enforcement

Barnett Lawrence

Editors' Summary: Supplemental Environmental Projects (SEPs) are environmentally beneficial projects that regulated parties perform in exchange for penalty reductions when settling claims for alleged violations. This Article discusses the use of SEPs, focusing particularly on EPA's 1995 SEP policy. The author first provides a context for understanding SEPs with a general review of the role of penalty policies in EPA enforcement, culminating in a discussion of the evolution of EPA policies about SEPs. Next, the author reviews EPA's 1995 policy in detail, discusses EPA's experience with SEPs, and alerts readers to information about SEPs in EPA "Sector Notebooks." He then discusses the use of SEPs in state and citizen enforcement actions and provides some suggestions for negotiators. The author concludes that use of SEPs in federal and state enforcement is likely to increase and that SEPs have the potential to provide important environmental benefits without a significant increase in government enforcement costs.

Mr. Lawrence is a legal editor with the Research Institute of America in Alexandria, Virginia. He was an ELR editor from 1986 until 1992.

[26 ELR 10174]

Over the last few years, the U.S. Environmental Protection Agency (EPA) entered into the following settlement agreements:

A petroleum company agreed to pay a $ 1.56 million penalty for alleged reporting violations of the Emergency Planning and Community Right-to-Know Act (EPCRA).¹ The company will pay $ 312,000 in cash to EPA and will perform environmentally beneficial projects valued at more than $ 1.2 million.²

To settle an EPCRA case, a china manufacturer agreed to perform a project, valued at more than $ 9 million, in which the company will convert its china dinner-ware production system to a lead-free process.³

A chemical company agreed to pay a $ 516,430 civil penalty to settle an action in which EPA alleged violations of the Federal Water Pollution Control Act (FWPCA).⁴ The company also agreed to perform a pollution prevention project, valued at $ 3.2 million, to prevent the generation of 60 to 145 million pounds of hazardous waste per year that was being deep well injected in disposal wells.⁵

These settlements include the two traditional elements of EPA settlement agreements: a monetary penalty and the requirement that the defendant take action to ensure compliance. However, each of these settlements also includes provisions, called supplemental environmental projects (SEPs), that signal a new approach for EPA's enforcement program. A SEP is an environmentally beneficial project that goes beyond simply correcting the underlying violation. In exchange for a defendant's agreement to perform a SEP, EPA will usually lower the civil penalty.

EPA and the states have used a variety of terms to describe these settlement conditions: alternative payments, mitigation projects, credit projects, and environmentally beneficial projects.⁶ In 1991, EPA adopted the term supplemental environmental project (SEP).⁷

EPA has used SEPs in some form since the late 1970s, but used them sparingly until the last few years. Several developments have spurred EPA's increased acceptance of SEPs. The most important is EPA's emphasis on environmental auditing and pollution prevention, which are the two key categories of SEPs identified in EPA's 1991 SEP policy.⁸ EPA's pollution prevention strategy challenges EPA to "ensure that its enforcement program seeks pollution prevention opportunities as part of ensuring compliance" and to "encourage the inclusion of pollution prevention conditions in Agency enforcement settlements."⁹ Similarly, [26 ELR 10175] EPA's environmental auditing policy statement encourages EPA to include auditing provisions in settlements.¹⁰

Another factor in EPA's increased acceptance of SEPs is the Agency's emphasis on environmental justice. SEPs can be used to promote environmental justice, for example by providing emergency response equipment to low-income areas. In addition, the SEP policy allows EPA to leverage its limited enforcement resources to achieve environmental benefits that would not be achieved under EPA's traditional enforcement approach.

This Article first discusses the role of EPA's civil penalty policies in the Agency's civil enforcement program and the evolution of the SEP policy. The Article then describes EPA's 1995 SEP policy, EPA's experience with SEPs, and SEPs in the states. Finally, the Article provides recommendations to defendants for negotiating SEPs.

Role of Penalty Policies in EPA Enforcement

Federal environmental statutes authorize EPA to assess civil penalties for violations. These statutes typically authorize EPA to assess a civil penalty of up to $ 25,000 per day of noncompliance for each violation.¹¹

These statutes also provide general criteria for EPA or the courts to follow in assessing penalties. For example, Clean Air Act § 113(e) requires EPA or the court to consider the following factors, among others, in assessing a civil penalty: the size of the business, the violator's full compliance history and good-faith efforts to comply, the duration of the violation, payment by the violator of penalties previously assessed for the same violation, the economic benefit of noncompliance, the seriousness of the violation, and other factors that justice may require.¹²

The statutory ceilings and penalty assessment criteria leave EPA with considerable discretion in setting penalties. EPA has published civil penalty policies to guide its calculation of appropriate penalties.¹³ These policies are internal agency guidance documents not subject to notice and comment rulemaking. EPA uses them to calculate penalties that it will seek in administrative enforcement actions and that would be acceptable in settlements of administrative and judicial actions. EPA reserves the right, however, to act at variance from the policies and to change the policies without public notice. Nonetheless, EPA has increasingly come to rely on penalty policies to guide its civil penalty assessment.

EPA's civil penalty policies have influence beyond establishing guidelines for EPA enforcement personnel.¹⁴ To a lesser extent, the policies are also used by:

state agencies in assessing penalties;

EPA administrative law judges in ruling on appeals of EPA's civil penalty assessments;

federal and state courts in calculating penalties; and

citizen suit plaintiffs in negotiating penalties with defendant companies.

