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INNOVATIVE ENVIRONMENTAL ENFORCEMENT SETTLEMENTS, Corporate Environmental Stategy Magazine, Vol. 1, Number 2, October 1993
James P. DeMaria and Robert B. Pojasek

There is a growing realization that programs for pollution prevention, toxic use reduction and waste minimization have significant, far-reaching benefits for industries that develop and use them. Aside from ensuring that liability for noncompliance with environmental laws and regulations is minimized, these programs are aiding companies in controlling issues that directly affect the bottom line. By re-engineering their manufacturing processes, forward-thinking companies are beginning to enjoy the fruits of reduced disposal costs and worker exposure, decreased feedstock and energy requirements, and better relations with local communities and the regulating agencies.

Needless to say, industry is not alone in realizing the value of pollution prevention and other environmentally beneficial programs. In 1990, the United States Congress enacted the Pollution Prevention Act to require the Environmental Protection Agency (EPA) to use a variety of regulatory and voluntary approaches to stimulate industry's transition from the traditional end-of-the-pipe pollution control to pollution prevention. At the time the Act was passed, more than half of the states had already passed pollution prevention laws seeking to accomplish the same goal.

Since that time, one area in which the promotion of environmentally beneficial programs has increased dramatically is in the settlement of the EPA's enforcement actions. Under its current enforcement policy, in the settlement of environmental enforcement cases in which the EPA will require defendants to achieve and maintain compliance with federal environmental laws and regulations, the agency if often including pollution prevention, waste reduction, and recycling conditions requiring facilities to achieve environmental benefits beyond those required by law. By developing these so-called supplemental environmental projects or SEPs, a company can reduce the cash portion of an enforcement penalty by agreeing to make environmentally beneficial expenditures that provide long-term benefits to human health and the environment. With the increased prevalence of the EPA's use of supplemental environmental projects in the settlement of enforcement cases, industry would do well to better understand not only how and when SEPs are incorporated into consent agreements, but also the benefits a company may derive in using supplemental environmental projects as a tool in settlement negotiations.

Beyond Penalty as Usual

EPA's Uniform Penalty Policy contains provisions for considering SEPs. Two fundamental principles guide the agency in this area.

First, the use of SEPs in settlement agreements cannot weaken the deterrent effect of enforcement actions.

According to the EAP:

Although enforcement must closely track agency requirements, there are opportunities for enforcement negotiations to better accommodate pollution prevention approaches for sources to return to compliance and for these settlement agreements to introduce creative conditions [that] can further pollution prevention goals. These opportunities must take into account overriding concerns for preserving both the deterrent effect of enforcement actions as well as elements of fairness and equity in the extent to which pollution prevention conditions relate to the legitimate environmental concerns of enforcement officials. (1)

While SEPs are often used as a means to reduce the cash penalty for noncompliance, the agency will not reduce fines below the level of the economic benefit derived by a company in violating the law (i.e., below the cost of compliance).

Second, the implementation of a SEP by a company must be enforceable; therefore, consent agreements involving SEPS customarily provide for a period of tracking and supervision by the EPA. As a result, less complicated SEPs are generally looked on more favorably by the agency than projects which will strain the EPA's limited resources.

In the words of the EPA:

Staff allocations for oversight requirements will necessarily increase as will the level of resources needed for tracking purposes since tracking a supplemental project is more complex than tracking whether a payment is made. (2)

Similarly, the EPA will not include a SEP in an enforcement settlement if it will further complicate the EPA's enforcement efforts. In a 1989 memorandum of the Final Action Plan on Pollution Prevention and Enforcement, the EPA makes this point clear.

