Forever Chemicals Starting To Affect Project Finance Market

Forever Chemicals Starting To Affect Project Finance Market

April 22, 2024 | By Andrew Skroback in New York

A US Environmental Protection Agency decision in April to expand federal regulation of per- and polyfluoroalkyl substances, known as “PFAS,” could allow more renewable energy projects to qualify for energy community bonus tax credits.

It will also require future phase I environmental site assessments to cover potential PFAS contamination on project sites and could subject companies owning such sites to potential cleanup liability.

Some water utilities will have to upgrade their facilities.

Diligence in M&A transactions will also be affected.

EPA took three actions in April with potentially significant consequences.

First, it announced legally enforceable national drinking water limits for the two PFAS most common in the environment -- perfluorooctanoic acid (PFOA) and perfluorooctane sulfonic acid (PFOS).

It then subjected those same two PFAS to regulation under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), commonly called the Superfund law. These are the first PFAS to be designated as “hazardous substances” under the Superfund statute.

These moves create the authority for both federal and state regulators to impose cleanup obligations and recover costs under CERCLA and trigger reporting obligations for releases into the environment. They could also subject property owners and other potentially responsible parties to wider CERCLA liability.

At the same time, the new drinking water regulations impose significant regulatory obligations on US water utilities, many of whose water supplies are affected by the chemicals.

Forever Chemicals

PFAS (pronounced PEE-fas) are a group of thousands of fluorinated chemicals that have been added to a wide variety of consumer products for more than half a century to make them non-stick, waterproof or stain-resistant or to make them effective at retarding high-intensity fires.

Such products include carpets and upholstery, waterproof apparel, floor waxes, non-stick cookware, camping gear, fast-food wrappers, pizza boxes, cleaners, makeup, dental floss and firefighting foams for putting out fuel fires.

They are more commonly referred to as "forever chemicals" in the media due to their persistence in the environment.

Studies suggesting links with cancer and various other health problems previously led a number of states to regulate PFAS, but the United States has been cautious about taking meaningful federal action until now due to the potential for broad regulatory fallout and unintended consequences.

PFAS have been found in drinking water in many areas of the country and worldwide.

Liability Exposure

CERCLA can require various categories of parties deemed potentially responsible, including property owners, to pay the cost of investigating and cleaning up sites contaminated with regulated hazardous substances. It also allows regulators to order removal or remediation.  

CERCLA liability is strict -- negligence or even knowledge need not be shown. The law is also retroactive, meaning that the fact a listed substance released into the environment long ago was previously unregulated is irrelevant.

Subject only to possible equitable allocation of liabilities among legally responsible parties, CERCLA liability is joint and several among those parties. That means that, if you have CERCLA liability for a little, you could have liability disproportionate to your contribution to the contamination, or even for the entire cost of a cleanup if the government cannot find any other financially viable parties with whom to share liability.

Before April, PFAS were not subject to any significant federal liability scheme. Instead, they have only been subject to state-level regulation varying in degree and form by location.  

This is the first time that EPA has used its CERCLA authority to add a substance to the list of hazardous substances by regulation. The other 800 or so listed substances subject to CERCLA regulation were first determined to be hazardous under other federal environmental laws, such as the Clean Water Act or Clean Air Act.

PFOA and PFOS are the first to be listed because they are the most common and have been subject to the most study. Though the new regulation leaves thousands of PFAS unregulated at the federal level, additional CERCLA listings may follow. In any event, the listing of PFOA and PFOS will tangentially affect a broader array of chemicals since these two were often included in product mixtures with other PFAS.

Reopener Risk

Almost all consent decrees or other regulatory settlements resolving environmental liability at contaminated sites, including those resolved under CERCLA, contain reopener provisions.

That means that regulators may be able to reopen a prior resolution if new environmental threats emerge not clearly addressed under the original settlement. The new listing of PFAS as hazardous substances presents such a danger.

Thus, project sites where previously regulated hazardous substances were cleaned up could still be subject to new obligations and liabilities if PFAS contamination is present and their environmental impacts have not been addressed.

