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Many businesses or developers are intimidated about purchasing property former industrial or commercial property that may be contaminated.  The fear of the unknown can be the biggest deterrent to considering properties that may be contaminated.  Common concerns include:

 

  • Could I be buying a potential mess, which could cost me six to seven figures to cleanup?
  • Could I be risking being liable to neighboring property owners if contamination is migrating off-property?
  • I don’t like spending upfront money on due diligence that may be lost if I don’t purchase the property; and
  • The complexity of environmental risk management is daunting.

These are legitimate concerns.  However, with the right approach there could be advantages to developing potentially contaminated property.  First, you should likely be able to negotiate a reduced purchase price.  I have had multiple deals where the property was purchase for $1.  Second, you may be able to leverage brownfield incentives to offset your due diligence or cleanup costs.

I have reviewed hundreds of Phase I and Phase II environmental assessments.  I also have managed redevelopment of highly complex brownfield sites as well as smaller sites with moderate contamination.  Here are five common mistakes I see by businesses, developers and even attorneys when purchasing potentially contaminated property.

1.  The LLC

Many buyers think that if the simply put contaminated property under ownership by a limited liability company (LLC) they will avoid personal liability.  While putting such property under separate corporate ownership is still advisable, it will not insulate you from personal liability.  There are a number of cases in which members of the LLC have been held personally liable even though they purchase the property with pre-existing contamination.  Ohio is particularly aggressive in pursuing members of an LLC personally.  Check out the following Ohio cases:

  • State ex rel. Petro v. Mercomp, Inc.  (2006) 167 Ohio App. 3d 64 – sole shareholder individual liable for corporation’s violations;
  • State ex rel. Cordray v. Evergreen Land Development, LTD 2016 WL 5408651- members personally participated in violations, and thus were jointly and severally liable with the LLC;
  • State ex rel. Petro v. Pure Tech Sys., Inc., 2015 WL 1959935- evidence sufficient to hold shareholder personally liable for a $6 million dollar penalty;
  • State v. Tri-State Group, Inc., 2004 WL 1882567- shareholder found personally liable for permit violations;
  • State ex rel. DeWine v. Sugar, 2016 Ohio 884- shareholder personally liable for failure to correctly remove and dispose of asbestos;
  • State ex rel. DeWine v. Marietta Industrial Enterprises, Inc., 2016 WL 6875425- overruled lower court and found there were genuine issues of material fact as to whether the president of the company, who was engaged in day-to-day compliance, could be held personally liable

2.  The “As Is” Sale 

This is more of a mistake on the seller’s side, but it is probably the singled biggest costly mistake I see made in transactions involving contaminated property.  The seller includes an “As Is” clause in the sale agreement and believes that the buyer is taking on all liability with regard to pre-existing contamination.

An “As Is” clause is simply a disclaimer of representations with regard to the condition of the property.  Unless the seller specifically includes a release of liability in the sale agreement, buyer still can sue seller for pre-existing contamination under a number of environmental statues as well as common law.  If you are selling property make sure you include a well-crafted release of environmental causes of action.

3.  If I Buy Contaminated Property I Must Perform a Highly Expensive Cleanup 

Most transactions involving contaminated property actually do not involve a full-blown cleanup under a particular environmental statute.  In Ohio, the brownfield cleanup program is called the Voluntary Action Program (VAP).  While the VAP can work well with highly contaminated property it doesn’t fit well with smaller or properties with marginal or moderate contamination.

To promote more redevelopment and reuse of contaminated property, U.S. EPA created the “Bona Fide Purchaser Defense” (BFPD).  The BFPD allows a buyer or potential tenant to significantly reduce their potential liability if the perform a certain level of due diligence (Phase I and Phase II property assessments).  If those assessment identify contamination, the BFPD requires the buyer to take “reasonable steps” to address contamination.  Broadly speaking, reasonable steps means eliminating ongoing releases of contamination and prevent exposure to contamination.  In the vast majority of cases, it will not mean full-blown cleanup of contamination.  Someone who properly utilizes the BFPD can appropriately manage their environmental risk allowing them to purchase or lease property that other buyers or tenants may avoid.

