Environmental protection law in the USA is older than the country itself. The beginnings of environmental law in what is now the USA can be found in the concepts of common law prevalent in the British colonies – for example, the doctrines of nuisance and public trust. Many current practitioners would trace the beginning of statutory environmental law in the country to the Environmental Protection Act (1970). However, the Rivers and Harbors Act, enacted 71 years before that (1899), did include several provisions we would today consider to be environmental protection measures, designed specifically to ensure the quality and navigability of waters subject to federal jurisdiction.
In the present day, most environmental protection law is a matter of statute and regulation. A common paradigm of such laws begins with an act of Congress intended to address a specific problem that has come to the attention of Congress. For example, the Clean Water Act (CWA) was enacted in response to notorious water quality problems such as fires in the debris-strewn and polluted Cuyahoga River in Ohio. The Clean Air Act (CAA) addressed specific air quality concerns arising out of smog and pollution in cities such as Los Angeles.
In the current paradigm, Congress develops broad principles or policies such as prohibition of discharges of hazardous substances to waters or emissions of pollutants to the air without a permit and then directs the Environmental Protection Agency (EPA) to develop rules to implement the policies. Congress, in establishing that system of delegation of regulation to the EPA, evidences trust in the expertise of the EPA. The EPA then promulgates regulations through an administrative rule-making procedure – which involves public notice and review of public comments – to develop specific laws and standards to implement the broad policies enacted by Congress.
In addition to the CAA and the CWA, the key US federal environmental laws are the Toxic Substances Control Act (TSCA), the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), the Emergency Planning and Community Right-to-Know Act (EPCRA), the Endangered Species Act, the Safe Drinking Water Act (SDWA), the National Environmental Policy Act, and the Federal Insecticide, Fungicide and Rodenticide Act. Each of those acts follows the paradigm described above. Although not directly an environmental protection law, the Occupational Safety and Health Act (OSHA) does regulate in a significant way the use of hazardous materials in the workplace.
Principles of federalism in the USA, however, allow states to adopt their own statutes and regulations even for matters where the federal government has enacted analogous regulations. Typically, such state regulations may be more, but not less, stringent than federal regulations. States enforce their own regulations without federal involvement. Further, municipalities such as cities or counties can enact their own statutes and regulations that work with, or are in contradiction to, state and federal standards. The result is a complex and often confusing web of overlapping and interlocking regulations.
As described above, at the federal level, Congress makes laws that establish broad policies for environmental protection and enforcement in the USA. Congress typically delegates rule-making and enforcement authority to the executive branch whose authority in the USA is embodied by the EPA. The EPA may further delegate its authority relating to a specific statute to states whose enforcement programmes the EPA has approved. The EPA is authorised in those states in certain circumstances to enforce federal regulations jointly with states to which authority has been delegated (a process known as “overfiling”). The EPA may also revoke its delegation of authority if the EPA believes that a state is not properly exercising the delegated authority. Revocation, however, is a measure the EPA has rarely taken.
However, as also discussed above, each state’s legislature can establish its own environmental policies and enforcement practices. Most states within their executive branches also have established regulatory authorities analogous to the federal EPA.
The EPA and most state environmental protection agencies employ their own investigative officers and often enforcement personnel. Typically, those officers are trained chemists, geologists, or engineers with experience in the communities they regulate. In addition, other law-enforcement agencies such as the Federal Bureau of Investigation (FBI) and the Offices of the United States Attorneys work with the EPA to enforce environmental protection laws, especially laws that provide for criminal penalties or enforcement.
The Fourth Amendment of the Constitution of the United States prohibits search of a business or residence without permission of the owner of the business or residence unless the investigating authority has probable cause to believe criminal activity is occurring or has occurred and has obtained a warrant. Many environmental permits include consent by the permittee for regulators to search facilities in specified circumstances. Many of the environmental statutes listed above, however, allow for “administrative warrants” which may be obtained from an employee of the agency itself or an administrative judge as opposed to a judge with authority to try criminal cases.
Federal environmental statutes require permits for a broad range of commercial activities. Permits are necessary for emission of hazardous air pollutants, discharge of hazardous substances into rivers, streams or publicly owned treatment works, hazardous waste management, transportation, storage or disposal, dredging or filling of wetlands, and activities affecting endangered species or their habitats.
As discussed above, the federal environmental statutes authorise the EPA to issue such permits, but the EPA has delegated its permitting authority to state environmental regulatory agencies. To obtain a permit under a federal environmental programme, therefore, a facility would typically apply to the regulatory authorities in the state in which the facility is located. Permits for activities in wetlands are a notable exception. Permits for wetlands activity are issued by the US Army Corps of Engineers.
Most of these permitting programmes include a public participation component, in which the regulatory authority will prepare a draft permit for public review and comment prior to issuance of a final permit. In cases of significant public interest, regulators may conduct a public hearing regarding the proposed permit.
After a permit is issued, any significant change in operations at the permanent facility will require an amendment to the permit. If the proposed change will result in an increase in emissions or discharges from the facility, a new public participation procedure will occur. Under most regulatory schemes, permits, strictly speaking, or not transferable. If, however, a transfer of ownership of the permanent facility will occur without changes in operations at the facility, a new permit may be issued on an administrative basis without a full permitting process or public participation.
Most federal and state permitting programmes allow applicants and permittees an opportunity to appeal permitting decisions. The first step in the appeal is typically to an administrative body. Typically, to prevail in such an administrative hearing, an applicant must make a greater showing than simply an incorrect permitting decision, since the administrative body will not modify or overturn a permit decision unless there is some gross error or abuse of discretion by the permitting authority. Generally, permittees or applicants who are aggrieved by a permitting decision from such an administrative appeals body may seek review of the decision in the judicial system.
US environmental statutes create several different types of potential liability. Violation of a statute may result in civil or criminal fines or penalties, or injunctive relief – that is, a court order requiring cessation of the conduct found to be violating the statute which, in extreme circumstances, could result in termination of operation of a permitted facility.
