Managing Environmental Risk in Transactions

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Often forgotten in the rush to expand the cannabis industry is the environmental impact of indoor cultivation operations and environmental considerations for the engineering and design of cultivation facilities. This article will briefly address environmental impacts of cannabis cultivation, specifically energy usage, in various states and how cultivators looking to the emerging New Jersey market can better equip themselves for potential regulation similar to what is being seen in other states.

Growing cannabis, especially indoors, is energy intensive. It can take upwards of 5,000 kWh to grow just one kilogram of cannabis (2,000 kWh to grow one pound) as compared to roughly 10,000 kWh of energy to power a residence in the United States for a year. Recent reports show the cannabis industry is having a significant impact on the use of electricity in states that have legalized it. In 2015, various reports concluded that cannabis growers accounted for approximately 1.7 percent of the United States’ total electricity usage, a cost of upwards of $6 billion. The vast majority of states that have legalized cannabis cultivation have not addressed the issues surrounding energy consumption prior to enacting legislation. As a result, municipal governments, state agencies and public utilities have had to take a reactive approach to the astronomical utilization of energy.

Currently, states and municipal governments are implementing various techniques in order to curtail electricity use. The techniques vary, but the most common are taxes and/or fees on energy consumption. For example, Boulder County, Colorado has a requirement that growers either offset energy consumption with the use of renewable energy or pay a $0.02 charge per kWh of energy use. In addition, some state regulations have an adverse effect on energy consumption, and compliance results in an increase in energy consumption by growers. For example, when Pennsylvania legalized cannabis in 2016, its regulations required growers to contain their entire crop in indoor facilities without addressing how the state would cope with the corresponding energy use from the requirement.

Though most states have not addresses environmental impacts of cannabis cultivation until after licenses were already awarded, one state has put into place some of the strictest energy regulations for cannabis cultivation.

In 2008, Massachusetts entered into the Global Warming Solutions Act, which required a reduction in the state’s greenhouse gas emissions by 80 percent no later than the year 2050. However, with the legalization of adult-use cannabis, the state had to address the fact that not only is cannabis an energy-hungry crop, but that it also emits dubious amounts of carbon dioxide (CO2). On average, the energy needed to grow one pound of cannabis indoors emits roughly 5,000 pounds of CO2 into the atmosphere. As a result, the Cannabis Control Commission of Massachusetts has included in their regulations a limit on how much energy can be utilized for cultivation operations.

Although New Jersey has not yet weighed in on the energy use and carbon emission issues associated with the emerging cannabis industry in the most recent adult-use cannabis legalization bill, state lawmakers are openly moving New Jersey towards being a leader in climate change solutions, especially with New Jersey rejoining the Regional Greenhouse Gas Initiative. Additionally, broad environmental concern has not completely escaped legislators, as the most recent call for medicinal cannabis licenses required applicants to submit an environmental impact plan as part of the application process.

As a result, it is imperative that cultivators from out of state, as well as those who are thinking of starting a cultivation operation, who wish to apply for licensing in New Jersey, consider the impacts of their future operations regarding electricity use in order to be prepared for any future regulations and/or taxes that might negatively affect their operations and profitability.

This article was originally published on the NJSBA website.

What are PFOA and PFOS?

Remember when everyone was in a tizzy about using Teflon or other non-stick cookware?  That had to do with the chemical PFOA (perfluorooctanoic acid), which is one of the most commonly found and most studied types of perfluoroalkyl substances (PFAS).  About 15 years ago reports on the toxicity of PFOA, along with resulting class action lawsuits, began hitting the news.  More studies identified other PFAS chemical with toxic effects, including PFOS (perfluorooctanesulfonic acid).

PFAS are manmade chemicals that repel both water and oil, which made them attractive for many commercial and industrial uses since the 1940s including numerous consumer products, such as carpets, clothing, non-stick pans, paints, cleaning products, and food packaging.  Firefighters, airports and the military use them in fire-suppressing foam.  They do not easily break down and are water soluble, so very low levels are found throughout the environment, including groundwater and other potable water sources.  This also means they accumulate in the body over time.  Studies have found that more than 98% of the US population has PFAS compounds in their blood.

