Identifying and Calculating Economic Benefit That Goes Beyond Avoided And/or Delayed Costs an SAB Draft Advisory a Draft Advisory of the Illegal Competitive Advantage (ICA) Economic Benefit (EB) Advisory Panel of the EPA Science Advisory Board March 23 2005

United States	EPA Science Advisory	EPA-SAB-ADV-05-XXX

Environmental	Board (1400F)	March 2005

Protection Agency	Washington DC	www.epa.gov/sab

&EPA IDENTIFYING AND

CALCULATING ECONOMIC
BENEFIT THAT GOES
BEYOND AVOIDED AND/OR
DELAYED COSTS: AN SAB
DRAFT ADVISORY

A DRAFT ADVISORY OF THE ILLEGAL
COMPETITIVE ADVANTAGE (ICA)
ECONOMIC BENEFIT (EB) ADVISORY
PANEL OF THE EPA SCIENCE
ADVISORY BOARD

March 23,2005

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i' O

UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
% proi^ WASHINGTON D.C. 20460

OFFICE OF
THE ADMINISTRATOR
EPA SCIENCE ADVISORY BOARD

March 23, 2005

Note to the Reader:

The attached draft advisory of the EPA Science Advisory Board (SAB) is still undergoing
internal SAB review. However, in its present form, it represents essentially a consensus position
of the panel involved in this advisory activity. Once approved as final, the advisory will be
transmitted to the EPA Administrator and will become available to the interested public.

This draft has been released for general information to members of the interested public
and to EPA staff. This is consistent with the SAB policy of releasing draft materials only when
the Panel involved is comfortable that the document is sufficiently complete to provide useful
information to the reader. The reader should remember that this is an unapproved working draft
and that the document should not be used to represent official EPA or SAB views or advice.

Draft documents at this stage of the process often undergo significant revisions before the final
version is approved and published.

The SAB is not soliciting comments on the advice contained herein. However, as a
courtesy to the EPA Program Office which is the subject of the SAB review, we have asked them
to respond to the issues listed below. Consistent with SAB policy on this matter, the SAB is not
obligated to address any responses which it receives.

1. Has the Panel adequately responded to the questions posed in the Charge?

2. Are any statements or responses made in the draft unclear?

3. Are there any technical errors?

For further information or to respond to the questions above, please contact:

K. Jack Kooyoomjian, Ph.D.,

Designated Federal Officer

ICA EB Advisory Panel

EPA Science Advisory Board (1400F)

US Environmental Protection Agency

1200 Pennsylvania Avenue, NW

Washington, DC 20460-0001

(202) 343-9984 Fax: (202) 233-0643 or 0645

E-Mail: koovoomiian.iack@epa.gov

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March 23, 2005

EPA- SAB - AD V-05 -XXX

The Honorable XX
Administrator

U.S. Environmental Protection Agency
1200 Pennsylvania Avenue, NW
Washington, DC 20460

Subject: An Advisory of the Illegal Competitive Advantage (ICA) Economic
benefit (EB) Advisory Panel of the EPA Science Advisory Board

Dear Administrator Leavitt:

The EPA Science Illegal Competitive Advantage (ICA) Economic Benefit Advisory
Panel of the Science Advisory Board has completed its review of Agency's Office of
Enforcement and Compliance Assurance (OECA) White Paper entitled "Identifying and
Calculating Economic Benefit That Goes Beyond Avoided and/or Delayed Costs, " dated May
25, 2003. The Panel conducted its review in a public teleconference call on July 12 and a
meeting August 5 & 6, 2004, followed by three public conference calls on September 22,
November 4, 2004 and January 19, 2005. The results of the Panel's efforts were
administratively reviewed and approved by the Board.

The EPA has made the violator's economic benefit from violating the law the centerpiece
of its calculation of civil penalties. The economic benefit from noncompliance consists of three
possible components: (A) the economic benefit from delayed costs associated with
noncompliance; (B) the economic benefit from avoided costs associated with noncompliance;
and (C) the economic benefit from an illegal competitive advantage generated by non-
compliance. The Agency identifies four categories of cases in which the economic gain of
noncompliance with an environmental regulation will go beyond the benefit of delaying or
avoiding compliance costs. It refers to these as "Illegal Competitive Advantage" (ICA). The
four categories of cases are:

-	violator gains additional market share;

-	violator sells products or services prohibited by law;

-	violator initiates construction or operation prior to government approval; and

-	violator operates at higher capacity than it should have.

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The Agency has asked our advice regarding these categories and the proposed methods for
estimating economic benefit for each.

The fundamental question for the determination of a penalty based on economic benefit is
how much did the profits of the firm increase as a result of its noncompliance? Profits can be
increased either by an increase in revenue or a decrease in the total cost of production (including
abatement costs), or some combination of both. The Agency's White Paper has essentially
placed all of the factors influencing revenues in one of the four categories under the heading of
"benefit from illegal competitive advantage."

The Panel finds the Agency's use of the term "illegal competitive advantage" to be
unhelpful. It would be more transparent to have only two categories: (i) economic advantage is
limited to delayed or avoided compliance costs; and (ii) economic advantage includes profits on
increased sales. For all of those cases in which revenues increase, we recommend that the
Agency examine the facts of each case and use methods and data appropriate to the case to
estimate the changes in streams of revenue and/or production costs as well as delayed or avoided
compliance costs (if any). We suggest an approach to revising the White Paper that is consistent
with our recommendations.

The Panel also considered some broader issues relating to the determination of the
magnitude of penalties for noncompliance. We believe that one of these is of particular
importance to you. This is the economic theory of optimal penalties.

This theory makes two points that are relevant to EPA's penalty policy. The first is
based on the assumption that potential offenders respond to both the probability of detection and
the severity of punishment if detected and punished. Thus, deterrence may be enhanced by
raising the penalty, by increasing monitoring activities to raise the likelihood that the offender
will be caught, or by changing legal rules to increase the probability of punishment. And
second, the economically optimal penalty balances the harm done by an offense against the cost
of deterring the offense in one or another of these ways. This balancing leads to the conclusion
that the appropriate methodology for calculating a penalty is to charge an amount per offense
equal to the (monetized) harm done divided by the probability of punishment.

The Panel believes that the state-of-the-art in benefits estimation has progressed to the
point where EPA should seriously explore how it might incorporate "harm-based" measures into
its penalty formula, at least for some types of environmental harm. We also recommend that the

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Agency explore ways to incorporate more explicitly the probability of detection and punishment
into its penalty policy as a way of making more effective the deterrent effects of its penalties.

Finally, if our recommendations regarding the penalty policy and the revisions to the
White paper are accepted, it will be necessary for the Agency to provide economic input into
these processes. The necessary economic expertise could come either from the National Center
for Environmental Economics or by adding an economist to the staff of the OECA.

We are pleased to have participated in this process and are particularly interested in your
response to the points we raise in this report.

Sincerely,

Dr. M. Granger Morgan, Chair
EPA Science Advisory Board

Dr. A. Myrick Freeman III, Chair
Illegal Competitive Advantage (ICA) Economic
Benefit (EB) Advisory Panel
EPA Science Advisory Board

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NOTICE

This report has been written as part of the activities of the EPA Science Advisory Board,
a public advisory committee providing extramural scientific information and advice to the
Administrator and other officials of the Environmental Protection Agency. The Board is
structured to provide balanced, expert assessment of scientific matters related to problems facing
the Agency. This report has not been reviewed for approval by the Agency and, hence, the
contents of this report do not necessarily represent the views and policies of the Environmental
Protection Agency, nor of other agencies in the Executive Branch of the Federal government, nor
does mention of trade names or commercial products constitute a recommendation for use.
Reports of the EPA Science Advisory Board are posted on the EPA website at
http ://www. epa. gov/ sab.

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ABSTRACT

The U.S. Environmental Protection Agency's Illegal Competitive Advantage (ICA)
Economic Benefit (EB) Advisory Panel ("the Panel") provided advice on four charge questions
relating to an Agency White Paper entitled "Identifying and Calculating Economic Benefit That
Goes Beyond Avoided and/or Delayed Costs, " dated May 25, 2003.

The EPA has made the recovery of a violator's economic benefit from violating the law
the basis of its calculation of civil penalties. The Agency has asked the Panel for advice in
estimating economic benefits when a firm's noncompliance enables it to increase sales (which
EPA terms "illegal competitive advantage" or ICA), as opposed to simply avoiding or delaying
compliance costs. The Panel suggests that the four categories of cases identified by EPA as
falling under the term ICA and described in the White Paper are not helpful for several reasons.

The Panel suggests that in all those cases in which revenues increase, the Agency should
examine the facts of each case and use methods and data appropriate to the case to estimate the
changes in streams of revenue and production costs, as well as any delayed or avoided
compliance costs.

After a review of the economic theory of optimal penalties, the Panel recommends that
the Agency explore ways to explicitly incorporate the probability of detection and punishment
into its penalty policy. The Panel also believes that the state-of-the-art in benefits estimation has
progressed to the point where EPA should seriously explore how it might incorporate "harm-
based" measures into its penalty formula, at least for some types of harm.

Key Words: Compliance, Economic Benefit, Economic Gain, Enforcement, Harm-Based
Measures, Illegal Competitive Advantage, Optimal Penalties

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1	U.S. Environmental Protection Agency

2	Science Advisory Board

3	Illegal Competitive Advantage (ICA) Economic Benefit (EB) Advisory Panel

4	CHAIR

5	Dr. A. Myrick Freeman III, Research Professor, Department of Economics, Bowdoin College,

6	Brunswick, ME (Member, SAB Board)

7	MEMBERS

8	Dr. Dallas Burtraw, Senior Fellow, Resources for the Future, Washington, DC (Member, SAB/

9	EEAC)

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11	Dr. Mark Cohen, Senior Associate Dean & Justin Potter Professor of American Competitive

12	Business, Owen Graduate School of Management, Vanderbilt University, Nashville, TTST

13	Dr. Jane V. Hall, Professor, Department of Economics, California State University, Fullerton,

14	CA

15	Dr. W. Michael Hanemann, Professor, Department of Agricultural & Resource Economics &

16	Public Policy, University of California, Berkeley, CA (Member SAB/EEAC)

17	Dr. Catherine L. Kling, Professor, Department of Economics, Iowa State University, Ames, IA

18	(Member SAB/EEAC; SAB Board)

19	Dr. Arik Levinson, Associate Professor, Economics Department, Georgetown University,
2 0	Washington, DC (Member SAB/EEAC)

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22	Dr. Clifford S. Russell, Professor of Economics Emeritus (Retired Former Director of the

2 3	Vanderbilt Institute for Public Policy Studies), Vanderbilt University, now residing in Alna, ME.

24	Dr. Michael A. Salinger, Finance & Economics Department, School of Management, Boston

25	University, Boston, MA

2 6	Dr. David Sunding, Professor, Agricultural and Resource Economics, College of Natural

2 7	Resources and Boalt Hall School of Law, University of California, Berkeley, CA,

2 8	SCIENCE ADVISORY BOARD STAFF

2	9	Dr. K. Jack Kooyoomjian, Designated Federal Officer, US EPA Science Advisory Board

3	0	(1400F), 1200 Pennsylvania Avenue, NW, Washington, DC 20460, Tel. (202)-343-9984, Fax

31	(202)-233-0643 or 0645, Email: koovoomiian.iack@epa.gov (Physical Delivery/Messenger

32	Address: 1025 F Street, NW, Rm 3606, Washington, DC 20004, General Tel. (202)-343-9999)

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2	[KJK - Check the page numbers]

3	1. EXECUTIVE SUMMARY 	1

4	1.1 Current Civil Penalty Policy at the Agency	1

5	1.2. The Panel's Responses	3

6	1.3. Ex Ante vs. Ex Post Assessments 	6

7	1.4. Toward an Optimal Penalty Policy	6

8	2. INTRODUCTION 	9

9	2.1 Request for EPA Science Advisory Board (SAB) Review	9

10	2.2 The Quality Review Process	9

11	2.3 Review and Transmittal 	10

12	3. CURRENT AGENCY PRACTICE AND QUESTIONS FOR THE PANEL 	11

13	3.1 Statutory Provisions and the EPA Penalty Policy - Recapture Economic Gain ..11

14	3.2 The Objectives of Penalties	13

15	3.3. Delayed and Avoided Compliance Costs and the BEN Model	16

16	3.4 The Four Categories of Illegal Competitive Advantage 	17

17	3.5 The Charge Questions for The Panel	18

18	4. THE PANEL'S RESPONSES 	19

19	4.1 The Economic Benefit is the Increase in Profits	19

2 0	4.2 Economic Benefit When Revenues Change Due to Noncompliance 	20

21	4.3. The Four Categories of Illegal Competitive Advantage 	22

22	4.4. Direct Responses to Charge Questions 	24

23	4.5. Revising the White Paper 	26

24	5. ADDITIONAL ISSUES	28

25	5.1. The Effect of Market Structure 	28

2 6	5.2. Dynamic Effects	29

2 7	5.3. Ex Ante vs. Ex Post Assessments 	30

2 8 6. TOWARD AN OPTIMAL PENALTY POLICY	32

2	9	6.1 Economic Theory of Optimal Penalties	32

3	0	6.2. Quantifying Harm 	34

31	6.3. Probability of Detection and Punishment 	35

32	6.4. Implications for Current EPA Policy	36

33	FIGURE 1 - Benefits from Non-Compliance	21

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1	APPENDIX A - A MORE DETAILED DESCRIPTION OF THE SAB PROCESS

2	AND PANEL REVIEW PROCEDURES	 A - 1

3	A. 1 Request for Review and Acceptance	 A-l

4	A.2 Panel Formation	 A-l

5	A.3 Panel Process and Review Documents 	 A-2

6	APPENDIX B - BRIEF BIO SKETCHES OF THE ILLEGAL COMPETITIVE

7	ADVANTAGE (ICA) ECONOMIC BENEFIT ( EB) ADVISORY PANEL	B - 1

8	APPENDIX - C ACRONYMS	C - 1

9	REFERENCES 	R - 1

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1. EXECUTIVE SUMMARY

The Illegal Competitive Advantage (ICA) Economic Benefit (EB) Advisory Panel of the
EPA Science Advisory Board (SAB) reviewed and evaluated a White Paper entitled "Identifying
and Calculating Economic Benefit That Goes Beyond Avoided and/or Delayed Costs, " dated
May 25, 2003, as well as supplemental materials, along with a charge for the Panel. The Panel
held a conference call on July 12, 2004, met in Washington, DC, on August 5-6, 2004, and
conducted follow-up conference calls on September 22, November 4, 2004, and January 19,
2005 to conclude its activity.