CERCLA requires investigation and remediation of any damage resulting from releases of hazardous substances. An unpermitted fill of a wetland may result in civil or criminal fines or penalties but also a requirement to restore the wetland to the condition in which it existed prior to the unpermitted fill. Such an investigation and remediation order may be imposed upon the owner of property on which unpermitted releases of hazardous substances occurred, even if those releases were caused by a third party.
Any person arranging for disposal of a hazardous substance is also responsible for remediation of any releases of that hazardous substance requiring remediation. Thus, for example, an industrial facility which generates hazardous waste shipped to a hazardous waste disposal facility could ultimately be responsible for cost of any required clean-up of the hazardous waste disposal facility. Such an investigation and remediation orders may be imposed upon the owner of property on which unpermitted releases of hazardous substances occurred, even if those releases were caused by a third party.
Persons are afforded protections of criminal law (representation by counsel, trial by jury, proof beyond a reasonable doubt) before any imposition of criminal penalties. Lesser procedural protections are afforded with respect to civil orchestrated penalties and fines.
CERCLA, enacted in 1980, is perhaps the most draconian of federal environmental statutes. CERCLA imposes liability based on the status of a person as opposed to any act or omission of the person. That is, CERCLA poses liability for clean-up of contaminated property on the current owner and operator, even if the current owner or operator did not cause (or was not even aware of) the existence of the contamination.
Liability under CERCLA is no-fault, and potentially joint and several, for the cost of cleaning up releases of hazardous substances on the property. In addition to the current owner and operator of property, potentially responsible parties include any past owner or operator who owned or operated property at the time of the disposal of hazardous substances at the property, and any person who transported hazardous substances for disposal, or otherwise arranged for disposal of any hazardous substances at the property.
In the USA, liability typically accrues as a result of some act or omission by a person that violates a regulatory or common law standard. Under statutory liability schemes, the owner or operator of a facility is liable if the facility violates a permit term or condition or other requirement of the statute. Under common law theories the person may be liable for damages caused by the person’s negligent action. CERCLA, discussed above, is the primary exception to that rule. The general parameters of CERCLA liability are described above.
Several defences have been added to CERCLA since its enactment. Congress added a third-party defence (of sorts) to CERCLA liability in 1986. The defence provides that an owner or operator of property is not responsible for cost of clean-up of contamination caused by third parties. CERCLA itself, though, contains a very narrow definition of “third party”. For CERCLA purposes, a third party does not include any person with whom the owner has a direct or indirect contractual relationship. That narrow and idiosyncratic definition means that an owner is responsible for contamination to the owner’s property caused by prior owners or tenants on the property because an indirect contractual relationship may be traced to such prior owners or tenants.
The exclusion for contractual relationships does, however, contain its own exception. That exception provides that an owner is not responsible for contamination caused by prior owners or tenants if the contamination occurred prior to the owner’s acquiring the property, the owner had no reason to know of the contamination, and the owner had conducted “all appropriate inquiry” into the previous ownership and uses of the property consistent with good commercial and customary practice. This “all appropriate inquiry” standard became the basis for what is now the Phase I environmental assessment industry in the USA.
From 1986 to 2002, the environmental consulting industry developed its own general standards for what constitutes “all appropriate inquiry” but those standards provided no legal certainty, and judicial decisions interpreting the standard provided no objective reliability. In 2002, Congress directed the EPA to develop regulations making the “all appropriate inquiry” standard clear and certain. Congress adopted its own interim standard providing that reliance on the environmental consulting industry standard would satisfy the “all appropriate inquiry” standard, providing its own guidance (though an amendment to CERCLA) for what the EPA “all appropriate inquiry” rules should contemplate. Congress directed the EPA to require the inquiry to be conducted by an environmental professional, including:
In November 2007, the EPA promulgated rules essentially adopting Congress’s statutory criteria, but also allowing for reliance on the current industry standard. Currently, under CERCLA, if a prospective purchaser conducts a Phase I complying with its all appropriate inquiry standards and finds no evidence of contamination, a prospective purchaser will not be responsible if it acquires property and contamination that occurred before the acquisition is discovered at a later date; this is known as the “innocent purchaser” defence.
That defence left unresolved the question of liability with respect to contamination discovered during the "all appropriate inquiry" process – that is, what is a party's responsibility if it conducts all appropriate inquiry and determines that the property is or may be contaminated. In 2002, Congress resolved that question by providing protection through a defence to liability for what it called “bona fide prospective purchasers”. Such purchasers are protected if, prior to acquiring property, a prospective purchaser discovers pre-existing contamination and, after acquiring the property, the purchaser fulfils certain “continuing obligations” regarding the contamination. Those continuing obligations require the purchaser to:
In addition, the purchaser must exercise appropriate care with respect to hazardous substances found on the property, stop any continuing release of hazardous substances, and prevent exposure to previously released hazardous substances.
As noted, liability for environmental damage or breaches of environmental law is imposed upon an actor who breaches a permit condition, regulatory requirement, or other statutory standard, or also causes or contributes to releases of hazardous substances. Typically, if those releases do not violate any environmental regulatory standard or permit condition, liability will be limited to the cost of clean-up or remediation of the contamination caused by the release. For breaches of permit conditions or regulatory or statutory standards, liability can include civil or administrative fines or penalties. If the violation was conducted with criminal intent, most statutes authorise imposition of criminal penalties as well.
In the USA, environmental liabilities, like other liabilities, respect corporate forms and formalities. In other words, shareholders and parent companies are not typically responsible for the liabilities of their subsidiaries or owned companies. This is true even if one person or entity owns 100% of the equity interest of a subsidiary. There are a couple of notable exceptions to this rule.
First, if an individual shareholder actually commits a violation of environmental law, that shareholder could be liable individually. If, for example, an individual shareholder personally removes a drum of hazardous substances or waste from the company’s facility and dumps it into a creek, that individual could be liable personally.
