What Volkswagen’s ‘Dieselgate’ Is, and Why it Matters

A public relations challenge that exploded in Volkswagen’s face last week had actually been a time bomb winding down, threatening behind the scenes for a couple of years.

In short, Volkswagen AG was roundly accused by regulators with evidence in hand, and admission by the accused, saying it deliberately devised a way to cheat its way through diesel emissions certification testing.

About 482,000 TDI diesel cars are implicated, including several 2009-2015 VW models and the Audi A3, and consumers, dealers, and others are feeling the effects now playing out.

SEE ALSO: EPA and California Allege Volkswagen Diesels Willfully Circumvented Clean Air Act

Some are calling the controversy “Dieselgate” reminiscent of former president Nixon’s “Watergate” scandal over lying to the public, and at least clear is the German automaker faces serious charges.

UPDATE 5:00 EST: From Germany, Volkswagen said up to 11 million diesels globally are so equipped with cheating software. This scandal has just been magnified by 20-fold.

SEE ALSO: VW Admits 11 Million Diesels Globally Are Cheating

To summarize what is happening, we’ll round up key facts and ramifications of the scandal that has rocked Volkswagen’s “clean diesel” legacy.

Just the Facts

On Friday Sept. 18 the U.S. EPA issued an unequivocal statement laying out a case for a “notice of violation” (NOV) against Volkswagen AG.

Separately, California is in process of issuing Volkswagen an In-Use Compliance letter. This was the first coming forth of an investigation that had been opened in May 2014.

At issue was a “defeat device” relying on computer software Volkswagen allegedly hoped would never be detected. It was letting cars sail past stringent U.S. Tier 2, Bin 5 emissions rules, but once on the road, they emitted 10-40 times the NOx.

Volkswagen plant, Chattanooga, Tenn.

Volkswagen plant, Chattanooga, Tenn.

The models in question are four-cylinder Jetta, Beetle, Golf, and Audi A3s, the EPA said, covering 2009-2015. Passats model year 2014 and 2015 were also included.

Other VW/Audi diesels have not been implicated, but the California Air Resources Board (CARB) has begun looking for other branded diesels that might have emissions cheating devices, and the EPA says it is is moving forward on the case at hand.

SEE ALSO: More Carmakers Might be Cheating on Diesel Emissions Testing

“Our goal now is to ensure that the affected cars are brought into compliance, to dig more deeply into the extent and implications of Volkswagen’s efforts to cheat on clean air rules, and to take appropriate further action,” said Cynthia Giles, Assistant Administrator for the Office of Enforcement and Compliance Assurance.

If the book is thrown at them, said the EPA, up to $18 billion in fines could be levied against VW at $37,500 per car for 482,000 model year 2009-2015 diesels sold in the U.S.

Not said in Friday’s press release was the EPA and CARB had let VW quietly save face. The automaker last December did recall the close-to half-million affected cars but software updates could not remedy the out-of-compliance emissions.

In July regulators had confronted VW, the controversy has been behind the scenes all summer, but it was not actually the U.S. Government of California which originally discovered the defeat device.

The evidence had been uncovered in the course of normal research by the International Council on Clean Transportation (ICCT) in Europe, according to Bloomberg.

SEE ALSO: How Volkswagen Tricked the EPA’s Emissions Test

They found VW diesels with the EA188 2.0-liter turbodiesel four-cylinder emitted far more on-road emissions than they did on testing dynamometers.

Ironically, VW apparently left the defeat device in place into its new EA288 2.0-liter four replacing the EA188 in question for current TDIs. This engine might have been emission compliant without cheating as it utilizes urea injection to tackle the NOx problem. Formerly urea injection was not employed.

Following ICCT’s suspicions, on the U.S. side, tests were then conducted at West Virginia University, and its Center for Alternative Fuels, Engines and Emissions confirmed the discrepancy.

Over the weekend the company’s CEO Dr. Martin Winterkorn apologized matching a humble tone set by the U.S. arm of the German automaker which has otherwise not offered further comment saying only it is cooperating with investigators.

Volkswagen Group of America, Inc.:

Volkswagen is committed to fixing this issue as soon as possible. We want to assure customers and owners of these models that their automobiles are safe to drive, and we are working to develop a remedy that meets emissions standards and satisfies our loyal and valued customers. Owners of these vehicles do not need to take any action at this time.