4.  Seller Gave Me a “Clean” Phase I 

Often I will hear a buyer say they don’t need to worry about environmental contamination because the seller of the property gave them a Phase I environmental assessment that showed no issues (i.e. a “Clean” Phase I).  However, over reliance on another party’s Phase I could be very problematic for several reasons:

  • A Phase I must be less than a year old and updated after six months to still provide BFPD protections to a buyer;
  • In order to use the seller’s Phase I, the buyer must get what is called a reliance letter from the environmental consultant that allows the buyer to rely on the conclusions of the report;
  • Low quality Phase I environmental assessment often show no issues.  Make sure the Seller used a reputable company and that the Phase I was performed to appropriate standards (i.e. ASTM 1527-13)
  • Remember that a Phase I does not involve any actual sampling of the property, therefore, contamination may go missed which is why it important to make sure you, as the buyer, qualify for the BFPD

5.  Not Having an Environmental Attorney Review the Purchase Agreement

I know this sounds self-serving, but I cannot tell you how many times in my practice I have seen this issue cause huge issues for both buyers and sellers of potentially contaminated property. A number of times I have been brought in late into a deal and the Client sends me a form purchase agreement that doesn’t address environmental issues. There are very specific environmental provisions in purchase agreements, which need to be carefully reviewed and negotiated.  These include:

  • Reps and warranties- Is there an “As Is” Clause?  Are there other reps being made about the environmental condition of the property?  Has the buyer made a rep that they have provided all available environmental reports in their possession?
  • Release- Is there a release of environmental liability included in the contract?  If so, what is the scope of the release?  There are court cases which have heavily analyzed the exact wording of environmental releases in contracts
  • Environmental Indemnity- Is either buyer or seller or both providing indemnification for environmental liability?  This is often the most challenging environmental provision in a purchase agreement to negotiate.

The Trump Administration has made it a priority to shift more responsibility to the states on enforcement.  On July 11, 2019, U.S. EPA released a memorandum to the Regional Administrators regarding federal and state enforcement.   The latest policy memorandum was a collaboration between U.S. EPA and State EPA Administrators.  The memorandum includes:

  • Best Practices for Coordination between U.S. EPA and the states on enforcement; and
  • Emphasizes the states primary role in performing inspections and taking enforcement

The first part of the memorandum discusses joint planning between U.S. EPA and the States to avoid duplicative inspections and enforcement.  The second part of the memorandum emphasizes a Trump Administrative priority that the states should be in the primary role of implementing programs under the Clean Air Act, Clean Water Act, Safe Drinking Water Act and hazardous waste regulation (i.e. RCRA).  The memorandum indicates that U.S. EPA will step in to take enforcement when “a state lacks economic or technical capability or the will to take timely an appropriate action.”

The memorandum identifies specific instances when it may be appropriate for U.S. EPA to take the lead on inspections or enforcement, including:

  1. When States request U.S. EPA take the lead;
  2. Violations that are part of the National Compliance Initiative (i.e. federal enforcement priorities);
  3. Emergency situations or where there is a substantial risk to human health or the environment;
  4. States lack the resources;
  5. Situations involving multi-state issues;
  6. Significant violations that a state has not timely or appropriately addressed;
  7. Situations where U.S. EPA criminal enforcement may be needed;
  8. When reviewing the effectiveness of a state’s enforcement program; and
  9. Enforcement at state owned or operated facilities

With a federal decrease in enforcement has there been an increase at the state level?

As reported in the Washington Post, in 2018 U.S. EPA inspected around 10,600 industrial facilities.  This amounts to about half as many inspections as U.S. EPA performed in 2010.  U.S. EPA assessed approximately $69 million in civil penalties which is the lowest in almost twenty-five years.  These statistics are based on data released by U.S. EPA.  While there has been a steady decline in enforcement over the last decade, the drop is more significant since the Trump Administration announced its policy that states will take the lead on enforcement.

Has there been a corresponding increase in the number of inspections and enforcement in the states?  It is very difficult to tell.  There a lack of consistency among the states in reporting enforcement statistics. Therefore, it is very difficult to determine if there has been an increase in recent years to correspond with the increased reliance on state enforcement by U.S. EPA.

Ohio is a good example of the difficulty in tracking whether states have increased enforcement in the past two years.  Ohio EPA no longer maintains a comprehensive enforcement report which annually reports its enforcement statistics.  Instead, each division publishes, in different locations on their webpages, links to each enforcement action taken sorted by calendar year.  A review of the number of enforcement actions taken over the last five years shows the difficulty in making any conclusions regarding Ohio EPA’s overall enforcement record.

    Air     Surface Water Hazardous Waste Drinking Water  Solid Waste/C&DD
2018  Not reported            69            11  Not reported                17
2017 Not reported            31            13 Not reported                16
2016 Not reported            39            17 Not reported                22
2015 Not reported            31            15 Not reported                12
2014 Not reported            33            18 Not reported                16

With the exception of a significant increase in enforcement actions in 2018 for the Division of Surface Water, the other divisions at Ohio EPA have not seen a significant increase in enforcement.  Two of the divisions do not publish issued enforcement actions on their webpages.  The Division of Air Pollution Control stopped listing the enforcement actions taken by calendar year in 2012.  No listing of enforcement actions taken could be found on the Division of Drinking and Groundwater webpage.

