Feeling the pinch: who pays TSCA risk evaluation fees?

September 2020 | SPOTLIGHT | SECTOR ANALYSIS

Financier Worldwide Magazine

September 2020 Issue

Ordinarily, government fees command little interest in corporate finance and board-level business circles. Newly imposed fees to defray the US Environmental Protection Agency’s (EPA’s) risk evaluation of high-priority chemical substances under Section 6 of the Toxic Substances Control Act (TSCA) are extraordinary, however, and are commanding significant interest. This article explains why.

TSCA Section 6 fees

Congress passed extensive revisions to the TSCA, the US industrial chemical safety law, in 2016. One of the most significant changes is Congress’s mandate under Section 6 that the EPA review existing chemicals and identify and mitigate adverse effects of each chemical’s uses and applications believed to pose unreasonable risks to humans and the environment. Congress appreciated that this task would be costly and authorised the EPA to assess and collect fees from TSCA-regulated entities to recoup a portion of the government’s costs in undertaking these, and other, actions under the TSCA.

Since there are more than 44,000 existing ‘active’ (meaning in commercial use) chemical substances, Congress directed the EPA to prioritise its risk evaluation of existing chemicals by first reviewing ‘high-priority’ substances, and to select those high-priority chemicals in the first instance from the EPA’s TSCA Work Plan Chemicals list. This elite list includes 90 chemicals that the EPA identified before Congress amended the TSCA in 2016. The list includes existing chemicals that satisfy certain risk criteria predictive of each chemical’s potential for causing adverse human and environmental effects that, according to the EPA, make them prime candidates for risk evaluation on a priority basis.

Perceptive investors will be quick to appreciate the business and commercial significance of any EPA list of presumptively ‘high-priority’ chemicals as certain inferences flow from being included on such a list. None of these inferences is positive. That Congress mandated the EPA to draw from this list, crafted several years before the TSCA was amended, to prioritise the risk evaluation process is telling, and it reflects Congress’s keen interest in evaluating these chemicals first.

Fast forward to 2018, when the EPA implemented Congress’s mandate that the EPA be able to recover the cost of certain administrative actions under the TSCA. In October 2018, the EPA issued a final rule establishing a fee schedule for these actions, for which regulated entities are required to pay. TSCA stakeholders were quick to note the non-trivial fee of $1.35m for an EPA-initiated risk evaluation of a high-priority chemical under TSCA Section 6. Not only is the fee significant, but also the final rule as then written applied broadly. Specifically, the final rule contained no exemption from the obligation to pay the fee for importers (considered manufacturers under the TSCA) of chemicals subject to risk evaluation in articles. Nor did the final rule exclude manufacturers of a chemical as an impurity or byproduct from the fee obligation. Stakeholders were somewhat prepared for the latter determination, but strongly urged the EPA to provide exemptions; the realisation that importers of manufactured articles that contain a high-priority chemical were also not excluded came as a bit of a shock.

In late 2019, the EPA identified the final list of 20 chemical substances slated for evaluation under TSCA Section 6. The 20 chemicals consist of seven chlorinated solvents, six phthalates, four flame-retardants, formaldehyde, a fragrance additive and a polymer precursor. Shortly thereafter, the EPA named some of the companies it identified as candidates to pay for the fee and required others to ‘self-identify’ as manufacturers by mid-June 2020. Failure to self-identify is a violation of the TSCA. Under the TSCA, the EPA considers each day a separate actionable event subject to penalty, and the maximum statutory amount per day for a penalty is $40,576.

Stakeholders quickly appreciated that the stakes were high and the implications of missteps consequential. Consider, for example, formaldehyde, one of the 20 high-priority chemicals selected for risk evaluation under the TSCA. Formaldehyde is included in a wide variety of consumer products and other finished products as an impurity or byproduct. Similarly, certain of the 20 high-priority chemicals selected for risk evaluation are included as byproducts or impurities in hard surface finishes on a wide variety of consumer and industrial goods. Under the rule as written, a vast number of commercial entities were on the hook for the risk evaluation fee payment, whether they knew it or not. While these entities had the option of certifying that they have not manufactured the chemical in the past five years, or certifying that they ceased producing or importing the substance prior to the day before the EPA initiated the TSCA prioritisation for the substances and committing that they will not do so again until after January 2025, these off ramps to fee payment are small comfort if entities had no earthly idea they were subject to the TSCA in the first place.