In assessing the environmental benefits proposals to prevent pollution as its source, the agency must take into account compliance behavior and the difficulty of enforcement. If reduction of smaller pollutant discharges, emissions, or wastes lead to smaller, more numerous sources, [the] EPA must weigh the problems of monitoring and disposal against current practice to truly assess the benefits of the practice. (3)

Even if the EPA is satisfied that the inclusion of a SEP in an enforcement through reasonable supervision, the agency will consider the use of SEP only if there is an appropriate link to nexus between the nature of the original violation and the environmental benefits to be derived. The SEP must improve the injured environment and must reduce the total risk burden posed to public health or the environment by that facility. From the EPA's viewpoint, the most appropriate connection between the violation and a SEP exists when the project remediates the injury caused by the same pollutant at the same facility giving rise to the violation.

A vertical nexus exists when the supplemental project operates to reduce pollutant discharges to a given environmental medium to offset earlier excess discharges of the same pollutant in the same medium that gave rise to the original violations. Typically, such projects follow a violation back to the manufacturing process to address the cause of the pollution. SEPs promote reductions from the source responsible for the violation or, in appropriate cases, from another site, either upstream, upgradient, or upwind of the original source.
For example, if pollutants were discharged in violation of the Clean Water Act (CWA) from a facility at a certain point along a river, an acceptable SEP would be to reduce discharge of that same pollutant at the facility in question or at an upstream facility on the same river. Similarly, a SEP may alter a production process at a facility handling a portion of the manufacturing process antecedent to the offending facility such that the SEP yields reductions in the discharges to the environmental media harmed by the violation.
A horizontal nexus exists when a SEP involves either relief for different medium at a given facility or relief for the same media at different facilities. The nexus will be met only if the SEP would reduce the overall public health or environmental risk posed by the facility responsible for the violation or enhance the prospects for reducing the likelihood of future violations.

For example, an enforcement action is pending against a company for violation of the Resource Conservation and Recovery act. (RCRA) or the CWA that has exposed the neighboring community to increased health risks through contamination of the drinking water. In addition to correcting these violations, a SEP would meet the horizontal nexus if the project was designed to reduce toxic air emissions from the same facility in order to compensate for the excess health risk to the community which resulted from the RCRA or CWA violations.

In another example, a facility has created a risk of unwarranted health or environmental injury by violating the Toxic Substances Control Act (TSCA) by manufacturing a chemical without providing formal advance notice. As part of an enforcement settlement, an acceptable SEP could be the establishment of a closed-loop recycling system to reduce the amount of that facility's product manufacturing waste that requires disposal at a RCRA Subtitle C landfill. In this instance, the SEP would achieve a horizontal nexus to the original violation by compensating for the unwarranted risk through a reduction in the overall health or environmental risk posed by the facility.

Finally, the EPA will usually not approve the use of a SEP that represents a sound business practice benefiting the company more than the public.

According to the EPA:

The federal governments sole interest in considering supplemental projects is to ameliorate the adverse public health and/or environmental impacts of violations. Projects are not intended to reward the defendant/respondent for undertaking activities which are obviously in [its] economic self-interest (e.g., update or modernize a plant to become more competitive). (4)

Any company against whom the agency has taken an enforcement action may propose to undertake a SEP at any time before the resolution of the action. The EPA will consider the status of the litigation or administrative action, the resources that have been committed to the enforcement action, and the company's ability to successfully complete the project before deciding whether the SEP will be accepted. As a result, repeat offenders and economically distressed entities may be less likely to receive approval of a SEP in an enforcement settlement than first time violators and financially stable companies.

The Many Kinds Of SEPs

Supplemental environmental projects that meet the criteria established by EPA for inclusion in enforcement settlements fall into five categories:

* Pollution prevention
* Pollution reduction
* Environmental restoration
* Environmental auditing
* Enforcement-related environmental Public awareness

What follows explores the nature and consequences of each.

Pollution Prevention

Pollution prevention projects are appropriate SEPs when the project substantially reduces or prevents the generation of pollution through use reduction or through the application of closed-loop processes. Project may change industrial processes or substitute different fuels or materials.

