Managing Environmental Risk in Transactions

On the heels of the six environmental enforcement lawsuits they filed in August, New Jersey Attorney General Gurbir S. Grewal and NJDEP Commissioner Catherine R. McCabe announced eight brand new environmental enforcement lawsuits filed today.  The suits relate to sites scattered throughout the state – Camden, Flemington, Newark, Palmyra, Pennsauken, Phillipsburg and Trenton – mapped out here.  The main focus for this wave of cases is environmental justice, which means environmental enforcement that is focused on addressing pollution and environmental hazards in minority and lower-income communities.  Environmental justice is very much on the Murphy Administration radar.

One of the cases, involving the alleged pollution of drinking water drawn from the Puchack Wellfield in Pennsauken, Camden County, asserts claims for natural resource damages, known as “NRDs.”  There hadn’t been an NRD case filed in New Jersey for almost a decade until this past August, when the state filed three such cases.

The state is seeking remedies across the board from the various defendants – cleanup and removal of contamination, financial penalties, recovery of tax monies spent by the state to clean up polluted sites, as well as NRDs.  The dollar amount of each of these types of remedies can add up very quickly, so we are talking about real money here.  The state just took another big action showing it may very well be a “new day” in environmental enforcement in New Jersey.

The Tax Cuts and Jobs Act of 2017 makes it harder to take tax deductions for some payments to governmental entities.  The change may impact settlements between private entities and federal, state and local environmental agencies.  In most cases, it will not affect environmental settlements between private parties.

Section 162(f) of the Tax Code has long prohibited deductions for fines and penalties paid to the government.  The new law makes the tests for deduction of certain payments to a governmental agency more stringent.  The amended Section 162(f) substantially limits the tax deduction available for (1) any settlement or other payments, (2) made to or incurred at the direction of a governmental entity, (3) related to a violation of any law or governmental investigation or inquiry into the potential violation of any law.

There is an exception to this rule, which allows a deduction for the following payments: (1) restitution, including remediation of property; or (2) an amount paid to come into compliance with a violated law or involved in an investigation or inquiry.  To be deductible, the payment has to be expressly identified under a court order or settlement agreement as a restitution or compliance payment.  This exception does not apply to amounts paid “as reimbursement to the government for the costs of any investigation or litigation.”

Under the statute, the limitation applies only to payments made to, or at the direction of, a governmental entity.  A deduction, therefore, remains available for remediation expenses paid to private parties without governmental direction.

Finally, a new provision under Sec. 6050X requires government agencies involved in settlements to report to the Internal Revenue Service (IRS) the portions of the settlement payment that are and are not deductible under Section 162(f).

Our tax and environmental groups can advise on the implications of the new law, including factoring into negotiations the potentially higher tax cost of government settlements and ensuring that the settlements reached are well-drafted and as tax-efficient as possible.

On February 12, 2018, the Trump Administration released its much-anticipated Infrastructure Plan. While the bulk of the more than 50-page document proposes a wide array of funding and reforms for various infrastructure programs, as well as ways to streamline and fast-track permitting for infrastructure projects, it also proposes changes to Brownfield redevelopment programs, including the federal Superfund law (CERLCA).  The plan seeks to incentivize the redevelopment of contaminated properties and address related legal and financial risks.

The proposed changes include allowing National Priorities List sites to be eligible for Brownfield revolving loan fund and grant programs, clarifying and expanding the liability protections for state and local governments that acquire contaminated properties through tax foreclosures and the like, expanding EPA’s authority to enter into administrative agreements with brownfield developers, and eliminating restrictions on funding for infrastructure projects that could be integrated with a remediation.  This would mean even more change at EPA, which has been busy implementing the Superfund Task Force Recommendations released last year.

 

 

New Jersey’s new governor signed an executive order yesterday directing his acting Department of Environmental Protection commissioner, Catherine McCabe, and Board of Public Utilities President Joseph Fiordaliso to begin negotiations with current state members of the Regional Greenhouse Gas Initiative (RGGI) to re-enter the program.  This order reverses former Governor Chris Christie’s 2011 action to withdraw New Jersey from the program.

RGGI, established almost 10 years ago in 2009, is the first mandatory market-based program in the United States to reduce greenhouse gas emissions.  At Governor Murphy’s direction, New Jersey will rejoin the cooperative effort among fellow northeastern states of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont to cap and reduce carbon dioxide (CO2) emissions from the power sector.

What does that mean?  From the 30,000 foot view, it means fossil-fuel-fired electric power generators with a capacity of 25 megawatts or greater would be required to hold allowances equal to their CO2 emissions over a three-year control period.  The power plants can use allowances issued by any of the participating states, and can buy them at regional auctions or in secondary markets.  The regional cap on total CO2 emissions ratchets down 2.5% each year until 2020, theoretically relying on the regional market to drive prices and efficiencies.  Proceeds from the auctions are used to fund renewable energy and energy efficiency projects.

In the weeds, it means the Department of Environmental Protection drafting new regulations (presumably using RGGI’s Model Rules), participation in a complex and well-developed compliance and tracking system as well as the auctions and secondary markets, passing along costs and savings to consumers, periodic reviews and adjustments, entering cooperative memorandums, and more.  It may also mean more opportunities to promote solar, wind, and other renewable projects.

Overall, RGGI has been seen as a success, reportedly reducing power sector carbon emissions as much as 40% since 2005, while member state economies continued to grow.  There are, however, many ways to interpret the different data and forecast future impacts.  Nonetheless, New Jersey is on the path back to RGGI and we will be on the lookout for the implications, costs, and opportunities.  We are also keeping an eye on state legislation directing New Jersey to join the U.S. Climate Alliance, which Governor Murphy is expected to approve if it hits his desk.  The governor may also bypass the legislature and use the executive order route.  The U.S. Climate Alliance doesn’t come along with the same compliance commitments as RGGI, but it is another example of ramped up state- and regional-level actions to address climate change in reaction to the reduction in federal action.  The U.S. Climate Alliance was formed in direct response to President Trump’s withdrawal of the United States from the Paris Climate Accord.

 

Last week, the New Jersey Department of Environmental Protection (NJDEP) announced a new Response Action Outcome (RAO) Notice, which allows Licensed Site Remediation Professionals (LSRPs) to issue an RAO for a site with contaminated sediment that migrated from an off-site source.  The new notice, entitled “Sediment Contamination From an Off-Site Source Not Remediated – General,” is the most recent addition to the growing list of RAO notices.

The notice can be used after a Preliminary Assessment and Site Investigation (PA/SI) confirms that the source of the sediment contamination is off-site and not related to the site being evaluated.  The off-site source must be reported to NJDEP and the resultant new incident number included in the Notice.  Furthermore, the LSRP can identify an existing NJDEP case if it is known to be the off-site source and is currently undergoing investigation or remediation.

Given that it is well-established law that you are not responsible for contamination coming from offsite, the primary purpose of this action appears to be to streamline the RAO process.  So, this is another tool in the LSRP toolbox for the often complicated sediment cases, which continue to garner regulator’s attention here in New Jersey and nationwide.

Read more on sediment contamination in these discussions:

JOIN THE CLUB: EPA Sizing Up Hackensack River for Superfund Listing

WE ARE JUST GETTING STARTED: EPA Issues Much Anticipated Cleanup Plan for the Lower 8.3 Miles of the Lower Passaic River