1.1 Current Civil Penalty Policy at the Agency

Since 1978, the EPA has made the violator's economic benefit from the violating the
Clean Air and Clean Water Acts the centerpiece of its calculation of civil penalties. In the
Agency's view, the economic benefit from noncompliance consists of three possible
components: (A) the economic benefit from delayed costs associated with noncompliance; (B)
the economic benefit from avoided costs associated with noncompliance; and (C) the economic
benefit from an illegal competitive advantage generated by non-compliance. The EPA's request
to the SAB deals with one aspect of just one of these three components of a penalty, the
assessment of illegal competitive advantage in the calculation of economic benefit.

The EPA Policy on Civil Penalties establishes "a single set of goals for penalty
assessment in EPA administrative and judicial enforcement actions." These goals are
characterized as "deterrence, fair and equitable treatment of the regulated community, and swift
resolution of environmental problems (U. S. EPA, 1984a, p. 1)." We focus on the first two items
-fairness and deterrence - as primary objectives in the determination of a civil penalty.

The deterrence objective is clearly recognized in the EPA's penalty process. But one
consideration that plays a substantial role in the economic theory of deterrence appears to be
entirely missing from the current penalty assessment process; this is the probability of detection
and punishment associated with the violation in question.

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An important aspect of fairness is the restoration of the status quo: the law has been
violated, and one objective of the penalty system is to return the status quo before the violation
occurred. Requiring the polluter to surrender the profit he gained by not complying with the law
is one important aspect of restoration of the status quo. However, removing the economic
benefit is not the only action that might be required in order to restore the status quo. With a
violation of an environmental regulation, there is a loss resulting from the polluter's action in the
form of some harm to the natural environment. Whether the natural resource that is harmed
belongs to a private individual or the general public, restoration of the status quo can call for
some appropriate compensatory action, perhaps in the form of a penalty based on harm to the
environment rather than on gain to the polluter.

These two points raise issues that lie outside of the charge to the Panel. Nevertheless the
Panel believes that they deserve consideration in the continuing evolution of the Agency's civil
penalty policy. Further discussion is deferred to the concluding section of this report.

Regarding the calculation of economic gain, the Agency developed the BEN model to
estimate the economic benefits that result from cost-savings during the time that a facility is not
in compliance. Because BEN is presently limited to calculating the difference in discounted
cash flows that result from cost-savings during non-compliance, it is not now configured to
support recapture of benefits that could result from higher revenues. There is, however, no
inherent reason that BEN could not be modified so that it could be used to estimate the benefits
of higher revenues.

In its White Paper the Agency identifies four categories of cases in which the economic
gain of noncompliance with an environmental regulation will go beyond the benefit of delaying
or avoiding compliance costs. It refers to these as instances of "Illegal Competitive Advantage"
(ICA). The four categories of cases are:

- violator gains additional market share;

- violator sells products or services prohibited by law;

- violator initiates construction or operation prior to government approval; and

- violator operates at higher capacity than it should have.

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The Agency has asked our advice regarding these categories and the proposed methods for
estimating economic benefit for each.

1.2. The Panel's Responses

The fundamental question for the determination of the economic benefit component of
the penalty is how much the profits of the firm increased as a result of its noncompliance. Profits
can be increased either by an increase in revenue or a decrease in the total cost of production
(including abatement costs), or some combination of both. The BEN model provides a reliable
measure of the change in after-tax profit only if no other change would have occurred that would
have affected the firm's profit. The Agency's White Paper has essentially placed all of the
factors other than cost that might influence the amount by which the violator's profit was
increased by the violation in one of four categories under the heading of "benefit from illegal
competitive advantage."

For several reasons, the Panel finds that the Agency's use of the term "illegal competitive
advantage" and its identification of the four categories of ICA cases is unhelpful.

1. It is not clear what the modifier "competitive" is intended to convey.

2. Increases in market share will often be difficult to identify in terms of comparing the
noncompliance scenario with the counterfactual compliance scenario; and observed increases in
market share might be difficult to attribute to the noncompliance.

3. In any case, increases in market share are not inherently valuable to the firm; what
matters is the impact of changes in market share on profits.

4. The other categories of ICA appear to be unusual circumstances that are very context
dependent.

It would be more transparent to have only two categories: (i) firms that experienced no
revenue increase so that profits were increased only by the amount of the delayed or avoided
compliance costs; and (ii) firms gained profits from increased sales. The BEN model, as

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currently configured, may be used as a calculation tool in the first category of cases. For the
other category, we recommend that the Agency examine the facts of each case and use methods
and data appropriate to the case to estimate the changes in streams of revenue and/or production
costs as well as delayed or avoided compliance costs (if any). BEN may be reconfigured to
assist in the calculation once the facts are known and relevant shifts in supply curves have been
estimated.

When non-compliant firms sell more than they would have had they complied, their
economic benefit includes the profits they earn on the increased sales. We use a simple
economic model to identify the economic gain due to noncompliance. We show that when a
firm is able to increase sales, using avoided costs at the actual quantity produced overstates the
true economic benefits of noncompliance.

There are two situations in which a calculation of economic benefit based only on
avoided/delayed costs could still be justified. The first is if it can be assumed that the effect on
marginal cost and therefore output is sufficiently small that the error induced by ignoring output
effects is also small. The second is if compliance would affect fixed costs only. In that case,
compliance would leave marginal cost and, accordingly, output unchanged.

Before answering the charge questions, we consider each of the four categories of ICA
described in the White Paper in more detail and offer comments on the appropriate methods for
estimating economic benefit for each.

Our answers to the four charge questions are as follows:

1. Are there categories of cases that would be useful for the Agency to consider in
calculating the ICA economic benefit, other than those that are identified in the White
Paper? Should any of these be combined?

We do not think that the categories offered in the White Paper are particularly useful. In
fact we believe that they should be combined into only one category - cases where profits
increase at least in part due to increases in revenue.

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2.	How can the Agency more accurately characterize the types of cases that are
described in the White Paper? Have any of the examples and counter-examples in the
White Paper been misidentified with regard to whether they are amenable to the BEN
model's simplifying paradigm?

As indicated above, we do not think that the categorization of cases in the White Paper is
useful. However, the White Paper is correct in its statements about whether specific cases can be
analyzed within the BEN framework as that model is currently configured..

3.	Are there any suggestions for modifying the described analytical approach to
calculate the economic benefits and;

We believe that there is no substitute for a careful examination of the facts of each case
and the use of methods and data appropriate to each case to estimate the changes in streams of
revenue and/or production costs as well as delayed or avoided compliance costs (if any).

4.	The Agency's proposed approach strives to avoid double-counting of the benefit
by laying out all relevant cash flows stemming from the violations, as opposed to simply
adding on the additional calculations to a BEN run. What additional measures (if any)
should the Agency put in place to avoid such potential double-counting?

Every effort should be made to calculate economic advantage as avoided/delayed costs
(and therefore not to decompose the gain into separate components.) One should only resort to a
full-blown change in profit analysis when avoided/delayed costs leads to a clearly substantial
overestimate or underestimate of the economic benefit. If it is necessary to do change-in-profit
analysis, it is important that the estimate of costs under compliance reflect the lower level of
output the firm would have produced rather than the actual production of the polluter.

In order for the OECA to implement our recommendations, it will have to have access to
the relevant expertise in economics. One possible source of this expertise in the Agency is the
National Center for Environmental Economics. But it might be more useful to OECA to have its
own in-house economist. This would be especially true if the agency accepts our
recommendations in Section 6.4 for rethinking the civil penalty policy.

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1.3. Ex Ante vs. Ex Post Assessments

To the extent that a violator should pay a penalty based on its expected rather than its
realized economic benefit, there remains the practical issue of how that benefit is to be
determined. Without knowing exactly what information is available, it is hard to describe how
to perform an expected benefit calculation that would withstand judicial scrutiny. However, the
committee believes that cases might arise in which the agency should consider putting forward
an expected benefit calculation as an alternative measure of harm.

To the extent that a violator should pay a penalty based on its expected rather than its
realized economic benefit, there remains the practical question of how that benefit is to be
determined. Without knowing exactly what information is available, it is hard to describe how to
perform an expected benefit calculation that would withstand judicial scrutiny.

1.4. Toward an Optimal Penalty Policy

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balances the harm done by an offense against the cost of deterring the offense in one or another
of these ways. This balancing leads to the conclusion that the appropriate methodology for
calculating a penalty is to charge an amount per offense equal to the (monetized) harm done,
divided by the probability of punishment.

If an environmental violation results in emissions levels that are beyond a legal standard,
there is likely to be some harm to natural resources or human health. Measuring people's value
for non-market items in monetary terms (e.g., measuring what they would be willing to pay to
prevent a specific harm to the natural environment) is inherently difficult, and in practice
different measurement techniques can produce different results. We also recognize that while
some of the methods used to value environmental harm can be employed with relatively little
cost, others require significant resources. Thus, in many cases, these methods may not be
practical unless the harm, and thus the expected penalty, is extremely large. But these are likely
to be the cases that result in very significant and quantifiable harm. Nevertheless, the Panel
believes that the state-of-the-art in benefits estimation has progressed to the point where EPA
should seriously explore how it might incorporate "harm-based" measures into its penalty
formula, at least for some types of environmental harm.

The probability of detection is likely to vary considerably by type of violation and even
across jurisdictions. An extremely harmful environmental violation is likely to have a
probability of detection and punishment of nearly one. If so, the optimal penalty for such a
violation is likely to be the monetary equivalent of harm. However, as the size of the harm
decreases, all else equal, we expect that the likelihood of detection also decreases. Other factors
that might influence the probability of detection and punishment are: (a) whether or not a
violator is subject to mandatory reporting that is available to the public to use in filing citizen
lawsuits, (b) the ratio of facilities to inspectors in an EPA region, (c) the strength of
environmental activism in a region/state, and (d) whether or not the violator had a history of
violations and thus was subject to increased scrutiny or targeted enforcement.

Although not widely employed in the environmental literature to date, numerous
techniques are available to estimate the probability of detection and punishment. One widely
used method is the "time till capture" approach which is most appropriate for ongoing violations
that occur over a period of time. Another method - the "capture/recapture" approach has its
foundation in estimating the number of animals in a given geographic area.

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The current EPA Penalty Policy starts with the calculation of "gain" - i.e. estimating the
amount that the offender saved by not complying with environmental regulations, and then adds
a "gravity" component based in part on the harm from the offense. However, the policy does not
provide for quantifying the "harm" in monetary terms and also ignores any explicit consideration
of the probability of detection. An alternative approach that might be explored by EPA would be
to provide for a "base" fine that is predicated on the harm. If harm cannot be quantified, the base
might either be "gain" or a "default" fine level that is specified by type of offense. This base fine
would then be multiplied by a factor that is based on an estimate of the probability of detection.
It should be emphasized that what is sought here is an approximate estimate of the general
probability of detection, not a highly elaborate calculation tailored to all the specific details of
the particular violation.

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2. INTRODUCTION

2.1	Request for EPA Science Advisory Board (SAB) Review

At the request of the EPA Office of Compliance and Assurance (OECA), the EPA
Science Advisory Board convened a Panel to review and evaluate a White Paper entitled
"Identifying and Calculating Economic Benefit That Goes Beyond Avoided and/or Delayed
Costs, " dated May 25, 2003, as well as supplemental materials, along with a charge for the
Panel. The White Paper identifies four categories of cases in which the economic gain of
noncompliance with an environmental regulation will go beyond the benefit of delaying or
avoiding compliance costs, provides examples and counterexamples of each, and briefly
describes how the economic gain can be calculated. The four categories of cases are:

-	violator gains additional market share;

-	violator sells products or services prohibited by law;

-	violator initiates construction or operation prior to government approval; and

-	violator operates at higher capacity than it should have.

The proposed charge to the ICA EB Advisory Panel of the SAB was developed based on
discussions between the OECA and SAB Staff offices. The specific charge questions are
presented in Section 3.5 below.