In EPA Region I, a New Hampshire company agreed to pay a final penalty of $33,000, reduced from a proposed penalty of $76,000, for violations of PCB regulations. In addition to paying the penalty, the company agreed to execute a series of environmental projects, including the removal of a PCB transformer from its facility. It also agreed to conduct pollution prevention projects that require closed-loop recycling and material substitution. The SEP called for a solvent recovery system and the elimination of heavy metals in the pigments found in the ink used to label the components the company manufactured. The projects will reduce the disposal of methyl ethyl ketone yearly by 75 percent and eliminate the annual consumption of 3,000 pounds of lead-cadmium pigments by replacing them with a non-heavy metal substitute. These projects were estimated to have a capital cost of $175,000. They were the reason the settlement was reduced by $43,000. (5)

In Region III, a Pennsylvania company reduced a proposed penalty of $85,000 for reporting violations to a final penalty of $30,500. In exchange the company agreed to undertake two environmental projects; a pollution reduction project that reduced the discharge of air pollution through more effective stack removal technologies, and a prevention project that reduced and replaced pollutants through a change in industrial processes and material substitution. (6)

Pollution Reduction

Pollution reduction projects go substantially beyond compliance with discharge limitations by further reducing the amount of pollution that would otherwise be discharged into the environment. These include projects that reduce the discharge of pollutant through more effective end-of-pipe or stack removal technologies, through improved operations and maintenance, or through the recycling of residuals at the end of the pipe. Pollution reduction projects also encompass SEPS that constitute accelerated compliance projects.

For example, an Indiana utility mitigated a proposed penalty of $429,000 to final penalty of $53,000 because of good-faith efforts to comply and by agreeing to a series of pollution reduction projects. The projects included the installation of filters at three regulatory stations, the installation of meter filters at affected residences and the implementation of a five-year monitoring program that include statistical meter sampling and a drip servicing program. The total estimated cost to the company was $175,000. (7)

A Los Angeles battery company agreed to pay a final penalty of $26,137 for violations of the Emergency Planning and Community Right-to-Know Act and engage in a variety of pollution reduction projects in exchange for a reduction in the Original proposed penalty of $235,000. The company installed equipment wastewater discharge from the production process at one facility and agreed to construct and operate, for a period of two years, a lead-acid battery recycling center targeting households in the greater Los Angeles area. (8)

Environmental Restoration and Auditing

Environmental restoration projects are designed not only to repair the damage done to the environment because of the violation but to go beyond repair to enhance the environment in the vicinity of the violating facility.

A New York corporation agreed to pay a final penalty of $125,000, reduced from $2,520,000 for violation of TSCA in the manufacturing of four chemicals before the chemicals were listed on the TSCA inventory. The company agreed to remove and destroy 36 PCB-filled transformers and 11 capacitors, destroying more than 14,000 gallons of PCB fluid. The project cost the company approximately $1.8 million.

Environmental auditing SEPs require the company to undertake additional auditing obligations designed to correct deficiencies in existing management or environmental practices. These audits must target practices that appear to be contributing to recurring or potential violations at the offending facility or other facilities owned and operated by the company.

In Region IX, a manufacturer reduced a $1,427,000 penalty for violations of TSCA to a final penalty of $225,000 by agreeing to conduct environmental auditing activities, including compliance audits at 57 facilities, developing a TSCA Compliance Plan, and creating computer software related to TSCA Compliance and the retrieval of information from the TSCA public inventory data base. In addition the company agreed to conduct TSCA training for more than 200 employees and to host compliance seminars for customers in at least 8 of the 10 EPA Regions. The cost to the company was approximately $800,000. (9)
Enforcement-Related Public Awareness

Enforcement-related environmental public awareness projects include developing publications, broadcasts, or seminars that underscore for the regulated community, the importance of complying with environmental laws and to disseminate technical information about the means of complying with current laws and regulations. The use of public awareness projects in enforcement settlements has been as diverse as the violators that develop them.

