The merits of in-kind settlements for environmental violations

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How to punish corporate environmental violations: The merits of in-kind settlements

Court cases for corporate wrongdoing often result in a defendant undertaking an in-kind punishment in lieu of a cash penalty.1 In the US, in-kind settlements have long been used in environmental enforcement actions under the Environmental Protection Agency (EPA)’s Supplemental Environmental Projects Policy, with a stated goal of addressing environmental justice concerns in communities with low incomes and a high share of minorities. The policy allows defendants to reduce the assessed cash penalty for violations of environmental statues by volunteering environmentally beneficial projects in the location of the violation. While the OECD has encouraged more countries to adopt the US model (OECD 2009), recent changes in the US have restricted the use of in-kind settlements (US Department of Justice 2020). The implications of in-kind settlements are not straightforward, yet policies on their use are being made in the absence of any quantitative analysis. 

In-kind settlements have the advantage of being able to target goods to a particular group, similar to in-kind benefit transfers, such as food stamps or housing assistance (Currie and Gahvari 2007), or to earmarking and placed-based policies (e.g. Siegloch et al. 2021, Ku et al. 2020).  In the context of US environmental enforcement cases, in-kind settlements constitute the only instrument to direct resources raised through corporate penalties to communities that are victims of corporate violations.2

Targeting is further pronounced in the case of Supplemental Environmental Projects through the EPA naming environmental justice as a critical factor to evaluate in-kind settlements.3 However, whether or not such provision can effectively promote more in-kind settlements in communities subject to EJ concerns is not obvious ex-ante, since the actual allocation is ultimately left to the negotiations between defendants and the EPA, with input from communities.  The correlation of pollution and socioeconomics has been well documented (for reviews, see Mohai et al. 2009, Banzhaf et al. 2018 and Banzhaf et al. 2019) but policies to combat environmental injustice directly, including the EPA’s Supplemental Environmental Projects, have been so far little studied.4  

In-kind settlements have also a dynamic feature that makes them unique from targeting and placed-based policies. One goal of penalties is to be punitive, in order to deter future violations. As observed in Armour et al. (2016), reputational sanctions following an enforcement action can be far more punitive than the monetary penalty per se. In-kind settlements, by providing some benefits to the firm in the form of improved reputation, may ultimately result in diminished deterrence. On the other hand, in-kind settlements could result in increased environmental quality if they improve firms’ goodwill, provide more incentives for communities to monitor and report violations, or enhance capital upgrades (Supplemental Environmental Projects can include the purchase of equipment for environmental improvements).

In a recent paper (Campa and Muehlenbachs 2021), we use the history of US federal environmental cases between 1997 and 2017 to estimate the implications of in-kind settlements for firms and communities. 

Every year around 5,000 cases are brought against defendants for violating federal environmental statutes, such as the Clean Air Act and the Clean Water Act. In the settlement of these cases, the EPA gives defendants the opportunity to volunteer environmental projects, which have to go above and beyond what would be legally required of the defendant.  These projects span a wide array of interventions including, for example, lead abatement, retrofitting school buses, emergency equipment for the local fire department, as well as upgrades at the violating facility.

Our study of the location of Supplemental…



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