By Claudia O’Brien and Bart Kempf

For the first time since California established its cap-and-trade market for greenhouse gas (GHG) emissions, the California Air Resources Board (CARB) has proposed canceling over 230,000 tons of offset credits due to a facility’s alleged potential failure to comply with unrelated environmental laws.[1]  CARB is proposing the invalidation even though it has concluded that “the [GHG] emission reductions represented by the offsets at issue here are real, quantified, and verified reductions.”[2]  CARB issued its preliminary determination on October 8, 2014, opening a 10-day comment period.  Following the comment period, CARB has 30 days to make a final determination.

The alleged noncompliance occurred at the Clean Harbors Incineration facility in El Dorado, Arkansas where, for over 20 years, ozone depleting substances have been destroyed.  The regulatory compliance issue relates to the facility’s generation of calcium brine material, which is sold for use in oil and gas exploration and development.  The Arkansas Department of Environmental Quality (ADEQ) and Clean Harbors both considered the calcium brine exempt from hazardous waste regulations under the Resource Conservation and Recovery Act (RCRA).  Nevertheless, US Environmental Protection Agency (EPA) Region 6 inspections in 2009 and 2011 raised questions regarding the validity of the exemption, which led to EPA’s issuance of two inspection reports.  Notably, these inspection reports are characterized by CARB as notices of “potential violation.”[1]  According to CARB, the first such report was sent by EPA on Jan. 5, 2012 (Report 1), although CARB could not confirm whether the report was actually received by Clean Harbors.  The second inspection report was confirmed to have been received by Clean Harbors on Feb. 2, 2012 (Report 2).  On the next day (Feb. 3, 2012), Clean Harbors, for the last time, disposed of the calcium brine material as non-hazardous waste.  Since that time, Clean Harbors has disposed of the material in accordance with RCRA’s hazardous waste requirements.  The issues were ultimately resolved through a Consent Agreement and Final Order (CAFO) between EPA and Clean Harbors dated Apr. 25, 2014.  Notably, Clean Harbors neither admitted nor denied any noncompliance in the CAFO.

For purposes of determining which credits to invalidate, CARB’s preliminary determination concludes that Clean Harbors was out of compliance from Feb. 2, 2012 – Feb. 3, 2012.  CARB chose to look to Clean Harbors receipt of Report 2 as the noncompliance “triggering event” even though CARB itself characterized the report as a “notice of potential violation.”[2]  CARB also determined that noncompliance by Clean Harbors ceased after its Feb. 3, 2012, disposal of calcium brine as non-hazardous waste.  Taking into account this alleged two-day period of potential noncompliance, CARB looked to offset projects with reporting periods covering those days.  Two such projects were identified – one generating 88,955 credits and the other 142,199 credits.  Thus, altogether CARB is proposing to invalidate 231,154 credits. 

This matter of first impression may have significant impacts on a wide range of GHG offset providers.  First, it potentially establishes a “zero-tolerance” policy with respect to environmental, health, and safety compliance, regardless of any connection with GHG impacts, even where the company believes that it is operating in compliance – and, indeed, even where the state agency agrees that the company is operating in compliance with environmental laws.  Even the smallest notice of violation (e.g. a minor recordkeeping violation) could call into question the validity of a facility’s offsets.  The proposed determination also appears to take the position that even a notice of potential noncompliance[3] triggers a facility’s obligation to immediately achieve compliance (or risk losing its credits).  This approach could deprive facilities of the ability to challenge a regulatory authority’s proposed determination/findings, or even to enter into a dialogue to resolve the issue.  And CARB’s position will be particularly troublesome where there are ambiguities in the laws or regulations – as here, where both the state and the company thought that the disposal method complied with RCRA.  As a result, offset providers could face the unenviable choice of spending significant resources to achieve vague – or even flatly incorrect – compliance mandates or risk losing their GHG offsets

[1] Preliminary Determination at 8. 

[2]  Id. (emphasis added).  CARB elected not to choose Report 1 as the noncompliance triggering event because it could not confirm that Clean Harbors actually received such report. 

[3]  Notably, CARB appears to take the view that a notice of potential noncompliance is enough to trigger the invalidation of offsets even though a definitive determination of noncompliance was not issued by EPA, ADEQ, a court, or any other entity.