More problematic, perhaps, is “operator” liability. As discussed above, most environmental statutes impose liability on the owner or operator of property or a facility. There have been cases where a parent corporation or even an individual shareholder has been deemed to be the operator of a facility nominally operated by a subsidiary company. These cases have been very rare and require unusual circumstances. The parent must completely control the day-to-day operations of the subsidiary for such liability to attach. The Supreme Court case examining this issue found that liability could be imposed only if the relationship between the parents and the subsidiary was “eccentric”. That standard may be difficult to apply in real world practice but it is clear that typical corporate operations will not usually result in liability.
As noted above, environment liabilities do respect corporate forms and directors are generally not personally responsible or liable for statutory claims against the corporations they direct or tortious conduct by those corporations. The same rules apply to officers as they act in their capacity as employees of the company.
There are exceptions to these general rules, however: if directors or officers personally engage in criminal behaviour, the director or officer can personally be criminally liable for that behaviour. In addition, the responsible corporate officer doctrine is applicable in most US jurisdictions. That doctrine permits, in certain circumstances, the prosecution of corporate officers and directors for misdemeanour criminal offences without the need to establish their intent or personal involvement in wrongful conduct. Under this doctrine, the government may prosecute directors, officers or other employees for corporate misconduct when they are in “a position of authority and failed to prevent or correct violation of the applicable law”.
Further, most federal statutes requiring permits issued by, or reports to be filed with, regulatory authorities and require that a “responsible corporate officer” execute the permit application or report. The responsible corporate officer must execute a certification stating that the certified document and any attachments were prepared under the officer’s direction or supervision, under a system designed to ensure qualified personnel properly gather the information submitted and that – based on the certifying officer’s inquiry of the people who manage the system – the information is to the best of the officer’s knowledge and belief, true, accurate and complete. Personal liability then may be imposed on the officer if inaccurate information is submitted and knowingly.
Director’s and officer’s insurance coverage is extremely common for public and private companies in the USA. The cost of such coverage has increased dramatically in recent years, especially after the onset of COVID-19. Nonetheless, most companies continue to remain in the market. Typically, such coverage, at base, excludes liability for clean-up of pollution or violation of environmental regulations. Companies for whom such liability is possible usually purchase riders specifically and expressly insuring against that risk, at an extra premium cost.
Under US statutes, liability is imposed upon owners or operators of facilities covered by the statute so lenders typically would not be liable parties with respect to the statutes. Otherwise, environmental liability is imposed upon an entity whose negligent act or omission caused the violation or contamination to occur. Again, lenders typically would not be such actors. CERCLA, however, imposes clean-up liability upon entities who hold indicia of ownership in facilities at which releases of hazardous substances have occurred. Courts have consistently held that a mortgage interest is an indication of ownership sufficient to result in liability under CERCLA. Mortgage lenders, therefore, can be responsible parties for clean-up under CERCLA, subject to the protections described below.
Congress amended CERCLA to limit lender exposure. The amendment provides that a person is not an owner if that person is a lender that, without participating in the management of the facility, holds indicia of ownership primarily to protect the security interest of the person in the facility.
Congress and the EPA have established safe harbours against liability for lender behaviour. Those guidelines state that it is safe for lenders to possess the capacity to influence, or an unexercised right to control operations and to hold a security interest in property or to abandon or release a security interest. Generally, inclusion of covenants requiring environmental compliance in credit agreements does not expose lenders to liability. Similarly, monitoring or enforcing terms and conditions of credit are allowed in the safe harbour. Inspections by lenders, requiring borrowers to clean up contamination, providing advice to mitigate, prevent or cure a default or diminution in value of collateral, restructuring in or renegotiating credit, and an exercising remedy including foreclosure, do not subject lenders to CERCLA exposure.
On the other hand, actual exercise of day-to-day control at a level comparable to a manager of the facility with respect to environmental compliance, or with respect to all activities except environmental compliance, will expose lenders to CERCLA liability. In addition, foreclosure can subject the lender to CERCLA liability if the lender does not seek to sell or otherwise divest the facility at the earliest practicable, commercially reasonable time, considering market conditions and legal and regulatory factors. The EPA has promulgated a policy that it will not hold lenders responsible if, within 12 months after foreclosure, the lender has relisted the property for sale with a broker engaged in the business of selling such properties.
Civil claims for environmental damages may be brought through common law causes of action such as negligence, trespass, or nuisance. Violation of an applicable environmental statute or regulation can also be used as evidence of negligence. Many US environmental statutes allow for parties damaged by violation of the statute to bring a separate cause of action under the statute.
In addition, many federal statutes allow for citizen suits in which affected private citizens may bring suits to enforce the statute. Citizens suits may cause an imposition of penalties against violators, but those penalties are paid to the government, not to the citizens bringing the suits. Typically, statutes allow award of attorneys’ fees to a prevailing party or, in proper circumstances, in citizen suits, which is contrary to the typical “United States Rule” in which each litigating party bears its own attorneys’ fees.
Punitive or exemplary damages are awarded not to compensate the damaged person but to punish the wrongdoer and thereby deter future wrongful acts. Such damages are imposed only in rare cases in the USA. The standards for imposing punitive damages vary across jurisdictions. In cases applying federal law, the fact-finder may award punitive damages if the defendant’s conduct was malicious, oppressive or in reckless disregard of the plaintiff’s rights. That standard is representative of the types of punitive damage rules in effect in jurisdictions across the USA.
Large-scale industrial incidents and accidents such as oil leaks, train wrecks, and plant explosions generally result in attempts by damaged parties to bring class actions in federal or state courts. The rules for certification of a group of potential plaintiffs as a class are well established. The plaintiffs must satisfy requirements for numerosity, commonality, typicality and adequacy, must show that common issues of law or fact predominate over any individual questions, and convince a court that a class action would be superior to other available methods for fairly and efficiently adjudicating the controversy.