Some debate whether states should be required to report enforcement statistics.  During a time when there is major shift toward prioritizing state enforcement by the Trump Administration transparency is even more critical.

Despite its limitations, most commercial and industrial property transactions rely on the Bona Fide Purchaser Defense (BFPD) to CERCLA as the principal means of protecting new owners from environmental liability.  While EPA has adopted the “All Appropriate Inquiry” (AAI Rule) to provide some clarity to the steps necessary to qualify for the defense, there is still aspects of the AAI Rule that are open to interpretation.  Therefore, court rulings on applicability of the BFPD can be very instructive to practitioners, developers and property owners.

There have been very few court rulings interpreting application of the BFPD to CERCLA liability. The most notable prior ruling, PCS Nitrogen Inc. v. Ashley II of Charleston, limited the BFPD based on the defendant’s failure to establish certain required elements of the defense.

In a decision issued last month, Von Duprin LLC v. Moran Elec. Serv., Inc., No. 116CV01942TWPDML, 2019 WL 535752 (S.D. Ind. Feb. 11, 2019), the Indiana Federal District Court granted the BFPD even though the party asserting the defense did not obtain a Phase I prior to purchasing the property.  The Court’s ruling is notable in that EPA’s AAI Rule is mostly focused on the required elements of a Phase I environmental assessment to qualify for the BFPD.  The AAI rule also discusses “reasonable steps” that are needed if the Phase I identifies the possibility of any contamination on the property, which include:

  1. Stop any continuing release;
  2. Prevent any threatened future release; and
  3. Prevent or limit any human, environmental, or natural resource exposure to any previously released hazardous substance

Plaintiff’s argued Defendants should not qualify for the BFPD because the Defendants failed to perform a Phase I in accordance with AAI prior to acquiring the property.  Plaintiff also contended that the Defendants failed to perform necessary “reasonable steps” post-acquisition to address the contamination and, therefore, should not qualify for the BFPD.  The Court rejected Plaintiff’s argument regarding the adequacy of Defendants “reasonable steps” stating that Plaintiff’s contention was not “well developed.”  The Court also held that the Defendants’ performance of a Phase II was sufficient to establish the defense even without a Phase I stating:

CERCLA makes it clear that performing a Phase I Environmental Site Assessment is sufficient to satisfy the all appropriate inquiries prong of the BFPP defense. 42 U.S.C. § 9601(35)(B)(iv)(II). But the law leaves open to interpretation whether a Phase I assessment is the only way to satisfy that prong, saying that a Phase I assessment “shall satisfy the requirements” of the all appropriate inquiries prong. At least one court has determined that a Phase I assessment is not the exclusive means by which a purchaser of land can make all appropriate inquiries. R.E. Goodson Const. Co., Inc. v. International Paper Co., No. 4:02-4184-RBH, 2006 WL 1677136, at *6 (D.S.C. June 14, 2006). The Goodson court determined that the Senate Report on the amendment adding the “shall satisfy” language to CERCLA read that a Phase I assessment “can satisfy” the “all appropriate inquiries” requirement. Id. That court also noted that “Congress could have provided that a Phase I site assessment was required or was the exclusive procedure to satisfy the ‘all appropriate inquiries’ standard; however, Congress made no such mandate…This Court is inclined to agree with Goodson that Congress did not intend to make a Phase I Environmental Site Assessment the exclusive means by which a purchaser could satisfy the BFPP defense’s all appropriate inquiries standard.

Defendants Phase II assessment included collection of seven soil samples and three groundwater samples.  The sampling showed some exceedances of cleanup standards.  The Phase II report recommended removal of an underground storage tank (UST) and the associated contaminated soil in accordance with Indiana Department of Environmental Management (IDEM) regulations.  Defendants did perform the removal and the UST and excavation of the contaminated soil as recommended in the Phase II report.  After excavation, the Defendants backfilled the excavation with clean soil.

What is interesting is that with no Phase I performed how could the Court determine that the Phase II scope was adequate?  What was the basis of the determination that the UST was the only potential source of contamination on site that warranted sampling?  It is possible there was testimony on this issue, but it was not discussed in the opinion.