EPA's 1984 General Civil Penalty Policy

EPA issued its general civil penalty policy (General Policy) in 1984 to guide penalty assessment in EPA administrative and judicial enforcement actions.¹⁵ The General Policy set three goals for penalty assessment: deterrence, equitable treatment of the regulated community, and swift resolution of environmental problems. It established the following process for assessing a penalty:

calculate a preliminary deterrence figure;

apply adjustment factors to establish an initial penalty target figure; and

apply additional adjustments to the initial penalty target figure after settlement negotiations have begun to arrive at the adjusted penalty target figure.

The preliminary deterrence figure includes an economic benefit and gravity component. Recovering the economic benefit from noncompliance has been a cornerstone of EPA's penalty assessment process since 1984. This component of the penalty is designed to remove any significant economic benefits the violator received from failure to comply with the law. It includes economic benefits from delayed costs and costs that are completely avoided by noncompliance.¹⁶ To effectively deter violations, however, a penalty must be higher than the economic benefit of noncompliance. The amount of the penalty above what is necessary to recover the economic benefit of noncompliance is called the gravity component. It reflects the seriousness of the violation. The sum of the economic benefit and gravity component yields the preliminary deterrence figure.

To achieve the goal of equitable treatment of the regulated community, the General Policy also provides that the preliminary deterrence figure should be adjusted to account for a defendant's degree of willfulness or negligence, history of noncompliance, ability to pay, degree of cooperation, and other unique factors specific to the violator or case.

The preliminary deterrence figure, as adjusted by these factors prior to settlement negotiations, yields the initial penalty target figure. This is generally the amount that EPA assesses in administrative complaints and would be EPA's first settlement goal in judicial actions. The General Policy then provides for additional adjustments to the initial penalty target to account for developments after negotiations have [26 ELR 10176] begun. These additional adjustments yield the adjusted penalty target figure.

Statute-Specific Penalty Policies

On the same day it issued the 1984 General Policy, EPA issued a document to establish a framework for individual EPA offices to follow in developing statute-specific civil penalty policies (Framework).¹⁷ The Framework includes a section entitled "Alternative Payments" that set out EPA's policy on reducing a civil penalty in exchange for a violator's agreement to perform an environmentally beneficial project. Using the General Policy and Framework as guides, EPA has issued or revised penalty policies for most of its programs for which civil penalties are authorized by statute. Many of the statute-specific policies included provisions modeled on the Framework's Alternative Payments section.¹⁸

Evolution of EPA's SEP Policy

After a number of years of experience with statute-specific "Alternative Payment" provisions, EPA issued a cross-media policy on SEPs in 1991.¹⁹ This policy superseded the Alternative Payments section of the 1984 Framework, as well as any conflicting provisions in statute-specific penalty policies.

The 1991 SEP policy established five categories of projects that EPA could consider as potential SEPs, including pollution prevention and environmental auditing projects.²⁰ It required that there be a "nexus" between the violation and the SEP's environmental benefits, that defendants have the technical and economic resources to implement the SEP, and that the SEP not require substantial government oversight. The policy also provided that settlements that include SEPs should generally include a substantial monetary penalty that is at least as large as the economic benefit of noncompliance.

The number of SEPs increased after EPA issued its 1991 SEP policy. However, the 1991 policy was seen as cumbersome, rigid, and difficult to apply.²¹ Moreover, several issues—summarized below—slowed the pace of SEPs under the 1991 policy.

Legal Authority. Representative John Dingell (D-Mich.), then chairman of the House Energy and Commerce Committee, raised questions about EPA's legal authority to enter into SEPs. In December 1991, he asked the Government Accounting Office (GAO) to examine whether EPA had authority to include SEPs when settling mobile source enforcement actions brought under the Clean Air Act.²² These settlements allowed violators to fund public awareness projects relating to automobile air pollution in exchange for a reduction in civil penalties.

In a July 1992 opinion, the GAO concluded that EPA lacks authority to enter into these SEPs.²³ The GAO found that EPA's power to "compromise, or remit, with or without conditions" administrative penalties under Clean Air Act § 205 does not authorize EPA's use of its SEP policy in the mobile source program. The GAO also determined that EPA's SEP policy violates the Miscellaneous Receipts Act,²⁴ which requires that monies received for the government by government officers be deposited in the U.S. Treasury. Further, the GAO asserted that EPA violated appropriations law by entering into SEPs that go beyond remedying the violation in order to carry out other statutory goals.

In a December 1992 letter, EPA responded to the GAO opinion by reiterating its belief that it has legal authority to include SEPs in settlements and questioning whether the GAO considered EPA's 1991 SEP policy document. The GAO released a follow-up opinion in March 1993 reaffirming its July 1992 opinion.²⁵ The GAO noted that it had considered EPA's 1991 SEP policy, but concluded that the SEP policy's provision for public awareness projects not closely related to the original violation is beyond EPA's authority.

Although the GAO opinions pertain only to the Clean Air Act mobile source program, EPA was justifiably concerned that its entire SEP program could be in jeopardy. In a February 1993 letter requesting the GAO follow-up decision, Representative Dingell stated his belief that EPA lacks authority to enter into SEPs under any statute.