In environmental cases, courts typically do not find commonality and it is difficult for classes to obtain certification. Courts refuse to certify classes, often because of disparities – perhaps wide disparities – with respect to exposure, risk and property damage among proposed class members.
Many environmental class action lawsuits have garnered significant media attention in recent years in the USA. The Deepwater Horizon oil spill case, the Volkswagen diesel emissions testing case, and the Duke Energy Corporation coal ash cases all involved multiple plaintiffs or class actions.
Liability under certain US environmental statutes such as the CERCLA is “strict”, meaning that a party may be liable based on his or her status without regard to fault. However, private parties often attempt to reallocate their liability under such statutes as between each other by contract. For example, a party with strict liability for an environmental issue by virtue of its ownership of a target property may attempt to shift that liability to the purchaser of the target property by using contractual mechanisms including an “as is” clause, release, assumption of risk clause, or indemnification in the selling party’s favour. Typically, such contractual provisions are not effective to shift a party’s liability to governmental agencies, although a governmental agency may take them into account when determining the course of enforcement actions.
General commercial liability insurance policies in the USA typically exclude coverage for environmental issues. A number of US insurers, however, offer specific pollution legal liability policies. Depending on their terms and length, such policies may cover known or unknown environmental conditions, and may contain exclusions for specific matters such as off-site disposal locations or conditions discovered voluntarily.
Two primary federal US environmental laws address contaminated land: CERCLA and RCRA.
As described above, CERCLA assigns liability for the costs of cleaning up contaminated land to four categories of potentially responsible parties:
Liability under CERCLA is strict (without regard to fault), potentially joint and several (any one responsible party potentially may be held liable for all clean-up costs), and retroactive (it applies to disposals that occurred prior to the enactment of CERCLA). Despite these broad categories of liability, certain defences exist, and courts may allocate clean-up costs among responsible parties according to certain equitable factors.
RCRA governs the handling, treatment, storage and disposal of hazardous waste from cradle to grave, including provisions for the management and clean-up of contaminated properties, with particular requirements for subject matter such as landfills and underground storage tanks.
US governmental agencies are increasingly permitting responsible parties to approach the remediation of contaminated properties using a risk-based framework. Remediation efforts under such frameworks may allow responsible parties to forego total clean-up in favour of the use of engineering controls, as well as institutional controls (land use restrictions) limiting future uses of the contaminated property to manage remaining environmental risk.
In 2007, the Supreme Court directed the EPA to make a formal determination whether to regulate greenhouse gas emissions. In response, the EPA found that six greenhouse gases in the atmosphere may reasonably be anticipated to endanger public health and endanger public welfare.
While the EPA was developing a plan to control greenhouse gas emissions, the US Congress considered its own legislation to address climate change. The American Clean Energy and Security Act – containing a cap and trade system for controlling greenhouse gas emissions – was approved by the House of Representatives in 2009 but never brought to the floor of the Senate for discussion or a vote.
The EPA continued to develop its plan which it formally proposed in 2014. The plan became final in 2015. The EPA assigned each state an individual goal for reducing carbon emissions based on prior years’ emissions and left it to each state to develop a plan to meet the goal. If individual states did not develop such a plan, the EPA could develop and implement the EPA’s own plan in that state. EPA claimed that if every state met its target, the plan would by 2030 reduce carbon emissions from electricity generation by approximately one-third from 2005 levels.
In 2017, however, President Trump signed an executive order mandating that EPA review and revising its plan and withdrew the USA from the Paris Climate Accord. In 2019 the EPA announced plans to change the way the agency calculates health risks, claiming the change is meant to rectify problems in the EPA’s cost benefit analysis. The changes have not yet become effective, and several groups have challenged them in court.
Although there are currently no national greenhouse gas reduction standards or national climate action plan, 31 states have implemented – or are in the process of implementing – climate action plans. Those plans generally include greenhouse gas emissions reduction targets and detail the actions the state will take to help meet those targets. Plans also include additional components such as clean energy targets and renewable grid strategies.
The US Congress has considered “green new deal” resolutions to address climate change. The resolutions call for a ten-year plan, the primary goals of which would be meeting 100% of the power demand in the USA through clean renewable and zero emissions energy sources, and a green power generation infrastructure. The resolutions also call for economic measures such as job guarantees and protection of access to healthcare protection.
The resolutions failed in the Senate on an early vote and have not yet been considered by the House of Representatives as of the date of writing.
The CAA imposes certain requirements on parties undertaking activities that may disturb asbestos-containing material in buildings. Such activities must be carried out by qualified professionals, and notifications, workplace standards, proper handling and disposal practices, and permitting requirements may apply.
Other US statutes such as TSCA and OSHA also provide certain protections for workers interacting with asbestos and occupants of buildings where asbestos is present. Asbestos is also regulated as a hazardous substance under CERCLA and is subject to a maximum contaminant level under the SDWA, and other requirements may apply to various market segments – for example, the Asbestos Hazard Emergency Response Act and School Hazard Abatement Reauthorization Act apply to schools and the Asbestos Information Act applies to manufacturers of asbestos-containing products.
Finally, the USA has seen significant private litigation in recent years in connection with health effects resulting from long-term occupational exposure to asbestos-containing material.
RCRA provides cradle-to-grave regulation of waste management in the USA, including permitting and management requirements around the handling, treatment, storage and disposal of hazardous waste. RCRA includes specific requirements applicable to landfills, underground storage tanks, medical waste, and other specific categories. Other federal laws such as the EPCRA and TSCA also govern the disclosure, handling, and disposal of wastes in the USA.
Under CERCLA’s strict liability scheme, generators (or “arrangers”) of hazardous substances are strictly liable for clean-up costs resulting from such substances. This liability exists even if a generator disposes of its waste at a separate location from its facility or contracts with a third party to dispose of such wastes. However, parties may attempt to shift this liability to other parties by contract, and courts may take into account equitable factors when apportioning costs to such parties.
