This document summarizes Jonathan D. Libber's credentials working for 31 years in EPA enforcement and as a consultant on calculating economic benefits of noncompliance. It then outlines EPA's three step approach to civil penalties which includes: [1] calculating the economic benefit of noncompliance, [2] calculating the gravity (seriousness) of the violation, and [3] applying adjustment factors. The document provides details on using the BEN model to calculate the economic benefit and gives a case example analyzing penalties for a dry cleaning business called DUDE that was not compliant with emissions standards.

1. Jonathan D. Libber
Jlibber Consulting
December 7, 2011
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2.  Worked for 31 years in U.S. EPA’s
enforcement program
 Godfather of the Models
 Contact information
◦ (410) 358-4616
◦ jlibberconsulting@gmail.com
◦ www.Jlibberconsulting.wordpress.com
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3. 1. Overview of EPA’s Civil Penalty
Approach
2. Calculating the Economic Benefit
Component of Penalties
3. Calculating the Gravity (Seriousness) of
the Violation Component of Penalties
4. Actual BEN Model Calculation: The
DUDE Case (If Time Permits)
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4.  Overview of
EPA’s Civil
Penalty
Approach
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5.  EPA’s response must:
◦ Deter violators from repeated
noncompliance
◦ Deter similarly situated
regulatees from violating the law
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6. Deterrence
Always Comply
Noncompliers
Rest of Companies
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7.  Revocation of an environmental permit
 Temporary or permanent closure
 Fines and Penalties
◦ Note that only with fines can you
adjust the sanction to fit the
violation. The rest are all or nothing

8.  To ensure consistency and
assessment of appropriate
penalties, EPA has adopted penalty
guidance
 Agency issued generic penalty policy
in 1984
 All subsequent penalty guidance
follows the approach laid out in that
policy.
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9.  Three step process
◦ Calculate economic savings
◦ Calculate seriousness (gravity) of
the violation
◦ Apply adjustment factors
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10.  Cornerstone of EPA’s approach is to
recapture savings gained from delayed or
avoided compliance
 Law-abiding entities should not be placed
at a competitive disadvantage with
competitors that fail to comply
◦ Approach is totally generic. It applies
whenever the violator saves money by
violating the law.
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11. Calculating the
Economic Benefit
Component of
Penalties
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12.  Three types of economic benefit
◦ Benefit from delayed costs (e.g. installs
the equipment 2 years late)
 All the money will get spent, but two years
late.
 Violator has had the use of that money for
two years.
 In a very simple sense, the benefit is based
on the interest alone, not the principle
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13.  Benefit from avoided costs (e.g. skips all the
operation and maintenance expense on that
equipment for those two years)
 None of the operation and maintenance
money is going to get spent until the firm is
finally in compliance. None of it is delayed.
 In a very simplistic sense, we are seeking both
the principle and the interest.
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14.  Benefit from an illegal competitive advantage
or illegal profits (e.g. selling banned pesticides
to pesticide applicators on the black market)
 There are no delayed or avoided costs associated
with smuggling DDT into New York City.
 It is like selling cocaine on the street corner
 The essence of this type of benefit is that there is
no way to make this money other than violating
the law.
 With the BEN type benefit, the firm can make all
the money it wants, but it just needs to do it in a
clean way.
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15.  BEN calculates the economic benefit of
noncompliance with environmental
requirements.
 Based on generally accepted financial
principles.
 Uses default values for the more difficult to
find parameters (tax rates, inflation rate
and cost of capital).
◦ If violator furnishes its own reliable
financial data, we use its data instead of
ours.
 Very user-friendly model.
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16. From 1975 to 1984, total national
penalties averaged $6 million per year
1985 (BEN’s first year) total was $22
million
1999 total was $167 million (record
high)
2008 total was $127 million
2009 total was $91 million
N.B. Other factors involved in
increase, but BEN at least facilitated the
increase in penalties
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17.  Required Inputs
◦ Case Name, Analyst’s Name, Agency Name
◦ Tax Status
◦ State
◦ Penalty Payment Date
◦ Run name
◦ Capital Investment
◦ One-time, nondepreciable expenditure
◦ Annual expenses
◦ Date of Noncompliance
◦ Date of Compliance
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18.  Optional Inputs (Model Provides Default
Values for These Variables)
◦ Discount Rate
◦ Inflation Rate
◦ Useful Life of Equipment
◦ Deselect Tax Deductibility for One-Time
Nondepreciable Cost
◦ Deselect “Delayed Not Avoided”
◦ Specific Cost Estimates
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19.  Judges have generally accepted the
concept of benefit recapture.
 In almost all published decisions
against for-profit entities, the judges
have ordered recapture as long as the
Agency, State or citizen group had a
clear approach to calculating benefit.
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20.  Calculating the
Gravity
(Seriousness) of
the Violation
Component of
Penalties
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21. - Factors to Consider
◦ Actual or possible harm
◦ Importance to regulatory scheme
◦ Size of violator
◦ Duration of the violation
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22.  Factors to Consider
◦ Degree of willfulness and/or
negligence.
◦ Degree of
cooperation/noncooperation.
◦ History of noncompliance.
◦ Ability to pay.
 Three other EPA computer models
to evaluate such claims.
◦ Other unique factors.
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23.  ABEL, INDIPAY and MUNIPAY
◦ Assess the ability to afford
environmental expenditures of
businesses, individuals and
municipalities, respectively.
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24.  Actual BEN
Model
Calculation: The
DUDE Case
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25.  Private dry-cleaning business (S-
Corporation) was built before
emissions requirements were in place.
 After standards were implemented
(compliance required by January
1, 2008), DUDE installed cheap fix
piece of equipment that did not in any
way reduce the emissions, at a cost of
$50,000 on May 1, 2006.
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26.  Eventually EPA forced DUDE to comply by
spending $750,000 on August 1, 2012.
DUDE began to incur annual operating costs
of $60,000 at this time. These figures
come from a consultant’s report dated July
2, 2011.
 DUDE will also be required to pay a penalty.
Hearing to take place June 28, 2012.
Penalty to be paid six months later.
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27.  First Scenario
Calculate the economic benefit
that DUDE gained as a result of
noncompliance, assuming a
penalty payment date six
months after the scheduled
hearing.
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28.  Second Scenario
Delora’s lawyer produces a
document about the expenses
associated with the installed
equipment and expected useful life
to argue that the useful life entry
should be 20 years, not BEN’s 15-
year standard value. Calculate the
revised economic benefit.
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29. Results from BEN – First
Scenario
- BEN calculates DUDE’s economic
benefit to be $447,390.
- We do not give Delora credit for her
initial “pollution control”
expenditure of $50,000, because it
appears unrelated to compliance.
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30. Results from BEN – Second
Scenario
The new economic benefit is
$409,140, assuming a 20-year useful
life. A longer useful life reduces the
economic benefit, all other assumptions
held constant.
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31.  Gracias
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