August 1999

Balancing economic benefits and environmental threats

Managing Environmental Justice Risks

By Roy Whitehead, Jr., and Richard O. Merritt

In Brief

Guidance for Choosing Business Sites

Environmental justice has been defined as "fair treatment for people of all races, cultures, and income, regarding the development of environmental laws, regulations, and policies." The President, the EPA, and the courts have expanded the definition of environmental justice to include not only the evils of intentional discrimination, but also the effects of unintended disparate impact discrimination.

In the past, it was generally accepted that Federal or state agencies serve as gatekeepers to which private individuals or groups must administratively submit their opposition to siting permits. A recent court case decided that private individuals or environmental activists have an implied private cause of action to challenge the plant permitting process in Federal court, even without first exhausting available remedies through gatekeepers. The EPA expanded this right to include permit renewals.

These rulings have led to situations where permits have not been granted even though the affected communities favor the permits because of their economic benefits.

Companies must constantly monitor changes in environmental law and the business risks associated with them. Astute executives, controllers, auditors, investors, and management accountants must be able to identify potential hidden environmental costs resulting from compliance with environmental regulations.

Few contemporary cows are more sacred than environmentalism and its underlying values. Legitimate policy controversies are generally portrayed as battles between victimized citizens and corporate polluters. In this context, who could fail to side with the environmentalists? Such a simplification, however, often represents a false and misleading dichotomy. It may actually operate to direct beneficial social and economic resources away from those the regulations were intended to benefit. It is reasonable to assume that the type of community most likely to accept a new factory would be a town where people most need the jobs or tax benefits the facility would provide.

Environmental Justice

The Environmental Protection Agency (EPA) defines environmental justice as "fair treatment for people of all races, cultures, and incomes, regarding the development of environmental laws, regulations, and policies." Since the early 1990s, there has been a steady increase in the incidence of claims that minority and low income populations bear a disproportionate amount of the negative health and environmental effects caused by pollution. This is referred to as environmental racism: the intentional siting of hazardous waste facilities in predominantly minority and low income areas.

The President, the EPA, and the courts have expanded the definition of environmental justice to include not only the evils of intentional discrimination, but also unintended "disparate impact" discrimination.

Disparate impact discrimination flows from practices that are not intended to discriminate, but may have an unintended, but discriminatory, disparate effect on a particular group. For example, an employer may have a policy that it will only hire the relatives of current employees. There may be well-intentioned reasons for the policy, such as knowledge of the company and presumed loyalty. If, however, all the current employees are white, the policy will have a discriminatory disparate impact on qualified blacks, who can never be employed.

On February 11, 1994, President Clinton moved environmental justice to the forefront of the national agenda when he issued Executive Order 12898, which broadly provides that "all communities and persons across this nation should live in a safe and healthful environment." The order further requires each department of the cabinet to make environmental justice a part of its mission.

New Developments

In the past, it was generally accepted that Federal or state permitting agencies served as gatekeepers to which private individuals or groups must administratively submit their opposition to siting permits. These agencies could then exercise discretion when dealing with such challenges. However, several recent significant developments, in the form of a court of appeals decision, an EPA policy statement, and a controversial EPA decision in the Louisiana Shimtech case, have the potential to open the floodgates for additional private actions in environmental permitting for plant sites. The obvious result would be a dramatic increase in the legal and contingent economic costs associated with the siting of industrial facilities. Companies and their advisors and consultants need to be aware of the potential business risks.

The Chester Case

The first critical question is whether private individuals or environmental activists have an implied cause of action in Federal court to challenge the permitting and permit renewal process without first exhausting available remedies through state or Federal agencies.

The Third Circuit Court of Appeals provided an affirmative answer to this question when it discovered a private cause of action to challenge the plant permitting process in Seif v. Chester Residents Concerned for Quality Living [132 F.3d 925 (3d Cir. Dec. 30, 1997)].