The ruling is a hopeful sign for the thousands of transactions that rely on the BFPD to address potential liability that the BFPD will be recognized by Courts.  However, despite the ruling, it is still strongly recommended that parties wishing to establish the BFPD do not skip the Phase I assessment process as set forth in the EPA AAI Rule.  Doing so leaves a new owner open to many different avenues of challenging its assertion of the BFPD.  Furthermore, the cost of a Phase I is somewhere between $2,500 to $4,500- a relatively small price to pay for environmental liability protection.

In February 2019, U.S. EPA released its action plan to regulate Per- and Polyfluoroalkyl Substances (PFASs).  The two most well-known PFAS chemicals are perfluorooctane sulfonate (PFOS) and perfluorooctonoic acid (PFOA).

Consumer products have long used PFASs for things such as non-stick cookware, waterproof carpeting, clothing, and some firefighting foams.  While PFASs made great consumer products, it was later discovered that the chemicals don’t break down in the environment and they have been linked to possible health impacts.  Humans are exposed to PFASs in drinking water, fish consumption and inhalation of dust.

Back in 2016, EPA issued an advisory under the Safe Drinking Water Act (“SDWA”) that recommended levels of 70 parts per trillion in the bloodstream.   An “advisory” is non-regulatory and unenforceable. While EPA adopted this recommendation, some states did adopt drinking water standards.  In the last few years it appeared EPA would defer to the states in regards to establishing standards for PFASs.

On February 14, 2019, after mounting calls for regulatory action on PFAS, EPA releases its PFAS Management Plan.  The plan calls for a number of regulatory actions, but most notably:

  • EPA will adopt a national drinking water standards for PFOAs and PFOS under the Safe Drinking Water Act sometime in 2019.  EPA only regulates approximately 90 chemicals under the SDWA, therefore, this is the most significant aspect of EPA’s announced management plan.
  • EPA will being to take the steps necessary to list PFOA and PFOS as hazardous substances under CERCLA (also known as “Superfund”).  Listing PFOA and PFOS as hazardous substances will leverage CERCLA’s broad joint and several liability scheme for sites across the U.S. with significant groundwater contamination; and
  • EPA is considering including PFASs on the Toxic Release Inventory (TRI) and rules to prohibit the use of certain chemicals.

While adopting an MCL for PFOA and PFOS under the SWDA would be very significant, EPA must go through rulemaking, including a notice and comment period, to put a standard in place.  Any such standard will be controversial because EPA must consider the cost of treatment compared with public health benefits.  Also, any established standard will almost certainly be challenged in the courts.

While EPA is moving forward to adopt regulations pertaining to PFASs, lawsuits have already been filed across the United States against manufacturers of PFASs.  In Ohio, a large private party class action suit against DuPont, a PFAS manufacturer, was settled for $670 million resolving 3,550 personal injury lawsuits related to exposure to PFASs into the environment. In 2018, now Governor Mike DeWine, when he was Attorney General, filed a suit against DuPont for releases of PFASs into the Ohio River.

From the newly announced EPA Management Plan, state regulatory actions and litigation, PFAS issues will be unfolding over the next few decades.

On February 14, 2019, the IRS will hold a public hearing on its regulations governing Qualified Opportunity Zones.  The public comment period closed on December 28, 2018.  The IRS is expected to finalize regulations soon after the public hearing.

One of the most notable comments received during the public comment period on the IRS regulations for Opportunity Zones (QOZ) came from the Deputy Director of U.S. EPA’s Office of Brownfields and Land Revitalization (See, epa_comments_on_qoz_regs).   The comment letter did an excellent job of pointing out that the regulations could, in large part, freeze out brownfields from leveraging the significant advantages of the OZ classification.  This is best highlighted by the following comment in the letter:

EPA’s OBLR encourages the IRS to clarify in the final guidance that investments in the assessment, remediation, and redevelopment of brownfields properties located in Qualified Opportunity Zones (QOZs) are included within the scope of Qualified Opportunity Funds (QOFs).  This clarification will provide an incentive to invest funds in the assessment, remediation, and reuse of brownfield properties.

As discussed in EPA’s comment letter, without proper treatment of costs associated with investigating and cleanup of brownfields, developers will have very little incentive to tackle properties with any significant environmental contamination.  At issue are regulations regarding which properties or improvements allow a property to qualify for the tax incentives associated with QOZs.  Under the draft regulations, properties must meet certain requirements to qualify:

  1. Substantial Improvement Test- the investor must substantially improve the real estate by doubling the tax basis of any building on the property without regard to the value of the land itself.    Under current regulations, if the investor/developer spends funds to investigate or cleanup contamination on the property and, as a result, the land value increases, that increase cannot be counted toward the substantial improvement test;
  2. 30-Month Window for Improvements- the draft regulations establish a 30-month window to complete the investments (i.e. building improvements) used to qualify under the Substantial Improvement Test.  Since most brownfield cleanups will add substantial time to a redevelopment project, the 30-month window requirement would also act to exclude brownfield redevelopment projects; and
  3. Original Use- the original use must commence with the applicable QOZ investment. The draft regulations put the focus on the vertical structure on the property, not the land itself.  By focusing on buildings, the QOZ would provide little incentive to cleaning up contaminated land.

