11/24/89
Final Penalty Policy for Production or Importation in Violation
of 40 CFR Part 82 of Substances that Deplete the Stratospheric Ozone
MEMORANDUM NOV 24, 1989
SUBJECT: Final Penalty Policy for Production or Importation in Violation of
40 CFR Part 82 of Substances that Deplete the Stratospheric Ozone
FROM: /s/ Michael S. Alushin
Associate Enforcement Counsel
Air Enforcement Division
/s/ John S. Seitz, Director
Stationary Source Compliance Division
Office of Air Quality Planning and Standards
TO: Addressees
Attached please find the final penalty policy the Agency will use to
assess penalties for production or importation of controlled substances in
amounts exceeding production or consumption allowances held in accordance
with the rule to protect the stratospheric ozone, 40 CFR Part 82 ( "the
Rule" ). We offer this policy as an appendix to the Clean Air Act
Stationary Source Civil Penalty Policy, to be used in the limited
circumstances described below. Please file the attached document in Part E
of your Policy Compendium as Appendix VIII to Document #30, the Clean Air
Act Stationary Source Civil Penalty Policy.
We thank you for your comments on our October 4, 1989 draft CFC penalty
policy. The final version attempts to address all of your concerns and
clarify our intentions. The most substantial change we have made is in the
method of calculating the gravity component. You will note that we
decreased the penalty assessment per kilogram of violation while inserting a
new penalty assessment for excess kilograms left uncured at the end of the
control period. We believe this change will provide violators with more of
an incentive to act expeditiously to cure violations that could endanger the
United States' compliance with the Montreal Protocol. We have also
increased the economic benefit rule of thumb to $0.30 per kilogram of
calculated level in order to reflect the recent increase in market prices.
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Applicability
The Rule issued allowances to companies as a whole. Because a producer
or importer may operate facilities in several Regions, the Agency believes
that only national oversight can effectively monitor a company's compliance
with its production and importation limits. EPA's program to track and
enforce these limits will be managed at Headquarters by the Federal Programs
Section of the Stationary Source Compliance Division with the legal
assistance of OECM-Air. The Agency will involve the attached policy only if
it determines that a company has produced or imported controlled substances
in amounts exceeding the allowances the company properly holds.
In situations where an exceedance by a company could cause the United
States to violate the Montreal Protocol, EPA Headquarters offices will
develop the cases which will use this proposed appendix to the penalty
policy. In instances where the compliance status of the United States is
not in question, i.e. where a company's exceedance has been cured within the
same control period by the purchase of additional allowances, or by the
transformation, destruction, or proper exportation of the excess quantities
of the controlled substances, the Region containing the violator's corporate
headquarters would assume the enforcement lead.
The Rule also requires producers and importers to maintain records for
inspection and to report to EPA quarterly and at the time of any transfers
of allowances. Violations of these provisions are of a more localized
nature and will be addressed by the Region in which the noncomplying
facility lies. For recordkeeping and reporting violations, the Regions can
rely on application of the general portion of the Clean Air Act Stationary
Source Civil Penalty Policy, p. 11, to generate an appropriate penalty
amount.
