Unravelling VW scandal

Since 2009, Volkswagen has installed software in 482,000 “clean diesel” vehicles sold in the US, so the cars’ pollution controls only worked when being tested for emissions. The rest of the time, the vehicles could freely emit hazardous compounds.

On September 18, the Environmental Protection Agency (EPA) in the States announced VW had violated the Clean Air Act. Not only did the EPA order the marque to fix the affected vehicles, which include diesel TDI versions of the Golf, Jetta, Beetle, and Passat, but the agency may end up levying fines as high as US$18 billion. The Department of Justice is also contemplating charges.

The scandal has widened since then. On September 22, VW admitted about 11 million clean diesel cars sold worldwide contain software to fool the regulators with the vast majority likely to be in Europe.

VW’s chief executive officer, Martin Winterkorn, announced his resignation on September 23. The company has halted US sales of its 2015 and 2016 clean diesel vehicles, and now has to fix millions of existing cars. It has already set aside $7.3 billion to deal with the problem. Meanwhile, VW’s stock price has been plummeting with the company losing one-third of its market cap in the past week.

The scandal raises questions. Why did Volkswagen cheat in the first place? Why was it so easy for the company to evade regulators for years? To get a better handle on this story, you need to look at the history of clean diesels – the specific cars that VW was selling.

Diesel engines have long been popular in Europe and one of their major advantages is fuel economy. Diesel fuel contains more energy per litre than petrol and diesel engines work more efficiently meaning a typical diesel car can travel up to 30 per cent further on a rank of fuel.

While diesels get better mileage and emit fewer carbon-dioxide emissions, they also emit more nitrogen oxides (NOx), which help form smog and particulate matter, which can damage lungs and can have serious health effects.

Historically, Europe has dealt with this trade-off by imposing relatively looser emissions standards on diesel cars in the pursuit of better fuel economy. Roughly one-third of car cars in Europe now run on diesel, and it’s one reason cities such as Paris have bad smog problems. The US, by contrast, has stricter rules around smog and other conventional pollutants since the 1970s, which is why diesel cars haven’t caught on widely there. Until recently, few could pass America’s stringent Nox standards.

Since 2009, however, things have changed. The Obama administration has been ratcheting up fuel-economy standards, which puts a higher premium on mileage. At the same time, diesel technology has been getting cleaner through a combination of lower-sulphur fuel, advanced engines and new emission-control technology.

Marques have shown a renewed interest in “clean diesel” cars that, in theory, don’t suffer from that trade-off between performance and pollution.

These vehicles have proved increasingly popular in the US even though they still represent less than one per cent of the market there. Since 2009, VW has sold more than 482,000 clean diesels containing four-cylinder turbo-charged direct-injection engines including included versions of the Passat, Jetta, Golf, Beetle, and Audi’s A3.

Since 2009, we now know, Volkswagen has been inserting intricate code in its vehicle software to track steering and pedal movements. When those movements suggest the car is being tested for nitrogen-oxide emissions in a lab, the car automatically turns its pollution controls on. The rest of the time, they are off.

Regulators didn’t notice this for years. The problem was only uncovered by the independent International Council on Clean Transportation (ICCT), which wanted to investigate why there were discrepancies between between laboratory tests and real-road performance for several of VW’s diesel cars in Europe. They worked with researchers at West Virginia University, who stuck a probe up the exhaust pipe of VW’s clean diesel cars and drove them from San Diego to Seattle.

On the road, VW’s Jetta was emitting 15 to 35 times as much nitrogen oxide as the allowable limit, while the Passat was emitting five to 20 times as much.

In May 2014, both California’s air-pollution regulator and the EPA ordered VW to investigate and fix the problem, and the company claimed it had done so. Once again, the cars performed well in testing, but real-world performance still didn’t match up. At that point, EPA regulators started grilling VW about this even threatening not to approve the company’s 2016 range of clean diesels. VW finally admitted the existence of these defeat devices, which had been carefully hidden in the software code.

VW hasn’t explained exactly why it cheated, but analysts have some good guesses. The NOx emission controls likely degraded the cars’ performance when they were switched on – the engines ran hotter, wore out more quickly and got poorer mileage. Some experts suggest the emission controls may have affected the cars’ torque and acceleration, making them less fun to drive.

In other words, VW was unable to produce diesel cars that had the ideal mix of performance, fuel economy, and low pollution or, at least, they couldn’t do this profitably, so they “solved” this trade-off by sacrificing cleanliness and loosening pollution controls via software designed to deceive regulators.

VW isn’t the first company to cheat on emission tests. As Frank O’Donnell of Clean Air Watch points out, the EPA has caught of truck marques, including Caterpillar and Volvo, doing something similar back in 1998 by programming their diesel trucks to emit fewer pollutants in lab tests than on the road.

Part of the problem is regulators usually test these vehicles under laboratory conditions by placing them on giant treadmills and requiring them to make a series of moves. Because this process is predictable, it’s easier to game. Combined with the fact marques are developing more elaborate software that can control and fine-tune engines, there are more opportunities for fraud.

European regulators will soon start requiring on-road emissions testing. In theory, governments can find ways to make cheating harder. Starting with model year 2017 vehicles, European regulators will require carmakers to test their products on the road in addition to laboratory tests. That sort of regime would have made it harder for VW to cheat the system.

Meanwhile, the VW scandal raises another issue around car regulations. Modern-day cars feature complex computer systems and software, which are protected under the 1998 Digital Millennium Copyright Act (DMCA) so it’s illegal to fiddle with the software. The rationale is to make it harder for consumers to tamper with emissions controls. But these protections also make it harder for independent researchers to scrutinise that code and identify problems. Some experts have proposed DMCA exemptions to allow researchers to test and evaluate these engines, but car companies and the EPA have resisted this.

The US scandal isn’t the end of the story with VW saying about 11 million clean diesel cars sold worldwide contain “defeat devices” – every car that features a Type EA 189 diesel engine. Most of these cars are in Europe. The company says its newest European diesel engines aren’t affected and comply with EU pollution rules.
In response, the company has pledged to stop selling 2015 and 2016 Volkswagen and Audi models equipped with TDI clean diesel engines in the US, and will likely end up recalling existing cars to fix the problem. It’s still unclear how many customers will actually want to fix the problem because any patch may degrade gas mileage and or performance.

Meanwhile, VW may face criminal prosecution and billions of dollars in fines. The Clean Air Act allows a fine of US$37,500 per non-compliant vehicle. That could total about US$18 billion compared to VW’s total profit of about $12b last year. VW is the world’s biggest automaker by sales, but it’s not as profitable as competitors such as Toyota and has struggled to gain a foothold in the US market.

This episode also raises questions about the future of clean diesel vehicles, which appears to be genuinely promising. In theory, such vehicles may achieve excellent mileage and lower emissions. But this scandal raises questions about how well marques can achieve both goals in practice.

According to www.vox.com models expected to be recalled include in the US include the 2009-15 VW Beetle 2.0L TDI, 2009-15 VW Golf 2.0L TDI, 2009-15 VW Jetta 2.0L TDI, 2009-15 Audi A3 2.0L TDI, and 2014-15 VW Passat 2.0L TDI.

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