Although a growing number of companies in the US sponsor take-back programmes for goods at the end of their life cycle, regulations requiring such practices are not widespread in the USA as compared to their popularity in many other countries.
Federal and state laws in the USA require responsible parties to disclose releases of hazardous substances under certain circumstances. These reporting obligations vary widely based on the type and source of the discharge and the jurisdiction in which the release occurred. Penalties, fines, and other liabilities may result from failure to report.
In addition, the EPA encourages business to voluntarily report violations of environmental law and compliance rules through its audit policy. Under this policy, a violator may be given more favourable treatment by virtue of its voluntary disclosure and prompt return to compliance, particularly for new owners disclosing existing violations.
Under the US Freedom of Information Act, members of the public are entitled to review the records of environmental agencies, with only limited exceptions. Some governmental agencies host their records online, while others require a formal request to obtain copies of particular records. Such requests from the public should be as specific as possible, and requestors may be required to pay for the government’s costs in responding to the request.
The US Securities and Exchange Commission (SEC) requires regulated companies to make annual disclosures around material estimated capital expenditures for environmental control facilities, as well as disclosure of certain environmental legal proceedings. A recent amendment to US SEC regulations also requires such companies to disclose the material effects that compliance with environmental regulations (among other regulations) may have upon the company’s capital expenditures, earnings, and competitive position.
Sustainability and environmental, social and governance criteria and reporting also are becoming increasingly common among US companies in response to interest from socially conscious investors.
As described above, because carrying out “all appropriate inquiry” in advance of a property purchase can serve as the basis for a defence to US strict liability laws such as CERCLA, it is standard practice in US commercial transactions for a buyer to conduct a Phase I Environmental Site Assessment. A Phase I report provides an overview of environmental risks and known conditions at a target property. If “recognised environmental conditions” are identified in a Phase I, buyers commonly carry out a Phase II investigation which includes invasive sampling of environmental media at the target property to evaluate such conditions.
Such investigations are commonly ordered in connection with property transactions, but they often play a key role in M&A and financing transactions as well. Other typical diligence measures for property transactions include review of wetlands requirements, natural/cultural resource issues, and permitting compliance. Additional diligence in corporate transactions may focus more heavily on evaluating operational risk associated with regulated businesses through a review of compliance history and any release/remediation issues.
In a US commercial transaction, the principle of caveat emptor (let the buyer beware) generally remains applicable to environmental conditions at a property. However, certain state or local jurisdictions may impose specific disclosure requirements (for example, with regard to underground storage tanks in residential transactions), and frequently sellers are asked to make representations regarding the environmental condition and compliance status of the target property in commercial property contracts.
Although US jurisdictions have adopted certain tax incentives in connection with the development of clean energy technology, energy reduction practices, etc, the USA has not developed a direct “carbon tax” or “pollution tax” as have some other countries. Instead, the major US environmental tax is the motor fuels excise tax. Various US jurisdictions also levy taxes on specific industry segments, such as dry cleaners and underground storage tanks, that are used to pay for administration of regulatory programmes and clean-up of contaminated sites.
Cap and trade systems have been used in the USA in various jurisdictions to cover various pollutants. In a cap and trade system, a governmental authority issues a limited number of annual allowances or credits that allow companies to emit a certain amount of the covered pollutant. The total amount permitted thus becomes the "cap" on emissions. Companies that reduce their emissions can sell or "trade" unused allowances to other companies. The federal government uses such a system to control sulphur dioxide emissions causing acid rain; several states and regional alliances use such a system to cover greenhouse gas emissions. As noted above, a greenhouse gas cap and trade system has been considered, but rejected, by the US Congress.
Accelerating Action to Address Climate Change, with or without Federal Mandates
The momentum behind private sector efforts to address climate change has increased significantly in response to calls to action from the public and investors. For example, Climate Action 100+, launched in December 2017, is an investor initiative designed to ensure that the world’s largest greenhouse gas (GHG) emitters take necessary action on climate change. To date, more than 500 investors, with more than USD47 trillion in assets under management, have signed on to the initiative.
Also, in January 2020, the Chairman and CEO of BlackRock Inc., the world’s largest asset manager, sent a letter to its clients announcing a number of initiatives placing sustainability at the centre of its investment approach and stating that climate risk is an investment risk. BlackRock followed in July 2020 with a report identifying 244 companies that it found were making insufficient progress integrating climate risk into their business models or disclosures and taking voting action against 53 of those companies.
In September 2019, Amazon co-founded The Climate Pledge, a commitment to be net zero carbon across its business by 2040, ten years ahead of the goals of the Paris Agreement. “Net zero” is achieved when GHG emissions are balanced by removing an equivalent amount from the atmosphere. Many global companies have reportedly signed the pledge. In June 2020, Amazon announced The Climate Pledge Fund with an initial USD2 billion in funding to invest in companies developing products or services that reduce carbon emissions and facilitate the transition to a low-carbon economy. Along those lines, in July 2020, the heads of nine companies, including Microsoft Corp., NIKE, and Starbucks, announced a new initiative known as Transform to Net Zero, which aims to provide research, guidance, and implementable roadmaps to enable all businesses to achieve net zero emissions by 2050, with the companies committing to lead by example.
RE100, launched in 2014 by The Climate Group and CDP (formerly known as the Carbon Disclosure Project), is a global corporate renewable energy initiative bringing together some of the world’s largest and most influential business committed to 100% renewable electricity. It currently reports more than 260 companies as members, most with goals to source all of their electricity from renewable sources by 2050, or much earlier in many cases.
The Science Based Targets Initiative is a collaboration between the World Resources Institute, the CDP, and the World Wildlife Fund, to help companies set science-based GHG emission reduction goals to limit global warming to below 2°C or 1.5°C. The Initiative was created in 2105, and reports that more than 1,000 companies are taking science-based climate action and 485 companies have approved science-based targets.