Facing strong pushback from stakeholders across a broad spectrum of business sectors, the EPA relented and on 24 March 2020 issued a rare ‘no action assurance’ for the three categories of manufacturers noted above (manufacturers and importers of the 20 chemical substances as an impurity and/or byproduct or imported as an article). The assurance reflects the EPA’s commitment to exercise ‘enforcement discretion’ and not pursue enforcement against entities that fall into any of the three categories if they neglected timely or at all to self-identify as entities potentially responsible for the risk evaluation fee, or if they decline to pay the fee if the EPA identified them as potentially responsible.

Why is this significant?

You may be wondering what all this may mean in the grand scheme of corporate and financial dealings. Three take-away points come immediately to mind.

First, it is important for businesses across many industry sectors to know the identity of the chemicals included on the TSCA Work Plan chemical list. These 90 chemicals are in the first tranche of chemicals undergoing TSCA Section 6 evaluation, a third of which are already under review. That means that these chemical substances, their manufacture and import, and the chemicals’ many uses and applications are or will be intensely evaluated by the EPA to determine whether any ‘condition of use’ poses an unreasonable risk to human health or the environment, and if so, will be subject to regulation. If your company makes or uses any such chemical, it is important to anticipate the legal, regulatory, commercial and ‘brand’ implications of this inconvenient fact.

Second, the EPA Section 6 risk evaluation fee is not trivial. If there are many manufacturers of the chemical, the financial hit is less consequential. If not, the fee is significant and is due in full early in the process. The fee, of course, is just that, an administrative assessment that is paid to the EPA. Depending upon the EPA’s determination of what use patterns pose the greatest risk, stakeholders will be required to spend much more on disabusing the EPA of any misinformation on which any such finding is based and otherwise participating actively in the risk evaluation process. The process is at least three years long, and manufacturers and brand managers must address issues along the way. The success of any advocacy effort can save entire product lines; failure risks entire product lines becoming commercial casualties of the risk evaluation process. The court of public opinion has torpedoed products even without the benefit of a final risk evaluation and before the EPA-required action. In 2018, for example, Lowe’s voluntarily removed 19 products containing methylene chloride before the EPA mandated the prohibition of consumer uses of methylene chloride in paint strippers. This cautionary tale is unlikely to be an isolated incident.

Third, the fee rule experience demonstrates quite vividly the wide reach of the EPA’s TSCA jurisdiction. For decades, the TSCA has been narrowly (and wrongly) interpreted as an arcane ‘chemical manufacturer’ law with little relevance to the broader value chain. Not anymore. The TSCA’s reach is now extensive, as Congress mandated the EPA to restrict chemical uses believed to pose unreasonable risk. The EPA’s broad grant of authority under the TSCA to regulate chemical manufacturers, importers and processors, coupled with the EPA’s authority to include in the category of manufacturers entities that ‘manufacture’ targeted chemicals as byproducts or impurities and importers of chemicals in finished articles, includes thousands of unsuspecting commercial businesses. Stakeholders with even tangential chemical interest are wise to know the law, appreciate its broad implications, and anticipate the law’s application to commercial operations. Failure to do less could prove costly.

Chemical stakeholders must know how the TSCA applies, which chemicals are ‘Work Plan’ chemicals, and how the EPA identifies chemicals as ‘high-priority’, as the risk evaluation process will play out for decades. Importers must be aware of their product content. TSCA compliance has never been more important, and the risks of non-compliance have never been more consequential.

Lynn L. Bergeson is managing partner of Bergeson & Campbell, P.C. She can be contacted on +1 (202) 557 3801 or by email: lbergeson@lawbc.com.

Lynn L. Bergeson

Bergeson & Campbell, P.C.