2.2	The Quality Review Process

A Quality Review Subcommittee (QRS) was formed to critique the ICA EB Advisory
Panel draft report. This review process identified the following issues: (to be completed when
this occurs	KJK)

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1	2.3 Review and Transmittal

2	The Board approved the Panel's report on (add date, e.g., March XX, 2005 and

3	transmitted the report to the Agency. For that review, the Panel report,	(to be completed

4	when this occurs	KJK)

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3. CURRENT AGENCY PRACTICE AND QUESTIONS FOR THE PANEL

3.1 Statutory Provisions and the EPA Penalty Policy - Recapture Economic Gain

The US Environmental Protection Agency exercises primary enforcement responsibility
for many of the federal environmental protection laws, including the Clean Air Act (CAA); the
Clean Water Act (CWA); the Oil Pollution Act (OPA); the Safe Drinking Water Act (SDWA);
the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA); the Toxic Substances Control
Act (TSCA); the Resource Conservation and Recovery Act (RCRA); the Comprehensive
Environmental Response, Compensation, and Liability Act (CERCLA); and the Emergency
Planning and Community Right-to-Know Act (EPCRA). While each of the statutes is different in
its particulars, they generally provide for the assessment of civil penalties in the event of non-
compliance, and they offer some guidance as to the considerations that should be considered
when assessing a civil penalty. For example, Section 7413(e)(1) of the Clean Air Act states:

In determining the amount of any penalty to be assessed under this section or section
7604(a) of this title, the Administrator or the court, as appropriate, shall take into
consideration (in addition to such other factors as justice may require) the size of the
business, the economic impact of the penalty on the business, the violator's full
compliance history and good faith efforts to comply, the duration of the violation as
established by any credible evidence (including evidence other than the applicable test
method), payment by the violator of penalties previously assessed for the same violation,
the economic benefit of noncompliance, and the seriousness of the violation [emphasis
added].

Section 7524(b) of the Act, dealing with mobile sources, states:

In determining the amount of any civil penalty to be assessed under this subsection, the
court shall take into account the gravity of the violation, the economic benefit or savings
(if any) resulting from the violation, the size of the violator's business, the violator's
history of compliance with this title, action taken to remedy the violation, the effect of
the penalty on the violator's ability to continue in business, and such other matters as
justice may require [emphasis added]..

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Since 1978, the EPA has based civil penalties under the Clean Air and Clean Water Acts
on the violator's economic benefit from violating the law (EPA "Civil Penalty Policy" 1978).
The monetary estimate of the economic benefit from noncompliance becomes the starting point
for establishing a penalty, and this is then adjusted up or down based on a qualitative assessment
of other considerations such as the factors listed above. This approach was further formalized in
February 1984 when the EPA issued the Policy on Civil Penalties, EPA Enforcement Policy
#GM-21 and the accompanying Framework for Statute-Specific Approaches to Penalty
Assessments, EPA General Enforcement Policy #GM-22. As explained in the latter document:
"The development of a penalty figure is a two-step process. First the case development team
must calculate a preliminary deterrence figure. This figure is composed of the economic benefit
component (where applicable) and the gravity component. The second step is to adjust the
preliminary deterrence figure through a number of factors (U. S. EPA, 1984b, p. 2)."

According to the 1984 Guidelines, the economic benefit from noncompliance consists of
three possible components: (A) the economic benefit from delayed costs associated with
noncompliance; (B) the economic benefit from avoided costs associated with noncompliance;
and (C) the economic benefit from an illegal competitive advantage generated by non-
compliance.

Following the assessment of the economic benefit, the EPA then performs an assessment
of the gravity component. This involves ranking different types of violations according to the
seriousness of the act, considering (i) actual or possible harm, (ii) importance to the regulatory
scheme, and (iii) availability of data from other sources. In evaluating the actual or possible
harm, consideration should be given to (a) the amount of pollutant, (b) toxicity of pollutant, (c)
sensitivity of the environment, (d) length of time of a violation, and (e) size of the violator.
Having ranked the violations, according to the 1984 Guidelines one "then should assign
appropriate dollar amounts or ranges of amounts to the different ranked violations to constitute
the 'gravity component'. This amount, added to the amount reflecting benefit, constitutes the
preliminary deterrence figure (U. S. EPA, 1984b, p. 3)."

In the second step, the preliminary deterrence amount is adjusted "to ensure that penalties
also further Agency goals besides deterrence (i.e. equity and swift correction of environmental

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problems). ... Adjustments (increases or decreases, as appropriate) that can be made to the
preliminary deterrence penalty to develop an initial penalty target to use at the outset of
negotiation include:

a. degree of willfulness and/or negligence

b. cooperation/noncooperation through pre-settlement action

c. history of noncompliance

d. ability to pay

e. other unique factors (including strength of case, competing public
policy considerations) ((U. S. EPA, 1984b, pp. 3-4)."

In summary, the dollar amount which the EPA calculates as its initial penalty target is
derived by calculating the economic benefit, adding a monetary amount which reflects the
gravity component, and adjusting the resulting total up or down based on the considerations
listed immediately above.

The EPA's request to the SAB deals with one aspect of just one of these three stages in
the development of a penalty target, the assessment of illegal competitive advantage in the
calculation of economic benefit. Nevertheless, before we address this question, it is useful to
situate the penalty procedure in the broader context of the economic and public policy
considerations that bear on the determination of a penalty for noncompliance with environmental
regulations.

3.2 The Objectives of Penalties

The EPA Policy on Civil Penalties establishes "a single set of goals for penalty
assessment in EPA administrative and judicial enforcement actions." These goals are
characterized as "deterrence, fair and equitable treatment of the regulated community, and swift
resolution of environmental problems (U. S. EPA, 1984a, p. 1)." In the context of our present
analysis, we see the last item as being more a constraint than an objective: whatever the formula
for assessing a civil penalty, it needs to be practical and susceptible of implementation in a
reasonably timely manner. Accordingly we focus on the other two items -fairness and

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deterrence - as primary objectives in the determination of a civil penalty; they are clearly
evident in the statutory provisions quoted above.

Deterrence and, especially, fairness have multiple possible interpretations depending on
both the philosophical position one adopts and how one interprets the violation of an
environmental law from a public policy perspective. In this section we note some issues that
arise in conceptualizing the objectives of fairness and deterrence.

An important aspect of fairness is what might be called the restoration of the status quo:
the law has been violated and the restorative objective of a penalty system is to undo the
violation and return the situation to how it was before the violation occurred. This is clearly the
major focus of the EPA's civil penalty policy since 1978. The assumption underlying this policy
is that the noncompliance with environmental regulations was associated with, and perhaps
motivated by, some increase in profit to the responsible party (from now on, we will use "the
polluter" as a shorthand term to refer to this party). Whether or not the assumption is correct is
obviously an empirical question that depends on the particular circumstances of the case; but, for
now, we will assume it is correct. In that case, a key element of the restoration of the status quo
is to compel the polluter to surrender the profit he gained by not complying with the law. This is
essentially what the EPA Penalty Policy focuses on by virtue of the prominent position it accords
to the calculation of economic benefit.

It should be noted, however, that removing the economic benefit is not the only action
that might be required in order to restore the status quo. This is because the failure to comply
with a federal regulation may entail not only an unwanted gain to the violator but also an
unwanted loss to some other party. In the case of violation of an economic regulation, for
example, a violation of anti-trust law may generate not only an unlawful gain to the seller but
also an unwanted loss to the customers who purchase from this seller. In that case, the restoration
of the status quo requires not only that the seller surrender his unlawful gain but also that the
customers be compensated for their unlawful loss. With a violation of an environmental
regulation, while there may not be an unwanted monetary loss to a third party, there is a non-
monetary loss resulting from the polluter's action in the form of some harm to the natural
environment, at least if the violation involves releases to the environment. Whether the natural
resource that is harmed belongs to a private individual or the general public, a loss has occurred,
and restoration of the status quo calls for some appropriate compensatory action. Depending on

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the circumstances, this action could include both clean-up and some form of environmental
restoration.1 The costs of clean-up and environmental restoration are thus compensation that
should be paid by the polluter in order to restore the status quo.

The popular name for what is being discussed here is "the polluter pays principle." Not
only is this called for by notions of fairness, but also it is supported by considerations of
economic efficiency. Ever since Pigou (1918), it has been recognized that, in the presence of a
harmful externality such as that caused by pollution, a competitive market is generally unlikely
to lead to a socially optimal allocation of resources unless the polluter is required to bear the cost
that his pollution imposes on others.

In summary, the restoration of the status quo would appear to be an important aspect of
the fairness objective in setting the penalty for a violation of an environmental regulation. This
restorative goal can be seen to have two possible implications. If one focuses on the polluter's
unlawful gain, restoration of the status quo implies that he should give up this gain. If one
focuses on the unlawful harm to the environment, restoration of the status quo implies that he
should pay an amount covering the cost of cleanup and/or environmental restoration. In general,
there is no reason to expect that the two different approaches lead to a similar assessment of a
monetary payment: the cost avoided by failing to control pollution need bear no relationship to
the damage caused by the pollution. This raises two questions: Which approach is presently
adopted by the EPA. Which approach seems preferable, or should they be combined in some
manner?

With regard to the first question, it must be recognized that the current EPA penalty
policy does contain some elements of both approaches, but they are combined in a manner that is
equivocal and perhaps somewhat muddled. The first step in the penalty assessment process, the
calculation of economic benefit, focuses on the unlawful gain to the polluter. The second step,
the assessment of the gravity component, contains elements that clearly relate to the unlawful
loss to the environment, specifically item (i), the actual or possible harm. But, the

With respect to the latter, although the context is different, it strikes us as relevant to quote the language used
by the Department of Interior (DOI) in its proposed regulations for natural resource damages under the
Comprehensive Environmental Response Compensation and Liability Act (CERCLA). DOI describes the
measure of damages as: "the cost of restoration, rehabilitation, replacement, and/or acquisition of the
equivalent of the injured natural resources and the services those resources provide, plus the compensable
value of the services lost to the public for the time period from the discharge or release until the attainment
of the restoration, rehabilitation, replacement and/or acquisition of equivalent of the resources and their
services to the baseline." (56 Fed. Reg. at 19,769 (proposed 43 C.F.R. § 11.80(b)).

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characterization of this item is somewhat confusing because, while it includes factors that relate
directly to the magnitude of the environmental damage — the amount of pollutant, the toxicity of
pollutant, the sensitivity of the environment, and the length of time of a violation - it also
includes a factor (the size of the violator) that has nothing to do with the amount of
environmental damage. We see the size of the violator as being relevant to the deterrence
objective of a penalty rather than the restoration of the status quo.

In short, the current EPA penalty process appears to focus overwhelmingly on the
calculation of the unlawful gain to the polluter, with no systematic consideration of the monetary
value of the environmental damage caused by the violation of the pollution control regulation.
We return to this issue in Section 6, below.

The deterrence objective is certainly recognized in the EPA's penalty process. In addition
to the item in the gravity component stage, noted above, the third stage of the process, the
adjustment stage, is heavily weighted to factors that bear on deterrence, including the degree of
willfulness and/or negligence, the extent of cooperation through pre-settlement action, the
history of noncompliance, and the polluter's ability to pay. But one consideration that plays a
substantial role in the economic theory of deterrence appears to be entirely missing from the
current penalty assessment process; this is the probability of detection and punishment associated
with the violation in question. Economic theory indicates that, to obtain a given degree of
deterrence, the penalty should vary inversely with the probability of detection: given two
possible violations with the same economic benefit to the polluter but where one is much less
likely to be detected than the other, the former requires a larger penalty in order to provide the
same degree of deterrence. We also return to this question in Section 6, below.

3.3. Delayed and Avoided Compliance Costs and the BEN Model

Since 1978, a key EPA objective in assessing civil penalties has been to deter violators.
The "cornerstone" of achieving this goal is to recapture the economic benefit that accrues from
non-compliance. The BEN model, first issued in late 1984, was developed to calculate the
economic benefits that result from cost-savings during the time that a facility is not in
compliance. As such, it can estimate savings from deferred capital investments in control

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equipment, deferred one-time expenditures (such as establishing accounting/tracking systems),
and reduced recurring costs of maintaining and operating control systems.

The model is simple to run, requiring the user to provide a minimal amount of information
to estimate cost-savings. Standard values, for things such as tax rates, the cost of capital, and
equipment life are embedded in the model itself (although they can be modified by the user), and
are determined by the user's response to a set of "screening questions." Since the BEN model
became a central tool in the penalty assessment process annual penalty assessments have risen
dramatically. It is not possible to entirely untangle the impact of BEN from the impact of
changes in EPA enforcement policies, but it seems apparent that it has been a factor in this
increase.

Because BEN is presently limited to calculating the difference in discounted cash flows
that result from cost-savings during non-compliance, it is not now configured to support
recapture of benefits that could result from higher revenues. Viewed as a calculator, however,
there is no inherent reason that BEN could not be used to estimate the benefits of higher
revenues. This would require construction of specific questions for the user to respond to,
parallel to the present questions that prompt the user to enter relevant information regarding
differences in costs that result from non-compliance. We suggest such questions in Section 4.5
below.

In cases where greater revenues might be a significant incentive to be non-compliant,
adding questions that would support estimation of differences in discounted net cash flows
would be useful and, in fact, critical to deterrence.

3.4 The Four Categories of Illegal Competitive Advantage

The White Paper identifies four categories of cases in which the economic gain of
noncompliance with an environmental regulation is said to go beyond the benefit of delaying or
avoiding compliance costs. It refers to these as "Illegal Competitive Advantage" (ICA). It also
provides examples and counterexamples of each category and briefly describes how the
economic gain can be calculated. The four categories of cases are:

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-	violator gains additional market share;

-	violator sells products or services prohibited by law;

-	violator initiates construction or operation prior to government approval; and

-	violator operates at higher capacity than it should have.

3.5 The Charge Questions for The Panel

The specific charge questions are:

1.	Are there categories of cases that would be useful for the Agency to consider in
calculating the ICA economic benefit, other than those that are identified in the White Paper?
Should any of these be combined?

