New Limits on Supplemental Environmental Projects Increase Risks to Business in EPA Enforcement

The United States Environmental Protection Agency has long made good use of its policy on Supplemental Environmental Projects (“SEP”). Since most environmental enforcement matters are resolved through settlements, the policy has resulted in significant environmental benefits in the communities directly impacted by violations.

Under EPA’s SEP policy, an alleged violator can voluntarily agree to undertake an environmentally beneficial project in exchange for mitigation of the penalty to be paid. The policy establishes guidelines, categories of projects and importantly, makes clear that a SEP does not include the activities required for a return to compliance. A SEP is something beyond compliance with a nexus to the damage allegedly caused by the violation. In exchange, EPA exercises its enforcement discretion in penalty assessment resulting in a smaller penalty payment.

A good Supplemental Environmental Project is a win-win-win. SEPs further EPA’s goal of protecting and enhancing the public health and the environment. Settling businesses often view SEPs as a better way to spend penalty dollars, giving them some say over how those dollars are spent and maybe even some positive public relations. SEPs are also often viewed positively by non-governmental organizations and local government because SEPs provide local benefits, which are viewed more positively than payments to the federal general fund. SEPs have resulted in the retirement of emissions credits, reductions in neighborhood emissions or restored wetlands, to name a few examples.

The future use of SEPs as a settlement tool is in question following Attorney General Session’s recent directive prohibiting any settlement agreement that “directs or provides for a payment or loan to any non-governmental person or entity that is not a party to the dispute.”

Many SEPs are performed by the alleged violator but third parties are the beneficiaries. While EPA’s policy does include a nexus requirement, it may be difficult to demonstrate that such SEPs meet the directive’s requirement that such settlement “directly remedies the harm that is sought to be redressed.” This standard will be especially challenging where the SEP goes beyond compliance requirements.

In taking away the option, or maybe just limiting it, it is not clear where the win falls and only time will tell if the new directive results in enforcement litigation instead of enforcement settlements. While a SEP may not have been the one thing that pushed a settlement to resolution, it often effectively opens the door to productive discourse. Going forward, businesses facing enforcement should take early stock of their options and be prepared for an increased likelihood of litigation and higher penalty assessments.

No Unanimity As To What New ASTM E1527-13 Standard Requires

Some environmental practitioners contend that Phase I site assessments, commonly used in real estate transactions, will now be more costly and time consuming due to the new standard. Seyfarth Shaw counsels in its Client Alert that the new standard requires that, “if the subject property has soil contamination or is underlain by groundwater contamination, unless the risk of vapor intrusion can be screened out, Phase II sampling likely will be necessary.”

But is that really the case? In his article titled, “Confusion on Role of VI in New ASTM E1527-13 Standard,” environmental guru, Larry Schnapf, argues that these law firms’ predictions are “simply incorrect.” Schnapf points out that the revised version of E1527 clarifies that the vapor intrusion pathway is like any other contaminant’s pathway and the potential for vapor intrusion should be evaluated and addressed as part of a Phase I inspection.

However, all a consultant is required to do as part of a Phase I is to recognize environmental conditions – the presence or potential presence of releases of hazardous substances. A consultant that identifies a REC due to an actual or potential source of soil or groundwater contamination will not normally collect samples as part of a Phase I.

Contrary to the interpretation of the new Phase I standard offered by some, Schnapf advises:

From a practical standpoint, the question of whether vapor intrusion should be independently flagged as a REC will only really be an issue for off-site releases where vapor intrusion is the only pathway for contamination to migrate onto the property. When the target property already has soil or groundwater contamination, the consultant would flag that contamination as a REC.

Thus, according to Schnapf, if a consultant determines that there is potential vapor intrusion because of the presence of an REC, the consultant is not required to actually collect sub-slab or indoor air samples as part of its Phase I.

The issue takes on additional importance when one also considers that Phase I diligence is required to protect both landowners and lenders from liability under CERCLA. 

According to USEPA,

"All Appropriate Inquiries," or AAI, is a process of evaluating a property’s environmental conditions and assessing the likelihood of any contamination…..The All Appropriate Inquiries Final Rule provides that the ASTM E1527-05 standard is consistent with the requirements of the final rule and may be used to comply with the provisions of the rule.

The Small Business Liability Relief and Brownfields Revitalization Act (the “Brownfields Amendments”) amended CERCLA to provide protections from liability for certain landowners and prospective purchasers of properties who can demonstrate compliance with specific statutory criteria and did not cause or contribute to contamination at the property.  

Therefore, if the Phase I diligence the new owner performs does not meet the revised ASTM E1527-13 standard, in the opinion of the Agency, due to the omission of vapor intrusion screening, there may be considerable adverse consequences down the road for both landowners and lenders.

The additional transactional cost to the real estate community in performing many thousands of  vapor intrusion studies in Phase I assessments each year is likely to be considerable. Considering that vapor intrusion is just one of many RECs, does it make sense from an environmental perspective to do these surveys as a matter of course?  More importantly, does the new standard require that these screenings be performed at all?