Volkswagen’s Dieselgate pain looks unlikely to be coming to an end, despite the imminent rubber-stamping of a multibillion-dollar compensation deal in the US.
The emissions cheating scandal broke on 18 September last year, when Volkswagen was found to be using a ‘defeat device’ on some of its diesel engines that could detect when they were undergoing a laboratory test and switch to an engine management program that minimised NOx emissions.
The US’s powerful Environmental Protection Agency (EPA), which discovered the deception, explained at the time: “VW manufactured and installed software in the electronic control module (ECM) of these vehicles that sensed when the vehicle was being tested for compliance with EPA emissions standards.”
Within a week of the EPA’s notification to Volkswagen about US-sold models, the company admitted that 11 million cars worldwide had been fitted with defeat devices (scroll down for timeline).
At the end of last month, reports from Germany said the Federal Financial Supervisory Authority was considering criminal charges against the entire Volkswagen board. At the very least, another massive fine is looking likely — and that’s on top of the huge sum being paid out in the US.
The EPA only regards the US-market deal as a partial settlement, and the fine detail of it is daunting. VW has until June 2019 to remove 85% of the offending 2.0-litre diesel vehicles from US roads, or come up with an acceptable fix for the engine’s excessive pollution. That fix must reduce NOx emissions by 80-90%.
Volkswagen must also offer to buy back the offending cars “at fair cost” or end lease deals at no cost. Buy-back cars can only be exported from the US if any emissions fix is successful. If not, they must scrapped or recycled. Some of the owners are “also entitled to additional compensation in connection with the buy-back or lease termination of vehicles”, according to the EPA.
In addition, VW has to pay £2bn into a mitigation fund, which will be used for offsetting the extra NOx emissions caused by the affected cars through investments such as buying electric school buses. It must also invest £1.5bn in “charging infrastructure and the promotion of electric vehicles”: £600m in California and £900m across the rest of the country.
This partial settlement only covers 44 US states. Talks with New York, Maryland, Pennsylvania and Massachusetts are set to get under way before 1 November.
As daunting as the EPA deal might seem, as the Wall Street Journal recently pointed out, of the 11 million VW Group cars fitted with the defeat device, just 600,000 were actually sold in the US.
The remaining 10.4m vehicles were sold across the rest of the world. However, according to the Wall Street Journal, a rising tide of claims, prosecutions and court judgments are shaping up to significantly increase the final cost of the deception to VW.
South Korea banned the sale of Volkswagen and Audi models in July and there are said to be pending legal moves against the firm in at least another 10 countries.
VW has only just reached a settlement with a US dealer group which had attempted to sue the car maker for, among other issues, a “loss of franchise value”. According to dealers’ representatives, the deal included “cash payments and additional benefits”.
One of the largest pension funds in the US, run for Californian teachers, is also said to be considering action against VW.
As Autocar reported in July, new VW Group boss Matthias Müller told German newspaper Welt am Sonntag that offering a US-style compensation and buy-back deal to European owners would simply sink the company. “You don’t have to be a mathematician to realise that compensation at arbitrarily high levels would overwhelm VW,” he said.
Müller’s argument was that because the US pollution laws were much stricter than European laws, affected diesel models sold in the US couldn’t undergo the ‘quick fix’ approved for European cars.
In any case, it appears that German political pressure will be brought to bear within the EU to prevent VW from suffering a full-scale buy-back or compensation scheme.
But Müller’s admission that its then-new EA189 commonrail diesel engines couldn’t be made to meet US — and particularly Californian — clean air regulations was a remarkable acknowledgement of the scale of VW’s deception.
VW didn’t just use software designed to ‘sense’ when a oratory test was taking place; it also heavily advertised its post-2009 diesel engines as ‘Clean Diesel’ in the US. That VW engineers had achieved this on some models without using urea injection systems to reduce the amount of NOx in exhaust gases was not questioned by anyone at the time. Ironically, it was doubts about the real-world NOx emissions of all diesel vehicles in the US that led to the uncovering of VW’s deception.
Concerns about the difference between the levels of pollution emitted during lab tests and realworld driving conditions were raised in the industry some years before. Finally, the International Council on Clean Transportation (ICCT) — an independent, non-profit environmental regulation research body — carried out its own detailed real-world testing of diesel vehicles, using both Euro 6 and the US ‘Tier 2 Bin 5’ regulations and made possible by the development of the Portable Emissions Measurement System (PEMS). The ICCT released a white paper in October 2014 with the test conclusions.