Attachment
Addressees:
Gerald Emison, Director
Office of Air Quality Planning and Standards
Edward E. Reich
Acting Assistant Administrator
for Civil Enforcement
Alan W. Eckert
Associate General Counsel
Air and Radiation Division
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Air and Waste Management Division Director
Region II
Air Management Division Directors
Regions III, IX
Air and Radiation Division Director
Region V
Air, Pesticides and Toxics Management Division Directors
Regions I, IV and VI
Air and Toxics Division Directors
Regions VII, VIII and X
Regional Counsels
Regions I - X
Air Branch Chiefs / Team Leaders
Office of Regional Counsel
Regions I - X
Air Division Branch Chiefs
Regions I - X
David T. Buente, Chief
Environmental Enforcement Section
U.S. Department of Justice
APPENDIX VIII
CLEAN AIR ACT CIVIL PENALTY POLICY APPLICABLE TO
PERSONS WHO MANUFACTURE OR IMPORT CONTROLLED SUBSTANCES
IN AMOUNTS EXCEEDING ALLOWANCES PROPERLY HELD UNDER
40 CFR PART 82: PROTECTION OF THE STRATOSPHERIC OZONE
Introduction
This appendix provides guidance for calculating the civil penalties EPA
will require in pre-trial settlement of district court enforcement actions,
pursuant to Title I of the Clean Air Act ( "CAA" ), against persons who
manufacture or import controlled substances in amounts exceeding allowances
properly held under 40 CFR Part 82, Protection of the Stratospheric Ozone
( "the Rule" ). 1/
1/ The Rule was promulgated in accordance with the Agency's authority
under CAA Part B--Ozone Protection, 42 USC Sections 150-159
( "Part B" ), and with the Montreal Protocol ( an agreement signed by
most industrial nations in 1987 ), to protect the stratospheric ozone
layer, a thin blanket of triatomic oxygen fifteen miles above the
surface of the earth that blocks harmful ultraviolet radiation emitted
by the sun. Section 113 of the CAA references Part B, expressly
providing that the Section 113(b) civil and the Section 113(c) criminal
remedies are available for violations of regulations promulgated under
that Part.
Settlement of violations of the recordkeeping and reporting provisions of
the Rule need not, for purposes of penalty assessment, be treated
differently from any other CAA recordkeeping and reporting violation. See
Clean Air Act Stationary Source Civil Penalty Policy, p. 11.
The Rule designates five chlorofluorocarbons ( "CFCs" ) and three halons
as "controlled substances" on the basis of the demonstrated capacity of
these eight chemicals to attack and destroy ozone in the stratosphere.
Manufacturers and importers of bulk quantities of the controlled substances
are allocated yearly production and consumption allowances which limit the
amounts of controlled substances that person or corporate entity may
introduce for use into the United States during a twelve month control
period. 2/
2/ EPA will restrict production and consumption of CFCs to 1986 levels
beginning July 1, 1989, 80% of 1986 levels beginning in July of 1993,
and 50% of 1986 levels in July of 1998. Halon production and
consumption will be frozen at 1986 levels beginning January 1, 1992.
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To assist EPA in monitoring compliance with production and consumption
limits, the Rule requires manufacturers of controlled substances to keep
daily records and submit quarterly reports to EPA. Importers must submit
information to EPA regarding the quantity of bulk controlled substances
brought into the United States and the country of their origin.
Production and consumption allowances may be traded, but such
transactions are invalid if not reported to EPA. If Agency records indicate
that the seller holds sufficient unexpended allowances, EPA will issue a
notice of no objection, and enter the transfer in its records. If EPA
initially does not object to an allowance trade, but later finds reason to
disapprove, the Agency will rescind the earlier transfer and correct its
records. For the purposes of the Rule, ownership of the allowances that
were the subject of the rescinded transfer never shifted from the seller to
the buyer.
The Penalty for Excess Amounts
The Rule states that each kilogram of controlled substances manufactured
or imported in excess of allowances is a separate violation. 3/
3/ 40 CFR Section 82.4(a) and (b).
Each excess kilogram, therefore, creates potential liability in the violator
for a penalty of up to the statutory maximum of $25,000. To promote
judicial economy and to conserve Agency resources, EPA will be willing to
accept substantially less in settlement.
The relative amount of stratospheric ozone that will be destroyed by a
given quantity of a controlled substance is called that substance's ozone
depletion weight, and varies from chemical to chemical. 4/
4/ The ozone depletion weights for the eight controlled substances can be
found in Appendix A of 40 CFR Part 82.
