11/02/90
New Amended Penalty Policy for Production or Importation in Violation of 4
Appendix VIII to Document #30 of Clean Air Act Policy Compendium
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON D.C. 20460
MEMORANDUM
SUBJECT: New 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
John B. Rasnic, Acting Director
Stationary Source Compliance Division
Office of Air Quality Planning and Standards
TO: Addressees
Attached please find the newly 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
April 2, 1990. 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 amendment to the policy involves a restructuring of the
integrity of the regulation factors assessed against those violators who
fail to cure their violations in the same control period in which their
wrongful activities occurred. Our offices determined that the Agency could
provide such violators with an incentive to obtain allowances in a later
control period, thereby encouraging violators to avert the potential
environmental harm that would otherwise result from their illegal
activities. Penalty assessment in such circumstances is discussed on page
four of the policy and illustrated in examples one through three.
In an attempt to clarify points not fully explained in the prior
version, we have expanded discussion throughout the policy. We particularly
draw you attention to the general clarification that the Rule applies to all
controlled substances ( not just chlorofluorocarbons ( CFCs ) and halons ),
and the discussion on pages four and five of adjustments to the calculated
penalty
- 2 -
amount. You should also note that we have raised the economic benefit rule
of thumb from $0.30 to $1.50 for each kilogram of calculated level, so that
that figure more closely approximates the cost of an allowance on the
market.
Attachment
Addressees:
John S. Seitz, 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, 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
Robert Van Heuvelen, Acting 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 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 113(b)
civil and the 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 bulk quantities of the chemicals named in
Appendix A as "controlled substances" on the basis of the demonstrated
capacity of these chemicals to attack and destroy ozone in the stratosphere.
Manufacturers and importers of the controlled substances who responded to
EPA's request for baseline data are apportioned 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 restricted production and consumption of five chlofluorocarbons
( CFCs ) to 1986 levels beginning July 1, 1989. Additional restrictions
on production and consumption of CFCs, and other controlled substances
were in development at this writing.
- 2 -
To assist EPA in monitoring compliance with production and consumption
limits, the Rule requires manufacturers of controlled substances to keep
daily records and submit information to EPA regarding the quantity of
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 of allowances holds a sufficient quantity unexpended, 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 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 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.
- 3 -
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 controlled substances will be the sum of an
economic benefit component and 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 $1.50
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 an allowance
apportioned violator agrees in the next control period to a reduction of its
current allowances in amounts equal to the calculated level of its earlier
violations. The economic benefit component will not be assessed against
violators who are not apportioned allowances if such violators obtain in the
next control period and hold unexpended allowances in amounts equal to the
calculated level of their 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 acknowledge the financial impact on importers of
a reduction of current allowances and adjust the penalty assessment
accordingly in order to provide importers with an incentive to
- 4 -
consent to injunctive relief mandating such reductions. In this way, EPA
can help avert the potential environmental harm resulting from the
violator's actions.
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 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 an additional
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. In the event that the violator
expeditiously and fully cures its violations in the next control period
following its violations, EPA will assess this integrity of the regulation
factor at $5,000, instead of $15,000, and the kilograms of calculated level
left uncured will be assessed at $0.10 for each kilogram.
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, and history of noncompliance. EPA construes these
adjustment factors strictly, with a bias toward upward adjustment. Downward
- 5 -
adjustments to the gravity component will be effected only in rare instances
where the defendant manifests extreme cooperation by agreeing to perform
environmentally beneficial actions not required by law that are directly
related to repairing the environmental harm potentially resulting from its
violations.
Mitigating Penalty Amounts
Application of this policy significantly compromises the penalty amount
EPA is authorized to pursue under both the CAA and the Rule. Penalty
amounts calculated in accordance with this policy represent the minimum
penalty that EPA can accept in settlement of cases of this nature.
Reductions from this amount are acceptable only on the basis of the
violator's demonstrated inability to pay the full amount ( substantiated by
the ABEL computer model ) or other unique factors. A proposed penalty
reduction, accompanied by a justification memorandum, must be submitted to
the Associate Enforcement Counsel for Air for his approval.
Examples of Penalty Calculations
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.
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 $200,000.
Assuming that Chemical Co. does nothing more to cure its violations, the
penalty is computed as follows:
- 6 -
Economic Benefit Component
Profit on sale of wrongfully produced controlled
substances ( 250,000 kg at $1.50 / kg */ ) $375,000
*/ The economic benefit rule of thumb is subject to change. Regional
offices using this guidance should consult with Headquarters to insure
that they use the appropriate number.
Offset by actual expenditure of $200,000
to purchase additional allowances -200,000
$175,000
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
Economic Benefit Component $175,000
Gravity Component +245,000
$410,000
Adjustment factors
20% upward adjustment to the gravity
component to reflect defendant's negligence +$49,000
Minimum penalty settlement amount
$459,000
- 7 -
If, in the next control period prior to settlement, Chemical Co. obtains
and holds unexpended sufficient consumption allowances to avert the
environmental harm potentially resulting from the uncured portion of its
wrongful production, the penalty would be calculated as follows:
Economic Benefit Component
Because Chemical Co. has obtained
consumption allowances in an amount
equal to the total amount of its violations,
there were no costs averted, and there is
no remaining economic benefit. $0
Gravity Component
Integrity of Regulation $15,000
250,000 kg calculated level wrongfully
produced ( at $0.5 / kg ) 125,000
Integrity of Regulation
( amounts left uncured, but environmental
harm averted ) 5,000
50,000 kg of calculated level left uncured,
but environmental harm averted ( at $0.1 / kg ) 5,000
Size of violator ( worth in excess of $70,000,000 ) +65,000
$215,000
Preliminary deterrence amount
Economic Benefit Component $0
Gravity Component $215,000
$215,000
Adjustment factors
20% upward adjustment to the gravity
component to reflect defendant's negligence +$43,000
Minimum penalty settlement amount
$258,000
- 8 -
Example 2
Commodities, Inc., which does not normally deal in chlorofluorocarbons
( 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 $1,500,000.
