The cost of deception has reached new heights in a settlement Volkswagen reached with the U.S. and California regulators on June 28 to fix or buy back diesel autos that were programmed to fudge standard pollution emission tests.
Original estimates of the cost to VW of building an emission test “defeat device” into its diesel cars was originally about $10 billion, but now that number has grown to $15 billion.
The settlement, which was reached by the automaker, the Justice Department, the Federal Trade Commission and the Environmental Protection Agency, along with the California Air Resources Board, requires the company to buy back or fix all of its 4-cylinder diesel cars made since 2010.
Volkswage’s fortunes began to unravel on September 18, 2015 when emissions testers decided to see how the company’s highly-touted clean diesel engine would fare in a real-world driving test rather than in the static test normally used for emissions testing. What they found shook the automotive world.
Diesel VW cars emitted up to 40 times more pollutants, mainly oxides of nitrogen, than were allowed under U.S. law during the real-world driving tests. It turns out that VW engineers had programmed the vehicles so that their emissions computer could detect when the car was being tested for emissions and when it was not. To do that, the car’s computer checked to see if the front drive wheels of the cars were turning when the others weren’t.
Because emissions testing takes place in a static environment where the car wasn’t actually moving, the computer then enabled the full emission controls for the duration of the test. The rest of the time, the computer turned them off. This allowed VW to give owners a vehicle that performed well, but which would still pass emissions tests. The problem was, it couldn’t do both at the same time.
Volkswagen admitted its error almost immediately. Diesel VW cars were pulled off the market in the United States and current owners learned their cars had diminished in value by nearly half. Meanwhile those cars were emitting pollutants far in excess of what the law allowed.
Ultimately, there are only two solutions. The first is that VW can buy the cars back from those owners and take them off the roads. The second is that the company can fix the cars so that they meet requirements.
Buying back the cars is something that VW can do, but it’s expensive. Fixing the cars is possible for newer versions, but may not be possible for older diesel Volkswagen because they lack the pollution-management hardware that the newer vehicles have.
For the newer cars, the fix is fairly straightforward. VW engineers need to update the software to remove the deceptive engine test configuration. This will probably make the cars less fuel efficient and produce less power. They will use more of a special urea solution that cleans up diesel exhaust, but at least they will run. For them, all that’s necessary is a software update.
Volkswagen to Pay Heavy Price for Diesel Auto Computer Trickery
For older cars, the fix would require installation of emissions control equipment, perhaps including the urea system. That might not be possible and even if it is technically possible, it might not work well. In any case, it’s a lot more than just new software.
The FTC, meanwhile, recognizing the difficulty for Volkswagen owners, required restitution that would help compensate them for the diminished value of their cars, and for the future cost in performance. The restitution formula is fairly complex, and it varies depending on the vehicle and mileage, but it ensures that owners will receive compensation of $5,000 to $10,000 per car.
At this point, the settlement is still in the proposal stage, which means that the federal judge overseeing the government’s litigation has to approve it. Then the parties involved need to start implementing the process of buying back cars and making compensation payments. At this point, it’s not clear whether Volkswagen’s proposed fix to the diesel emissions will be approved by the EPA and until it is, fixing the cars isn’t an option.
For Volkswagen, it presents a massive financial and administrative problem that will only get worse when the buybacks begin. While VW can repair the cars it buys back, it must do so in a manner approved by the EPA. Until then, the company can salvage the cars and sell parts, but that’s all. They can’t be exported to places where air pollution regulations are more lax because the EPA requires the cars to be repaired to meet U.S. emissions standards before they can be exported.
For owners, the pain will continue for a while. The earliest that buybacks can begin is October 2016, and it may take longer than that, but it doesn’t end there.
Criminal probes have begun in the U.S. and Germany. VW is required to take action to offset the pollution it’s already allowed. The company must implement new service and warranty coverage for people who keep their diesels.
Other repercussions will continue indefinitely as well. Volkswagen may not be able to start selling diesel cars in the U.S. Diesel cars from other companies including BMW and Mercedes Benz will operate under a cloud of suspicion, even though they’ve been found in compliance with diesel emission regulations.
It’s hard to understand why a global industrial giant like Volkswagen decided that it was a good idea to use a bit of clever programming to deceive U.S. regulators and car buyers under the foolish assumption it would never be discovered.
As a result, Volkswagen stockholders are hurt. People who have breathed dirtier air are hurt. There’s more pain and expense yet to come and it’s likely that criminal prosecutions are in the future of the responsible executives and engineers. It’s questionable whether Volkswagen’s market reputation will ever recover and the enormous expense will drag down the company’s growth and earnings for years.
All of this happened over a chunk of computer code that surely could have been fixed anytime over the past six years, but now it’s a $15 billion chunk of code.