There has also been a recent surge in “sustainable finance” including green or sustainable bonds and loans. These financial instruments fund environmental or social projects – such as renewable energy, energy efficiency, pollution prevention and control, clean transportation, and green buildings – often with defined environmental benefits, goals, or performance indicators. This trend is expected to continue into 2021.
US states have also stepped up their efforts to address climate change in the perceived absence of strong federal mandates. Since 2019, approximately 11 additional states have adopted, by statute or executive action, specific GHG reduction targets. As a result, 23 states and the District of Columbia now have such targets, most with interim goals and plans on how to achieve them. Several states aim to be net zero or “carbon neutral” by 2050 or earlier.
In addition, several recent federal actions may incentivise carbon capture and sequestration (CCS) projects. CCS is a process by which carbon is captured at the point of emission – at power plants, for example – and then permanently sequestered, or stored, deep underground in facilities such as salt or oil and gas reservoirs or unminable coal seams. Its aim is to reduce the amount of GHGs in the atmosphere that contribute to climate change.
In 2018, Internal Revenue Code Section 45Q was amended to provide a tax credit of up to USD50 per metric ton for the permanent sequestration of carbon oxides or USD35 per metric ton for their use in enhanced oil recovery. In February 2020, the Internal Revenue Service (IRS) issued guidance on the beginning of construction requirement for CCS facilities and partnership allocations of Section 45Q credits. Further, in May 2020, the US Department of the Treasury and the IRS issued proposed regulations under Section 45Q that provide avenues to demonstrate secure geologic storage and details on when the tax credit can be recaptured (85 FR 34050).
In addition, EPA has granted “primacy” to two states – North Dakota in April 2018 and Wyoming in September 2020 – for the issuance of permits Class VI wells for the injection of carbon dioxide in connection with CCS projects. Louisiana’s application for primacy is pending before EPA. State primacy may speed up the granting of permits for these injection wells. These actions may encourage investors to commit capital for CCS projects which, in turn, may play a part in combatting climate change.
Developing Law on Environmental Claims in Bankruptcy
With the COVID-19 pandemic and corresponding economic downturn, we are likely to see an uptick in bankruptcy filings. There is an inherent conflict between the US Bankruptcy Code, which seeks to provide debtors with a fresh start, and environmental law which seeks to hold parties responsible for environmental violations and contamination. Judicial decisions are mixed on a number of issues, including whether the automatic stay applies to agency actions to assess penalties amounts, allocate clean-up costs, and collect these amounts, whether contaminated properties can be abandoned, and whether environmental liabilities and obligations are dischargeable.
A few recent cases ruled in favour of dischargeability. In In re S. Coast Air Quality Mgmt. Dist. v Exide Techs. (In re Exide Techs.), 613 B.R. 79, 81 (D. Del. 2020), a California air-quality regulatory agency filed a proof of claim against Exide, a battery manufacturer, for almost USD40 million in liquidated penalties. Exide successfully argued that the agency’s claim was an attempt to collect “ordinary noncompensable penalties” owed to a governmental unit, which are excepted from discharge with respect to individual debtors, but not corporate debtors. The bankruptcy court found that since the agency suffered no loss or damage, the penalties were not entitled to priority administration expenses and were dischargeable. The US District Court affirmed the decision. See also W. Salem Storage, LLC v Exide Techs. (In re Exide Techs.), 600 B.R. 753, 756 (Bankr. D. Del. 2019), where the court found that West Salem should have known of the contamination before the 2013 bankruptcy filing and, thus, the claims were considered pre-petition and dischargeable.
In City of San Mateo v Peabody Energy Corp. (In re Peabody Energy Corp.), 958 F.3d 717 (8th Cir. 6 May 2020), certain California municipalities sued reorganised Peabody based on climate change-related claims under various tort theories, including public nuisance. Peabody moved to enforce the discharge and injunction provisions of the Chapter 11 plan and confirmation order. The bankruptcy court held that the municipalities’ claims were pre-petition and thus were all discharged. On appeal, the municipalities argued that their claims were exempt from discharge under certain provisions in the plan exempting from discharge governmental claims brought under environmental law and claims brought under police or regulatory law. The Eight Circuit Court of Appeal affirmed the bankruptcy court’s decision, finding that neither of these carve-out provisions covered the municipalities’ common-law claims and the claims therefore were discharged.
Analysis of environmental issues in bankruptcy can be complicated and highly fact-dependent. The courts continue to grapple with many of these issues.
National Environmental Policy Act Developments
The National Environmental Policy Act (NEPA), 42 USC § 4321, et seq, requires a federal agency to take a “hard look” at the environmental consequences of any federal action – including federal permit decisions – “significantly affecting the quality of the human environment”. Generally, unless the proposed action is subject to a categorical exclusion, the agency must prepare an environmental assessment (EA) in determining whether to prepare a more extensive environmental impact statement (EIS) with respect to the proposed action.
On 16 July 2020, the Council on Environmental Quality (CEQ) issued a final rule to comprehensively update, modernise, and clarify its regulations for agencies to implement the National Environmental Quality Act (NEPA) (85 FR 43304). The final rule is intended to eliminate confusion surrounding the prior NEPA regulations, streamline the NEPA process, and make it more predictable. Among other things, the final rule removes language referring to “indirect” and “cumulative” effects. The focus is instead whether the environmental consequences of a project are causally related and reasonably foreseeable, and the agency should not include effects that it has no control over or ability to prevent or that would happen regardless of the project. EAs are to be no longer than 75 pages and EISs are to be no more than 150 pages, and the time limits for their preparation are one year and two years, respectively. Also, non-federal projects are not required to undergo NEPA review where there is minimal federal funding or involvement.
The final rule became effective on 14 September 2020. Several federal lawsuits have been filed challenging the final rule; however, efforts to stay the rule thus far have been unsuccessful.
Clean Water Act Developments
The Water Quality Certification Rule
Section 401 of the Clean Water Act (CWA) provides that a federal agency may not issue a permit or licence to conduct any activity that may result in any discharge into waters of the USA unless a Section 401 water quality certification is issued verifying compliance with water quality requirements or certification is waived. States and authorised native American tribes in whose territory the discharge would originate are generally responsible for issuing water quality certifications.