EPA did not issue a formal response to the second GAO decision. However, after meetings between the GAO, Dingell's staff, and EPA, a consensus emerged that the GAO decisions do not apply to all SEPs;²⁶ thus, EPA continues to use SEPs in its enforcement actions. However, EPA's legal authority for at least the public awareness category in the 1991 SEP policy remains in question.

In response to the GAO opinions, EPA has considered seeking legislative changes to explicitly authorize SEPs.²⁷ One of the bills introduced in 1994 to reauthorize the FWPCA included provisions on environmentally beneficial projects in judicial enforcement actions. The bill would have authorized a district court to order that all or part of a civil penalty in an EPA enforcement action under FWPCA § 309(d) be used for a beneficial project designed to restore [26 ELR 10177] the water quality or wildlife of the waters in which the violation occurred.²⁸

Recovery of Economic Benefit. EPA penalty policies require the assessment of a substantial monetary penalty, which generally must include a violator's economic benefit of noncompliance plus some appreciable portion of the gravity component of the penalty. The gravity component is the only portion of the penalty available for reduction in exchange for a SEP. In some cases, this may leave EPA with little room to negotiate a SEP.

Violations in some EPA programs, such as EPCRA § 313's reporting program, may not produce significant economic benefits from noncompliance. For such violations, EPA may have more latitude in negotiating penalty reductions in exchange for SEPS.

Inconsistent Application Across Programs. Differences between the major environmental laws make it difficult for EPA to use SEPs consistently.²⁹ For example, enforcement under some programs tends to involve a large number of small penalties, while others involve fewer cases with higher penalties. Major SEPs may not be feasible in programs that typically produce small penalties.

Another reason for inconsistent application of SEP policy is the multiple organizations responsible for enforcement. State and local agencies with delegated authority are often not as willing to include SEPs in settlements as the federal EPA.

Agency Errors. Finally, occasional misuse of SEPs in certain programs may have reduced EPA's enthusiasm in other programs. EPA negotiators have sometimes accepted poorly designed projects that were difficult to monitor to expedite settlement.³⁰

EPA's 1995 SEP Policy

EPA attempted to address many of the problems with implementation of its 1991 policy when it issued a revised SEP policy in May 1995.³¹ To promote the use of SEPs, the 1995 SEP policy gives EPA more flexibility in establishing penalties in settlements and gives defendants more leeway in proposing SEPs.³² The primary purpose of the policy is to encourage improvement in the environment and public health that may not have occurred without the settlement incentives provided by the policy.³³

EPA's 1995 SEP policy emphasizes that SEPs can be particularly useful in achieving policy goals, such as promoting pollution prevention and environmental justice. EPA will evaluate proposed SEPs based on the environmental management hierarchy identified in the Pollution Prevention Act.³⁴ Thus, SEPs that involve pollution prevention are preferred to other types of control strategies. EPA also encourages SEPs in communities where environmental justice is an issue.³⁵

Applicability of SEP Policy

The 1995 SEP policy applies to settlements of all EPA civil judicial and administrative actions. EPA and the Department of Justice may also use the policy in reviewing proposed SEPs in citizen-suit settlements. The policy does not apply to settlements of claims for stipulated penalties for violations of consent decrees or other settlement agreement requirements, although EPA is evaluating whether SEPs should be used in evaluating these claims.

The policy is not intended for use by EPA, defendants, courts, or administrative law judges at a hearing or in a trial. EPA reserves the right to act at variance with the policy.³⁶

SEP Defined

The 1995 SEP policy defines a SEP as "environmentally beneficial projects which a defendant/respondent agrees to undertake in settlement of an enforcement action, but which the defendant/respondent is not otherwise legally required to perform."³⁷ The policy elaborates on the three bolded phrases in the definition as follows:

"Environmentally beneficial" means a SEP must improve, protect, or reduce risks to public health, or the environment at large. While in some cases a SEP may provide the alleged violator with certain benefits, there must be no doubt that the project primarily benefits the public health or the environment.

"In settlement of an enforcement action" means: (1) EPA has the opportunity to help shape the scope of the project before it is implemented; and (2) the project is not commenced until after the Agency has identified a violation (e.g., issued a notice of violation, administrative order, or complaint).

"Not otherwise legally required to perform" means the SEP is not required by any federal, state or local law or regulation. Further, SEPs cannot include actions which the defendant/respondent may be required to perform: as injunctive relief in the instant case; as part of a settlement or order in another legal action; or by state or local requirements. SEPs may include activities which the defendant/respondent will become legally obligated to undertake two or more years in the future. Such "accelerated compliance" projects are not allowable, however, if the regulation or statute provides a benefit (e.g., a higher emission limit) to the defendant/respondent for early compliance.³⁸

[26 ELR 10178]

Legal Guidelines

EPA has developed the following five legal guidelines to ensure that proposed SEPs are within its authority under federal law:³⁹

1. There must be an adequate nexus between the violation and the proposed project. An adequate nexus exists only if the project reduces the overall environmental or public health impacts to which the violation contributes, or if the project reduces the likelihood of similar violations. SEPs performed at the site of the alleged violations, in the same ecosystem, or within the immediate geographic area are likely to satisfy the nexus requirement, even if the SEP addresses a different pollutant in a different medium.

