04/02/90
Amended Penalty Policy for Production or Importation in Violation of>
40 CFR Part 82 of Substances that Deplete the Stratospheric Ozone
MEMORANDUM
SUBJECT: Amended 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 amended 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" ). This policy amends and supersedes the earlier version dated
November 24, 1989. 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.
The major changes to the policy involve the addition of two integrity of
the regulation factors, one assessed against all violators of the Rule, and
the other assessed against those violators who leave any amount of their
violations uncured. We have also added a fourth example illustrating the
application of this penalty policy to small companies. All other amendments
are minor, and have no affect on the application of the policy.
The two integrity of the regulation factors, inserted as part of the
gravity component, are intended to protect the integrity of the Rule by
ensuring that wrongful production or importation of even a small quantity of
controlled substances results in the assessment of a significant penalty and
that violators have an incentive to cure their violations completely. The
integrity factors are discussed on page four of the penalty policy and
illustrated in all four examples.
Attachment
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Addressees:
Gerald Emison, Director
Office of Air Quality Planning and Standards
James M. Strock
Assistant Administrator
Office of Enforcement
Alan W. Eckert
Associate General Counsel
Air and Radiation Division
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 $15,000
against all violators. An additional $0.50 for each kilogram of calculated
level manufactured or imported in excess of allowances held at the time of
manufacture or importation will be assessed against first time violators, or
$1.00 for each kilogram against repeat offenders. So that the penalty will
reflect the seriousness of the environmental harm resulting from the
violations and to provide violators with an incentive to cure their
violations completely, EPA will assess a penalty of $15,000 against
violators who leave any amount of their violations, no matter how small,
uncured. EPA will assess an additional penalty of $.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 four 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, 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, Chemical Co. 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
Integrity of Regulation $15,000
250,000 kg of calculated level
wrongfully produced ( at $0.5/kg ) 125,000
Integrity of Regulation
( amounts left uncured ) 15,000
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
____________
$245,000
Preliminary deterrence amount
$245,000
+ 25,000
_____________
$270,000
Adjustment factors
No adjustments to the gravity component $0
Minimum penalty settlement amount
$270,000
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Example 2
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 Commodities, Inc. is still
negotiating with Company Z to buy the last block of 300,000 kg of calculated
level 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 Commodities, Inc.'s CFCs. Commodities, Inc.
immediately breaks off negotiations with Company Z and exports its entire
stock of 1,000,000 kg of calculated level to Country B for a selling price
of $2 million. Commodities, Inc. 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, Commodities, Inc. 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 Commodities, Inc. 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 Commodities, Inc.'s economic benefit, EPA would not use
$0.15/kg as the cost averted by not purchasing allowances because Company Z,
apparently, was unwilling to sell at the price Commodities, Inc. was
offering. EPA would not use Commodities, Inc.'s later selling price,
$0.35/kg, because that amount does not necessarily reflect the market rate
at the time Commodities, Inc. was attempting to buy. In the absence of a
more reliable
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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.
Gravity Component
Integrity of Regulation $15,000
300,000 kg of calculated level
wrongfully imported ( at $0.5/kg ) 150,000
Integrity of Regulation
( amounts left uncured ) 15,000
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 Commodities, Inc. 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, Commodities, Inc.'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
_________
$365,000
Preliminary Deterrence Amount
$645,000
+365,000
___________
$1,010,000
Adjustment Factors
Degree of willfulness or negligence
( 20% of the gravity component ) +$73,000
Minimum settlement penalty amount
$1,083,000
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Example 3
During the fourth quarter of the control period, Importers International
contracts to sell 40,000 kg of calculated level of consumption allowances to
CFCs, Inc., a producer and importer of CFCs, at $0.25/kg, despite the fact
that Importers International has recently exhausted all of its 250,000 kg
allowance. Importers International submits a transfer request to EPA for
which the Agency issues a no objection notice. ( EPA's determination is
based on information contained in Importers International's previous
quarterly report. ) Upon receipt of EPA's notice of no objection, CFCs,
Inc. purchases the allowances from Importers International for $10,000 and
imports 40,000 kg of calculated level of controlled substances. EPA
discovers during its review of Importers International'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.
Importers International'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. Importers International
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 hinge 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.
CFCs, Inc., which purchased Importers International'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 CFCs, Inc.'s final
quarter reports, EPA determines that CFCs, Inc. is liable for the
importation of only 15,000 kg of calculated level of controlled substances
for which it did not
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hold proper consumption allowances. After receiving notification from EPA,
CFCs, Inc. agrees to reduce its current-year production and consumption
allowances by that amount.
The penalty is computed as follows:
Economic Benefit Component 6/
6/ CFCs, Inc.'s economic benefit would not be offset by the amount it paid
to Importers International 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
Integrity of Regulation $15,000
15,000 kg of calculated level
wrongfully imported ( at $0.5/kg ) 7,500
Integrity of Regulation
( amounts left uncured ) 15,000
15,000 kg of calculated level left uncured
at close of control period ( at $0.5/kg ) 7,500
Size of violator ( worth more that $70 million ) +65,000
_________
$110,000
Preliminary Deterrence Amount
$0
+80,000
_________
$110,000
Adjustment Factors
10% downward adjustment of gravity
component for cooperativeness -$11,000
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Minimum Settlement Penalty Amount
$99,000
Example 4
Small Brokerage Co., an import broker located in a minor port city,
imports 200 kg of calculated level of CFC-113 for Company X, a manufacturer
of airplane parts. Company X intends to use the CFC-113 to degrease
precision metal parts prior to assembly. Neither company holds consumption
allowances. EPA discovers the violation during its review of the computer
printout of Customs Entry Summary forms provided to EPA by the U.S. Census
Bureau.
Upon receipt of a Section 114 letter from EPA requesting more
information about its imports of controlled substances, Small Brokerage Co.
contacts EPA to explain that neither it nor Company X was aware of the
Rule's prohibition on importing controlled substances without consumption
allowances. Small Brokerage Co. fully responds to the Section 114 request,
but points out that its imports were in one liter canisters, and asserts
exemption under the "one-gallon rule of thumb."
The one-gallon rule of thumb exempts from regulation imports of
controlled substances in containers of one gallon or smaller only if the
eventual use of the container is not known and cannot be determined with
reasonable efforts. ( See GUIDANCE FOR THE STRATOSPHERIC OZONE PROTECTION
PROGRAM, pp. 4-5. ) Here, EPA investigates the process Company X uses to
degrease small metal parts and determines that Company X pours CFC-113 from
the one liter canister into a basin containing the parts to be cleaned.
Therefore, the eventual use of the imported canister is known, and the
canister is not part of a "use system." Small Brokerage Co.'s imports are
subject to regulation.
Economic Benefit Component
Cost averted by not purchasing
allowances ( 200 kg at $0.3/kg ) $60
Gravity Component
Integrity of Regulation $15,000
200 kg of calculated level wrongfully
imported ( at $0.5/kg ) 100
Integrity of Regulation
( amounts left uncured ) 15,000
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200 kg of calculated level left uncured
at close of control period ( at $0.5/kg ) $100
Size of violator ( worth between $100,001
and $1,000,000 ) $2,000
Preliminary Deterrence Amount
$32,260
Adjustment Factors
No adjustments to the gravity component $0
Minimum Penalty Amount
$32,260
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