On 1 June 2020, the US Environmental Protection Agency (EPA) finalised the Water Quality Certification Rule (WQC Rule) (84 FR 42210). The rule restricts the ability of states and tribes to deny water quality certifications for reasons other than water quality concerns. Certain states have used the water quality certification process to block significant energy infrastructure projects. For example, in May 2020, the New York Department of Environmental Conservation denied a water quality certification for an interstate natural gas pipeline based in part on its findings that the project would result in greenhouse gas emissions that contribute to climate change and indirectly impact water and coastal resources, and that mitigation would be required to address those impacts. The WQC Rule is intended to preclude denial on this type of basis.
The WQC Rule also clarifies the timeline within which states and tribes must make a decision on a water quality certification application. Section 401 of the CWA provides that states and tribes have one year to approve or deny a water quality certification application or their right is waived. In the past, some states allegedly have worked around this timeline by requesting additional information and having the applicant withdraw and reapply throughout the review period, restarting the clock on each re-application. Under the WQC Rule, the state agency will have one year from the “certification request” and failure to timely act can result in the federal permitting agency determining the state has waived their decision.
The WQC Rule went into effect on 11 September 2020. At least five lawsuits challenging the rule are pending in US district courts.
The Navigable Waters Protections Rule
On 21 April 2020, the new Navigable Waters Protection Rule (NWP Rule) (85 FR 22250) was published by the US Army Corps of Engineers and the EPA. The new rule defines “Waters of the United States” to mean territorial seas, traditionally navigable water bodies, tributaries, lakes and ponds, impoundments of jurisdictional waters, and their adjacent wetlands. It affects several CWA programmes, including Section 404 (wetlands permitting), Section 402 (end-of-the-pipe discharges), and Section 311 (oil and hazardous substance spills).
The final NWP Rule applies the CWA more broadly than the 2019 proposed rule. For example, ditches, even if man-made, are considered “tributaries” if they pass through wetlands and water flows through them; “adjacent” (regulated) wetlands include those separated by natural or artificial means, as long as the wetlands are inundated by the waterway in a typical year; and possibly ephemeral surface waters may be considered regulated as intermittent, if they are seasonally inundated by more than a direct response to precipitation – eg, indirectly by groundwater table elevation or snowpack melts.
The NWP Rule, however, applies the CWA more narrowly than the now-repealed 2015 “Waters of the United States” rule. The final rule rejects the controversial “significant nexus” test from 2015 and the concurring opinion in the Rapanos v United States decision by the US Supreme Court. Instead, it accommodates the plurality and concurring opinion in Rapanos by expanding jurisdiction somewhat. Also, the final rule expands the Natural Resources Conservation Service-certified “prior converted cropland” exemption from Section 404, which excludes lands farmed since 1985 from Section 404 regulation if they have not been abandoned from documented cropping, haying, pasturing, or conservation for five years. Interstate waters, groundwater, and isolated waters such as prairie potholes are also excluded and are left to states and tribes to regulate.
The NWP Rule became effective on 22 June 2020. Multiple states have sought to enjoin or to stay the rule, but only Colorado has been successful to date. As a result, the NWP Rule is now in effect in all states except in Colorado.
US Supreme Court decision on permit requirements for discharges to groundwater
The CWA requires an NPDES permit for the discharge of a pollutant from any point source, such as a pipe or ditch, to waters of the USA (jurisdictional surface waters). In April 2019, after a split between the Fourth and Ninth Circuit Courts of Appeals as to whether an NPDES permit is required for discharges from a point source to groundwater that subsequently migrate or are conveyed to jurisdictional surface waters, the EPA issued an interpretive statement concluding that all releases of pollutants from a point source to groundwater are excluded from NPDES permit requirements regardless of a hydrological connection between the groundwater and a jurisdictional surface water. This interpretation was expected to avoid a flood of new permit applications for indirect discharges to jurisdictional surface waters via groundwater at landfills, facilities that operate with ponds, and other facilities.
The US Supreme Court addressed the issue in Maui v Hawaii Wildlife Fund, et al, 140 S.Ct. 1462 (23 April 2020). A six-member majority held that the answer to the question turns on whether such a migration is the “functional equivalent of a discharge”, which depends on “how similar to (or different from) the particular discharge is to a direct discharge”. In making that determination, lower courts should look at a non-exhaustive list of seven factors, the most important of which may be time and distance.
The Court declined to issue a bright line ruling, which leaves confusion regarding whether groundwater is somehow regulated by the CWA, at what point groundwater pollution ceases to be from a “point source” (and subject to CWA) and becomes a “non-point source” (regulated by the states), and the definitive factors and relative weight of each factor should be given. Instead, the Court determined that the lower courts and the agencies will have to figure out what a “functional equivalent of a discharge” looks like on a case-by-case basis.
Clean Air Act Developments
Regulatory rescission of the “once in, always in” policy
EPA’s controversial “once in, always in” policy was announced in a 1995 memorandum authored by the then director of the EPA’s Office of Air Quality Planning and Standards. It provided that any facility that was a “major source” of hazardous air pollutants (HAPs) on the first substantive compliance date of an applicable maximum achievable control technology (MACT) standard under the Clean Air Act (CAA) must “permanently” comply with that standard. This means the facility could not reclassify as an area (minor) source, even if it subsequently reduced its emissions and accepted enforceable limits on its potential to emit HAPs below the major source thresholds. In January 2018, EPA issued a memorandum that withdrew the “once in, always in” policy on grounds that it was contrary to the plain language of the CAA. On 1 October 2020, EPA issued a pre-publication version of a final rule that rescinds the “once in, always in” policy and effectively codifies its January 2018 memorandum. The final rule will become effective 60 days after its forthcoming publication in the Federal Register.