EPA has approved several SEPs that required violators to perform projects at locations other than where the violations occurred. EPA will consider these SEPs if they achieve greater environmental benefit than would have been otherwise possible. For example, a 1994 settlement between EPA Region III and a manufacturer of lead products included a multisite SEP. EPA brought a Toxic Substances Control Act administrative action against the company, alleging that the company failed to submit reports required by the inventory update rule on chemicals manufactured at its Philadelphia plant. The company agreed to pay a $ 57,000 civil penalty, $ 43,620 of which will be remitted by EPA if the company completes SEPs at its Philadelphia and Laredo, Texas facilities. The SEPs have a combined estimated cost of $ 198,800.⁴⁰

2. A SEP must advance at least one of the declared objectives of the statutes under which the enforcement action was brought.

3. EPA or other federal agencies may not manage or control funds that are set aside or escrowed for performance of a SEP. EPA also may not retain authority to manage a SEP, but may provide oversight.

4. The signed settlement agreement must specify the type and scope of each SEP. Settlements in which the defendant agrees to spend an amount of money to be determined after the settlement is signed are generally not allowed.

5. A SEP may not be something that EPA is required to do, and may not provide EPA with additional resources to perform an activity for which Congress has appropriated funds. A SEP should also not appear to be an expansion of an existing EPA program.

SEP Categories

The 1995 SEP policy establishes seven categories of projects that may qualify as SEPs:⁴¹

1. Public Health. These projects provide human health care that is related to the actual or potential harm to human health caused by the violation. Examples of public health SEPs include: epidemiological studies, medical examinations of potentially affected persons, and medical treatment.

2. Pollution Prevention. These projects reduce the generation of pollution through source reduction, which is any practice that reduces the amount of pollutants entering any waste stream or otherwise released into the environment. Pollution prevention is no longer possible after the pollutant or waste stream has been generated. There must be an overall decrease in the amount or toxicity of pollution released to the environment, not merely a transfer among media.

Examples of pollution prevention SEPs include: equipment or technology modifications; product reformulation or redesign; substitution of raw materials; improvements in housekeeping, maintenance, training, or inventory control; projects that protect natural resources through conservation or increased energy efficiency; and in-process recycling, in which waste materials produced in a manufacturing process are returned directly to production as raw materials onsite. In 1994, EPA approved pollution prevention SEPs that involved solvent substitution, converting a production system to a lead-free process, and installing an alternative cooling system to reduce fresh water withdrawals.⁴²

3. Pollution Reduction. These projects are used when the pollutant or waste stream has already been generated or released. A pollution reduction project results in a decrease in the amount or toxicity of a pollutant by a means that does not qualify as pollution prevention.

Examples of pollution reduction SEPs include: installation of more effective end-of-process control or treatment technology; out-of-process recycling, in which industrial waste collected after the manufacturing process or consumer waste materials are used as raw materials for production offsite. In 1994, EPA approved a pollution prevention SEP that involved use of wastewater treatment sludge as fertilizer, and improved scrubber performance to reduce air toxics emissions.⁴³

4. Environmental Restoration and Protection. These projects go beyond repairing the damage caused by the violation to enhance the condition of the ecosystem or immediate geographic area. They can include restoration or protection of natural or man-made environments.

Examples of environmental restoration and protection SEPs include: reductions in discharges of pollutants that are not the subject of the violations to an affected air basin or watershed; restoration of a wetland along the same avian flyway in which the facility is located; developing conservation programs or protecting habitat critical to a species endangered by the violation.

5. Assessments and Audits. These are potential SEPs if not otherwise available as injunctive relief. They include pollution prevention assessments, site assessments, environmental management system audits, and compliance audits. EPA will generally only accept compliance audits as SEPs when the defendant is a small business.

[26 ELR 10179]

6. Environmental Compliance Promotion. These projects provide training or technical support to other members of the regulated community. EPA will consider these SEPs only if their primary impact focuses on the same regulatory requirements that were violated and if EPA believes that compliance in the industry sector would be significantly advanced.

Examples of environmental compliance promotion SEPs include: producing or sponsoring a seminar directly related to correcting widespread violations in the defendant's industry sector. EPA will not accept general educational or public awareness projects, such as sponsoring public seminars or promoting recycling in a community.

7. Emergency Planning and Preparedness. These projects provide assistance, such as computers and software, to a state or local emergency response or planning entity. EPA will consider these SEPs if their primary impact is within the same emergency planning district or state affected by the violations, the SEP involves noncash assistance, and the complaint alleges violations of EPCRA or the reporting requirements in Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) § 103.⁴⁴

Calculating the Adjusted Penalty

The policy provides for a three-step process in calculating the penalty in a settlement that includes a SEP.⁴⁵ EPA will first use its penalty policies to calculate the penalty, including the economic benefit and gravity components. The penalty should generally recover at least the economic benefit of noncompliance plus 10 percent of the gravity component or 25 percent of the gravity component, whichever is greater.

In the second step of the penalty calculation, EPA will determine the net-present after-tax cost of the SEP, which EPA calls the "SEP Cost." The policy provides for use of a computer model called PROJECT to calculate the SEP Cost, which can include capital costs, one-time nondepreciable costs, and annual operation costs.

