The Giant Falls Hard: Implications of Volkswagen’s Emissions Scandal

Roughly two months ago, the U.S. Environmental Protection Agency (EPA) accused Volkswagen of deliberately using special software to cheat emissions tests.

According to Cynthia Giles of the EPA, since 2009, special software had been installed in over 11 million Volkswagen diesel-powered cars to pass emissions testing and to maintain the illusion that the diesel-powered vehicles were more environmentally safe than they truly were.  Chris Ziegler of The Verge reported the company’s diesel engines were performing so poorly on emissions tests that Volkswagen engineers employed special devices to efficaciously champion the appeal of diesel.  Ziegler described the devices as working by “only turning on emissions control when undergoing emissions testing, but not when the car is actually being driven normally and pollution is at its peak.”  According to Aaron Morrison of International Business Times, the defeat devices in the diesel cars enabled the vehicles to release from 10 to 40 times more nitrogen oxides than permitted by U.S. environmental regulations.

Volkswagen has already seen out its CEO, Martin Winkertorn, and while the scandal will have devastating effects for the company itself, the scandal will have massive repercussions for Europe and the automobile industry as a whole.

The once-lucrative Germany car company now faces catastrophic financial troubles.  Volkswagen may have to pay fines of up to $18 billion, with civil penalties accumulating to roughly $37,500 on each vehicle, according to Timothy Gardner of Reuters.  Roughly a week after the emissions scandal surfaced, the market value of Volkswagen dropped 30 percent, Rocky Newman of Fortune Insider reported. Newman concludes that the accumulation of fines will put a “conservative estimate of the cost to Volkswagen and its shareholders in the vicinity of at least $54 billion, given fines outside the U.S. and lost sales that result from the scandal.”

The financial burden may not be limited to Volkswagen.  The revelation of Volkswagen’s use of special software to beat emissions tests will likely prompt stricter oversight of all automakers and emissions testing processes.  Greg Archer, a former UK government adviser, claims there is “lots of anecdotal evidence about the use of defeat devices to disguise environmental impacts and that the scandal could spread beyond diesel and into Europe, where tests are more prone to abuse.”  Evidently, Volkswagen may be representative of a larger problem within the automaker industry and emissions testing.

The implications of Volkswagen’s emissions scandal will extend beyond the confines of the company.  Germany and Europe as a whole will undoubtedly be affected by the crisis; the scandal’s far-reaching effects can be explained by the mere size and reach of Volkswagen.  The automaker employs over a quarter million Germans alone.  According to Kevin Roose of Fusion, Volkswagen cars “account for one of every ten passenger vehicles in the world.”  In addition, Germany has the largest economy of any European country, and relies heavily on exports with approximately 45 percent of the country’s total gross domestic product coming from exports.  Given the EPA’s fine that could amount to over 18 billion, Volkswagen will undoubtedly have to make employment and salary cuts that will heavily damage the export-based Germany economy.

Prior to Volkswagen’s scandal, diesel engines had been increasing in popularity in both the United States and Europe.  After all, many of diesel’s benefits over gasoline are indisputable:  according to Allen Schaeffer, director of the Diesel Technology Forum, diesel has on average “30 percent greater energy efficiency than a comparable gasoline engine.”  Volkswagen had been persistently advertising the notion of clean diesel in the United States with notable success.  During the first half of 2015, Volkswagen overtook reigning sales leader Toyota as the sales leader for diesel vehicles.  EPA’s revelation in early September will likely halt the automaker’s progress, however.

Opinions regarding diesel vehicles have already reversed following the scandal.  According to US News, “Major European cities such as Paris and Birmingham are already calling for a crackdown on diesel and the FT has suggested that Europe, where 53 percent of 2014 engines sold used diesel, might switch “virtually overnight” to petrol.” As Leonid Bershidsky of the Bloomberg View explains, “diesel-powered vehicles popularized as a result of lower excise taxes on diesel than gasoline throughout most of Europe, and relatively loose environmental standards for diesel engines that permitted higher levels of nitrogen oxides and other unsafe particles.”

Many drawbacks of diesel fuel that were previously overlooked have come to light as a result of VW’s emissions testing scandal.  Diesel fuel is noticeably more expensive than gasoline; according to Alex Davies of Wired, the price of diesel in September was $2.501 per gallon compared to the national average of $2.289 per gallon for regular gas.  In addition, Davies claims that diesel “cars are typically several thousand dollars more expensive than the equivalent model with a gas engine, because scrubbing the exhaust gas of nitrogen oxide and other particulates takes know-how and hardware.

Now, buyers of Volkswagen diesel-powered vehicles will pay:  According to Newman, “VW owners of “clean diesel” vehicles will incur lost resale value as high as $5,000 per vehicle.”

Volkswagen’s emission scandal has and will continue to weaken support for the diesel industry.  Diesel sales were in excess of 2.4 million in 2013 for Volkswagen, accounting for a quarter of the company’s factory output, according to U.S. News.  In addition, the company had nearly twice as many diesel-powered vehicle sales as its closest competitors.  Bershidsky asserts that the scandal is “the result of Europe backing the wrong emissions-reducing technology on a regulatory level.”  The Volkswagen scandal has undoubtedly put a dent in the diesel engine industry and will prove to difficult to reverse.  As Bershidsky alleges, “There will be only two paths for them to take: making sure the emissions performance of all new diesel cars is irreproachable—which isn’t easy in the real world—or shifting production toward hybrid and electric vehicles, as Japanese companies did when they decided diesel was on its way out.” Evidently, the Volkswagen scandal may carve the way for the rise of hybrid and electric vehicles around the world; only time will tell.

Volkswagen’s emissions scandal has reverberated all over the globe.  The revelation of Volkswagen’s use of defeat device has negatively impacted not only the German economy but the European economy altogether.  In addition, the emissions-cheating scandal has devastated the company itself and will call for increasingly intense regulatory oversight on all major car companies.  Most importantly, Volkswagen’s crisis has given the hybrid and electric car industry the opportunity to rise to prominence.  Although the German-based car company with survive, Volkswagen’s scandal and the EPA’s catastrophic fine in its own should serve as noteworthy lessons to automakers around the world: Companies ultimately pay the price for their wrongdoings and should never test the boundaries of regulatory oversight.