2.	How can the Agency more accurately characterize the types of cases that are
described in the White Paper? Have any of the examples and counter-examples in the White
Paper been misidentified with regard to whether they are amenable to the BEN model's
simplifying paradigm?

3.	Are there any suggestions for modifying the described analytical approach to
calculate the economic benefits and;

4.	The Agency's proposed approach strives to avoid double-counting of the benefit
by laying out all relevant cash flows stemming from the violations, as opposed to simply adding
on the additional calculations to a BEN run. What additional measures (if any) should the
Agency put in place to avoid such potential double-counting?

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4. THE PANEL'S RESPONSES

4.1 The Economic Benefit is the Increase in Profits

The fundamental question for the determination of the economic benefit component of the
penalty is how much the profits of the firm have increased or will increase as a result of its
noncompliance. Profits can be increased either by an increase in revenue or a decrease in the
total cost of production (including abatement costs), or some combination of both. The BEN
model provides a reliable measure of the change in after-tax profit only if no other change would
have occurred that would have affected the firm's profit. This is an empirical question that should
be explored and not assumed.

The Agency's White Paper has essentially placed all of the other factors that might
influence the amount by which the violator's profit was increased by the violation in one of the
four categories under the heading of "benefit from illegal competitive activity." For several
reasons, the Panel finds that the Agency's use of the term "illegal competitive advantage" and its
identification of the four categories of ICA cases is unhelpful.

1.	It is not clear what the modifier "competitive" is intended to convey.

2.	Increases in market share will often be difficult to identify in terms of comparing the
noncompliance scenario with the counterfactual compliance scenario; and observed increases in
market share might be difficult to attribute to the noncompliance.

3.	In any case, increases in market share are not inherently valuable to the firm; what
matters is the impact of changes in market share on profits.

4.	The other categories of ICA appear to be unusual circumstances that are very context
dependent.

The Panel believes that it would be more transparent to have only two categories of benefit
from noncompliance: (i) firms experienced no revenue increase and violators' profits were
increased by the amount of the delayed or avoided compliance costs; and (ii) firms gained profits

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from increased sales. The BEN model would be applicable for those cases that fit into the first
category. For all other cases, we recommend that the Agency examine the facts of each case and
use methods and data appropriate to the case to estimate the changes in streams of revenue and/or
production costs as well as delayed or avoided compliance costs (if any). As already noted, the
Panel believes that BEN can be modified to deal with estimates of increased revenues.

4.2 Economic Benefit When Revenues Change Due to Noncompliance

When non-compliant firms do sell more than they would have if they had complied, their
economic benefit includes the profits they earn on the increased sales. A key point of potential
confusion is whether (or when) profits on increased sales should be added to avoided/delayed
costs as opposed to being a substitute measure of economic benefit.

Figure 1 illustrates the issues. The downward-sloping lines are the demand curve faced by
a firm and its corresponding marginal revenue curve. The two solid horizontal lines represent
unit costs when the firm is and is not in compliance with EPA regulations.2 QC and PC are the
profit-maximizing quantity produced and price charged when the firm is in compliance while QN
and PN are the profit-maximizing quantity and price when the firm is not in compliance. The
graph represents a case based on the implicit assumption that the violator is a monopolist or a
monopolistic competitor, and in which non-compliance lowers marginal cost and therefore causes
the firm to produce more than it otherwise would.

When the firm complies with regulations, its profits are the sum of areas A and B. When it
does not comply, its profits are the sum of B, C, D, and E. The economic benefit is, therefore, the
difference between the two, or C + D + E - A. This benefit is difficult to calculate, because all
that is observed is the actual prices and quantities (QN and PN). Calculating the true economic
benefit requires estimating the quantities that would have been produced, and the prices that
would have been charged, if the firm had complied (QC and PC).

If instead of calculating the true economic benefits to the violator, the EPA uses avoided
costs at the quantity actually produced, that measure in figure 1 would be areas C + D. This

2 The graph as drawn is based on the assumption of constant returns to scale both with and without

compliance. That assumption simplifies the graph because it implies that marginal and average cost are
equal to each other.

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1	avoided cost measure differs from the true measure by the amount A - E, and it is a general

2	proposition in economics that A is greater than E. (If it were not, a compliant firm could make

3	more profits by producing QN than QC.) Thus, using avoided costs at the actual quantity

4	produced overstates the true economic benefits of noncompliance.

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Benefits from Non-Compliance

8	Figure 1 -Benefits from Non-Compliance

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10	There are two situations in which a calculation of economic benefit based on

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12	marginal cost and therefore output is sufficiently small that the error induced by ignoring output

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effects is also small. The second is if compliance would affect fixed costs only. In that case,
compliance would leave marginal cost and, accordingly, output unchanged.

Figure 1 can also be used to analyze cases in which output would be 0 under compliance.
Imagine having QC shift to the left until it reaches the axis. (At the same time, PC would move
up and reach the intercept of the demand curve.) As QC moves to the left, areas A, B, and C
would shrink while D and E would grow. At the point where QC becomes 0, areas A, B, and C
disappear, leaving D + E as the measure of economic gain. The sum of those two areas is the
company's profits in the non-compliant activity, which at least in principle can be measured
directly. This class of cases may well represent the vast majority of cases in which cost savings is
not the appropriate measure of economic benefit. It includes those when a firm sells illegal
output. It also covers many cases involving illegal development of wetlands.

4.3. The Four Categories of Illegal Competitive Advantage

In this section we consider each of the four categories of ICA in more detail and offer
comments on the appropriate methods for estimating economic benefit.

A. Violator Gains Additional Market Share

In this case, a violator gains market share by offering a price to the market that compliant
competitors cannot match. This is possible because failure to comply lowers costs, allowing the
firm to under-cut the market price. The presumption is that a gain in market share then leads
directly to higher net revenues. Profits might not increase, however, even with higher revenues if
the non-compliant firm also experienced unexpectedly higher unit costs at a higher level of
output. This could result from overtime payroll expenses or a decline in quality control, for
example. Further, compliance costs are typically a small share of operating costs and unlikely to
support long-term under-cutting of the market price. Consequently, a case that considers only
changes in market share is not useful in determining whether there was economic gain as a result
of the violation.

Example #1 in the White paper (a firm bidding on a cost-plus contract) is highly contrived
as it brings together elements that would not generally be observed in one case. As a result of a

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cost advantage from non-compliance, a company subject, in effect, to minimum price regulation
charges a lower price than it otherwise would and obtains a contract it would not have gotten.3
The experience gained from the contract helps it get future business. The set of facts seems
unlikely because most price regulation is maximum price regulation and because price regulation
tends to arise in monopoly markets.

The discussion in the White Paper through the bottom of page 14 of how to deal with the
profits from the contract in Example #1 is appropriate. The remainder of the discussion in that
section is highly speculative because of the problems in translating increases in market share into
increases in profits. It is not likely to form the basis for practical, defensible calculations of
economic benefit.

It is of interest to consider separately the issue of a firm subject to cost-based price
regulation. An electric utility would be a possible example. If it charged a lower price as a result
of not complying with environmental regulations, non-compliance would increase the quantity of
electricity sold. Again, avoided cost would tend to overstate the economic benefit the utility
gained because it would ignore the fact that the cost-based regulation would allow the utility to
pass the cost on to customers. (In practice, prices in cost-based regulations do not necessarily
adjust immediately to cost changes. One exception, though, is fuel-price adjustment clauses,
which could come into play if a utility used a lower-cost but higher-polluting fuel source.)

B. Violator Sells Products or Services Prohibited by Law

Customers might prefer, based on correct or incorrect information, to use a product that
has been prohibited, such as leaded paint, Freon, or certain pesticides with limited legal
application. Non-compliant firms that produce or sell these products would then gain revenues by
selling products that compliant firms do not offer to their customers. Such products might well
cost more to provide, but customers might be willing to pay a higher price to obtain products that
they perceive will meet their needs better than compliant products. The economic benefit is the
profit on the sales.

"Minimum price regulation" is a price floor, meaning that a company could not charge less than the
regulated price even if it wanted to. Most price regulation, such as the regulation of public utilities, sets a maximum
or a ceiling on what price a company can charge. (Even when a regulatory agency sets an exact price that is
technically both a floor and a ceiling, the rationale is usually to prevent the company from charging more.)

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C. Violator Initiates Construction or Operation Prior to Government Approval

This case involves premature sales, which are like sales of an illegal product. The sales
are illegal in the period before the permit is obtained. The approach recommended in the White
Paper is theoretically correct but likely to be difficult to implement in full generality. In practice,
the period of time over which non-compliance has an effect should be limited. But it need not be
limited to the head-start period. For example, suppose a company begins operations 6 months
before it is allowed to and that it typically takes 1 year to attain full market penetration. The head
start would affect the level of sales up to the point when full penetration would have been
obtained under compliance. The longer the hypothesized effect, the more speculative the estimate
becomes. Attempts to link permanent changes in market share to the head start are likely to be
too speculative to withstand scrutiny.

D. Violator Operates at Higher Capacity Than It Should Have

The case hypothesizes that the company installs durable capacity that is non-compliant but
that it is allowed to use the capacity. As with example 1, the hypothesis seems contrived.
However, if such a case were to arise, it would be useful to ask whether non-compliance resulted
in sales that it could not have made legally, or could it have generated the same level of sales at
higher cost. If the sales could not have been made legally, then the economic benefit is the profits
on the increased sales. If they could, then benefit could be measured as avoided cost. The
conceptual problem with doing so is that the higher level of sales might have proven unprofitable
if the firm had to entail the costs associated with compliance.

If the firm makes sales it could not have made legally under compliance, then the profits
on the illegal sales are part of economic benefit. The White Paper is correct that BEN can be used
if there would have been a legal but higher cost way to make those sales. If an economic benefit
calculation does have these two pieces, then it is important that the avoided costs be limited to the
avoided costs of producing the output that would have been legal under compliance.

4.4. Direct Responses to Charge Questions

Our answers to the four charge questions are as follows:

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1.	Are there categories of cases that would be useful for the Agency to consider in
calculating the ICA economic benefit, other than those that are identified in the White
Paper? Should any of these be combined?

We do not think that the categories offered in the White Paper are particularly useful. In
fact we believe that they should be combined into only one category - cases where profits increase
at least in part due to increases in revenue.

2.	How can the Agency more accurately characterize the types of cases that are
described in the White Paper? Have any of the examples and counter-examples in the
White Paper been misidentified with regard to whether they are amenable to the BEN
model's simplifying paradigm?

As indicated above, we do not think that the categorization of cases in the White Paper is
useful. However, the White Paper is correct in its statements about whether specific cases can be
analyzed within the BEN framework as that calculation software is currently configured.

3.	Are there any suggestions for modifying the described analytical approach to
calculate the economic benefits and;

We believe that there is no substitute for a careful examination of the facts of each case
and the use of methods and data appropriate to each case to estimate the changes in streams of
revenue and/or production costs as well as delayed or avoided compliance costs (if any).

4.	The Agency's proposed approach strives to avoid double-counting of the benefit
by laying out all relevant cash flows stemming from the violations, as opposed to simply
adding on the additional calculations to a BEN run. What additional measures (if any)
should the Agency put in place to avoid such potential double-counting?

Every effort should be made to calculate economic advantage as avoided/delayed costs
(and therefore not to decompose the gain into separate components.) One should only resort to a
full-blown change-in-profit analysis when using avoided/delayed costs leads to a clearly
substantial overestimate or underestimate of the economic benefit. If it is necessary to do

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change-in-profit analysis, it is important that the estimate of costs under compliance reflect the
lower level of output the firm would have produced rather than the actual production of the
polluter.

4.5. Revising the White Paper

We recognize that if the foregoing recommendations are accepted, it will be necessary for
the EPA to revise the White Paper. We suggest that this be done in the following manner. The
Paper should start with the observation that the fundamental question for the determination of the
economic benefit component of the penalty is how much did the profits of the firm increase as a
result of its noncompliance. Profits can be increased either by an increase in revenue or a
decrease in the total cost of production (including abatement costs), or some combination of both.

To determine the nature of the economic gain, we propose the following screening
questions:

A. Did the violation lead to an increase in sales volume and/or revenue that would not
have otherwise occurred!

If the answer is "No," then economic gain is limited to avoided/delayed costs, and the
BEN Model can be used. If the answer is "Yes," then:

(b) Was there an increase in revenue but not in volumel (The answer to this

question is likely "No." For the answer to be "Yes," the violator would have
had to sell the same volume but charged a higher price, perhaps because the
violation was to add an illegal ingredient that made the product more effective.)

If the answer to (B) is "Yes," then the BEN model as presently configured is not
appropriate for computing economic gain. It is necessary to estimate the increase in revenues as
well as the avoided/delayed compliance cost.

If the answer to (B) is "No," then the firm must have sold units of output that it would not
have sold if it had complied with EPA regulations. As explained in Section 4.2, in such a setting

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avoided/delayed compliance cost overstates the true economic benefit of noncompliance, at least
in competitive and monopolistic markets.

It might nonetheless be appropriate to estimate economic benefit as avoided/delayed costs
if there was nothing inherently illegal about the sales themselves. To ascertain whether that is
correct, a "Yes" to (A) and a "No" to (B) should be followed by:

(c) Could the firm have made these incremental sales legally and complied with
regulations? (If the firm sold an illegal item, the answer should be "No. If the firm simply chose
a higher level of output because of its cost-savings from failing to comply, it should be "Yes".)

If the answer is "No," then the BEN model is not appropriate for computing economic

gain.