When decided, Chester was widely regarded as having the same effect on environmental law as Brown v. Board of Education had on education law. Although the appeal of the decision was recently vacated by the U.S. Supreme Court as moot because the contested facility decided to surrender the challenged permit in question, it still provides a valuable road map for following the theory used by courts to evaluate private causes of action.

The city of Chester is located in Delaware County, Penn., and has a population of approximately 42,000, of which 65% is black and 32% is white. Delaware County, excluding Chester, has a population of about 502,000, of which 6.2% is black and 91% is white. The environmental group, Chester Residents Concerned for Quality Living, contended that state and environmental authorities had granted five waste facility permits for sites for the city of Chester since 1987, while granting only two permits for sites in the rest of Delaware County. It further charged that Chester facilities have a total permit capacity of 2.1 million tons of waste per year, while non-Chester facilities have a total permit capacity of only 1,400 tons.

The court was faced with the question of whether a private right-of-action exists under the Discriminatory Effect Regulations promulgated by a Federal administrative agency (EPA) under Title VI of the Civil Rights Act of 1964.

The original trial court found that no private right-of-action exists that would allow a private individual to enforce the EPA civil rights regulations, thus affirming that the state permitting agency acts as a gatekeeper for such complaints.

On appeal, the Third Circuit agreed that there is some weight to the argument that the EPA, or a state permitting agency, acts only as a gatekeeper to enforcement, with private parties submitting their objections to the agency to act at its discretion. The court decided that private lawsuits are consistent with the underlying legislative scheme of Title VI, and, as a result, the purposes of the act would best be served by allowing a private right-of-action. The court also said that a private right-of-action is desirable and will further the public policy purposes of the statute because it will "deputize private attorneys general who will enforce Title VI and its implementing regulation."

The case, however, leaves several important questions unresolved. Is there a cause of action, for example, in the renewal of a site license? The interim guidance released by the EPA shortly after the Chester decision deals with that question.

EPA Interim Guidance

On February 5, 1998, referring to the President's executive order, the EPA issued "Interim Guidance for Investigating Title VI Administrative Complaints Challenging Permits." The EPA cites the Chester case with approval and flatly states that "individuals may file a private right-of-action in court to enforce the nondiscrimination requirements in Title VI or the EPA's implementing regulations without exhausting administrative remedies." This means that the EPA and state permitting agencies are no longer considered as gatekeepers, thereby allowing private individuals direct access to the Federal courts. The EPA announced the following five-step framework for determining whether a disparate impact exists that could be subject to a private cause of action:

* Identify the population affected by the permit that triggered the complaint. The affected population is that which suffers the adverse impacts of the permitted activity.

* Determine the racial or ethnic composition of the affected population.

* Identify which other permitted facilities, if any, are to be included in the analysis and the racial or ethnic composition of the population already affected by those permits. This is referred to as the universe of the facilities.

* Conduct a disparate impact analysis to determine whether persons protected under Title VI are being impacted by the facility at a disparate rate. The EPA expects the rates of impact for the protected population and comparison populations to be relatively comparable.

* Use arithmetic or statistical analysis to determine whether the disparity is significant under Title VI. After calculations, the EPA may make a prima facie disparate impact finding, subject to the recipient's opportunity to rebut.

The recipient will have an opportunity to justify the decision to issue a permit notwithstanding the resulting disparate impact, based on the recipient's legitimate, substantial interests. Demonstrating that the permit complies with applicable environmental regulations will not be considered a legitimate justification. Rather, there must be some articulable, demonstrated community value in the permitted activity. The types of factors that will be considered in determining the sufficiency of the justification can include the seriousness of the disparate impact, whether the permit is a renewal (with demonstrated benefits) or a new facility (with only speculative benefits), or whether any of the articulated benefits associated with the permit can be expected to benefit the affected community. Finally, an offered justification will not be considered if there is a less discriminatory alternative that lessens the adverse disparate impact.

