Recent research finds that voluntary public works projects that mitigate the penalties applied for violations of environmental law are favored by the public and provide benefits to violating firms, but primarily appear in high-income, white communities.
Research on environmental justice has long documented a correlation between pollution and demographic groups; however, less is known about policies that aim to combat environmental injustice directly. One such policy involves supplemental environmental projects (SEPs), which are administered by the US Environmental Protection Agency (EPA). In court cases between EPA and a firm that has violated environmental regulations, EPA allows the firm to mitigate a cash penalty by volunteering to complete one or more projects that would benefit the environment or public health, such as retrofitting diesel school buses with electric engines or building a public park. The agency’s evaluation of each proposed project is based on six critical factors, including whether the proposed project addresses concerns about environmental justice.
In a new paper that is forthcoming in American Economic Journal: Economic Policy, we examine the use and implications of SEPs in the settlement of environmental court cases. We were surprised to see that SEPs are rarely used; only around 4 percent of cases in which EPA assessed a penalty against a firm involved a SEP.
A SEP costs a defendant more than a cash penalty, because every $1.00 that a firm spends on a SEP offsets, at most, $0.80 of the assessed cash penalty. Nevertheless, we thought SEPs might be common, given that SEPs could provide benefits to firms. In an online survey of US residents, we found that SEPs improve public perception of firms that violate environmental regulations. The reaction of the stock market to the announcement of a SEP also indicates a positive view of SEPs among investors: a cash penalty is associated with a decrease in a firm’s stock price, whereas a SEP is associated with an increase.
We were surprised to see how much the public likes SEPs. Given the benefits of SEPs for firms, we thought that the public might be skeptical of this type of settlement. Instead, in a randomized survey online, we found that an overwhelming majority of respondents prefer a settlement that includes a SEP for the afflicted community over a settlement in which a violating firm only pays a cash penalty to the US Department of the Treasury. Respondents prefer SEPs even if the strategy means foregoing much larger cash penalties, and respondents prefer SEPs even more when projects would reach areas with environmental justice concerns.
But do SEPs really reach environmental justice communities? EPA lacks the authority to mandate SEPs in settlements; the agency only can accept or reject SEPs that defendants (i.e., violating firms) propose. So, even though EPA encourages the use of SEPs in areas with environmental justice concerns, the ultimate allocation of a SEP is not necessarily confined to these areas. In fact, our analysis of the location of SEPs shows that the share of environmental enforcement cases that include a SEP is largest in communities that are least vulnerable to environmental justice concerns. However, the second-largest share is in communities that are most vulnerable.
Our paper offers a few insights for policymakers and decisionmakers who are considering implementing SEPs in jurisdictions outside the United States or extending the use of SEPs in the United States: regulated firms likely will support the policy, and the public likely will welcome the resulting projects. However, if the primary goal is to address environmental justice concerns, then the policy misses the mark, because the richest and whitest communities are the main beneficiaries of the projects. So, while the policy may be easy to adopt, SEPs likely are not the most effective tool to address environmental justice concerns.