If the answer to (C) is "Yes," then in principle, use of the BEN model is inappropriate.
However, as explained in Section 4.2, if it can be assumed that the effect on marginal cost and
output is sufficiently small that the error induced by ignoring output effects is small,
avoided/delayed cost can be taken as a reasonable approximation of economic benefit.

In order for the OECA to implement our recommendations, it will have to have access to
the relevant expertise in economics. One possible source of this expertise in the Agency is the
National Center for Environmental Economics. But it might be more useful to OECA to have its
own in-house economist. This would be especially true if the agency accepts our
recommendations in Section 6.4 for rethinking the civil penalty policy.

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5. ADDITIONAL ISSUES

5.1. The Effect of Market Structure

As noted, the graphical treatment above (Figure 1) is based on the implicit assumption that the
violator is a monopolist or monopolistic competitor. The point that measures of delayed and
avoided cost overstate economic benefit when output is increased because of lower costs applies
to competitive markets as well. As with monopoly, this is true even though non-compliance
might induce it to produce additional output. The key point is that the cost of coming into
compliance at that higher level of output is greater than the profits on the increased sales.
(Otherwise, the compliant firm would have also wanted to produce that increased output.)

Whether the point is true in oligopoly is less clear. In the frequently-used Cournot model,
avoided and delayed cost on the actual level of output understates the gains companies get from
not complying. However, there are other oligopoly models, such as the Bertrand and Stackelberg
models, in which avoided and delayed costs overstate the economic benefit from non-compliance,
as is the case with monopoly and perfect competition.4 Cases might arise in which the Agency
would want to compute profits from increased sales based on an underlying model of oligopoly.
As the appropriate choice among competing models would likely depend on the details of the
violator's industry, however, the committee cannot recommend a standard approach. Any
estimate of economic gain from non-compliance based on an oligopoly model is likely to be
controversial and harder to defend in court than an estimate of avoided or delayed cost. Thus, the
EPA should only attempt such estimates when it believes that the profits on increases sales are
substantial.

4 Modeling oligopolistic markets raises fundamental issues of economic logic. In general, forcing a firm to

pay what it would have cost to comply given its actual level of output leaves it with the profits it would have
had if it complied and it chose that same level of output. If it had complied, however, it would not have
chosen that output because the profits it generates are lower than it could get with a different output. This
logic breaks down in oligopoly models in which firms make incorrect conjectures about the responses of
rivals. In the Cournot model, any one firm could make higher profits by increasing its output. A reduction
in marginal cost due to non-compliance then induces it to do what it should have done anyway - expand
output. The different result for the Bertrand model is because each firm starts by producing too much rather
than too little. A marginal cost reduction from non-compliance would cause the firm to produce still more
and move to even lower profit levels. For further discussion of these oligopoly models see one of the
standard treatises, for example Shapiro (1989) or Tirole (1988).

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5.2. Dynamic Effects

To this point, we have implicitly assumed that economic benefit from non-compliance
arises during the period of non-compliance. There are a variety of reasons, however, why non-
compliance could have enduring effects. The violator might gain customers who remain loyal.
There might be "learning curve" effects that give it strategic advantages in future periods. It
might be involved in an industry in which market saturation takes time. If non-compliance allows
it to enter the market earlier than it would have, it might move forward the entire diffusion path.

The presence of dynamic effects does not alter the point that avoided/delayed costs over-
estimate economic gains when the polluter increases sales because of lower marginal production
costs from the noncompliance. This point follows from the general logic of optimization.

Forcing the firm to pay what it would have cost to comply with regulations at its actual output
leaves it as well off as it would have been if it had chosen that output and complied. However,
the firm might have done still better by choosing a different (presumably lower) output. Thus, the
presence of dynamic effects does not cause avoided/delayed costs to understate economic
advantage.

Dynamic effects create more of a problem for profits on increased sales as a measure of
economic benefit. If the firm sells more by virtue of not complying and those sales increase
future profits, then the value of those future profits is part of the economic gain from non-
compliance. A case could arise, for example, in which a company gets an unexpectedly large
order from a valued customer. Had it anticipated the order, the company could have made the
investments needed to fill the order and comply with environmental regulations. Having not
anticipated the order, however, it must either violate environmental regulations or risk losing
subsequent business.5 One might compute the economic gain from the violation as profits on
increased sales, but the proper measure would include profits on future sales, the extent and
duration of which might be hard to measure. An easier approach might be to determine what it
would have cost to bring the plant into compliance for the level of activity that actually occurred.
(Even if the notice on the order was so short that it was not physically possible to comply prior to

5 In public comments, Jasbinder Singh, President of Policy, Planning & Evaluation, Inc. of Herndon, VA
(2004) recounted one such case to the Panel. In that case, an automobile parts paint company violated
environmental regulations while satisfying an unexpectedly large order from Chrysler. See also Singh
(1999, and 2000).

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filling the order, one might estimate the economic gain as what compliance would have cost if it
did have sufficient notice.)

5.3. Ex Ante vs. Ex Post Assessments

A conceptual issue is whether the economic benefit from non-compliance should be
measured as the benefit the violator actually realizes or the benefit it expects at the time it decides
not to comply. (In economic terminology, the former is referred to as the ex post benefit whereas
the latter is the ex ante benefit.) These can be quite different. For example, suppose a company
illegally develops a wetlands to start a business that turns out to be unprofitable. This would be
an example of case 2 in the White Paper. If the benefit is computed as the ex post profits actually
earned, the economic benefit recapture portion of the penalty would be zero. Yet, the company
presumably developed the business because ex ante it expected it to be profitable, so it did expect
to get a benefit at the time it decided to violate the law. Of course, the ex ante benefit may also be
lower than the ex post benefit. In the wetland example, this case would occur when the
development earned higher profits than expected. Enforcement personnel should avoid simply
selecting the method that results in the largest or smallest penalty.

Panel members debated whether and when ex ante penalties would be more appropriate
than the ex post version. Most members could envision cases in which an ex ante penalty would
be more desirable, either for fairness or deterrence reasons, but the panel was unable to formulate
general rules that would arguably cover all possible decision situations for EPA. Therefore, the
panel considers its advice on this subject to be in the nature of a caution to consider the possibility
that the standard ex post approach will not fit every penalty challenge that comes up.

To the extent that a violator should pay a penalty based on its expected rather than its

realized economic benefit from a violation, the panel recognizes the practical question of how to

estimate what that ex ante amount was. One possibility suggested was for EPA to base an

estimate on evidence from any business plan that justified the action taken to executives and

board. A second suggestion was to examine the average profits earned from comparable

ventures, whether or not these involved violations of environmental regulations (legal wetland

development activities, for example). Where the benefit from the violation was arguably a

reduction in risk, it could be measured in the insurance market from premiums avoided. Without

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1	knowing in advance what information will be available for an assessment of ex ante benefit, it is

2	difficult to judge the adequacy of these suggestions.

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6. TOWARD AN OPTIMAL PENALTY POLICY

6.1 Economic Theory of Optimal Penalties

As explained in Section 3.2, the EPA Penalty Policy sets the goals of fairness and
deterrence as primary objectives in the determination of a civil penalty. Here we wish to discuss
these objectives and the larger question of the approach to the determination of a civil penalty in
the light of the economic theory of "optimal" penalty, originally developed by Becker (1968) in
the context of criminal punishment, and subsequently elaborated in a large body of economic
literature applying the notion to civil penalties as well, including penalties for environmental
offenses (see e.g. Cohen, 1992 and 1999).

The economic theory of optimal penalty approaches the issue of deterrence from the
perspective of economic efficiency rather than that of fairness. This theory makes two points that
are relevant to EPA's penalty policy. The first is based on the assumption that potential offenders
respond to both the probability of detection and the severity of punishment if detected and
punished. Thus, deterrence may be enhanced by raising the penalty, by increasing monitoring
activities to raise the likelihood that the offender will be caught, or by changing legal rules to
increase the probability of punishment. And second, the economically optimal penalty balances
the harm done by an offense against the cost of deterring the offense in one or another of these
ways. This balancing leads to the conclusion that the appropriate methodology for calculating a
penalty is to charge an amount per offense equal to the (monetized) harm done divided by the
probability of punishment (see Becker, 1968).

It is worth emphasizing that this optimal penalty is based on the "harm" caused by the
offense, not the "gain" to the offender. To take a simple criminal example, if a mugger obtained
$100 in a robbery and the victim ended up spending three days in the hospital, a penalty based on
the $100 gain to the offender would surely be too low - and would "under-deter" such offenses.
In the context of environmental offenses, suppose a firm fails to install a $100 safety valve and as
a result 10,000 gallons of crude oil spill into a sensitive coastal area. The $100 "gain" to the
offender would certainly not be an appropriate starting point for a penalty. On the other hand, if
the savings due to noncompliance were large relative to the harm, a harm-based penalty would

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not deter noncompliance. But since the gain from noncompliance exceeds the harm,
noncompliance is the economically efficient outcome. Or to put it differently, if regulations were
based on a weighing of the benefits and costs, the regulation in question would not have been
adopted and the activity would have gone ahead legally.

Alternatively, if the goal is to deter every violation of the law ("absolute deterrence"),
then a gains-based penalty is appropriate. We could impose a penalty equal to the gain to the
offender divided by the probability of detection and punishment. Then it would never be in the
potential offender's interest to violate the law. Some offenses - like violent assaults and rapes -
are of this nature (economists sometimes refer to these as "unconditionally deterred" offenses) -
society would never condone these offenses regardless of the private benefit to the offender.
However, pollution is usually a byproduct of a socially beneficial activity. In the jargon of the
law and economics literature, pollution is a "conditionally deterred" offense - one that we only
want to prohibit when its social costs exceed its social benefits. If the expected penalty greatly
exceeds the expected benefit to the offender and yet the harm from the offense is relatively minor,
the result will likely be "over-deterrence." On the other hand, as suggested by the earlier
example of 'under-deterring' a mugging offense, and as Polinsky and Shavell (1994) show more
generally, if the enforcement agency underestimates the gain to the violator, that makes it more
profitable to violate the law. Thus, gain-based penalties are more susceptible to under-deterrence
than harm-based penalties, because, even if harm is underestimated, the offense is still likely to be
deterred if it is very harmful.

Thus, conceptually, if the goal of environmental policy is economic efficiency, the EPA
enforcement office should start with an examination of both the harm and the probability of
punishment. To do so would require relatively good data on both these elements - which are
difficult and sometimes impossible to quantify. We are aware that many of the statutes governing
EPA appear not to make economic efficiency the goal but rather imply a goal of absolute
deterrence of polluting activities.

The next two sections deal with each of the two components of an optimal penalty - harm
and probability of detection. Following that, we discuss the current EPA Penalty Policy that
focuses primarily on "gain" instead of "harm," and examine what features of that policy might be
improved upon.

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6.2. Quantifying Harm

If an environmental violation results in emissions levels that are beyond a legal standard,
there is likely to be some harm to natural resources or human health. Over the past 40 years,
economists have developed a variety of techniques to measure these harms in monetary terms -
including both revealed preference approaches (e.g. travel cost methodology) and stated
preference approaches (e.g. contingent valuation). The field of non-market valuation has
emerged as a major branch of environmental economics and there is a very extensive literature on
the subject. Measuring people's value for non-market items in monetary terms (e.g., measuring
what they would be willing to pay to prevent a specific harm to the natural environment) is
inherently difficult, and in practice different measurement techniques can produce different
results (this is also true of market valuation). While the methodologies are now well developed
and have been used extensively by government agencies for the cost-benefit assessment of public
investment projects, the design of public policies, and the assessment of natural resource
damages, the methodologies do continue to evolve and there is some continuing disagreement
about the relative merits of alternative approaches and their overall reliability.6 Nevertheless, the
Panel believes that the state-of-the-art in benefits estimation has progressed to the point where
EPA should seriously explore how it might incorporate "harm-based" measures into its penalty
formula, at least for some types of environmental harm.

We recognize that while some of the methods used to value environmental harm can be
employed with relatively little cost, others require significant resources. Thus, in many (if not the
majority of) cases, these methods may not be practical unless the harm (and thus expected
penalty) is extremely large. Harm-based measures might only be appropriate for a small number
of cases. But these are likely to be the cases that result in very significant and quantifiable harm.
Furthermore, since the EPA already makes extensive use of non-market valuation to assess the
efficacy of its environmental protection programs and policies, it seems to us appropriate that the
Agency should in principle be prepared to apply these same techniques, at least in some cases, to
assess the value of the damage when the environmental laws are violated.

For comprehensive presentations of the methods for valuing changes in environmental conditions,
see Freeman (2003) and Champ, Boyle, and Brown (2003).

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A possible approach would be to allow for use of "gain to the offender" in cases where
harm is not easily quantified and the cost of estimating harm is too great. This approach is similar
to that employed by the U.S. Sentencing Commission in determining the default fine tables for
organizations punished for federal crimes (USSC, 2003: Chapter 8 - Sentencing of
Organizations). However, they mandate the larger of harm or gain and specifically indicate that if
one is hard to estimate, the court may use the other.

6.3. Probability of Detection and Punishment

The probability of detection is likely to vary considerably by type of violation and even
across jurisdictions. By definition, the probability of punishment is bounded between zero and
one. Using the optimal penalty formula, this means that the optimal penalty is bounded by harm
and an infinite multiple of harm. Taking the most simplistic case of a very large oil tanker
accident, the probability of detection and punishment is likely to be one. Hence, the optimal
penalty is simply equal to the harm. This suggests that the optimal penalty for an extremely
harmful environmental violation is likely to be the monetary equivalent of harm - without
inflating the harm by a multiple. However, as the size of the harm decreases, all else equal, we
expect that the likelihood of detection also decreases.

