June 01, 2017

Into the Woods: Does EPA’s Formaldehyde Rule for Wood Products Go Too Far?

Shani Harmon

In the wake of Hurricane Katrina, the health risk of formaldehyde emissions from indoor furniture and fixtures was brought to light when trailers distributed by the Federal Emergency Management Agency were found to contain higher-than-average levels of formaldehyde emissions. Formaldehyde is a chemical that is part of some resins, or glues, used in the manufacture of composite wood products, such as hardwood plywood, particleboard, and medium-density fiberboard. The U.S. Environmental Protection Agency (EPA or Agency) recently issued a rule intended to limit formaldehyde emissions from wood products, including furniture, kitchen cabinets, flooring, picture frames, and wooden children’s toys sold in the United States. Although EPA’s rule will reduce the formaldehyde emissions from wood products, EPA’s rule has some flaws. Specifically, EPA’s rule sets up a costly and complicated third-party certification system, is overbroad with respect to some of the wood products that must reduce formaldehyde emissions, and includes a vague prohibition on stockpiling wood products manufactured before the rule’s compliance deadline.

In 2007, the California Air Resources Board (CARB) took action to address indoor formaldehyde emissions by establishing the Composite Wood Products Airborne Toxic Control Measure (ATCM). In 2010, Congress amended the Toxic Substances Control Act (TSCA) and directed EPA to establish one national standard for formaldehyde emissions from domestic and imported composite wood products. Congress determined that federal action to address formaldehyde emissions from wood products was necessary. According to Congress, cheap, foreign wood products with high formaldehyde emissions were undercutting domestic producers that complied with the CARB ATCM. By directing EPA to create one national standard for formaldehyde emissions from domestic and foreign wood products, Congress aimed to level the playing field and ensure that American consumers are not exposed to high formaldehyde concentrations.

In December 2016, EPA finalized the Formaldehyde Emission Standards for Composite Wood Products (Formaldehyde Rule or Rule), largely based on the CARB ATCM. 81 Fed. Reg. 89,674 (Dec. 12, 2016). The Rule establishes emission standards for certain typically upstream, or unfinished, wood products and requires testing, third-party certification, labeling requirements, and recordkeeping by various entities involved in bringing wood products to market. EPA estimates that the cost of implementing the Formaldehyde Rule will be $38 million to $83 million per year.

EPA’s Formaldehyde Rule regulates wood composite products—including hardwood plywood, medium-density fiberwood, and particleboard—by setting emission standards and requiring testing, third-party certification, recordkeeping, and labeling to ensure that the emission standards are met.

EPA has adopted the CARB model of setting upstream emission standards for wood composite products. Under the Formaldehyde Rule, all wood composite products must meet the formaldehyde emission standards, whether in the form of a core or incorporated into a finished good. The regulatory burden of emissions testing and third-party certification falls on upstream wood product producers rather than downstream fabricators, distributers, or importers. Wood product producers must test their products quarterly and have their products certified by an EPA TSCA Title VI Third Party Certifier, a certification body approved by EPA to certify compliance with EPA’s rule. Wood product producers also must label their products with the producer’s name (or other identification), lot number, and a statement of compliance with TSCA Title VI. Additionally, wood product producers must keep records of testing, production, purchases, transport and non-complying lot information for three years.

In contrast, the compliance requirements for fabricators, distributors, and retailers under the Formaldehyde Rule are less onerous. Wood product fabricators, distributors, and retailers must keep bills of lading, invoices, or comparable documents for three years. They also must ensure that wood products are properly labeled with the producer’s name, the date the good was produced, and a statement of TSCA Title VI compliance. An exception to this general rule is that fabricators that laminate wood products with wood or woody grass veneer are required to test and certify that their products meet an emission standard for such laminates unless the fabricator uses ultra-low-emitting formaldehyde resins or no-added formaldehyde-based resins.

EPA appears to support CARB’s upstream approach to emission standards implementation based on the logic that it is more efficient to regulate the relatively few core producers than the more numerous fabricators, distributors, and retailers of wood composite products of wood products. EPA, Formaldehyde Emission Standards for Composite Wood Products: Response to Public Comments 37, Docket No. EPA-HQ-OPPT-2016-0461-0034 (July 2016), www.regulations.gov/document?D=EPA-HQ-OPPT-2016-0461-0034 (EPA Response to Public Comments). Additionally, according to EPA, wood core producers are more likely to be sophisticated members of industry than downstream buyers. EPA Response to Public Comments at 125.