This approach will obviously lead to increased environmental permitting litigation. The statement of agency policy will also likely have considerable influence on courts in other circuits that are, or soon will be, considering the same question.

Under the interim guidance, disparate impact claims may be brought directly in Federal court long after permits have been issued. Jeopardizing existing permits by giving retroactive reach to environmental justice claims is likely to cause considerable reluctance in related capital investment decisions by managers in industry. Although unfortunate, a likely result is the abandonment of otherwise beneficial economic development in the very minority and low income communities that Title VI was intended to benefit.

The Shimtech and Select Steel Decisions

The Shimtech decision by the EPA in February 1998 demonstrates how environmental issues can interfere with desirable economic development. The decision delayed the issue of a permit already granted by Louisiana's Department of Environmental Quality. The stated reason was that polluting industries locate in minority areas because their residents are powerless to stop them. The action was taken despite local NAACP polls that showed that 73% of black residents favored the plant location. According to a lawyer representing town residents, the EPA and opposing nonresident activists also ignored the favorable opinions of all the locally elected black officials. Community residents were excited because the average wage paid by Shimtech was $15.00 per hour, compared to the prevailing wages of $6.00 per hour. Shortly after the EPA's decision, Shimtech abandoned the project and moved to another location. The Shimtech decision has generated considerable criticism from governors, mayors, and chambers of commerce because it failed to follow the interim guidance by not taking into account the demonstrated community economic benefits of the facility.

A different result occurred in an October 30, 1998, decision concerning the Select Steel Corporation (EPA File No. 5R-98-R5). In Select Steel, the EPA's Office of Civil Rights carefully followed the five-step framework previously discussed. The private complaint charged that the Michigan Department of Environmental Quality's permit for a steel recycling mill would lead to a discriminatory disparate impact on minority residents of Genesee Township. The EPA followed the guidance's five-step framework and found there was no affected population that suffered adverse impacts as defined by Title VI. The EPA dismissed the private complaint. The decision was obviously influenced by the Michigan Department of Environmental Quality's careful investigation of the permit application that generally followed the EPA's guidance. The decision signals that an applicant applying the interim guidance's five-step approach will likely receive a reasoned response from the EPA.

Managing Environmental Justice Issues

Taken together, these developments foretell an explosion of regulatory and judicial activity in site permitting and renewals. How can company managers cope with these developing concerns? The EPA decision in Select Steel complimented the Michigan state agency for essentially following the interim guidance. So at a minimum, a study along the lines of the five-step framework should be accomplished prior to requesting a permit.

Even if a disparate impact is found, the permit may still be justified based on a legitimate, substantial interest of the recipient. Factors that may be considered are the seriousness of the disparate impact, whether the permit is a renewal (with demonstrated benefits), or, perhaps most important, whether the articulated benefits can be expected to benefit the affected community. Surely, new jobs and tax revenues can be considered a substantial benefit.

There is one other very practical concern that is not often addressed: how to educate the affected community about the facility and its impact. Pre-permit application contact with community members allows opportunities to successfully introduce the project to local leaders and networks. Community contacts allow the permit applicant to institute "issue tracking" mechanisms so citizens can understand how their interests are being addressed, thereby building public support for the project and focusing decision making on the legitimate interests of the community. Recognizing the values of the local community allows for the social and physical environments to be linked together into a plan that will accommodate community interests. Such actions will signal to regulators that the permit applicant is accommodating the community interests and, as in the Select Steel case, is likely to receive a favorable response from the regulators.

Some might express concern about the costs associated with initially following the five-step framework of the interim guidance or citizen participation. The alternative to a contested permit, however, is surely costlier in terms of money, personnel, and resources. Funds expended on pre-permit management are funds well spent. *

Roy Whitehead, Jr., JD, LLM, is an associate professor of business law at the University of Central Arkansas. Richard O. Merritt, LLB, is an environmental analyst with James Kent & Associates, an environmental consulting firm in Aspen, Colo.

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