Allowances are allocated on the basis of a calculated level, i.e., the total
ozone depletion effect of all controlled substances produced and imported, a
value that is expressed in kilograms. The holder of allowances is free to
produce or import any combination of controlled substances during the
control period so long as the calculated level of its activity does not
exceed the calculated level of the allowances it holds. When the Rule
states that each kilogram in excess of allowances is a separate violation,
the reference is to kilograms in the sense of a calculated level.
Therefore, the statutory maximum penalty is $25,000 per kilogram of
calculated level manufactured or imported in excess of properly held
allowances.
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Calculating a Penalty
In accordance with the general practice EPA follows when calculating all
Clean Air Act civil penalties, penalties assessed for manufacturing or
importing excess quantities of CFCs or halons will be the sum of an economic
benefit component and a gravity component.
Economic Benefit
Determining the actual economic benefit accruing to the violator will be
difficult, if not impossible. Some allowance holders produce a variety of
controlled substances at different locations across the country. Rather
than attempt to distinguish what amount of which chemical produced at each
of several continuously operating facilities was responsible for how many
kilograms of excess calculated level, EPA will instead rely on an economic
benefit rule of thumb. On the basis of financial information currently
available, EPA will assume an economic benefit ( profit margin ) of $0.30
per kilogram of calculated level for both the manufacture and importation of
controlled substances. EPA may supplant this amount by reference to price
lists appearing in industry journals or to any other source which the Agency
believes is a reliable indicator. Because the Agency's economic benefit
rule of thumb is subject to change, in situations where the Region is
applying this penalty policy, Regional staff should consult with EPA
Headquarters before attempting to assess the violator's economic benefit of
noncompliance.
The violator's economic benefit may be offset by amounts paid for
allowances purchased during the same control period to cure excess
production or imports, as such purchases clearly lessen the economic benefit
of noncompliance.
The economic benefit component may be omitted entirely if the violator
agrees to a reduction of its current allowances equal to the calculated
level of its earlier violations. The Montreal Protocol does not permit
member nations to meet their national limits by applying allowances left
unexpended in one control period to negate excess quantities of controlled
substances manufactured or imported in any other control period. EPA,
however, can recognize the true financial impact on importers of reduced
current allowances, in order to provide importers with an incentive to
consent to injunctive relief mandating such reductions. In this way, EPA
can prevent environmental harm that would otherwise result from the
violator's actions in an earlier control period.
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Gravity
Even if the violator demonstrates that its purchase of additional
allowances or its voluntary reduction of current allowances eliminates its
economic benefit, it still must pay the gravity component of the penalty.
The gravity component is the measure of the seriousness of the violation.
Accordingly, this component is linked both to the integrity of the
regulatory system and to the ozone-depleting effect of the violator's
actions. The Rule states that each kilogram of controlled substance
manufactured or imported in excess of allowances is a separate violation.
To protect the integrity of the Rule, EPA will assess a penalty of $0.50 for
each kilogram of calculated level manufactured or imported in excess of
allowances held at the time of manufacture or importation for first time
violators, and $1.00 for each kilogram for repeat offenders. So that the
penalty will reflect the seriousness of the environmental harm resulting
from the violations, EPA will assess an additional $.50 for each kilogram of
calculated level left uncured at the end of the control period in question.
A violator can cure the potential environmental harm by purchasing
allowances, by chemically transforming the controlled substances into other
substances not regulated by the Rule, by proper exportation, or by any
combination of these means. In keeping with the matrix provided by the
general stationary source civil penalty policy, p. 11, EPA will assess an
additional amount to scale the penalty to the size of the violator.
Adjustments to the gravity component must be made in accordance with the
provisions of the general stationary source civil penalty policy, pp. 12-18,
taking into account such factors as degree of willfulness or negligence,
degree of cooperation, history of noncompliance, ability to pay, and other
unique factors. The violator's degree of cooperation can be measured, in
part, by its efforts to avoid causing environmental harm. A violator which
completely cures its violations within the same control period will be
considered more cooperative than a violator which achieves only a partial
cure, or which completes its cure in another control period.