To allow flexibility for brownfield projects, EPA proposes the following changes to the IRS proposed regulations:

  • Brownfield = Original Use- Allow “brownfields” (as that term is defined under CERCLA) to qualify for the “original use” thereby putting the focus on the land when the land is contaminated.  EPA also states that allowing brownfields to qualify as the “original use” will address  30-month deadline for improvements which may be too restrictive if substantial cleanup is needed prior to development;
  • Vacant or Underutilized Properties = Original Use-  Allow properties that have been vacant or underutilized for a period of one year or more to meet the definition of “original use” under the regulations.  “Underutilized” would mean the entire property or a portion thereof which is only used at irregular periods or intermittently.  Expansion of the definition of “original use,” as suggested by EPA, would address concerns related to properties that add to blight even if they don’t meet the definition of a “brownfield;”
  • Foreclosed or Land Bank Property Should Qualify– if a property has gone through foreclosure or is being held by a land bank, EPA encourages the IRS to allow those properties to qualify for QOZ investment by treating them as “Underutilized or Abandoned Property” under the regulations;
  • Sampling and Cleanup Costs = Substantial Improvements- EPA requests that the IRS regulation treat assessment, cleanup and other site preparation costs as expenses that meet the “Substantial Improvement” Test under the QOZ regulations;
  • Allow Redevelopment Ready Brownfield Projects to Qualify-  EPA asks that the regulation allow a project to qualify that is solely assessment and cleanup of a brownfield property in preparation for future development.  Such a change could add a major incentive to spur cleanup of brownfields and positioning such property for future development;
  • Allow Gains from QOZ Investment Related to Brownfield Cleanup to Be Carried Over to Vertical Improvements on the Property-  EPA requests that the regulations allow the gains realized from the sale or exchange of QOZ Property to be deferred if they are reinvested in replacement QOZ Property within a 12-month period.  Without such clarification EPA is concerned that a Redevelopment Ready Brownfield Project may have to delay actual building construction for ten years after cleanup is complete to access the benefits of the Opportunity Zone incentive; and
  • Stack Window for Cleanup with Window for Redevelopment-  EPA requests that the IRS allow a 30-month window for brownfield cleanup to show substantial improvement to the land value and a separate 30-month window for building improvements for costs to count toward the Substantial Improvement Test.

If the IRS does not revise its regulations to address EPA regulations there is a strong possibility that brownfield projects will not be able to leverage the significant tax incentives provided by QOZs.

Generally, the Natural Gas Act (NGA) preempts a state’s ability to enforce its own state laws with limited exceptions.  The purpose of the NGA preemption of state law is to expedite interstate energy projects such as natural gas pipelines that could otherwise be entangled in state regulations in multiple jurisdictions.

There are limited exceptions to the NGA preemption of state law. One such exception is the ability of states to exercise permitting authority under the Clean Water Act pursuant to 15 U.S.C. 717b(d)(3).  In 2017 and 2018, there has been extensive litigation in the federal courts regarding state authority under the Clean Water Act carve out from NGA preemption.   Most challenges involved whether states had acted lawfully in either issuing or denying 401 Water Quality Certifications under the Clean Water Act.

Conflicts over the NGA and the Clean Water Act carve out are likely to continue.  As reported in North American Oil & Gas Pipelines, natural gas infrastructure projects are expected to be “$417 billion, an average of $23 billion annually, from 2018 through 2035. This includes transmission pipelines, compressors, laterals, gas-lease equipment, processing, gas storage and LNG export facilities.”

Politico recently reported that the Trump Administration is considering steps to curtail the states ability to hold up or block interstate pipelines by exercising state’s permitting authority under the Clean Water Act.  This from Bloomberg regarding the proposal:

The effort, possibly done through executive order, is aimed chiefly at states in the Northeast U.S., where opposition to pipeline project has helped prevent abundant shale gas in Pennsylvania and Ohio from reaching consumers in New York or other cities….New York used a Clean Water Act provision to effectively block the construction of a natural gas pipeline being developed by Williams Partners LP to carry Marcellus shale gas 124 mi to New England.

