Supplemental Environmental Projects
Karin Sinclair, National Renewable Energy Laboratory
Introduction to SEPs The U.S. Environmental Protection Agency (EPA) is responsible for enforcing compliance with Federal environmental laws and regulations. Through settlement agreements, violators are required to rectify violations and pay a civil penalty. The settlement agreement may also include Supplemental Environmental Projects (SEPs). Under EPA’s SEP Policy, companies are encouraged (participation is voluntary) to fund environmentally beneficial projects to mitigate all or part of penalties imposed as a result of an emissions violation. Because SEPs must result in direct environmental benefits, they can provide pollution prevention and environmental justice. SEPs are applicable to all civil judicial and administrative enforcement actions and are an alternative to standard fines in enforcement actions. Enforcement actions take place at the federal and state levels. States are responsible for implementing the SEP Policy to handle state-specific violations. State-specific penalties typically range from $10,000 to $500,000. Federal penalties can be millions of dollars. In FY 1999, violators spent $3.4 billion to correct violations as a result of enforcement actions. In addition, EPA assessed $166.7 million in civil penalties. Of the total penalties assessed in 1999, $236.8 million was spent on SEPs.17 The EPA’s SEP Policy affords both near-term and long-term opportunities for providing a sustained and quantifiable contribution to meeting EPA’s objectives. SEPs can include both energy efficiency and renewable energy projects (EE/RE). Wind projects can play a unique role in meeting EPA objectives. SEPs can provide capitalization for wind development. The U.S. Department of Energy and the National Renewable Energy Laboratory are working to support the development of wind SEPs at the state and federal levels with the expectation that these successful examples will be used to foster replication of wind SEPs across the country.
Purpose of EPA SEP Policy “The primary purpose of this Policy is to encourage and obtain environmental and public health protection and improvements that may not otherwise have occurred without the settlement incentives provided by this Policy.”18 Generally, SEP funds cannot be used to support projects that are required by legislative or regulatory bodies, such as meeting renewable portfolio standards. Further, projects already planned by the defendant are not eligible. SEP funds provide resources that would not otherwise be available. They can be used to support the development of a project that would otherwise not be economically viable or for locations where financing may be difficult, such as on tribal lands. In specific cases, however, “SEPs may include activities which the defendant/respondent will become legally obligated to undertake two or more years in the future, if the project will result in the facility coming into compliance earlier than the deadline.” If public notice is made about the project, the violator must explicitly indicate the project was done in response to an enforcement action. To help ensure the violator does not realize economic gain from a SEP, a multiplier is calculated and applied to the penalty to take into consideration all expected financial benefits (such as the federal Production Tax Credit or Renewable Energy Production Incentive, tax benefits, other incentives or subsidies, gains from sale of commodity, etc.). Although the multiplier is often 1.5 or 2, as a result of all the benefits that are available to wind projects, the penalty multiplier could be as high as 5. For example, a $100,000 penalty could result in a project investment of up to $500,000. The violator would be required to initially invest $500,000 in the project but would get back some of this in incentives/benefits as listed above, resulting in a net investment of $100,000.
Colorado Wind SEP In 2000, the Colorado Department of Public Health & Environment revised its SEP policy to explicitly allow renewable energy SEPs. In that year, it negotiated a settlement with a large industrial company for violating state air quality regulations. The settlement resulted in a wind related SEP, funded by a civil penalty of approximately $303,000. The full penalty amount was deposited with the local utility in an escrow account and used to pay for wind premiums from wind development for at least 5 years.
StEPP The Strategic Environment Project Pipeline (StEPP) is a nonprofit, government-preferred organization. The first of its kind in the country, StEPP works with states and the EPA to facilitate EE/RE projects using enforcement settlement funds, directing some of the penalty funds that would have gone into the state or federal general funds into EE/RE projects. StEPP will “review and recommend appropriate projects, contract for project implementation, escrow the funds allocated to that project, manage the project, then assess and report measurable project outcomes.” The State of Colorado has entered into an agreement with StEPP to aggregate Colorado enforcement penalty funds. StEPP will select projects with the greatest environmental benefit for the investment dollar and oversee the implementation of the projects. StEPP is prepared to work with other states and regions.
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