Third, EPA will evaluate the benefits of the SEP to determine what percentage of the net-present and after-tax cost can be applied to mitigate the penalty's gravity component. In evaluating SEP benefits, EPA will consider benefits to the public or environment at large, the degree of innovation, environmental justice, multimedia impacts, and pollution prevention. As a general guideline, the final mitigation percentage should not exceed 80 percent of the SEP Cost. EPA may raise this percentage to 100 percent for any defendant that performs a pollution prevention SEP.⁴⁶ EPA may also allow 100 percent mitigation for small businesses, government agencies, and nonprofit organizations, regardless of the type of SEP performed.

EPA Experience With SEPs

The majority of SEPs have been in three programs: the Toxic Substances Control Act (TSCA), EPCRA, and the Clean Air Act mobile source program. Most of theSEPs in the Clean Air Act mobile source program were public awareness SEPs. Because of the GAO's determination that EPA lacks the legal authority to enter into these SEPs, however, the Agency no longer accepts public awareness projects as SEPs.

One reason for the large number of SEPs in TSCA and EPCRA cases is that these programs produce many enforcement cases. Also, the EPCRA § 313 program requires facilities to report their emissions to EPA, providing an abundance of good information on pollution prevention opportunities. Further, the EPA pioneered the use of SEPs in the late 1970s in the TSCA program and TSCA has statutory language that encourages EPA to pursue SEPs.⁴⁷

Fiscal year 1992 was the first year that EPA compiled agencywide information on SEPs. In that year, EPA negotiated 226 SEPs (not including 183 public awareness SEPs under the Clean Air Act mobile source program) worth approximately $ 50 million.⁴⁸ By program, the SEPs broke down as follows: 38 percent in the TSCA program, 38 percent EPCRA, 9 percent FWPCA, 9 percent in the Resource Conservation and Recovery Act (RCRA) program, 3 percent under the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA), 2 percent CERCLA, and 1 percent Clean Air Act. Fifty-two percent of the fiscal year 1992 SEPs involved pollution reduction, 29 percent involved pollution prevention, and 9 percent involved environmental auditing.

In fiscal year 1993, EPA negotiated 229 SEPs worth an estimated $ 73.8 million.⁴⁹ Forty-eight percent of these SEPs were pollution reduction projects and 18 percent were pollution prevention projects. Complete information is not available for fiscal year 1994. However, during that period, EPA negotiated a total of 190 SEPs in EPCRA (127), TSCA (55), and FIFRA (8) cases.⁵⁰ EPA Region II negotiated 28 SEPs worth an estimated $ 18.5 million in fiscal year 1994.

EPA appears to be continuing to increase its use of SEPs. One EPA regional enforcement official claims that SEPs are brought up in half of the enforcement negotiations he is involved in, although the proposals do not always succeed.⁵¹ Top EPA officials have stated their commitment to expanding the use of SEPs over the next several years.⁵²

Industry-Specific Information

EPA's Office of Enforcement and Compliance Assurance has developed reports that compile environmental compliance [26 ELR 10180] information for 18 major industrial categories.⁵³ These reports, called EPA Sector Notebooks, include a comprehensive environmental profile of the applicable industry and summaries of industrial process information, pollution prevention techniques, regulatory requirements, and innovative programs. The reports also include summaries of SEPs performed by companies in the particular industrial category.⁵⁴ For example, the report on the organic chemical industry notes that organic chemical facilities performed a total of 17 SEPs during fiscal years 1993 and 1994.⁵⁵ Unlike the SEPs in most other industrial sectors, none of the SEPs undertaken by organic chemical facilities involved specific manufacturing process changes. The SEPs fell into two categories: (1) nonprocess related projects, such as contributions to local emergency planning committees; and (2) improvement or installation of control and recovery technology to reduce production of toxic chemicals.

SEPs in the States

The approach to SEPs differs from state to state. In general, states rely less on formal policies and more on negotiations in incorporating SEPs into settlements. Many states have been less willing than EPA to grant SEPs. One reason is that some states use penalties to help fund environmental programs or designate penalties for specific state or local programs.

Much state environmental enforcement is done through delegated authority under federal law. EPA can impose various requirements on states as conditions of approval of state programs. For example, FWPCA § 402(b), concerning delegation to states of the national pollutant discharge elimination system program, requires EPA to ensure that approved states have adequate authority to abate violations, including civil and criminal penalties and other means of enforcement.⁵⁶ However, EPA has not gone so far as to require approved states to adopt specific penalty or SEP policies. Many states have adopted aspects of EPA's civil penalty policies, especially the requirement to recoup the economic benefit of noncompliance. However, fewer states have adopted formal SEP policies.

The following are examples of SEP policies in selected states:

California. California has adopted a policy similar to EPA's 1991 SEP policy.⁵⁷ However, the California program is less generous than the federal program—the maximum penalty setoff allowed is generally only 25 percent of the total settlement.⁵⁸

New York. The New York Department of Environmental Conservation issued a new policy on "environmentally beneficial projects" in August 1995.⁵⁹ The policy is similar to EPA's 1995 SEP policy. Under the New York policy, environmental benefit projects may not be accepted where the violator has a record of significant noncompliance, the violation was committed with any of the culpable mental states defined in the state penal law, or if the violator did not take all the steps needed to promptly correct the violation.