Any executive order that target the NGA carve out language will almost certainly be challenged by states intent on protecting their ability to regulate water quality impacts through issuance of 401 Water Quality Permits under the Clean Water Act.  As projects continue, there will no doubt continue to be extensive federal litigation in this area.

With a divided Congress, it is unlikely there will be amendments to the NGA similar to the Energy Policy Act of 2005 which was the last congressional attempt to expedite oil & gas infrastructure projects.

There has been multiple blog posts over the history of this site tracking the long and arduous processing of defining federally protected waters under the Clean Water Act.  The U.S. Supreme Court has taken up the issue on multiple occasions, perhaps most significantly in Rapanos v. United States, 547 U.S. 715 (2006) where Justice Kennedy created the “significant nexus” test for determining whether streams and/or wetlands were protected under the Clean Water Act.  The plurality decision in Rapanos along with Justice Kennedy’s Significant Nexus Test federally protect any waters that:

  • Plurality Test– are relatively permanent, standing or continuously flowing bodies of water, including those deemed traditionally navigable waterways (i.e. “traditional jurisdictional water”); and
  • Significant Nexus Test– those waters that alone or in combination with other similarly situated waters in the region, significantly affects the chemical, physical or biological integrity of a traditional jurisdictional water;

Obama 2015 WOTUS Rule and Current Court Challenges

Due to the uncertainty of applying the case-by-case “significant nexus test,” in 2015 the Obama Administration proposed the Waters of the United States (WOTUS) rule to clearly define the extent of federal jurisdiction under the Clean Water Act.  Under WOTUS, a federally protected tributary was defined to include:

  • those that can have perennial, intermittent or ephemeral flow;
  • Has a defined bed, bank and ordinary high water mark (a term defined under existing regulations);
  • Contributes flow, either directly or through another water, to as jurisdictional water; and
  • Or, is part of a network that drains to a jurisdictional water

WOTUS was seen to broaden federal jurisdiction over waterways.  The WOTUS rule was challenged immediately.  Various suits have been filed in federal district courts around the country.  Some challengers were successful in obtaining preliminary injunctions that prevented enforcement of WOTUS in a total of 28 states.  While WOTUS remains in effect in the remaining 22 states.

In 2017, the Trump Administration announced its intention to unwind the WOTUS rule and replace it with a new rule defining the extent of federal jurisdiction. The Trump Administration implemented what was deemed the “Suspension Rule” which delayed the effectiveness of WOTUS until 2020 to give it time to finalize its own rulemaking defining the scope of the Clean Water Act.

However, two recent Court decisions vacated the Suspension rule nationwide–Puget Soundkeeper Alliance, et al., v. Wheeler, et al., and South Carolina Coastal Conservation League, et al. v. Wheeler, et al.. —which held that EPA and the Army Corps of Engineers failed to comply with the Administrative Procedure Act when it issued the rule suspending WOTUS for two yearsThese rulings mean that WOTUS remains effective in the 22 states where a prior preliminary injunction has not been obtained staying the effectiveness of the rule.

Trump Administration Proposes to Narrow the Definition of Federally Protected Waterways

On December 11, 2018, the Trump Administration released its draft rule defining “Waters of the U.S.” (Trump Proposed WOTUS) setting the proposed limits of federal jurisdiction under the Clean Water Act.  At the outset, the proposed rule states federally protected waters “encompass relatively permanent flowing and standing waterbodies that are traditional navigable waters in their own right or that have a specific connection to traditional navigable waters, as well as wetlands abutting or having a direct hydrologic surface connection to those waters.”  The rule states it intends the new definition to establish “bright lines” as to what is regulated and not regulated to give greater certainty.  The proposed rule goes on to discuss various categories of federally protected waters:

  • Traditional Navigable Waters and Territorial Seas– generally, all such waters are federally protected;
  • Interstate Waters– Proposal removes this category from the definition of “Waters of the U.S.;”
  • Impoundments- impoundments of regulated waterways will be federally protected;
  • Tributaries– a river, stream, or similar naturally occurring surface water channel that contributes perennial or intermittent flow to a traditional navigable water or territorial sea in a typical year either directly or indirectly through other jurisdictional waters (as well as adjacent wetlands).  The proposal excludes ephemeral streams;
  • Ditches- generally, the proposed rule would federally protect ditches that a) are traditional navigable waters; b) subject to the tides; c) constructed in a protect tributary or a protected wetland.  All other ditches are excluded from federal protection;
  • Lakes and Ponds– generally, the rule proposed to federally protect any lake and ponds that a) are traditional navigable waters; b) contribute to perennial or intermittent flow to traditional navigable waters; or c) are flooded by another federally protected waterway.
  • Wetlands- any wetlands that are adjacent to a) traditional navigable waterways; b) tributaries to traditional navigable waters; c) federally protected ditches; d) federally protected lakes and ponds; and e) federally protected impoundments.