For example, a pesticide manufacturer in Missouri reduced a $30,000 penalty by more than $25,000 by undertaking an environmental public awareness project consisting of a seven-hour educational seminar on complying with the Federal Insecticide, Fungicide, and Rodenticide Act and the proper use, management, and disposal of hazardous house-hold products. (10)

The Future of SEPs

As these examples show, the substantial benefits of incorporating SEPs into the settlement of enforcement actions have resulted in an uncommon alliance between federal regulators, industry, and environmental groups. Industry has demonstrated its willingness to expend significant resources on pollution prevention in return for more lenient settlements.

Beyond penalty reduction, organizations are also finding that the availability of SEPs allows for a unique opportunity to rethink manufacturing processes and to begin a complete analysis of how they run their operations. Such endeavors often result in programs that increase efficiency, reduce costs and liabilities, and ultimately, enhance competitiveness. In addition, the capital costs associated with instituting SEPs are deductible against corporate profits as a cost of doing business.

For the EPA, the use of SEPs in the enforcement context provides significant flexibility in crafting settlements and providing incentive for the regulated community to initiate pollution prevention and recycling. SEPs provide a means of achieving and moving beyond compliance for the betterment of human health and the environment.

For environmental groups, SEPs give teeth to the enforcement process and provide a means of extracting environmental concessions from industry that benefit communities and the environment.

Still, not everyone is enthusiastic about the use of SEPs in enforcement settlements and their future use remains uncertain. For example, the Department of Justice is often adverse to including SEPs in settlements. This is because the penalty reductions given in exchange for SEPs reflect poorly on the bottom line of penalty accounting.

Likewise, many states have systematic disincentives to promoting SEPs in enforcement settlements. Unlike the EPA, the penalties collected by state enforcement do not always fund the general treasury. Instead, many states rely on penalties from violators to fund directly significant segments of their environmental agencies and programs. Fine reductions in exchange for the development of SEPs often serve only to diminish a state agency's enforcement coffers.

Perhaps more significant to the prospects for the increased use of SEPs, however, are the questions raised by Rep. John D. Dingle (D-MI) regarding the legality of using SEPs to reduce penalties and the potential for agency abuse of such loosely defined settlement tools. In December 1992, Dingel, who chairs the House Energy and Commerce Committee, called for a study by the General Accounting Office of SEPs and federal agency use of them in enforcement. Earlier that year, the GAO had issued an opinion stating that the EPA did not have the authority to reduce mobile source penalties under the Clean Air Act. While the EPA maintains that is has the legal authority to include SEPs in settlement agreements under all federal environmental statutes, the Justice Department has nevertheless begun an examination of the issue. And, even if SEPs are deemed legal, concerns remain regarding their fair use in achieving environmental protection beyond statutory and regulatory provisions.

Despite this lack of universal acceptance, the EPA approved 200 SEPs in 1992 and SEPs are now included in 5 percent to 10 percent of all EPA enforcement settlements.

That is not to say that SEPs have been, or will be, an easy cure-all for enforcement-related problems, or that SEPs will have applicability in every enforcement case. On the contrary, practical application can prove difficult and financial obstacles insurmountable, even when the notion of using a SEP in an enforcement settlement is agreeable to all of the parties involved. There is no substitute for having the best team in place and no room for poor planning and strategy. The company must combine knowledgeable engineering and legal expertise to identify potential opportunities and assist in the implementation of a SEP.

Despite the difficulties in negotiating a SEP, they are being used successfully. Companies can benefit by exploring the ways SEPs can turn a negative enforcement situation into an opportunity for improving environmental performance and managing public perception.


1. EPA Final Action Plan on Pollution Prevention and Enforcement, June 1989.
2. EPA Final Action Plan.
3. EPA Final Action Plan.
4. EPA Policy on Use of Supplemental Environmental Projects in EPA Settlements, February 1991.
5. EPA Report on Pollution Prevention Through Compliance and Enforcement. No. 22-T-1002, January 1992.
6. EPA Report on Pollution Prevention
7. EPA Report on Pollution Prevention.
8. EPA Report on Pollution Prevention.
9. EPA Report on Pollution Prevention.
10. EPA Report on Pollution Prevention.