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 $3 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 $2.00 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 $0.75 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 $1.50 / kg */ ) $450,000
*/ The economic benefit rule of thumb is subject to change. Regional
offices using this guidance should consult with Headquarters to insure
that they use the appropriate number.
Profit on export sale of wrongfully imported
controlled substances ( 300,000 kg at $1.50 / kg ) 450,000
Profit on sale of wrongfully obtained
consumption rights ( 300,000 kg at $2.00 / kg ) +600,000
$1,500,000
- 9 -
In computing Commodities, Inc.'s economic benefit, EPA would not
use $0.75 / 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,
$2.00 / 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 figure, EPA will use the $1.50 / kg rule of thumb. The profit
on the sale of wrongfully imported controlled substances is simply the
difference between the selling price and the defendant's purchase price
( $3.00 / kg - $1.50 / kg = $1.50 / kg ) as there were no allowance costs
for these 300,000 kilograms. The profit on the sale of the wrongfully
obtained consumption allowances is the full selling price because the
defendant never properly held consumption allowances for those 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
Economic Benefit Component $1,500,000
Gravity Component +365,000
$1,865,000
- 10 -
Adjustment Factors
Degree of willfulness or negligence
( 20% of the gravity component ) +$73,000
Minimum settlement penalty amount
$1,938,000
If, in the next control period prior to settlement, Commodities, Inc.
had obtained and held unexpended the 300,000 kilograms of calculated level
of consumption allowances necessary to avert the potential environmental
harm resulting from its wrongful importation, the penalty would be
calculated as follows:
Economic Benefit Component
Profit on export sale of wrongfully imported
controlled substances ( 300,000 kg at $1.50 / kg ) 450,000
Profit on sale of wrongfully obtained
consumption rights ( 300,000 kg at $2.00 / kg ) +600,000
$1,050,000
Gravity Component
Integrity of Regulation $15,000
300,000 kg of calculated level
wrongfully imported ( at $0.5 / kg ) 150,000
Integrity of Regulation
( amount left uncured, but environmental
harm averted ) 5,000
300,000 kg of calculated level left uncured,
but environmental harm averted ( at $0.1 / kg ) 30,000
Reporting violation - one incorrect report 15,000
Size of violator ( worth between $20-40 million ) +20,000
$235,000
Preliminary Deterrence Amount
Economic Benefit Component $1,050,000
Gravity Component +235,000
$1,285,000
- 11 -
Adjustment Factors
Degree of willfulness or negligence
( 20% of the gravity component ) +47,000
Minimum settlement penalty amount $1,332,000
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 $1.25 / 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 $50,000 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 OE's Office of Criminal Enforcement. Importers International is
probably subject to fines and imprisonment under 113(c) of the Clean Air
Act, 18 USC 1001 ( supplying false information to the federal government ),
and possibly 18 USC 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.
- 12 -
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 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 for CFC, Inc. 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 $1.50 / kg */ ) $22,500
*/ The economic benefit rule of thumb is subject to change. Regional
offices using this guidance should consult with Headquarters to insure
that they use the appropriate number.
Offset by reduction of current-year
allowances by 15,000 kg of calculated level -22,000
0
Gravity Component
Integrity of Regulation $15,000
15,000 kg of calculated level
wrongfully imported ( at $0.5 / kg ) 7,000
Integrity of Regulation
( amounts left uncured, but environmental
harm averted ) 5,000
15,000 kg of calculated level left uncured,
but environmental harm averted ( at $0.10 / kg ) 1,500
Size of violator ( worth more that $70 million ) +65,000
$94,000
- 13 -
Preliminary Deterrence Amount
Economic Benefit Component $0
Gravity Component +94,000
$94,000
Adjustment Factors
No adjustment of gravity 0
Minimum Settlement Penalty Amount
$94,000
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 if 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." EPA informs Small Brokerage Co.
that its imports are subject to regulation. Before the end of the control
period, Small Brokerage Co. obtains from another company a sufficient amount
of unexpended consumption allowances to cure its violations.
-14 -
The penalty is calculated as follows:
Economic Benefit Component
Because Small Brokerage Co. obtained
consumption allowances in an amount equal to
the total amount of its violations, there
were no costs averted, and there was no
economic benefit. $0
Gravity Component
Integrity of Regulation $15,000
200 kg of calculated level wrongfully
imported ( at $0.5 / kg ) 100
Size of violator ( worth between $100,001
and $1,000,000 ) $2,000
$17,000
Preliminary Deterrence Amount
Economic Benefit Component $0
Gravity Component $17,000
$17,000
Adjustment Factors
Degree of willfulness or negligence
( 20% of the gravity component ) +$3,400
Minimum Penalty Amount
$20,000
Return to Enforcement Policies