Supplemental Environmental Projects: Environmental Settlement Tool Poised to Advance Environmental Justice

Supplemental Environmental Projects: Environmental Settlement Tool Poised to Advance Environmental Justice

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Future federal environmental settlements are likely to include more creative remedies to address the impacts of violations on communities, thanks to recent policy changes at the US Department of Justice (DOJ). A new rule—issued by DOJ in May and briefly summarized in a WilmerHale ESG blog post here (the DOJ SEP Rule)—revives the use of supplemental environmental projects (SEPs) in environmental settlement agreements, allowing an alleged violator to undertake a project that provides a tangible environmental or public health benefit to the affected community, and goes beyond what is required under federal or local laws, in lieu of civil penalties. Unlike civil penalties, which go to the US Treasury, SEPs allow companies to voluntarily fund projects that provide important environmental benefits directly to affected communities, such as investments in enhanced monitoring or remediating the effects of emissions.

The revival of SEPs is just one of several actions recently taken by the Biden Administration to advance environmental justice (EJ). SEPs were commonly included in settlement agreements until the Trump Administration controversially suspended them. As federal enforcement officials seek to implement the Biden Administration’s ambitious environmental agenda, companies should consider opportunities to include SEPs in settlements to provide direct benefits to affected communities in alignment with federal priorities. Minor differences in the DOJ SEP Rule are not anticipated to affect how the mitigation projects are used to provide tangible benefits in affected communities. For example, EPA’s SEP policy provides guidance for how to develop and implement SEPs that account for EJ concerns (e.g., developing SEPs with input from the affected community), and SEPs implemented under the DOJ SEP Rule are expected to continue this trend.

History of SEP Policy

The US Environmental Protection Agency (EPA) and DOJ utilized SEPs in settlements for decades, and they were well received until the practice was suspended by the Trump Administration. Since 1993, nearly 2,800 federal environmental settlements have included a SEP, according to reports by EPA. Projects can range from replacing high-polluting diesel school buses as part of Clean Air Act settlements to marine restoration projects on beaches as part of Clean Water Act settlements.

For example, in a 2016 settlement with EPA, Detroit Diesel Corporation agreed to spend $14.5 million on projects to reduce nitrogen oxide and other air pollutants, including replacing high-polluting diesel school buses and locomotive engines with models that met current emissions standards. This settlement was the result of alleged violations of the Clean Air Act for selling heavy-duty diesel engines that did not have valid EPA-issued certificates of conformity and that failed to meet 2010 emissions standards.

Similarly, five years prior, in a 2011 settlement between Northern Indiana Public Service Company (NIPSCO) and EPA, the company agreed to pay $9.5 million for environmental mitigation projects, which included retrofitting in-service, public diesel engines with emission control equipment to reduce emissions of volatile organic compounds; restoring lands adjacent to the Indiana Dunes National Lakeshore; and sponsoring a wood-burning stove/outdoor boiler changeout and retrofit project. The projects covered all of NIPSCO’s coal-fired power plants located in Chestertown, Michigan City, Wheatfield and Gary, Indiana. These examples of directly reducing localized environmental burdens are just a few of the many ways that SEPs can provide redress to communities harmed by an environmental violation.

Prior to the Trump Administration’s actions suspending SEPs, DOJ did not have its own formal SEP policy, although DOJ’s Office of Legal Counsel consistently upheld the use of SEPs in civil environmental actions. When the Trump Administration began to erode the SEP policy in 2017, it had the effect of severely limiting SEPs in EPA settlements.

On May 5, 2022, DOJ published an internal rule reinstating SEPs as settlement tools and issued a memorandum presenting guidance and limitations on SEPs. The internal rule revokes DOJ’s previous policy prohibiting settlement agreements including third-party payments, and the memorandum provides guidelines for SEPs, noting that, when used appropriately, SEPs are critical tools for addressing violations of federal law and remedying the harms those violations cause. SEPs are also important tools in companies’ and agencies’ EJ toolbox because of the effect that SEPs can have in remedying environmental violations affecting communities.

Key Differences in DOJ SEP Rule

Many of DOJ’s new SEP guidelines and limitations parallel EPA’s SEP policy, most recently updated in 2015, but there are some key differences. For example, one of the new guidelines in the DOJ SEP Rule requires SEPs to have a “strong connection” to the underlying violation and reduce the likelihood of similar violations in the future, whereas the 2015 EPA policy requires projects to have a “sufficient” nexus to the underlying violation or reduce the likelihood of similar violations in the future. The DOJ SEP Rule also requires all SEPs to be approved by the deputy attorney general or associate attorney general, whereas the 2015 policy requires special approval only in certain cases. These two changes constitute slightly more restrictive provisions than those in the original policy. However, DOJ’s guidance allows restricted cash donations to third parties, whereas EPA’s policy prohibits all cash donations. This is an aspect of the DOJ SEP Rule that is less restrictive than EPA’s SEP Rule. It is unclear at this time whether more or less restrictive provisions in the two policies will have any effect on the kinds of settlements proposed or implemented.

Looking Forward: Using SEPs to Advance Environmental Justice

We expect DOJ and EPA to utilize SEPs more frequently in future settlements to provide tangible benefits to communities affected by environmental violations, consistent with the Biden Administration’s EJ agenda. Companies should become familiar with the updated SEP policies and evaluate whether there may be strategic advantages in proposing projects in settlements.

Community engagement and publicly available screening tools can provide helpful insights for companies seeking to design SEPs. A May 2022 DTE Energy Settlement may provide a template for SEPs moving forward. Under the settlement, DTE will spend $2.7 million on 10 environmentally beneficial projects in three mostly low-income and minority Detroit-area neighborhoods. The projects included in the settlement were selected by members of a five-person community committee that DTE formed to review and select the projects, thus ensuring that the SEP would provide valuable benefits to the affected community.

Additionally, screening tools like the White House Council on Environmental Quality’s Climate and Economic Justice Screening Tool and EPA’s EJScreen can help companies understand community characteristics and environmental burdens. In addition to collaboration and conversation with the impacted community, these kinds of tools can help inform an on-the-ground outreach strategy to determine where and what projects would be most beneficial to the community.

Because projects must have a strong connection to the underlying violation, an uptick in SEPs related to fenceline and community emissions monitoring is anticipated. Multiple Clean Air Act settlements in recent months have included substantial investments in fenceline emissions monitoring technology that will provide publicly available information about community air quality. The Biden Administration has prioritized funding for community and local efforts to monitor air quality through the American Rescue Plan and will likely seek ways to boost these investments.

WilmerHale is closely monitoring these developments and is at the forefront of advising businesses in navigating regulatory, enforcement and ESG-related risks in this space.

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