Examples
Following are three examples of application of this policy.
Adjustments to the gravity component are made in accordance with the general
stationary source civil penalty policy.
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Example 1
Due to inadequate communications between its seven facilities for the
production of controlled substances, B.I.G. Chemical Co. overshoots its
production and consumption allowances of 147,000,000 kg of calculated level
by 250,000 kg before ceasing all production on May 20. On June 5, B.I.G.
manages to purchase 200,000 kg of calculated level in additional allowances
at a cost of $50,000.
The penalty is computed as follows:
Economic Benefit Component
Profit on sale of wrongfully produced
CFCs ( 250,000 kg at $0.3/kg ) $75,000
Offset by actual expenditure of $50,000
to purchase additional allowances -50,000
_______
$25,000
Gravity Component
250,000 kg of calculated level
wrongfully produced ( at $0.5/kg ) $125,000
50,000 kg of calculated level left uncured
at close of control period ( at $0.5/kg ) 25,000
Size of violator ( worth in excess
of $70,000,000 ) +65,000
_______
$215,000
Preliminary deterrence amount
$215,000
+ 25,000
________
$240,000
Adjustment factors
Prompt correction of environmental
harm ( 20% of gravity component ) -$43,000
Minimum penalty settlement amount
$197,000
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Example 2
Gekko Commodities, Inc., which does not normally deal in CFCs, works
toward buying up the unexpended consumption allowances it needs to permit
its purchase of 1,000,000 kg of calculated level of a controlled substance
from a seller in Country A at a price of $500,000. The shipment of cheap
CFCs is offloaded at the American port of entry while Gekko is still
negotiating with Broesky to buy the last block of 300,000 kg calculated
levels of allowances. In Country B, a major industrial accident virtually
destroys that country's largest producer of CFCs, suddenly creating a huge
demand in that country for Gekko's CFCs. Gekko immediately breaks off
negotiations with Broesky and exports its entire stock of 1,000,000 kg of
calculated level to Country B for a selling price of $2 million. Gekko
provides proof to the EPA of its export and receives consumption allowances
in the amount of 1,000,000 kg of calculated level, which it then sells on
the bullish CFC market at $0.35 per kilogram of calculated level.
During settlement negotiations with EPA, Gekko introduces records
showing that it purchased 700,000 kg of calculated level of consumption
allowances for $0.15 per kilogram and argues that this amount should be used
to calculate its economic benefit.
The penalty is computed as follows ( for the purposes of this exercise,
we assume that Gekko bore none of the shipping expenses ):
Economic Benefit Component
Cost averted by not purchasing
allowances ( 300,000 kg at $0.3/kg ) $90,000
Profit on export sale of wrongfully imported
controlled substances ( 300,000 kg at $1.5/kg ) 450,000
Profit on sale of wrongfully obtained
consumption rights ( 300,000 kg at $0.35/kg ) +105,000
________
$645,000
In computing Gekko's economic benefit, EPA would not use $0.15/kg as the
cost averted by not purchasing allowances because Broesky, apparently, was
unwilling to sell at Gekko's price. EPA would not use $0.35/kg, Gekko's
later selling price, because that amount does not necessarily reflect the
market rate at the time Gekko was attempting to buy. In the absence of a
more reliable figure, EPA will use the $0.30/kg rule of thumb. Profit on
the sale of wrongfully imported controlled substances is listed as
$1.5/kg ( $2/kg selling price - $0.5/kg purchase price ) because there were
no allowance costs for these 300,000 kilograms.
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Gravity Component
300,000 kg of calculated level
wrongfully imported ( at $0.5/kg ) $150,000
300,000 kg of calculated level left uncured
at close of control period ( at $0.5/kg ) 150,000
Reporting violation - one incorrect report
See general CAA penalty policy at 11.