Massachusetts. The Massachusetts Toxics Use Reduction Act is designed to encourage businesses to reduce their use of toxic substances.⁶⁰ The Act establishes toxic use reduction as the preferred means for achieving compliance with certain federal or state environmental laws. To achieve this statutory mandate, the state attorney general's office adopted a policy to, whenever possible, incorporate into consent decrees the requirement that defendants use toxic reduction as means of coming into compliance, and reducing pollution beyond compliance levels.⁶¹

Texas. The Texas Natural Resource Conservation Commission has developed guidelines for administrative enforcement settlements with SEPs. The guidelines provide that credit for a SEP should be limited to no more than 50 percent of the total penalty. Projects that directly clean up environmental contamination or reduce pollutants entering the environment may qualify for a dollar-for-dollar penalty reduction under the Texas policy.⁶²

SEPs in Citizen Suits

Under the citizen suit provisions of most federal environmental statutes, EPA and the Department of Justice may comment on proposed consent decrees in citizen enforcement suits.⁶³ EPA and the Department of Justice can use the 1995 SEP policy to evaluate proposed SEPs in citizen suit settlements.⁶⁴

In the late 1980s, the Department of Justice objected to a number of citizen suit settlements that included provisions for environmentally beneficial expenditures. Depending on [26 ELR 10181] the case, the Department's objections included the following: all penalties should go the U.S. Treasury, a substantial penalty should be paid to the Treasury in addition to the SEP, and there must be a strong nexus between the SEP and the violation.⁶⁵ Several courts invalidated consent decrees that included SEPs without a sufficient nexus to the violation,⁶⁶ although the prevailing view seems to be that courts will be liberal in approving SEP provisions in citizen suit settlements.⁶⁷

The 1990 Clean Air Act Amendments included a provision that specifically authorizes courts to order that civil penalties in citizen suits be used to fund environmentally beneficial projects.⁶⁸ Although the Act does not explicitly approve the inclusion of SEPs in citizen suit settlements, Congress was aware of this practice and did not include anything in the Act to prohibit it.

Negotiating SEPs

In enforcement negotiations, defendants should always be aware of the option of performing SEPs in exchange for a lower penalty. Companies may be able to reap some long-term rewards by using money to finance SEPs that would otherwise be lost as civil penalties.

The primary purpose of a SEP must be to benefit the environment or public health, not the defendant, and defendants must generally pay more for a SEP than the amount of the penalty reduction. However, SEPs may still be attractive alternatives for some defendants.⁶⁹ A company that performs a SEP can get good publicity, more favorable treatment from EPA in subsequent enforcement actions, and the opportunity to evaluate possibly inefficient production processes. Companies that perform pollution prevention or environmental auditing SEPs may discover methods to eliminate the use of toxic materials, switch to less toxic alternatives, or recover toxic material from their waste streams. These measures could make the companies more competitive while reducing pollution.

When proposing a SEP to EPA, defendants should ensure that they meet all the requirements in EPA's 1995 SEP policy. Defendants should also be prepared to educate EPA staff on the value of the proposed SEP. Some EPA staff may lack the technical expertise to quantify the benefits of pollution prevention projects and other SEPs.⁷⁰

Finally, EPA favors SEPs that result in direct reductions of pollution or that may lead to the development of innovative methods for reducing pollution. Defendants should emphasize these aspects of proposed SEPs during settlement negotiations.

Conclusion

Following issuance of EPA's 1995 SEP policy, SEPs should finally become an ordinary part of environmental enforcement. The number of SEPs included in EPA settlements probably will continue to increase, and more states are likely to adopt or formalize SEP policies.

In this time of uncertainty about environmental enforcement budgets, the SEP policy should result in significant environmental benefits without much additional expense for EPA and state agencies. Moreover, expanded use of this enforcement tool could fit in well with EPA's new emphasis on regulatory options that increase the flexibility available to regulated parties.⁷¹ The result may be to improve the effectiveness of environmental enforcement without making it significantly more harsh or expensive.

1. 42 U.S.C. §§ 11001-11050, ELR STAT. EPCRA §§ 301-330.

2. EPA, ENFORCEMENT AND COMPLIANCE ASSURANCE ACCOMPLISHMENTS REPORT FY 1994 2-13 (May 1995) (available from the ELR Document Service, ELR Order No. AD-1236) [hereinafter EPA 1994 ENFORCEMENT REPORT] (describing a 1994 EPA Region IV consent agreement and consent order with Ashland Petroleum).

3. EPA 1994 ENFORCEMENT REPORT, supra note 2, at 3-10 (describing a 1994 EPA Region III consent agreement and consent order with Homer Laughlin China Company.

4. 33 U.S.C. §§ 1251-1387, ELR STAT. FWPCA §§ 101-607.

5. EPA 1994 ENFORCEMENT REPORT, supra note 2, at 3-10 (describing a 1994 consent decree with I.E. DuPont de Nemours.

6. EPA, POLICY ON THE USE OF SUPPLEMENTAL ENVIRONMENTAL PROJECTS IN EPA SETTLEMENTS (1991) [hereinafter 1991 SEP POLICY], ELR ADMIN. MAT. I 35607.

7. Id.

8. Id. These SEP categories continue to be key categories under EPA's 1995 SEP policy. See infra notes 41-44 and accompanying text.