Other factors that might influence the probability of detection and punishment are: (a)
whether or not a violator is subject to mandatory reporting that is available to the public to
scrutinize and file citizen lawsuits, (b) the ratio of facilities to inspectors in an EPA region, (c) the
strength of environmental activism in a region/state, and (d) whether or not the violator had a
history of violations and thus was subject to increased scrutiny or targeted enforcement.

An additional consideration in penalty calculations is that the offender may take actions to
reduce the likelihood of detection. For example, an oil tanker might clean its tanks far at sea to
evade detection by the Coast Guard. A firm that fails to meet permit standards might falsify
mandatory reporting records. Inspectors might be bribed or their attention diverted with false
emergencies or false leads. While these hypothetical examples are not exhaustive, they illustrate
that the EPA (and/or the Court) might ultimately determine that actions were taken to reduce the
chance of being caught or prosecuted. Those actions would lead to lower detection probabilities
and hence higher penalties under the optimal penalty framework.

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Although not widely employed in the environmental literature to date, numerous
techniques are available to estimate the probability of detection and punishment - depending
upon the circumstances. For a detailed discussion of this issue, see Parker (1989: 578-81). One
widely used method is the "time till capture" approach which is most appropriate for ongoing
violations that occur over a period of time. Nash (1991) used this approach to estimate the
probability of detection for four types of fraud violations enforced by the Federal Trade
Commission - violations of FTC orders, violations of FTC regulatory standards, Truth-in-
Lending case, and unfair business practices. Nash concluded that the appropriate multiple for this
type of regulatory violation is approximately 4.0, indicating that the penalty should be four times
the harm.

Another method - the "capture/recapture" approach has its foundation in estimating the
number of animals in a given geographic area. When there are multiple sources of detection (e.g.
government inspectors as well as private citizens monitoring self-report data), one can exploit the
fact that there is some overlap between these multiple sources. By examining how many different
offenses are observed between the two "inspectors" and how many are identical, one can estimate
the total number of offenders in the population. For example, Froehlich and Bellantoni (1981)
estimated the probability of detection for oil spills greater than 10,000 gallons was 0.87, based on
the combination of two independent sources of information. Cohen (1987: 44-5) combined this
with Coast Guard data indicating that they can identify the source of about 70 percent of spills
that are detected, to arrive at an overall probability of detection of 60 percent.

6.4. Implications for Current EPA Policy

As discussed earlier, the current EPA Penalty Policy starts with the calculation of "gain" -
i.e. estimating the amount that the offender saved by not complying with environmental
regulations, and then adds a "gravity" component based in part on the harm from the offense.
However, the policy does not provide for quantifying the "harm" in monetary terms and also
ignores any explicit consideration of the probability of detection.

Thus, an alternative approach that might be explored by EPA would be to provide for a

"base" fine that is predicated on the harm. If harm cannot be quantified, the base might either be

"gain" or a "default" fine level that is specified by type of offense. For example, EPA might

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study average natural resource damage awards by type of pollutant to arrive at an approximation
of the harm per "gallon" or per "ton" of a particular pollutant or waste. This could be
incorporated into a default harms-based fine table.

The base fine would then be multiplied by a factor that is based on the probability of
detection and a penalty being imposed.7 As discussed above, in several settings, the appropriate
probability is 1.0, or so close to that value that any difference could be ignored. Examples
include really massive oil spills, whether in coastal waters or on the open sea (where they would
most likely result from serious damage to the tanker hull), and wetland destruction for
development purposes, where the evidence is by definition permanently in place. Another
example would be self-reported violations where the violator explicitly comes forward and
announces its violation, corrects any problems, and offers to pay the appropriate penalty. In fact,
under EPA's Audit Policy, violators who expeditiously self-report and remedy a violation are
penalized on the basis of the BEN model and do not have to pay any gravity component -
effectively yielding a multiple of one. For smaller oil spills and other sorts of discharges that are
not necessarily detected automatically, Section 6.3 contains several examples and citations to the
relevant estimation literature. These techniques are not too difficult to implement, and EPA
should be in a position to gather relevant data.

The more typical regulatory violations such as exceeding a point source pollution discharge
permit can be divided into two broad classes: self-monitoring/self-reporting sources, and all other
sources. For the self-monitoring sources, if we assume honest reporting, the probability ought to
be one. But it is clear from the existence of citizen suits that state enforcement agencies lack the
resources to find and penalize many types of reported violations. (These self-reports are different
from the type of self-reported violations noted above where the offender essentially calls up the
regulatory authorities and turns himself in.) The applicable probability is therefore less than one.
How much less could be estimated by examination of the accumulated data and comparison with
the data on violations pursued, whether by the state or by an NGO. This analysis could be done
using a random sample of firms to reduce the burden of estimating the probability.8

7 This is similar to the approach taken by the U.S. Sentencing Commission (2003). Also see U.S.
Sentencing Commission (1988) for draft guidelines for sentencing organizations that more explicitly
identify harm and probability of detection as the controlling factors.

8 If reporting is not honest, the enforcement problem becomes much harder, since "audits", in the
usual sense of the word are not possible due to the ephemeral nature of the discharges. To find a
real violation when there was reported compliance would require actual monitoring at a time
coinciding with the reported compliance. The act of the monitoring, if observable by the source,

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For non-self-monitoring/reporting sources, the relevant probability can be derived from the
rate of EPA (or state EPA) inspections. Note that some estimates along these lines have been
made in the past (Russell, 1983). This could be estimated from existing EPA and state data on
regulated sources, permits, and inspections. It is not a trivial exercise and would require some
further investigation and making informed assumptions about the length of time of a typical
violation, etc. However, while the data are not perfect, neither is the need for 100% accuracy.
Instead, the goal is to arrive at some realistic estimate of the probability for various offenses that
can be applied uniformly to those offense types.

The probability of detecting RCRA offenses might be more difficult to estimate. However,
it might be possible to compare the number of known illegal dumpsites to the number of illegal
"midnight" dumpers who are convicted of those offenses. If there are two different sources (e.g.
"informants" and those identified directly through other law enforcement surveillance), one might
be able to use the "capture-recapture" method described above to estimate the probability of
detection. Alternatively, one might need to resort to a default multiple that is the equivalent of (or
higher than) other empirically derived multiples, based on the assumption that these violations are
the most difficult to detect.

Overall, for several situations that concern EPA, a probability close to or equal to one will
be appropriate. But this will not be true in general for routine point source discharge permit
violations because of the lack of effort going into monitoring, either of the discharges themselves
or of the self-reports. On the other hand, the research required to find reasonable values for the
probability for self-reporting sources by state ought to be straightforward, since the reports are
likely to be stored somewhere, and there will also be some record of enforcement actions
undertaken. For sources that do not self-monitor, the approach would be to attempt to estimate the
probability that a randomly chosen source is visited and has its discharges sampled for a period of
time that corresponds in some way to the permit terms.

It should be emphasized that what is sought here is an approximate estimate of the general
probability of detection, not a highly elaborate calculation tailored to all the specific details of the

would, one expects, eliminate the temptation to lie about the compliance state, and so, without an
informant, catching lying would be impossible, though catching violations would not. The
applicable probability for a violation would, as discussed just below, be based on the probability
with which the discharges were subject to "surprise" measurement.

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particular violation. This could well be handled in a practical manner by identifying a small
number of different types of violation, each associated with a generic estimate of the probability of
detection.

EPA's civil penalty policy currently incorporates a few features that might proxy for the
probability of detection and imposition of a penalty. Specific gravity components are (EPA, 1984:
14-15):

I. Importance of the regulatory scheme - The policy indicates that violations that are more
important to the regulatory scheme will receive higher penalties. The example given
suggests that more important violations will be harder to detect in many situations.

Thus, the fact that no warning label is contained on a product would be more important
than a warning label that was simply too small. The existence of the small warning label
makes detection easy - since the product has already been identified as being hazardous.
Whether or not this one example is illustrative and other cases are related to the
detection probability is unclear.

II. Availability of data from other sources - If a record keeping or reporting
requirement is violated and that is the only source of information, the probability of
detection is much lower than if multiple sources of the same data are available
elsewhere. Thus, this gravity component appears to be consistent with increasing the
penalty when the likelihood of detection is smaller.

Importantly, the policy also contains a provision that addresses the "general deterrent"
effect of the calculated gravity component of the penalty (EPA, 1984: 16). This provision states
that in some cases, "the normal gravity calculation may be insufficient to effect general deterrence.
This could happen if there was extensive noncompliance with certain regulatory programs in
specific areas of the United States. This would demonstrate that the normal penalty assessment
had not been achieving general deterrence." Thus, even though there is no guidance on a proper
multiple, there appears to be some understanding that detection probability needs to be taken into
account. The Panel recommends that EPA begin to study the feasibility of formalizing these

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120	concepts and providing more explicit guidance on how to calculate penalties that take into account

121	both the harm and probability of detection.9

One public commenter (Fuhrman, 2004 and 2004a) questioned whether EPA had the legal
authority to consider probability in setting penalties. But as noted in Section 3.2 above, deterrence
has long been one of the objectives of EPA penalty policy. And the probability of detection and
imposition of a penalty is a key factor in the deterrent power of a penalty policy. See also ACC
(2004) and Manufacturers Ad Hoc Group (2004).

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APPENDIX A - A MORE DETAILED DESCRIPTION OF THE SAB
PROCESS AND PANEL REVIEW PROCEDURES

This Appendix identifies process of Panel selection and formation.

A.l Request for Review and Acceptance

In June 2002, the Office of Enforcement and Compliance Assurance (OECA) had
requested that the Science Advisory Board review the OECA White Paper. After considering all
requests for 2004, the Science Advisory Board determined that the review should be conducted by
a specialized panel. The Director of the Science Advisory Board Staff Office, in consultation with
the Chairman of the Science Advisory Board, selected SAB member Dr. A. Myrick Freeman of
Bowdoin College, as chair of the Illegal Competitive Advantage (ICA) Economic Benefit (EB)
Advisory Panel.

A.2 Panel Formation

The panel was formed in accordance with the principles set out in the 2002 commentary
of the Science Advisory Board, Panel Formation Process: Immediate Steps to Improve Policies
and Procedures (EPA-SAB-EC-COM-02-003). A notice offering the public the opportunity to
nominate qualified individuals for service on the panel was published in the Federal Register on
August 6, 2003 (68 FR 46604) soliciting nominations for Panel membership and can be found on
the SAB Web site at: http://www.epa.gov/sab. Eleven individuals were considered for
membership on the panel. On the basis of candidates' qualifications, interest, and availability, the
SAB Staff Office made the decision to put 11 candidates on the "short list" for the panel. On
March 26, 2004, the SAB Staff Office posted a notice on the SAB Web site inviting public
comments on the prospective candidates for the panel.

The SAB Staff Office Director — in consultation with SAB Staff (including the
Designated Federal Officer (DFO) and the Acting SAB Ethics Advisor) and the Chair of the

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Executive Committee — selected the final panel. Selection criteria included: excellent
qualifications in terms of scientific and technical expertise; the need to maintain a balance with
respect to qualifying expertise, background and perspectives; willingness to serve and availability
to meet during the proposed time periods; and the candidates prior involvement with the topic
under consideration. The final panel includes persons with expertise in one on more of the
following areas:

(a)	Financial Economics, which includes Corporate Finance,

(b)	Economic Benefit recapture Issues,

(c)	Business/Commercial Damages, which includes Anti-trust Law, Torts, and
Economics,

(d)	Business Economics and Competitive Strategy, which includes aspects of
Statistical Decision-Making and Game Theory, as well as Competitive Effects of
Vertical Integration and Quantitative Economics, and

(e)	Industrial Organization, in the context of environmental regulations, and their
enforcement, as well as Environmental and Regulatory Economics,
Environmental Ethics and Sustainability in this context.

The Panel members include individuals who are SAB members or consultants familiar with
the Agency as well as first-time consultants. The final panel determination memo was posted on
July 9, 2004.

A.3 Panel Process and Review Documents

The Panel first met via conference call on July 12, 2004. The purpose of this public
conference call meeting was to provide background information for the Panelists on the issues in
preparation for the advisory activity. The Panelists a) discussed the charge, review and
background materials provided to the Panel, b) discussed specific charge assignments for the
Panelists, and c) advised the Office of Enforcement and Compliance Assurance (OECA) of any
specific points that need clarification for the August 5 & 6 advisory meeting. Two Panelists were
unable to attend this initial conference call meeting.

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August 5-6, 2004 face-to-face meeting was held in Washington, DC. This also was a
public meeting, and as in the teleconference call, an opportunity was provided for public
comments pursuant to and consistent with the requirements of the Federal Advisory Committee
Act (Public Law 92-463. All but one of the panelists were present at the August 5 & 6, 2004
meeting. The one unable to attend the Washington meeting was available via conference call
hookup.