Although EPA’s Formaldehyde Rule prevents the patchwork of regulation that could result from solely state action because it preempts inconsistent state law, the Rule is overly burdensome in some aspects. For example, the Formaldehyde Rule’s third-party certification program will likely be time-consuming and costly, as well as difficult to implement in some cases. Also, the upstream regulation required by the Rule has the potential to be over-inclusive, creating burdensome requirements for wood products that emit little or no emissions when in finished form.

EPA’s decision not to set a firm date for selling wood products that were manufactured before the compliance date for the Rule is an improvement on the deadlines of the CARB ATCM. The CARB ATCM set firm deadlines for selling products that were manufactured before the CARB ATCM compliance deadline and CARB had to extend the deadline for selling those non-compliant wood products. However, it is not clear that EPA provided manufacturers and fabricators enough time to begin using cores that comply with the new Rule. Similarly, it is not clear that EPA has provided enough time for the Rule’s third-party certification program to ramp up and meet the demand to certify wood products before the compliance deadline. Finally, the Rule’s provisions designed to prevent stockpiling are vague and could lead to enforcement in cases where there was no intent to stockpile.

The Pros and Cons of Third-Party Certification

When Congress amended TSCA and mandated that EPA regulate formaldehyde emissions in wood products, Congress specified that EPA’s regulation must include a third-party testing and certification program. EPA cites the WaterSense and EnergyStar programs, voluntary programs that encourage water and energy efficiency through product labeling, as precedent for EPA oversight over accrediting bodies. However, the Formaldehyde Rule appears to be the first time that EPA has relied on third-party certification as the primary means of compliance assurance for manufacturing facilities in a mandatory program. The Formaldehyde Rule’s third-party certification program may become an important test case for allowing more rules in the future to rely on third-party certification as the primary means of compliance.

In the final Formaldehyde Rule, third-party certifiers test producers’ composite wood products quarterly and perform quarterly inspections of producers’ products and records. If a certified product fails a quarterly test, certifications for all products represented by the failing sample must be suspended until a compliant quarterly test is obtained.

One major question in the design of the Formaldehyde Rule was who would qualify as a third-party certifier. At the proposal stage of the Rule, EPA suggested a third-party certification program under which accrediting bodies would apply to EPA, and would enter into a recognition agreement with EPA if deemed qualified. After being recognized by EPA, accrediting bodies would in turn approve or deny third-party certifiers’ applications for accreditation based on the requirements laid out in the Formaldehyde Rule.

EPA received numerous comments expressing the concern that having accrediting bodies review and approve or deny third-party certifier applications to participate in the EPA TSCA Title VI Third-Party Certification Program presented conflicts of interest and the potential for abuse of discretion. In response, in the final rule, third-party certifiers are now required to seek approval and recognition directly from EPA. However, third-party certifiers still must be accredited by EPA-recognized accrediting bodies to the necessary standards developed by the International Organization for Standards (ISO) and the International Electrochemical Commission (IEC), or be approved by CARB or another EPA-approved accrediting body before applying to EPA to be a third-party certifier for the EPA TSCA Title VI Third-Party Certification Program.

It is unclear how many third-party certifiers will be accredited and approved by EPA to participate in the certification program when the requirements first come into effect. Third-party certifiers would need to be approved well in advance of the December 12, 2017, compliance date for manufacturers. EPA aligned, to the extent practicable, the EPA TSCA Title VI Third-Party Certification requirements with those in the CARB ATCM to avoid placing differing or duplicative requirements on the regulated community. Consequently, there are some third-party certifiers accredited by CARB that likely will have received approval to participate in the EPA TSCA Title VI Third-Party Certification Program before the compliance date. Even if the accreditation and EPA approval process for third-party certifiers is burdensome, it is likely that there eventually will be enough third-party certifiers to meet wood product producers demand. Because the certification is mandatory under the Rule, third-party certifiers are guaranteed a steady flow of customers.