9. EPA, Pollution Prevention Strategy, 56 Fed. Reg. 7849 (Feb. 6, 1991).

10. EPA, Environmental Auditing Policy Statement, 51 Fed. Reg. 25004 (July 9, 1986), ELR ADMIN. MAT. I 35001.

11. See, e.g., 42 U.S.C. § 6928(g), ELR STAT. RCRA § 3008(g); 42 U.S.C. § 7413(b), ELR STAT. CAA § 113(b). Some statutory provisions for administrative penalties have lower ceilings. See, e.g., 42 U.S.C. § 1319(g), ELR STAT. FWPCA § 309(g).

12. 42 U.S.C. § 7413(e), ELR STAT. CAA § 113(e).

13. See Jonathan Libber, Penalty Assessment at the Environmental Protection Agency: A View From Inside, NAT'L ENVTL. ENFOR. J., Apr. 1991, at 3. See also Barnett M. Lawrence, EPA's Civil Penalty Policies: Making the Penalty Fit the Violation, 22 ELR 10529 (Aug. 1992).

14. See Lawrence, supra note 13, at 10530.

15. EPA, POLICY ON CIVIL PENALTIES (Feb. 16, 1984), ELR ADMIN. MAT. I 35083.

16. Seealso EPA, GUIDANCE FOR CALCULATING THE ECONOMIC BENEFIT OF NONCOMPLIANCE FOR A CIVIL PENALTY ASSESSMENT (Nov. 5, 1984), ELR ADMIN. MAT. I 35085. This document introduced a computer model called BEN for calculating economic benefit. See BEN: A MODEL TO CALCULATE THE ECONOMIC BENEFITS OF NONCOMPLIANCE: USER'S MANUAL (Dec. 1993) (available with August 1994 software from the ELR Document Service, ELR Order No. AD-284).

17. EPA, A FRAMEWORK FOR STATUTE-SPECIFIC APPROACHES TO PENALTY ASSESSMENT: IMPLEMENTING EPA's POLICY ON CIVIL PENALTIES (Feb. 16, 1984), ELR ADMIN. MAT. I 35073.

18. See, e.g., EPA, CLEAN WATER ACT PENALTY POLICY FOR CIVIL SETTLEMENT NEGOTIATIONS, Sec. V (Mitigation Projects) (Feb. 11, 1986) (available from the ELR Document Service, ELR Order No. AD-1041); EPA, RCRA CIVIL PENALTY POLICY, Sec. IX.A.3.e. (Environmental Projects) (Oct. 1990), ELR ADMIN. MAT. I 35273, 35283.

19. 1991 SEP POLICY, supra note 6.

20. The five categories were: pollution prevention projects, pollution reduction projects, environmental restoration projects, environmental auditing projects, and public awareness projects. EPA later added a sixth SEP category: support to local emergency planning committees under EPCRA.

21. EPA, INTERIM REVISED EPA SUPPLEMENTAL ENVIRONMENTAL PROJECTS POLICY ISSUED, 60 Fed. Reg. 24856 (May 10, 1995), ELR ADMIN. MAT. I 35613 [hereinafter 1995 SEP POLICY].

22. 42 U.S.C. §§ 7401-7671q, ELR STAT. CAA §§ 101-618.

23. GOVERNMENT ACCOUNTING OFFICE DECISION, B-247155 (July 7, 1992).

24. 31 U.S.C. § 3302.

25. GOVERNMENT ACCOUNTING OFFICE DECISION, B-247155.2 (Mar. 1, 1993).

26. Telephone Interview with Peter Rosenberg, Policy Analyst, EPA Office of Enforcement and Compliance Assessment (Oct. 1995).

27. Id.

28. S. 1114, 103d Cong., 2d Sess. (1994).

29. EPA, ENFORCEMENT IN THE 1990'S PROJECT, RECOMMENDATIONS OF THE ANALYTICAL WORKGROUPS 4-70 (Oct. 1991). This is related to the fact, noted above, that violations of some statutes can result in large economic benefits, while other types of violations often do not produce significant economic benefits.

30. Id. See also Memorandum from James M. Strock to Regional Administrators et al. (Feb. 12, 1991) accompanying 1991 SEP POLICY, supra note 6.

31. 1995 SEP POLICY, supra note 21.

32. See Steven A. Herman, EPA's Enforcement and Compliance Assurance Priorities for Fiscal Year 1995, NAT'L ENVTL. ENFOR. J., Feb. 1995, at 5.

33. 1995 SEP POLICY, supra note 21, at 24856.

34. 42 U.S.C. §§ 13101-13109, ELR STAT. PPA §§ 13101-13109.

35. 1995 SEP POLICY, supra note 21, at 24857.

36. Id.

37. Id. (bold in original).

38. 1995 SEP POLICY, supra note 21, at 24857-58 (footnote omitted).

39. 1995 SEP POLICY, supra note 21, at 24858.

40. EPA 1994 ENFORCEMENT REPORT, supra note 2, at 3-10 (describing a 1994 EPA Region III settlement with Anzon, Inc.).

41. 1995 SEP POLICY, supra note 21, at 24858-60.

42. EPA 1994 ENFORCEMENT REPORT, supra note 2, at 3-11.

43. Id.

44. 42 U.S.C. § 9603, ELR STAT. CERCLA § 103.

45. 1995 SEP POLICY, supra note 21, at 24860-61.

46. See James J. Periconi & David Nelson, The Precedent-Setting Use of a Pollution Prevention Project in an EPA Enforcement Settlement: The First Dollar-for-Dollar Penalty Offset, 24 Env't Rep. (BNA) 2049, 2056 (Apr. 1, 1994) (providing an example of a pollution prevention SEP for which EPA granted a dollar-for-dollar offset).