The rule also includes “Waters and Features That are Not Waters of the United States.”  Some of the notable excluded categories include:

  • groundwater
  • farm and roadside ditches
  • features that only receive rain water; and
  • stormwater control features

What is Next?

Multiple challenges to the legality of WOTUS remain in the federal district courts.  The ultimate legality of the rule seems destined for the U.S. Supreme Court.  While the litigation continues, the 2015 WOTUS rule remains effective in nearly half the country, at least right now.

After the Trump Administration finalizes its rule redefining the scope of the Clean Water Act, challenges to that rule will also be filed in district courts.  One thing seems certain, uncertainty will persist and litigation will remain for years to come unless Congress were to pass legislation to define the extent of federal jurisdiction under the Clean Water Act and put an end to the litigation.

It is a fundamental tenant of financial planning that you need to hedge against risk.  Investors are always cautioned to diversify their portfolios (i.e. have a mix of stock, bonds and cash).  Further diversify by investing in both U.S. and foreign companies.  As you age, become more conservative in your investing to hedge against risk.

With recent developments on climate change, many parallels exist between making decisions regarding regulations of greenhouse gases and financial planning.  Even if you are a doubter of climate change, most would acknowledge there is some risk that climate change is occurring and that humans are increasing the risk through emissions of greenhouse gases.  The following statement is from NASA regarding the degree of scientific consensus that climate change is caused by human activities:

Multiple studies published in peer-reviewed scientific journals show that 97 percent or more of actively publishing climate scientists agree: Climate-warming trends over the past century are extremely likely due to human activities. In addition, most of the leading scientific organizations worldwide have issued public statements endorsing this position.

Intergovernmental Panel on Climate Change October 2018 Report

Back in 2016, the Intergovernmental Panel on Climate Change (IPCC) was commissioned to prepare a special report on the impacts of global warming over 1.5 degrees Celsius above pre-industrial levels.  In assessing the current global warming trends, the IPCC states the following in its report:

Human activities are estimated to have caused approximately 1.0°C of global warming
above pre-industrial levels, with a likely range of 0.8°C to 1.2°C. Global warming is likely to reach 1.5°C between 2030 and 2052 if it continues to increase at the current rate.

The IPCC issued a dire warning it its report.  Immediate action must begin to keep warning at a maximum of 1.5 Celsius by 2030.  If warming exceeds that level, the risk of drought, floods, extreme heat and poverty increases dramatically for millions of people.

Impacts are not just in remote corners of the globe.  The United States is already beginning to experience the risk associated with climate change.  The Global Change Research Act of 1990 mandated that the U.S. Global Change Research Program (USGCRP) deliver a report to Congress and the President.  The 4th National Climate Assessment (NCA4) was released on the heels of the IPCC report.  The report is the culmination of work by thirteen federal agencies, including NASA and the Defense Department, with contributions from 300 scientists. The report states the climate change impacts are already occurring in the United States.

National Geographic highlighted the risks discussed in the NCA4 report:

As the report makes clear, different parts of the country face different risks posed by climate change. In vulnerable Southeastern states, coastal flooding is projected to increase dramatically; Charleston, South Carolina, could experience 180 tidal floods in a year by 2045, compared to 11 per year in 2014. In the Southern Great Plains, extreme heat could cause thousands of premature deaths and billions in lost work-hours by the end of the century.

Drought conditions worsened the recent California wildfires.  Fortune reported that the recent California wildfires destroyed 6,700 structures.  The total cost to the state, homeowners and insurers is expected to exceed $19 billion.

The recent IPCC and NCA4 reports show the dramatic risk climate change presents.  If such risk is analyzed in a similar fashion to financial risk, prudent decision making would include taking appropriate steps to mitigate that risk.

U.S. Rolls Back Climate Change Regulations

The Trump Administration has rolled back climate change regulations and has announced its intention to remove the United States from the Paris Climate treaty.  Some of the climate change deregulation includes the following:

With regard to the NCA4 Report, as reported on VOX, President Trump even recently stated he “didn’t believe” the report prepared by his own federal agencies.  Even if the President doubts climate change or the likely impacts to the U.S. in the coming years, a prudent course of action calls for managing against the risk.