( Although Gekko did export 1,000,000 kg of
calculated level of a controlled substance,
only 700,000 kg of that amount had entered
the country legally. Therefore, Gekko's
transfer request could not properly claim
ownership of the entire 1,000,000 kg of
calculated level. ) 15,000
Size of violator ( worth between $20-40 million ) +20,000
$335,000
Preliminary Deterrence Amount $645,000
+335,000
$980,000
Adjustment Factors
Degree of willfulness or negligence
( 20% of the gravity component ) +$67,600
Minimum settlement penalty amount
$1,047,600
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Example 3
During the fourth quarter of the control period, Merkey Importers
contracts to sell 40,000 kg of calculated level of consumption allowances to
Shill, Inc., a producer and importer of CFCs, at $0.25/kg, despite the fact
that Merkey has recently exhausted all of its 250,000 kg allowance. Merkey
submits a transfer request to EPA for which the Agency issues a no objection
notice. ( EPA's determination is based on information contained in Merkey's
previous quarterly report. ) Upon receipt of EPA's notice of no objection,
Shill purchases the allowances from Merkey for $10,000 and imports 40,000 kg
of calculated level of controlled substances. EPA discovers during its
review of Merkey's fourth quarter report that the company did not hold
unexpended allowances at the time of the trade, rescinds the transfer, and
notifies both parties to the transaction.
Merkey's action appears to be a fraudulent transfer in knowing violation
of consumption limitations, and this matter should be referred to OECM's
Office of Criminal Enforcement. Merkey is probably subject to fines and
imprisonment under Section 113(c) of the Clean Air Act, 18 USC Section 1001
( supplying false information to the federal government ), and possibly 18
USC Section 1341 ( fraudulent use of the mails ). 5/
5/ EPA's election to pursue a criminal enforcement action must hinnge on
its evaluation of the strength of the evidence of knowing violation and
also of the adequacy of available civil relief. Where a defendant
exceeds its production or consumption allowances and submits inaccurate
information in a transfer request, EPA may find it difficult to show a
knowing violation, but large civil penalties are available. If the
defendant stays within the limits of its allowances but transfers
allowances it does not hold, the available civil relief would be based
on a single reporting violation, but EPA can more likely demonstrate
that the violation was knowing. It is important also to remember that
buyers of large amounts of allowances will be aware of the financial
risk associated with wrongful production or importation and will
purchase only from reputable sellers.
Shill, which purchased Merkey's purported allowances at risk, held other
consumption allowances at the time it imported the 40,000 kg of calculated
level. These other consumption allowances, in part, offset that import.
After analyzing Shill's final quarter reports, EPA determines that Shill is
liable for the importation of only 15,000 kg of calculated level of
controlled substances for which it did not hold proper consumption
allowances. After receiving notification from EPA, Shill agrees to reduce
its current-year production and consumption allowances by that amount.
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The penalty is computed as follows:
Economic Benefit Component 6/
6/ Shill's economic benefit would not be offset by the amount it paid to
Merkey for the purported allowances. Only those transactions which
result in a transfer of valid consumption allowances to the violator can
be counted against its economic benefit.
Profit on sale of wrongfully produced
CFCs ( 15,000 kg at $0.3/kg ) $4,500
Offset by reduction of current-year
allowances by 15,000 kg of calculated level -4,500
______
0
Gravity Component
15,000 kg of calculated level
wrongfully imported ( at $0.5/kg ) $7,500
15,000 kg of calculated level left uncured
at close of control period ( at $0.5/kg ) 7,500
Size of violator ( worth more than $70 million ) +65,000
________
$80,000
Preliminary Deterrence Amount $0
+80,000
_______
$80,000
Adjustment Factors
Prompt correction of environmental
harm ( 20% of gravity component ) -$16,000
The only other appropriate adjustment of the gravity component would be
in response to the litigation practicality of seeking a penalty greatly in
excess of the defendant's economic benefit. Recognition of the fact that
Shill will seek restitution from Merkey should militate against substantial
reduction of the penalty.
Minimum Settlement Penalty Amount $64,000
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