Follow-up conference calls were held on September 22, and November 4, 2004 and
January 19, 2005 to prepare and complete edits to the draft Advisory. At the September 22, 2004
public conference call, the Panel discussed in a public forum, the edits that were needed on its'
internal working draft advisory. The first public draft Advisory dated October 22, 2004 was
shared with the interested public, including the Agency and discussed at the November 4, 20004
public conference call. The second public draft Advisory dated December 15, 2004 was shared
with the interested public, including the Agency for discussions to take place at the January 19,
2005 public conference call. (More details to follow, as this unfolds	KJK)

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APPENDIX B - BRIEF BIOSKETCHES OF THE ILLEGAL
COMPETITIVE ADVANTAGE (ICA) ECONOMIC BENEFIT ( EB)

ADVISORY PANEL

Dr. Dallas Burtraw:

Dr. Burtraw is a Senior Fellow at Resources for the Future. He recently served on the
National Research Council, Committee on Air Quality Management in the United States and
serves as a reviewer, National Energy Modeling System, Energy Information Administration,
(1992-present). Dr. Burtraw's areas of expertise include: air pollution, cost-benefit analysis,
electricity restructuring, regulatory design, and public finance. His research interests include the
restructuring of the electric utility market, the social costs of environmental pollution, benefit-cost
analyses of environmental regulation, and the design of incentive-based environmental policies.
His current projects include the study of integrated approaches to pollutant control in the
electricity sector and the valuation of natural resource improvements in the Adirondacks.

Recently, Dr. Burtraw analyzed the cost-effectiveness of various designs for N02 emission trading
in the eastern states and of the design for a carbon emission trading program in the electricity
sector. He also investigated the effects on electric utilities of the sulfur dioxide emissions-permit
trading program legislated under the 1990 Amendments to the Clean Air Act, and evaluated the
benefits of emission reductions resulting from the 1990 Amendments. He holds a Ph.D. in
Economics and a Master in Public Policy from the University of Michigan.

Dr. Mark Cohen:

Professor Cohen is Senior Associate Dean and Justin Potter Professor of American
Competitive Business at the Owen Graduate School of Management at Vanderbilt University. He
also serves as Co-Director of the Vanderbilt Center for Environmental Management Studies, and
as Visiting

Professor of Criminal Justice Economics at the University of York (UK). He recently
served as Chairman of the American Statistical Association's Committee on Law and Justice
Statistics and is currently a member of the Stakeholder Council of the Global Reporting Initiative.
Prior to his position at Vanderbilt, he had served as senior economist with the U.S. Sentencing
Commission. His work experiences include the Federal Trade Commission, the U.S.

Environmental Protection Agency, the U.S. Department of the Treasury, and the U.S. Senate
Banking Committee. He received his B.S.F.S. in International Economics from Georgetown
University, and his M.A. and Ph.D. in Economics from Carnegie-Mellon University. Professor
Cohen has published over 70 articles on diverse topics such as enforcement of government
regulation, law and economics, white-collar and corporate crime, and environmental management.
Some of his prior work related to the proposed panel include: the costs and benefits of oil spill
enforcement policies; analysis of EPA's penalty policy; optimal penalties for corporate crime
including environmental and antitrust offenses; the public's willingness-to-pay for crime control
policies; why firms comply (and overcomply) with environmental regulations; does it "pay" to be
green; and the effect of disclosure on environmental performance. Research grants over the past
few years include "Measuring Public Perception of Appropriate Prison Sentences" (National
Institute of Justice, 1999) and "Does It Pay to be Green? The Relationship between Environmental
and Financial Performance" (W. Alton Jones Foundation, 1996). In addition he has recently served
as a consultant to two different research projects on corporate environmental performance: (1)
University of Kansas, funded by EPA, and (2)University of Maryland, funded by NIJ.

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Dr. A. Mvrick Freeman TTT:

DR. Freeman is Research Professor of Economics at Bowdoin College. In 2000 he retired
from teaching after 35 years. Dr. Freeman received his Ph.D. in economics from the University of
Washington in 1965. He has been on the faculty at Bowdoin since that time and has served as chair
of the economics department and Director of the Environmental Studies Program there. He has
also held appointments as Visiting College Professor at the University of Washington and Robert
M. La Follette Distinguished Visiting Professor at the University of Wisconsin-Madison and as a
Senior Fellow at Resources for the Future, a research organization in Washington, DC.

Dr. Freeman's principal research interests are in the areas of applied welfare economics,
benefit-cost analysis, and risk management as applied to environmental and resource management
issues. Much of his work has been devoted to the development of models and techniques for
estimating the welfare effects of environmental changes such as the benefits of controlling
pollution and the damages to natural resources due to releases of chemicals into the environment.
He has authored or co-authored eight books including Air and Water Pollution Control: A Benefit-
Cost Assessment, and The Measurement of Environmental and Resource Values: Theory and
Methods, now in its second edition. He has also published more than 70 articles and papers in
academic journals and edited collections. Dr. Freeman has been a member of the Board on
Toxicology and Environmental Health Hazards of the National Academy of Sciences and has
served as a member of the Advisory Council on Clean Air Compliance Analysis, the Clean Air
Science Advisory Committee and the Environmental Economics Advisory Committee of the U.S.
Environmental Protection Agency Science Advisory Board. Most recently, he chaired the EPA
SAB Review Panel on UST/RCRA Benefits, Costs, and Impacts Assessment.

Dr. Jane V. Hall

Dr. Jane V. Hall is Professor of Economics in the College of Business and Economics and
Co-Director of the Institute for Economic and Environmental Studies at California State
University, Fullerton. Her current research areas are assessing the value of environmental
protection, economics of air pollution policy, natural resource scarcity, and environmental
resource scarcity and conflict. She has lectured and conducted research on the topics of energy,
sustainability, resource scarcity and conflict, benefit assessment, economic performance and
environmental regulation, economic incentives for environmental management and related topics.
She has developed positions on air quality standards, fuel composition and taxation, energy policy
as an Associate Staff Scientist with the Environmental Defense Fund and as a Special Advisor to
the Chair of the California Air Resources Board, and Deputy Assistant for Environmental
Protection to the Governor of California. She has also served as an economist with Unocal (Union
Oil Company) to assess the impact of federal and state energy policies on the economy and the
energy industry. She has published over 100 articles, books or book chapters, working papers and
presentations on the above topics. She has served as a member of the Advisory Council on Clean
Air Compliance Analysis (COUNCIL), and its Health and Ecological Effects Subcommittee, the
EPA's Children's Health Protection Advisory Committee, and a number of other advisory and
scientific bodies. She has served as a reviewer for the National Science Foundation, California Air
Resources Board Research Division, and for the following publications: Contemporary Economics
Policy, Ecological Economics, Environmental Science and Technology, the Journal of Economics
and Environmental Management, the Journal of Environment and Development, and the National
Science Foundation's Science Journal. Dr. Hall received her B. A. in Economics from the
University of Washington, her M.S. in Agricultural and Resource Economics and her Ph.D. in
Energy and Resources from the University of California at Berkeley.

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During the past five years, Dr. Hall has had research funding from the California Air
Resources Board (A Pilot Study to Quantify Health Benefits of Incremental Improvements in Air
Quality; Economic Valuation of Ozone-Related School Absences in the South Coast Air Basin;
and Innovative Clean Air Technology Assessment), the W. Alton Jones Foundation (Growth for
health: the Zero Emission Vehicle and California's Future Prosperity), Sea Grant/NOAA
(Economic Valuation of the Rocky Intertidal Zone), and the U.S. Environmental Protection
Agency and City of Houston (Valuation of Air Pollution and Health).

Dr. W. Michael Hanemann:

Dr. W. Michael Hanemann is Chancellor's Professor in the Department of Agricultural and
Resource Economics and Goldman School of Public Policy at the University of California,
Berkeley. He is Director of the California Climate Change Center at UC Berkeley. Dr. Hanemann's
research interests include non-market valuation, environmental economics and policy, water
pricing and management, demand modeling for market research and policy design, the economics
of climate change, the economics of irreversibility and adaptive management, and welfare
economics. Dr. Hanemann's recent publications have addressed the economic impact of climate
change on US agriculture, fishery management under multiple uncertainty, non-market valuation
using the contingent valuation method, the economic value of reducing asthma, and the economic
theory of willingness to pay and willingness to accept.

Dr. Hanemann was educated at Oxford University (B.A.), the London School of
Economics (M. Sc.), Harvard University, (M. A. in Public Finance and Decision Theory and
Harvard University (Ph.D. in Economics). Last October, he was awarded an Honorary Ph.D. by
the Swedish University of Agricultural Sciences. Dr. Hanemann is a member of the California
Bay-Delta Authority Drinking Water Advisory Committee. He served as Chair of the Organizing
Committee for the Second World Congress of Environmental and Resource Economists, held in
Monterey CA in June 2002. In the past 5 years, Dr. Hanemann has received research funding from
the US EPA STAR Grant Program (economic value of childhood asthma, embedding in contingent
valuation); NSF (price and non-price tools for water conservation), NOAA, MMS, the California
State Water Resources Control Board and The California Department of Fish & Game (economic
value of beach recreation in Southern California), and the California Energy Commission (climate
change policy in California).

Dr. Catherine L. Kling:

Dr. Kling is a Professor of Economics at Iowa State University (ISU) and Head of the
Resource and Environmental Policy Division of the Center for Agricultural and Rural
Development at ISU. Prior to coming to Iowa State University in 1993, she was an Associate and
Assistant Professor in the Department of Agricultural Economics at the University of California,
Davis. She has taught graduate and undergraduate courses in environmental economics,
microeconomic theory, and econometrics. Dr. Kling's research encompasses nonmarket valuation
issues in environmental economics and economic incentives for pollution control related especially
to agricultural problems. Her research has been published in a variety of economics journals
including The Review of Economics and Statistics, Journal of Public Economics, Journal of
Environmental Economics and Management, American Journal of Agricultural Economics, Land
Economics, Environmental and Resource Economics, and Ecological Economics.

Dr. Kling has also served the profession and the public sector in a variety of capacities
including her current membership on EPA's Environmental Economics Advisory Committee to the
Science Advisory Board. Current and past service includes as a member of the board of directors
and awards committee chair for the American Agricultural Economics Association, vice president

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and member of the board of directors of the Association of Environmental and Resource
Economists, associate editor for the American Journal of Agricultural Economics, and the Journal
of Environmental Economics and Management, as well as numerous ad hoc committees for the
AAEA, AERE, and other professional associations. Dr. Kling's research support has been
provided through grants from the Iowa Department of Natural Resources, the U.S. Environmental
Protection Agency, the U.S. Department of Agriculture, the California Institute for Energy
Efficiency, the Giannini Foundation, and the Sloan Foundation. Dr. Kling holds a B.A. in
Business and Economics from the University of Iowa, and a Ph.D. in Economics from the
University of Maryland.

Dr. Arik Levinson:

Dr. Levinson is an Associate Professor in the Economics Department of Georgetown
University, where he teaches environmental economics, public finance, and microeconomics, and
is Director of Undergraduate Economic Studies. He is a Faculty Research Fellow at the National
Bureau of Economic Research, is on the Editorial Council of the Journal of Environmental
Economics and Management, and is a member of the American Economic Association, the
Association of Environmental and Resource Economists, and the Association for Public Policy
Analysis and Management. Professor Levinson's research interests include the fields of public
finance and environmental economics. He has studied the theoretical welfare consequences of
states competing to attract manufacturers by enacting successively less stringent environmental
standards (a "race to the bottom"), and measured empirically the effects of interstate differences in
environmental standard stringency on manufacturer location decisions, trade, employment, and
foreign direct investment. Recently, he has written theoretical and empirical papers on the
relationship between countries' environmental quality and their incomes. He has studied the
energy efficiency consequences of apartment leases that include monthly utility costs, and he has
written about the relationship between individuals' willingness to pay for environmental quality,
household income, and national income. His research has in part been funded by the National
Science Foundation, and by the Association for Public Policy Analysis and Management. Dr.
Levinson holds a Ph.D. in Economics from Columbia University.

Dr. Clifford S. Russell:

Dr. Clifford S. Russell is Professor of Economics, Emeritus, Vanderbilt University; and
Research Associate, Bowdoin College. He joined the Vanderbilt faculty as professor of economics
and director of the Institute for Public Policy Studies in January, 1986. Before coming to
Vanderbilt, Dr. Russell was a Senior Fellow and director of the Environmental Quality Research
Division at Resources for the Future in Washington, D.C. During his 17-year tenure there, he held
several other leadership positions. He is the author and editor of 16 books and author or co-author
of 68 articles in environmental economics. His major current interest is in the systematic
examination of environmental labeling as a tool of environmental policy. Dr. Russell has served
as a member of several National Academy of Science committees, and on the Environmental
Studies Board. In 1992/93 he chaired an NAS panel evaluating the U.S. Department of Energy's
proposed system for setting clean-up priorities at contaminated nuclear weapons and research
facilities. He was President of the Association of Environmental and Resource Economists in
1993 and 1994. From December, 1996, to August, 1997, he held the Valfrid Paulsson visiting
chair in environmental economics at the Beijer Institute, part of the Royal Swedish Academy of
Sciences in Stockholm. In 2003 he held the Thomas Sowell Distinguished Visiting Chair of
Economics at Bates College. In the 1970s and '80s Dr. Russell was on the Executive Committee
of the Board of the Environmental Defense Fund (now Environmental Defense). He also served
on the board of the Tennessee Environmental Council. Dr. Russell received his B.A. in
mathematics from Dartmouth College and his Ph.D. from Harvard University, where he was a

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Harvard Graduate Prize Fellow in Economics. From 1960 through 1963, he served as a
commissioned officer in the U.S. Navy.