Although third-party certification will increase the cost of producing wood products for some manufacturers, it does have advantages as a means of ensuring compliance. First, third-party certification has been shown to be a more reliable means of assessing compliance than self-certification. In 2010, the Government Accounting Office’s (GAO) investigation of the Energy Star program concluded that its self-certification design was vulnerable to fraud and abuse. GAO, Covert Testing Shows the Energy Star Program Certification Process Is Vulnerable to Fraud and Abuse, GAO-10-470 (Mar. 2010). Specifically, GAO obtained Energy Star certifications for 15 fictitious products, including a gas-powered alarm clock. EPA remedied Energy Star’s compliance issues by requiring third-party certification for all products, rather than the less onerous option of limited third-party verification checks.

More recently, EPA and states have taken enforcement action against Volkswagen for installing “defeat devices,” any device or software that bypasses, defeats, or renders inoperative a required element of the vehicle’s emissions control system on its vehicles. EPA’s vehicle emissions testing program relies on self-certification as its primary means of compliance. EPA randomly verifies the emissions of 10 to 15 percent of vehicles. EPA’s spot verification of vehicle emissions did not uncover Volkswagen’s misrepresentation of its vehicles emissions. Rather, it was independent analysis by researchers at West Virginia University, working with the International Council on Clean Transportation, that revealed Volkswagen’s defeat device and resulting vehicle emissions in excess of EPA’s standards. U.S. Dep’t of Justice, Office of Public Affairs, Volkswagen AG Agrees to Plead Guilty and Pay $4.3 Billion in Criminal and Civil Penalties; Six Volkswagen Executives and Employees are Indicted in Connection with Conspiracy to Cheat U.S. Emissions Tests, Justice News (Jan. 11, 2017), www.justice.gov/opa/pr/volkswagen-ag-agrees-plead-guilty-and-pay-43-billion-criminal-and-civil-penalties-six. Thus, it appears that third-party certification would be a fairly reliable means of ensuring compliance with the Formaldehyde Rule. Further, the Formaldehyde Rule’s requirement that wood product manufacturers make their testing records available to direct purchasers could be a means of detecting noncompliance when third-party certification alone fails to induce compliance.

Third-party certification is also preferable to the bottleneck that would result if EPA directly certified all wood products. Given EPA’s limited resources, the Agency would not be able to certify wood products in a timely manner, resulting in a regulatory bottleneck in the wood product supply chain.

Another potential complication in the implementation of the Rule’s third-party certification program is how the accreditation process will work for accrediting bodies and third-party certifiers in foreign countries. In the preamble to the final Formaldehyde Rule, EPA states that because many accrediting bodies and the entities they accredit are not located in the United States, it is necessary for accrediting bodies to enter into a recognition agreement with EPA to ensure proper EPA oversight of its regulatory program. 81 Fed. Reg. at 89,692; 40 C.F.R. § 770.7(a), (b). Accordingly, foreign accrediting bodies would need to apply to EPA to participate in the EPA TSCA Title VI Third-Party Certification Program and then, if approved, enter into a recognition agreement with EPA. Foreign accrediting bodies would also need to designate an agent for service in the United States—a requirement that is not part of CARB’s program.

EPA’s oversight of foreign accrediting boards may be complicated by the fact that some of these boards are not private organizations, but rather are government or quasi-government entities that may not be receptive to EPA oversight or want to invest in EPA’s certification program. Further, some countries may not have accrediting bodies. EPA has tried to accommodate some of these possibilities by allowing third-party certifiers to request accreditation in another European Union member state in cases where no national accreditation body exists, the body does not offer the requested service, or where it has not received a positive result in peer evaluation in relation to the wood product certification program for which accreditation is requested.

Another challenge in implementing the Formaldehyde Rule’s accreditation program internationally is that the formaldehyde standards for wood products are different in foreign countries. Canada, Australia, Japan, and European countries have their own regulations governing formaldehyde emissions from wood products that differ from the United States’ regime. EPA has shown no interest in harmonizing its formaldehyde regulations with those of other countries or working toward an international standard for formaldehyde emissions from wood products. This has created a patchwork of regulation of formaldehyde emissions for wood products at the international level, which is problematic because the production and supply of wood products crosses many countries’ boundaries. Accrediting bodies; third-party certifiers; and wood product producers, fabricators, and importers will have to decide whether the costs of complying with EPA’s program are outweighed by the benefits of doing business in the United States. Though Congress intended to prevent foreign companies from flooding the U.S. market with wood products with high levels of formaldehyde, the unintended effect could well be to shut out foreign wood products that do not have high formaldehyde emissions from the U.S. market.