They are also toxic, with adverse human health effects ranging from increased cholesterol to effects on infant birth weights to immune system or thyroid disruption and even cancer.  Studies continue to explore more about exposure risks in everyday life.  Most recently, a study found exposure routes associated with dental floss and food packaging.  That being said, the science continues to evolve and there are challenges with figuring out safe exposure levels for setting drinking water and cleanup standards.

What are the Regulators Doing?

Regulators have been paying attention.  In 2016, the United States Environmental Protection Agency (USEPA) released a Drinking Water Health Advisory of 70 parts per trillion (ppt) for either PFOA or PFOS, or when both are combined.  This is not an enforceable drinking water standard, but it has served as a guidepost for actions at the state level.  Around 20 states from across the country have adopted or proposed drinking water and/or cleanup standards, or are considering other actions.  These states include California, Vermont, Florida, New Jersey, New York, Massachusetts, New Hampshire, Texas, Minnesota, Michigan and Pennsylvania.

What Happened Last Week?

New Jersey.  The New Jersey Department of Environmental Protection (NJDEP) has developed draft interim groundwater standards for both PFOS and PFOA and is requesting public input on a number of technical focus questions concerning the availability of data, toxicology, epidemiology or other studies and information.  The proposed standards are for Class II-A aquifers, which means groundwater designated for use as potable water and is subject to health-based criteria that does not take into consideration remediation feasibility, treatability, or cost. This type of aquifer accounts for most of the State’s groundwater, so the impacts of the eventual new standards will be broad.  Comments are due to NJDEP by 5:00 pm on Tuesday February 19, 2019.  

Massachusetts.  The Massachusetts Department of Environmental Protection (MassDEP) held a public meeting last week to consider a petition filed by conservation and community groups requesting, among other things, a drinking water standard of 1 part per trillion (ppt) for each PFAS compound as a class. This is a remarkably low standard as compared to USEPA’s health advisory standard of 70 ppt, and even New Jersey’s preliminary drinking water guidance level of 40 ppt for PFOA and recommended level of 13 ppt for PFOS.   The petition also requests more community involvement and sampling to further advise the public about exposure risks in their communities.  MassDEP plans to issue its decision on the petition on Monday, Jan. 28, 2019.

 What’s Next?

Regulating PFAS compounds is a hot button issue in a lot of states.  Plenty of activity is expected this year in New Jersey, Massachusetts, California, New York and others.  We are already seeing impacts of this new focus on existing remediation projects and on the horizon there is certainly a reopener risk for completed remediation sites.  This is also an important due diligence issue.  Follow our blog for updates and join us for our Environmental Hot Topics CLE in April 2019 for more details.

 

 

The jurisdictional reach of the federal 1972 Clean Water Act, which hinges on the definition of “navigable waters” or the “waters of the United States,” has been the subject of hot debate, consternation and interpretation – with plenty of litigation, regulation, agency interpretative guidance, inter-agency memorandum of agreements, more litigation, new regulations, supplemental agency guidance and memoranda, even injunctions, and so on – for decades.

The last major action in this saga was the Obama administration’s 2015 Clean Water Rule, which broadened the Act’s jurisdiction to water bodies not previously regulated, such as smaller streams and tributaries, dry washes or intermittent streams, and certain ditches or gravel pits.  Farmers, especially in the West (where a large majority of surface water flows intermittently), developers, and the mining industry were most affected by the expansion.

One of President Trump’s first actions in office was a February 2017 executive order directing the United States Environmental Protection Agency and the Army Corps of Engineers (the two agencies share regulatory authority under the Act) to rescind and replace the Obama Rule.  Today, the two agencies released the proposed replacement rule.  As expected, it proposes a significantly more limited definition of “waters of the United States.”

Early estimates are saying that millions of acres of wetlands and thousands of miles of streams will no longer be subject to federal regulation, but there is a long road ahead before the rule becomes law.  First, the proposed rule is subject to a 60 day public comment period.  Second is the litigation, which is a practically guaranteed – environmental groups have made their opposition clear.  And the saga continues…

 

 

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.