Even Those in the U.S. Who Still Question Climate Change Should Be Persuaded to Take Action

In discussing risk associated with your investment portfolio, Forbes comments “the higher the level of risk your portfolio has, the more likely you are to experience loss or injury, and the more significant that loss or injury may be.”  If you face greater risk, your financial advisor would counsel you to rebalance your investments to reduce your risk.

As discussed above International and U.S. governmental agencies warn the risk of significant impacts due to climate change are increasing dramatically.  According to U.S. EPA, the U.S. is the second largest emitter of greenhouse gases in the world.  As a result, the climate change risk profile to the U.S. EPA is severe.

Even for those conservatives that are concerned with the impacts to the U.S. economy from climate change regulation, the U.S. risk profile demands taking prudent action to reduce greenhouse emissions.

With headlines in the United States of intense wildfires out West and more frequent hurricanes hitting the Gulf and East Coasts, concern that the U.S. is already beginning to experience the impacts of climate change is growing.  While most recognize climate change is occurring, the debate over how to effectively address climate change by reducing greenhouse gas emissions rages on.

The Washington Post recently noted carbon taxes have been cited by the United Nations as, perhaps, the most efficient and effective tool to reduce greenhouse gas emissions:

The United Nations contends taxing carbon dioxide emissions is an essential component of halting a steady rise in global temperatures.  It was a key element of the world body’s major October report predicting Earth’s atmosphere may warm by up to 2. 7 degrees Fahrenheit over preindustrial levels as soon as 2040, potentially triggering a global crisis decades earlier than expected.

However, imposing new taxes also can have significant economic impacts, particularly on the middle and lower class.

Over the weekend, Reuters reported that Paris was the scene of some of the worst rioting France has seen in a generation.  One reason for the protests is a fuel tax imposed by the French government to combat climate change.  The fuel tax is one tool in an aggressive plan to reduce carbon emissions by 40 percent by 2030.  The purpose of the tax is put incentives in place to encourage less usage of fossil fuel powered vehicles and to create an incentive to convert to electric vehicles.

The protesters believe the fuel tax demonstrates that the French government caters to the rich and elite.  They believe the government does not understand that the fuel tax disproportionately impacts the lower and middle class.

U.S. Considers First Bi-Partisan Carbon Tax Bill 

The goal of a carbon tax is to impose a price on sources of greenhouse gas emissions in order to create an economic incentive to move toward more efficient and less polluting sources.  In the U.S., Congress has yet to act on any comprehensive climate change legislation.  That could change with the introduction of a bi-partisan bill that would impose a carbon tax.

In November, a five members of the House introduced the “Energy Innovation and Carbon Dividend Act” which would impose a tax on carbon.  As discussed in the Miami Herald, the goal of the proposal is to reduce greenhouse gas emission by 40 percent within 10 years with a 91 percent reduction by 2050.  The reductions would be achieved by initially charging $15 per metric ton of carbon emitted and increase the price by $10 every year.

However, unlike other proposals, that would use tax revenues to fund infrastructure or reduce the deficit, the Bill would return the revenue back to citizens in the form of a dividend to offset higher energy costs.  The Bill is similar to a proposal put forward by the Climate Leadership Council, led by former Republican Secretaries of State James A. Baker III and George P. Schultz.  The Climate Leadership Council proposal called for a $40 per ton price on carbon dioxide emissions with the price rising thereafter.  Citizens would receive rebates starting at $2,000 per year for a family of four.

In October 2018, the Climate Leadership Council released a new report titled “The-Dividend-AdvantageThe 10 Reasons Why Rebating All Carbon Fee Revenue Directly to the American People Offers the Most Popular, Equitable and Politically Viable Climate Solution”  Some of the 10 reasons include:

  • Returning revenues to citizens has the highest public support
  • Carrots trumps sticks- creating incentives to reduce emissions is better than mandates
  • Most equitable- avoids regressive taxes that put the burden on the least fortunate.

It is the last bullet point that ties directly to what is occurring in France.  The French Government has directed the revenues from its fuel tax to pay down the deficit rather than returning it to the citizens.  This means that the increased cost of fuel is being directly felt by the consumers at the pump.   The French Government defends the allocation of the tax revenues by stating that citizens need to be encouraged to do their part to reduce usage of fossil fuels.

The U.S. carbon tax proposal would address the concern that carbon taxes would disproportionately impact lower income Americans by increasing energy prices.  As the recent protests demonstrate, climate strategies must be properly balanced so as to not disproportionately impact citizens more vulnerable to prices and tax increases.  The French protests are a real world example of failing to account for those impacts.