Trump administration attempts to roll back Obama-era methane rule
The Bureau of Land Management (BLM) under the Obama administration issued the Waste Prevention Rule to address methane emissions from upstream oil and gas operations on federal lands by limiting venting and flaring practices, and requiring measures such as capturing a percentage of leaked gas and leak detection activities (81 FR 83008). The rule became effective on 17 January 2017, three days before President Trump took office.
The BLM under the Trump administration issued the Revision Rule, effective on 27 November 2018, which rescinded much of the Waste Prevention Rule (83 FR 49184). On 15 July 2020, a California federal district court vacated the Revision Rule: California v Zinke, No 418-CV-05712-YGR (N.D. Cal.). On 8 October 2020, however, in a separate lawsuit, the Wyoming federal district court vacated the Obama-era Waste Prevention Rule on grounds that BLM exceeded its statutory authority and acted arbitrarily in issuing the rule: Wyoming v Department of Interior, No 2:16-CV-00285 (D. Wyo.). As a result, at present, the Waste Prevention Rule is not in effect.
The Trump administration has also attempted to undo methane regulation on another front. In 2012, the EPA published the New Source Performance Standards (NSPS) for volatile organic compounds (VOCs) for new wells and certain oil and gas equipment (77 FR 49490). This rule, referred to as Quad O, regulated VOCs and had the effect of regulating methane emissions from the entire gas sector, including production, transmission, and storage. In 2016, the EPA published amended Quad O and introduced Quad Oa which established methane emission limitations. These rules only applied to new or modified sources. However, under the CAA, regulating new sources requires EPA to prescribe regulations that establish a procedure for states to submit standards of performance for any existing source that would apply if the existing source were a new source: 42 U.S.C.§ 7411(d)(1). Therefore, existing sources were likely to become subject to these regulations.
On 13 August 2020, the EPA released two rules – referred to as the Review Rule and the Reconsideration Rule – that rolled back much of the 2012 and 2016 NSPSs. The Review Rule is the most noteworthy as it eliminated the transmission and storage segment from regulation under the NSPSs and therefore removed the VOC and methane emission limitations for this segment, and also rescinded methane standards for the production and processing segments. The Review Rule also raised the bar for EPA regulation of GHGs. It requires that the EPA make a separate finding that the pollutant from the specific source category “significantly” contributes to air pollution which may reasonably be anticipated to endanger public health or welfare before it can regulate a pollutant from a source category under 42 U.S.C. § 7411(b)(1). Because the Review Rule eliminates new sources from the methane standards, existing sources cannot be regulated under 42 U.S.C. § 7411(d). The Review Rule was published on 14 September 2020 and became effective the same day (85 FR 57018).
The Reconsideration Rule consists of technical amendments that only apply to VOC emissions at the production and processing segments. It covers activities involving well completions, technical infeasibility exemptions, repairs, monitoring, and record-keeping. It becomes effective on 16 November 2020 (85 FR 57398). Challenges to the two rules were filed by environmental groups on 14 and 15 September 2020 and are pending in the US Court of Appeals for the District of Columbia Circuit: California v Wheeler, No 20-1359 (D.C. Cir.).
BOEM update of air quality regulations for offshore oil and gas activities
The Outer Continental Shelf Lands Act (OCSLA) authorises the Department of the Interior (DOI) to regulate activities authorised by the Bureau of Ocean Energy Management (BOEM) in the Central and Western Gulf of Mexico and offshore the North Slope Borough of Alaska. The EPA has air quality jurisdiction over all other parts of the OCS under the Clean Air Act. BOEM regulates air emission of offshore facilities by approval and enforcement of operators and lessees’ exploration, production, and development plans. BOEM’s air quality regulations had not been updated in nearly 40 years prior to the Obama administration’s DOI 2016 proposed rule. The 2016 rule would have expanded the regulations beyond the mandate of the OCSLA for the regulation of onshore impacts and National Ambient Air Quality Standards (NAAQS) compliance from offshore facilities. The final rule, as promulgated by the Trump administration’s DOI, is limited to an evaluation of onshore impacts and NAAQS compliance from offshore facility emissions and is mainly a modernisation of the pre-existing OCS air rules. Under the new rule there is still some complexity in reporting air emissions which may impact onshore air quality.
Developments in Federal Enforcement
Further DOJ curtailment of the use of Supplemental Environmental Projects in environmental settlements
Supplemental Environmental Projects (SEPs) are environmentally beneficial projects or activities that go beyond what could legally be required, but that a company agrees to undertake as part of the settlement of an enforcement action. Since 2018, the DOJ has been chipping away at the availability of SEPs as a partial penalty alternative, by largely prohibiting their use in settlements with state and local governments. On 12 March 2020, the DOJ issued a memorandum extending the prohibition on the use of SEPs in settlements with private parties. The new policy is not retroactive.
This latest DOJ memorandum states that it is “intended to govern the staff of the United States Department of Justice, Environment and Natural Resource Division, in their handling of enforcement actions”. Its effect on EPA settlements that do not involve the DOJ Environment and Natural Resource Division is unclear. EPA has used SEPS in its own administrative enforcement authority for decades. Whether it will continue to do so remains to be seen.
Memorandum on fairness and due process in federal enforcement
On 31 August 2020, the Office of Information and Regulatory Affairs, a sub-agency of the Office of Management and Budget, issued Memorandum M-20-32 to all federal agencies providing additional guidance on implementing Section 6 of Executive Order 13924, an “Executive Order on Regulatory Relief to Support Economic Recovery”. Section 6 of the Executive Order directs the agencies to "consider the principles of fairness in administrative enforcement and adjudication" and revise their procedures and practices accordingly. The Memorandum sets forth a long list of best practices pertaining to due process in enforcement actions which provide, among other things, that agencies should:
The best practices outlined in the Memorandum, if implemented by the EPA and other agencies, could have a notable impact on enforcement practices by requiring a high level of fairness, transparency, documentation, and procedural rigour.