Dr. Michael A. Salinger:

Dr. Salinger is Professor of Economics at the Boston University School of Management.
He served as an economist in the Bureau of Economics in the Antitrust Division with the United
States Federal Trade Commission while on leave from Columbia University. At Columbia
University, he served as Associate Professor of Economics and Finance. He also was a Visiting
Associate Professor of Economics at MIT's Sloan School of Management. Dr. Salinger is on the
Editorial Boards of the Journal of Industrial Economics, and Review of Industrial Organization.
He has published on such topics as the relationship between market structure and corporate
profitability, the competitive effects of business practices (including vertical mergers and
bundling), the statistical properties of firm growth, antitrust policy, and the regulation of
telecommunication prices. His recent research has been funded by the National Science
Foundation and by Microsoft. He has served as a peer reviewer of the BEN model for the EPA.
He received his B.A. in Economics form Yale University and his Ph.D. in Economics from
Massachusetts Institute of Technology.

Dr. David Sunding:

David Sunding is a professor at the University of California at Berkeley in both the College
of Natural Resources and the Boalt Hall School of Law. He received a B.A. in Economics from
Claremont McKenna College in 1983 and his Ph.D. in Agricultural and Resource Economics from
the University of California at Berkeley in 1989. He specializes in environmental policy, natural
resource economics, land use, and law and economics. Prior to his current position, Prof. Sunding
served as a senior economist at the President's Council of Economic Advisers where he had
responsibility for natural resource and environmental policy. He currently serves as member of the
Science Advisory Board of the National Center for Housing and the Environment and is the co-
director of UC Berkeley's Center for Sustainable Resource Development.

Professor Sunding is the author of over 50 journal articles and book chapters in the areas of
environmental economics, natural resource economics, and law and economics. He has been
commissioned to write over 30 technical reports and monographs for government and private
interests. Recently, Professor Sunding's research has focused on the measurement of
environmental compliance costs, environmental regulation and processes of urban growth and
development, and the diffusion of conservation technology. Dr. Sunding has had extensive
litigation experience in the areas of compliance cost measurement, environmental remediation and
cost allocation, antitrust and unfair competition, and agricultural and natural resource markets. He
has performed economic and financial analysis relating to damage calculations, market
determination, real property valuation, antitrust and price discrimination and has testified at
deposition and trial. He has recently received grants and/or research funding from the U.S.
Environmental Protection Agency, Food Systems Research Group, California Department of Food
and Agriculture, California Department of Water Resources and U.S. Department of the Interior.

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APPENDIX - C ACRONYMS

AAEA	American Agricultural Economics Association

ACC	American Chemistry Council

ADV	Advisory

AERE	Association of Environmental Resource Economists

ALJ	Administrative Law Judges (of the U.S. EPA)

BEN	Benefits Calculation Computer Model (to calculate the economic

benefit a violator derives from delaying and/or avoiding
compliance with environmental statutes)

CAA	Clean Air Act

CERCLA	Comprehensive Environmental Response Compensation and

Liability Act

CFR	Code of Federal Regulations

COM	Commentary (U.S. EPA/SAB)

COUNCIL	Advisory Council on Clean Air Compliance Analysis (U.S.

EPA/SAB/COUNCIL)

CWA	Clean Water Act

DC	District of Columbia

DFO	Designated Federal Officer

DOI	Department of the Interior (U.S. DOI)

EB	Economic Benefit

EC	Executive Committee (of the U.S. EPA/SAB)

EEAC	Environmental Economics Advisory Committee (of the U.S.

EPA/SAB)

EPA	Environmental Protection Agency (U.S. EPA)

EPCRA	Emergency Planning and Community Right-to-Know Act

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FIFRA	Federal Insecticide, Fungicide and Rodenticide Act

FR	Federal Register

FTC	Federal Trade Commission

GM	General Management

ICA	Illegal Competitive Advantage

ISU	Iowa State University

LLC	Limited Liability Corporation

MIT	Massachusetts Institute of Technology

NAS	National Academy of Science

NCEE	National Center for Environmental Economics (U.S. EPA/NCEE)

NGO	Non-Government Organization

NIJ	National Institute of Justice

NOAA	National Oceanic and Atmospheric Administration (U.S. NOAA)

NSF	National Science Foundation

OECA	Office of Enforcement and Compliance Assurance (U.S.

EPA/OECA)

OECM	Office of Enforcement and Compliance Monitoring (U.S.

EPA/OECM)

OPA	Oil Pollution Act

QRS	Quality Review Subcommittee (U.S. EPA/SAB)

PC	Price-Compliant

PN	Price Non-Compliant

QC	Quantity-Compliant

QN	Quantity Non-Compliant

QRS	Quality Review Subcommittee

RCRA	Resource Conservation and Recovery Act

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SAB

Science Advisory Board (of the U.S. EPA/SAB)

SDWA

Safe Drinking Water Act

TSCA

Toxic Substances Control Act

UC

University of California

UK

United Kingdom

USSC

United States Sentencing Commission

USSC

United States Statutory Code

U.S.

United States

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REFERENCES

WORKS CITED:

Becker, Gary S. (1968). "Crime and Punishment: An Economic Approach." Journal of
Political Economy 76. 169-217.

Champ, Patricia A., Kevin J. Boyle, and Thomas C. Brown. (2003). A Primer on
Nonmarket Valuation. Norwell, MA: Kluwer Academic Publishers.

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Regions," in 1981 Oil Spill Conference Proceedings. American Petroleum Institute.

Fuhrman, R.H. (2004). Comments of the Manufacturers Ad Hoc Group. [Prepared by
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Fuhrman, R.H. (2004a). Comments on the Draft Advisory of the ICA EB Advisory Panel.
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Behalf of: American Chemistry Council, Corporate Environmental Enforcement Council],
November 3, 2004, 3 pages

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D.C.: Resources for the Future.

Shapiro, Carl. (1989). "Theories of Oligopoly Behavior," in Richard L. Schmalensee and
Robert D. Willig, eds., Handbook of Industrial Organization, vol 1, Amsterdam: North Holland.

Shefftz, Jonathan S., "Wrongful Profits: Setting the Record, and the Concept, Straight,"
Environment Reporter. BNA, Inc. Vol. 35, No. 1, January 2, 2004

Singh, Jasbinder, "Making Business Sense of Environmental Compliance." MIT Sloan
Management Review. Vol. 41, No. 3, Reprint 4137, Spring, 2000

Singh, Jasbinder, "Countering the Dean Dairy 'Hammer' With a Unified Theory of
Economic Benefit of Noncompliance," Environment Reporter. BNA, Inc., Vol. 29, No. 41,
February 19, 1999, pp. 2096-2101

Singh, Jasbinder, "Comments Before the Illegal Competitive Advantage Economic Benefit
Advisory Panel," Science Advisory Board, Environmental Protection Agency, August 5, 2004

Tirole, Jean. (1988). The Theory of Industrial Organization. Cambridge, MA: MIT Press.

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CITATION - - - KJK]

U.S. Environmental Protection Agency. (1984a) Policy on Civil Penalties, EPA
Enforcement Policy #GM-21.

U.S. Environmental Protection Agency. (1984b) Framework for Statute-Specific
Approaches to Penalty Assessments, EPA General Enforcement Policy #GM-22.

U.S. Environmental Protection Agency. (1984c). "Policy on Civil Penalties," February 16,
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U.S. Sentencing Commission (2003). Guidelines Manual (November).

	. (1988). "Discussion Draft of Sentencing Guidelines and Policy Statements

for Organizations," reprinted in Whittier Law Review 10(1): 7-75.

U.S. EPA. EPA GENERAL ENFORCEMENT POLICY. #GM -21, POLICY ON CIVIL
PENALTIES, Feb 16, 1984

U.S. EPA, Office of Enforcement and Compliance Monitoring (OECM), Identifying and
Calculating Economic Benefit That Goes Beyond Avoided and/or Delayed Costs. May 25, 2003

U.S. EPA, BEN User's Manual. September, 1999

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DRAFT MARCH 23, 2 005 DO NOT CITE OR QUOTE - - -

U.S. EPA, Appendix B, Penalty Provisions from Environmental Statutes, date & citation to
be provided

CASE STUDIES AND BACKGROUND MATERIALS:

Summary of Significant ICA Cases, Prepared by U.S. EPA/OECA Staff, July 26, 2004;

Ballard, Andrew, M., "N.C. Court Orders Illegal Landfill to Close; Forfeiture of Profits
Called New State Tool, " BNA, Inc No. 84, Monday, May 3, 2004 ISSN 1521-9402;

Van Hollen, J.B., U.S. Attorney, Western District of Wisconsin, Press Release Pertaining
to Gerke Excavating, Inc. of Tomah, Wisconsin, May 5, 2004;

United States of America, Plaintiff, v. MAC's Muffler Shop, Inc., and Winston McKinney,
defendant, Civil Action No. C85-138R, Unites States District Court for the Northern District of
Georgia, Rome Division, 1986 U.S. Dist. LEXIS 18108; 25 ERC (BNA) 1369, November 4, 1986,
Decided and Filed;

United States Environmental Protection Agency Before the Administrator In the Matter of:
Lawrence John Crescio, III (also known as John Crescio) Respondent, Docket No. 5-CWA-98-
004, Initial Decision, May 17, 2001;

Borden Ranch Partnership ands Angelo K. Tsakopoulos, Plaintiffs, v. Unite States Army
Corps of Engineers and United States Environmental Protection Agency, Defendants. And
Related Counterclaim., CIV. S-97-0858 GEB JFM, United States District Court for the Eastern
District of California, Lexsee 12999 US Dist LEXIS 21389, November 8, 1999, Decided,
November 8,1999 Filed;

In the Unites States District Court for the Western District of Wisconsin, United States of
America, Planitiff vs. Peter Thorson, Managed Investments Inc., Construction Management, Inc.,
and Gerke Excavating, Inc. Madison, Wisconsin, Case No. 03-C-0074-C, May 4, 2004;

In the Matter of E.I. DuPont De Nemours & Co., Inc. Respondent, United States
Environmental Protection Agency, Office of Administrative Law Judges, 1998 EPA ALJ LEXIS
129, April 30, 1998;

Garlow, Charles and Jay Ryan Article: A Brief Argument for the Inclusion of An
Assessment of Increased market Share in the Determination of Civil Penalty Liability for
Environmental Violations: Letting Corporations Share the Regulatory Burden of Policing Their
Markets, 22 B.C. Envtl. Aff. L. Rev 27, Fall, 1994;

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United States Environmental Protection Agency Before the Administrator, In the Matter of
Bretton Construction, Co., BIC Investments, Inc., and William and Mary Hammond, Respondents,
Docket No. CWA-III-096, 1994;

Agency of Natural Resources v. Richard Demo (2001-532), Entry Order 2003 VT 36,
Supreme Court Docket No. 2001-532, Appealed from Environmental Court, January 2003;

United States Environmental Protection Agency Before the Administrator In the Matter of
Campeachy Corporation Respondent Docket No. 5-IFFRA-96-017, Intitial Decision by Andrew S.
Pearlstein, Administrative Law Judge, February 25, 1999;

Borden Ranch Partnership; Angelo K. Tsakopoulos, Plaintiffs-Appellants v. Unites States
Army Corps of Engineers, Unites States Environmental Protection Agency, No. 00-15700, United
States Court of Appeals for the Ninth Circuit Court, July 9, 2001 Argued and Submitted, San
Francisco, California, August 15, 2001, Filed;

United States of America v. The Municipal Authority of Union Township, Dean Dairy
products, Inc., d/b/a Fairmont Products, Appellant, No. 97-7115, Unites States Court of Appeals
for the Third Court, March 19, 1998, Argued, July 20, 1998, Filed

United States of America, Plaintiff v. The Municipal Authority of Union Township; and
Dean Dairy Products Co., Inc. d/b/a Fairmont Products, Defendants, Civil Action No. l:CV-94-
0621, United States District Court for the Middle District of p4ennsylvania, July 10, 1996,
Decided, July 10, 1996, Filed;

Libber, Jonathan, "Making the Polluter Pay: EPA's Experience in Recapturing A
Violator's Economic Benefit from Noncompliance," date and citation to be provided

Libber, Jonathan, "Impact of One Policy Change on EPA Enforcement Actions," date and
citation to be provided

PUBLIC COMMENTS:

Comments on the December 15. 2004 Draft Advisory of the ICA EB Advisory Panel.
[Prepared and submitted by Rohert H. Fuhrman, Principal and CEO, Seneca Economics and
Environment, LLC on Behalf of and with the concurrence of the Manufacturers Ad Hoc Group,
January 18, 2005

Comments on the Draft Advisory of the ICA EB Advisory Panel. [Prepared and submitted
by Robert H. Fuhrman, Seneca Economics and Environment, LLC on Behalf of: American
Chemistry Council, Corporate Environmental Enforcement Council], November 3, 2004, 3 pages

Comments of the Manufacturers Ad Hoc Group. [Prepared by Robert H. Fuhrman, Seneca
Economics and Environment, LLC], July 22, 2004

Shefftz, Jonathan S., "Wrongful Profits: Setting the Record, and the Concept, Straight,"
Environment Reporter. BNA, Inc. Vol. 35, No. 1, January 2, 2004

Singh, Jasbinder, "Making Business Sense of Environmental Compliance, " MIT Sloan
Management Review, Vol. 41, No. 3, Reprint 4137, Spring, 2000

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Singh, Jasbinder, "Countering the Dean Dairy 'Hammer' With a Unified Theory of
Economic Benefit of Noncompliance, " Environment Reporter. BNA, Inc., Vol. 29, No. 41,
February 19, 1999, pp. 2096-2101

Singh, Jasbinder, "Comments Before the Illegal Competitive Advantage Economic Benefit
Advisory Panel, " Science Advisory Board, Environmental Protection Agency, August 5, 2004

(end of text)

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