The Formaldehyde Rule Is Over-Inclusive

When Congress amended TSCA and directed EPA to issue a rule limiting formaldehyde emissions from wood products, it was clear that Congress intended to reduce the exposure of end-use consumers of wood products to formaldehyde emissions. To that end, the statute directs EPA to establish a formaldehyde emission standard for wood products regardless of whether the composite wood product is in the form of an unfinished core or incorporated into a finished good. EPA has interpreted this to mean that the Agency may set emission standards exclusively for unfinished wood products, regardless of whether the wood product is later incorporated into a finished wood product.

As some commenters to the proposed rule pointed out, EPA’s interpretation that all unfinished wood products must meet an emission standard regardless of how the product is finished has the potential to be over-inclusive. As EPA acknowledges in its response to comments, evidence in the record shows that, in most cases, finishing a wood product reduces the formaldehyde emitted from the product. For example, CARB has found that applying stain to unfinished wood products reduces formaldehyde emissions. Consequently, some wood products that would meet the Rule’s emission standards in finished form are nonetheless required to make modifications to the core of product because the unfinished core does not meet the Rule’s emission standards. EPA states that the Agency decided not to take this barrier effect into account when developing the Rule because EPA is concerned that the barrier effect could become ineffective and formaldehyde emissions could increase over time. For example, if the stain of a wood product is scratched or damaged, the formaldehyde emission could conceivably increase.

Rather than rule out the possibility of some wood products demonstrating compliance with emission standards in finished form altogether, a better policy may have been to allow wood product producers and fabricators to petition EPA on a case-by-case basis for a testing variance to allow a wood product to comply in finished form. This regulatory flexibility is consistent with the text of TSCA and Congress’s intent. Such a testing policy could provide EPA with the data that it lacks regarding the efficacy of the barrier effect. Moreover, such a policy could drive innovation in wood finishing and accommodate a variety of manufacturing scenarios.

EPA’s Sell-Through Provisions Are an Improvement on the CARB ATCM Approach

In the Formaldehyde Rule, EPA set a date by which all new wood products that are manufactured must be compliant with the Rule’s requirements. In other words, the cores of wood products must meet EPA’s emission standards and testing, certification, and labeling requirements by a “manufactured by” date. Any cores that are manufactured before this “manufactured by” date can still be sold even though they do not meet the Rule’s requirements. Unlike the CARB ATCM, which set a deadline for selling noncompliant wood products, EPA’s rule allows fabricators, retailers, and distributors as much time as they need to finish and sell their noncompliant inventory.

EPA’s approach of setting a deadline for new cores to be compliant is preferable to setting a hard deadline for selling off inventory predating the requirements of the Rule because there may be slow turnover of preexisting inventory. As one commenter on the proposed rule explained, it may take eight years from the time a core is manufactured until the end-consumer is sold a finished wood product. As a result, CARB has had to extend its sell-through dates multiple times. Nevertheless, EPA’s sell-through provisions present some challenges to manufacturers and importers in particular.

In the final Rule, EPA set a “manufactured by” date of December 12, 2017. Under TSCA, EPA could set the “manufactured by” date no earlier than 180 days after the promulgation of the final Formaldehyde Rule. EPA concluded that one year is enough time for manufacturers to run through their stock of cores that do not meet the Rule’s emission standards, which was disputed by some members of industry in comments on the rule.

For importers, the requirement to use compliant cores takes effect even sooner than one year as a result of the way EPA interprets “manufactured by.” According to EPA, because the term “manufacture” means manufacture and import under TSCA, noncompliant cores must be manufactured and imported to the United States before December 12, 2017, in order not to be subject to the requirements of the Rule. Consequently, importers of wood products are at a competitive disadvantage in selling off their noncompliant inventory.