Although the cars tested remained anonymous, only one car met the Euro 6 pollution limits in real-world conditions. The average across all the cars tested was NOx emissions “seven times the certified limits for Euro 6”, according to the ICCT.
At around the same time, the ICCT granted scientists at West Virginia University £38,000 to study the realworld emissions of diesel vehicles. The three models tested were a Volkswagen Passat, a Volkswagen Jetta and a BMW X5.
Extensive road testing by the university team found that the two VWs emitted significantly more NOx in real driving conditions than they did when tested in approved laboratory conditions.
US rules specify a NOx emissions limit of 0.043g/km. Tested in a lab, the Jetta achieved an impressive 0.022g/km. Using the PEMS equipment, Jetta NOx emissions on the road varied between 0.61 and 1.5g/km. Even the Passat, equipped with urea injection, had real NOx emissions figures of between 0.34 and 0.67g/km.
However, despite the weight of scientific analysis expended on the VWs, the nature of the deception wasn’t uncovered by either the university or the ICCT.
As early as May 2014, the EPA was demanding answers from VW. The firm reportedly claimed it had discovered “technical glitches” in the management of the diesel engines in question and suggested a software patch. When this patch made no difference, the EPA threatened to refuse to certify VW’s 2016-model-year diesel vehicles.
Only then did Volkswagen admit to the embedded ‘cheat’ software. Reports suggest that VW finally explained how it worked as late as 3 September last year.
Then, on 18 September, the EPA issued a ‘Notice of Violation of the Clean Air Act’, alleging that “modelyear 2009-2015” VW and Audi cars with the 2.0-litre four-cylinder diesel engine included “software that circumvents EPA emissions standards for nitrogen oxides. This software is a ‘defeat device’ as defined by the Clean Air Act”.
On the morning of 18 September, VW’s share price stood at €162.40. Over the next five days it took a nosedive to ¤106, at which point Martin Winterkorn stepped down as VW Group CEO. The share price bottomed out on 2 October at just €92.36.
But things got worse. The EPA issued a second Notice of Violation to VW and Porsche on 2 November last year, alleging that they had also “developed and installed a defeat device in certain light-duty diesel vehicles equipped with 3.0-litre engines for model years 2014 through 2016 that increases emissions of NOx up to nine times EPA’s standard”. Seventeen days later, VW admitted the cheat software had been fitted to V6 diesel engines since 2009.
By 29 September VW had announced that it would recall nearly 8.5m EA189 diesel-engined models across Europe for modifications, despite insisting that the cheat software was not needed to pass Euro 5 tests.
By the time Volkswagen UK boss Paul Willis appeared before the transport select committee on 12 October, VW had announced a new strategy that would place a bigger emphasis on EVs and hybrids, more petrol engines for smaller cars and a switch to urea injection for diesel engines.
This summer VW revealed its ‘electric strategy’ — a promise of 30 new EVs by 2025 and a new, dedicated MEB electric platform. But only in the past few weeks has the ‘fix’ for the EA189 started to roll out in the UK.
The sequence of events will be examined by business students for years to come. So far, it appears that the scandal has not seriously damaged VW brand sales. In the first six months of this year, global sales were down just 0.9% on the same period last year, at 3.37 million units.
There’s no doubt that the final cost of the scandal will be crushing for VW. It has already put aside £13.6bn to cover the costs of its cheating, with £9.62bn of that already allocated in the US. But there is more to come and many other legal actions to be fought across the rest of the globe.
Dieselgate: the timeline
18 September 2015
VW announces recall of 482,000 cars in the US after it is caught using software to cheat emissions tests.
VW admits 11 million cars worldwide are fitted with defeat devices. A day later, boss Martin Winterkorn quits, saying he is “not aware of any wrongdoing” on his part.
Almost 1.2m VW Group diesel cars in the UK are revealed to be affected. By mid-October, a Europe-wide recall of 8.5m cars is announced.
3 February 2016
New real-world emissions testing plans are given the go-ahead by the European parliament. They are set to replace laboratory tests by the end of 2017.
VW admits that Winterkorn was aware of NOx irregularities on the EA189 diesel engine in 2014, but it denies shareholders were misled by withholding the information until September 2015.
The British government says it has not uncovered any evidence that manufacturers other than the VW Group have used defeat devices.
Germany’s financial watchdog urges prosecutors to investigate the entire former board of VW over the time it took to disclose the cheating, including current boss Herbert Diess.
German media reports that VW is holding its stance on no compensation for European owners of affected cars, despite heavy campaigning.
Preliminary approval is gained for VW to provide a $14.7bn settlement to affected owners in the US. Final approval is due on 18 October.
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