Enforcement Discretion

Along with the CERCLA listing, EPA issued a separate policy of enforcement discretion in the context of PFAS contamination to limit unintended consequences and protect certain sectors.

The policy suggests that EPA will focus mainly on pursuing manufacturers and others “who significantly contributed to the release of PFAS into the environment.”

This move is intended to reduce the potential burdens on entities that had only a passive role in PFAS contamination, such as “community water systems and publicly owned treatment works, municipal separate storm sewer systems, publicly owned/operated municipal solid waste landfills, publicly owned airports and local fire departments, and farms where biosolids are applied to the land.”  

EPA may decide not to pursue such parties. It may also offer settlements with contribution protections or even try to prod more responsible parties to waive rights of contribution against entities that were only passively involved.  

EPA is not legally required to follow the new policy. There is no guarantee the policy will not change over time.

Inflation Reduction Act 

The Inflation Reduction Act allows a 10% energy community bonus tax credit to be claimed on new renewable projects built on federal brownfield sites. For more information about such bonus credits, see "More areas qualify as energy communities"  and "Energy community bonus credit guidance".

The new PFAS listing may allow some sites to qualify that did not qualify as brownfields earlier.

To qualify as a brownfield for tax purposes, a project site must be challenging to develop because of the potential presence of substances regulated under CERCLA. Petroleum-related contamination often does not qualify a project site for brownfield tax incentives because petroleum is excluded from CERCLA regulation. State regulation is irrelevant.  

The new PFAS listing suggests some sites should be revisited for brownfield qualification.

PFAS Diligence

Notwithstanding the potential tax benefit, CERCLA regulation of the most common PFAS chemicals raises cost and liability risk.

Property owners and operators of projects on sites with PFAS could become ensnared in litigation.    

An EPA policy of enforcement discretion may mean little where other potentially responsible parties are looking to expand the number of people contributing to cleanup efforts.

Developers, project companies, purchasers, lenders and investors all conduct environmental due diligence not only to understand potential risk, but also to meet the “all appropriate inquiry” diligence standard that EPA requires to claim certain defenses to CERCLA liability where a property later turns out to be a contaminated.

That diligence standard requires a qualified phase I environmental site assessment.

Until now, phase I environmental site assessments have not been required to address PFAS impacts, although some consultants may have done so as a matter of course. The applicable standard for such assessments requires assessment of hazardous substances already regulated under CERCLA, plus petroleum products.

This is true even if a particular contaminant was already regulated under state law and therefore presented liability risk on that basis or if its presence might establish a basis for tort exposure.

The new PFOA and PFOS listing will require future phase I environmental site assessments to cover those PFAS.

The law is unclear whether an already completed phase I assessment can be a defense against PFAS liability if PFAS contamination later becomes an issue.

Environmental counsel should assess the potential limitations of any reports on which a lender, tax equity investor or acquiror is asked to rely for environmental diligence.

For M&A transactions, it is important to keep in mind the reopener risk if environmental liabilities were addressed, but PFAS contamination is later found on the project site. Counsel should review the terms of any consent decrees and other existing settlement agreements.

Drinking Water

US water utilities will probably be required to eliminate nearly all detectable levels of PFOA and PFOS from drinking water flowing from their taps within five years.

The eventual final PFAS regulation will probably also impose drinking water restrictions on four other PFAS chemicals, namely PFNA, PFHxS, PFBS and GenX. Because these six PFAS were often included in mixtures with other unregulated PFAS in products, the final regulation will effectively address more than just the six listed chemicals.

The regulation could affect utilities currently serving about one in three Americans. EPA estimates that between 6% and 10% of the country’s 66,000 water utilities will need to upgrade their treatment facilities to meet the new standards.  

EPA has also created a hazard index calculation focused on overall dose that requires upgrades to water treatment systems if the combination of multiple PFAS is considered dangerous, even if each individual chemical is at or below its limit.