Uncertainty in the Enforcement of the Prohibition on Stockpiling

The general rule that manufacturers, fabricators, retailers, and distributors can sell off their noncompliant stock of wood products assumes that such entities have not been stockpiling noncompliant wood products to delay or avoid complying with the Formaldehyde Rule. TSCA directs EPA to prohibit the sale of inventory that was stockpiled. TSCA defines stockpiling as manufacturing or purchasing wood products between the date the statute was enacted and 180 days following the promulgation of the Formaldehyde Rule at “a rate significantly greater” than the rate during a base period to be defined by EPA.

In the Rule, EPA clarified that the base period is calendar year 2009. Under TSCA, the base period is required to end before July 7, 2010, the date that Congress amended TSCA and directed EPA to issue regulations addressing formaldehyde emissions from wood products. EPA’s selection of the full calendar year closest to the date that Congress amended TSCA is a reasonable choice for a base year that provides regulatory certainty. However, in selecting 2009 as the baseline year, EPA was required to develop a policy for entities that did not exist in 2009. Under the Rule, if an entity was not in existence at the beginning of calendar year 2009, no baseline exists for production or purchases for the company. It is unclear how EPA will assess whether such companies are stockpiling.

EPA has defined “significantly greater” as a 20 percent increase in manufacturing or purchasing with an intent to circumvent the Rule’s emission standards. EPA acknowledges that there will be instances where a company has increased its manufacturing or purchasing of composite wood products by more than 20 percent without intent to circumvent the Rule’s emission standards. For example, a more than 20 percent increase could result from an immediate increase in customer demand or sales, or a planned business expansion. Therefore, the 20 percent number is not intended to be the basis of a presumptive finding that stockpiling has occurred. Rather, it is a “safe harbor” below which EPA will assume no stockpiling has occurred. According to EPA, entities that have experienced a 20 percent increase in manufacturing or purchasing of regulated composite wood products will not be found to have stockpiled unless evidence exists indicating that the increase was to circumvent the emission standards.

In determining whether an entity has a 20 percent increase in manufacturing or purchasing of regulated composite wood products, EPA states that it will compare the production or purchasing in annual year 2009 to the production in the annual year the stockpiling is alleged to have taken place, not an average of several annual years. EPA recognized that an entity with low annual purchasing or manufacturing in the year that the regulations are finalized could obscure a small amount of stockpiling in the final month before the emission standards became effective. Nonetheless, EPA does not believe it is appropriate to compare manufacturing and purchasing rates on a monthly basis because of seasonal shifts in purchasing and production.

It remains uncertain what, in EPA’s view, constitutes an intent to circumvent the Rule’s emission standards. The standard is vague and likely will be difficult to enforce. But this impediment to enforcement may not be problematic for EPA. As a practical matter, EPA does not anticipate it will be required to undertake a significant amount of enforcement related to the ban on stockpiling. EPA believes that there is little incentive to stockpile noncompliant products because most businesses are already meeting the Formaldehyde Rule’s emission standards because they are compliant with CARB’s emission standards. EPA Response to Public Comments, supra page 26, at 150. Moreover, EPA believes that the costs associated with storage of noncompliant products for an extended period of time will deter stockpiling. Id. However, EPA does acknowledge that manufacturers of wood products that do not do business in California may not already be compliant with the Formaldehyde Rule’s emission standards and could benefit from flooding the market with noncompliant and potentially high-emitting products shortly before the effective date of the regulations. Id.

In summary, EPA’s Formaldehyde Rule achieves the goal of reducing the exposure of end-use consumers of wood products to formaldehyde emissions. A primary criticism of the Rule is that it goes too far in at least one aspect: regulating products that likely do not pose a risk to end-use consumers. EPA has a rational argument that the over-inclusiveness that results from the upstream regulation is justified because, in the case of the wood products industry, regulating upstream is more efficient than regulating downstream. Nonetheless, it is not clear why EPA has not provided more flexibility to wood product manufacturers and fabricators with regard to testing and certification variances. The biggest challenges for EPA appear to lie ahead, in the implementation of the Rule. As manufacturers rush to test and certify their products by the end of the year, it will quickly become evident if EPA’s third-party certification program is an impediment to business and if EPA’s compliance timeline is too ambitious.

Shani Harmon

Ms. Harmon is an associate at Orrick, Herrington & Sutcliffe in Washington, D.C. She may be reached at sharmon@orrick.com.