47. TSCA provides that "[EPA] may compromise, modify, or remit, with or without conditions, any civil penalty which may be imposed under this subsection." 15 U.S.C. § 2615(a)(2)(C), ELR STAT. TSCA § 16(a)(2)(C).

48. EPA, ENFORCEMENT ACCOMPLISHMENTS REPORT FY 1992 (Apr. 1993) (available from the ELR Document Service, ELR Order No. AD-93).

49. EPA, ENFORCEMENT ACCOMPLISHMENTS REPORT FY 1993 (Apr. 1994) (available from the ELR Document Service, ELR Order No. AD-15).

50. EPA 1994 ENFORCEMENT REPORT, supra note 2.

51. Use of Supplemental Environmental Projects by EPA, States Increasing as Familiarity Grows, 25 Env't Rep. (BNA) 282 (June 10, 1994) (quoting Frank Ney, an assistant counsel with EPA Region IV).

52. See, e.g., Steven A. Herman, EPA's Enforcement Priorities for Fiscal Year 1994, NAT'L ENVTL. ENFOR. J., Feb. 1994, at 3; Herman, supra note 32, at 5.

53. The categories are: dry cleaning; electronics and computer; wood furniture and fixtures; inorganic chemistry; organic chemistry; iron and steel; lumber and wood products; fabricated metal products; metal mining; motor vehicle assembly; nonferrous metals; nonfuel, nonmetal mining; petroleum refining; printing; pulp and paper; rubber and plastic; stone, clay, glass, and concrete; and transportation equipment cleaning.

54. Hard copies of the EPA Sector Notebooks are available from the U.S. Government Printing Office. Electronic versions are available via the Internet on EPA's Envirosense World Wide Web site at "http://es.inel.gov/comply/sector/index.html."

55. EPA OFFICE OF ENFORCEMENT AND COMPLIANCE ASSURANCE, ORGANIC CHEMICAL INDUSTRY SECTOR NOTEBOOK 98 (Sept. 1995).

56. 33 U.S.C. § 1342(b), ELR STAT. FWPCA § 402(b).

57. CAL/EPA, POLICY ON THE USEOF SUPPLEMENTAL ENVIRONMENTAL PROJECTS IN CIVIL AND ADMINISTRATIVE SETTLEMENTS (Mar. 22, 1993). One reason for the similarity of the state and federal SEP policies is that the head of the California EPA, James Strock, led the development of the 1991 federal SEP policy when he was with EPA.

58. Periconi & Nelson, supra note 46, at 2056.

59. NEW YORK STATE DEPARTMENT OF ENVIRONMENTAL CONSERVATION, ENVIRONMENTAL BENEFIT POLICY (Aug. 3, 1995). New York formerly allowed only government agencies and nonprofit organizations to perform environmentally beneficial projects (EBPs) in exchange for lower penalties. The 1995 policy expanded this practice to include private companies. However, in January 1996, New York State Assemblyman Richard Brodsky (D-Westchester) introduced a bill (A. 8483) to restrict the types of EBPs that could lead to penalty reductions and to require all settlements with EBPs to include a monetary penalty.

60. MASS. GEN. L. ch. 211.

61. Madelyn Morris, Preventing Pollution: Using the Massachusetts Toxic Use Reduction Act, NAT'L ENVTL. ENFOR. J., Mar. 1992, at 6.

62. TEXAS NATURAL RESOURCE CONSERVATION COMMISSION, ENVIRONMENTAL ENFORCEMENT POLICY STATEMENT (Oct. 26, 1995).

63. See, e.g., 33 U.S.C. § 1365(c)(3), ELR STAT. FWPCA § 505(c)(3).

64. 1995 SEP POLICY, supra note 21, at 24857.

65. See David S. Mann, Polluter-Financed Environmentally Beneficial Expenditures: Effective Use or Improper Abuse of Citizen Suits Under the Clean Water Act?, 21 ENVTL. L. 175 (Winter 1991).

66. See, e.g., Pennsylvania Envtl. Defense Found. v. Bellefonte Borough, 718 F. Supp. 431, 20 ELR 20286 (M.D. Pa. 1989).

67. See, e.g., Sierra Club v. Electronic Controls Design, Inc., 909 F.2d 1350, 20 ELR 21081 (9th Cir. 1990).

68. 42 U.S.C. § 7404(g)(2), ELR STAT. CAA § 304(g)(2).

69. See Guinn, Pollution Prevention and Waste Minimization, NAT. RESOURCES & ENV'T, Fall 1994, at 10; David L. Markell, Pollution Prevention, in ENVIRONMENTAL LAW PRACTICE GUIDE: STATE AND FEDERAL LAW (Matthew Bender & Co. 1995).

70. MIT CENTER FOR TECHNOLOGY, POLICY & INDUSTRIAL DEVELOPMENT: RECENT EXPERIENCE IN ENCOURAGING THE USE OF POLLUTION PREVENTION IN ENFORCEMENT SETTLEMENTS (1994) (prepared for the EPA Office of Enforcement and Compliance Assurance).

71. See, e.g., Beth S. Ginsberg & Cynthia Cummis, EPA's Project XL: A Paradigm for Promising Regulatory Reform, 26 ELR 10059 (Feb. 1996).