Winterkorn’s statement:

The Board of Management at Volkswagen AG takes these findings very seriously. I personally am deeply sorry that we have broken the trust of our customers and the public. We will cooperate fully with the responsible agencies, with transparency and urgency, to clearly, openly, and completely establish all of the facts of this case. Volkswagen has ordered an external investigation of this matter.

We do not and will not tolerate violations of any kind of our internal rules or of the law.

The trust of our customers and the public is and continues to be our most important asset. We at Volkswagen will do everything that must be done in order to re-establish the trust that so many people have placed in us, and we will do everything necessary in order to reverse the damage this has caused. This matter has first priority for me, personally, and for our entire Board of Management.

Ramifications

Immediately Volkswagen stopped sales of affected 2015 vehicles, and beyond the sting to the company’s repuation now being felt, its dealers are left in the lurch further by the EPA refusing to certify 2016s.

Consumer Reports reported that CARB could make VW re-register its cars before they could again be sold.

SEE ALSO: Will America Avoid Europe’s ‘Clean’ Diesel Problems?

Volkswagen is unique in that its TDIs, while commanding a price premium above gas models, are the leaders in the small diesel market in the U.S. It was a claim to fame, and TDIs comprise 20 to 30 percent of sales on the models in which diesel is offered.

Audi has gone so far as to lobby Washington and take conspicuous photos of its symbolically white diesels parked in front of the famous landmarks in the U.S. capital. Its executives have asked for a “level playing field” for diesel cars they said meet environmental needs but which do not enjoy subsidies and perks electrified vehicles currently do.

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But that was last year’s news. On Monday Volkswagen’s stock tumbled more than 20 percent. Today, Tuesday, the stock is still in free fall, and down over 19 percent at mid-day. It has dropped from the $160s to around $107 in a couple days, meaning many more billions in lost market capitalization value than the potential $18 billion fines.

Yesterday also, the U.S. Justice Department said it is opening a criminal investigation, and the U.S. Congress has opened a formal inquiry as well.

No criminal charges by the Justice Department have been pressed at this point, but House Energy and Commerce Committee chairman Fred Upton and Oversight and Investigations Subcommittee chairman Tim Murphy will hold a hearing in coming weeks.

That timing of the allegations further, has not been good.

The incident came in the wake of a $900 million GM ignition switch recall settlement, and still in the public memory is Toyota’s unintended acceleration controversy and settlement.

collecting_emissions

EPA testing itself is done on an honor system, and automakers are trusted to follow EPA protocols and certify they met the grade. The EPA tests 10-15 percent of cars at its National Vehicles and Fuel Emissions Laboratory, it says.

In the past couple years Ford downgraded certain hybrids and internal combustion vehicles when it was found to have used a loophole and due to other issues, and Kia and Hyundai also were found overstating results.

In cases where automakers are found out, everyone apologizes, and seeks forgiveness, but how the public responds to instances of lost public trust varies.

Unlike the GM crisis, no one has died by VW’s alleged misdeeds, and the vehicles are not a direct safety risk authorities say. The four-cylinder TDIs actually perform better with satisfying horsepower and torque, and can beat their mpg ratings, but they are not emissions complaint and by law never should have been sold.

They are to be recalled, but whether it will be an easy fix, or cost thousands per car has yet to be stated.

What this could do to 2009-2015 four-cylinder TDI resale values is still playing out for cars people paid a premium for in good faith thinking they were buying clean diesels.

The 2015 models with EA288 diesel have urea injection to combat NOx.

The 2015 models with EA288 diesel, such as this Golf Sportwagen, employ urea injection to combat NOx.

The VW brand already has had profitability challenges, and as a whole it ranks 15th on Consumer Reports list of automakers out of nearly 30.

Anecdotes are surfacing of VW vehicles having other quality control issues, though there are many others who love their VWs.

As can be the case in the immediate aftermath of a shocking event however, it may be tough to gain clear perspective on all potential ramifications.

SEE ALSO: VW CEO Winterkorn Again Apologizes, VW Denies Report of His Firing

It should be noted no other automaker has yet been accused of such misdeeds with its diesels, but Allen Schaeffer, executive director of the Diesel Technology Forum, otherwise is taking a wait and see approach with no comment on VW.

“[W]e are confident that clean diesel cars will be an important technology for meeting current and future clean air, fuel efficiency and environmental standards,” said Schaeffer. “Also we won’t speculate about impacts on the diesel market in general. There are a number of manufacturers selling diesel cars, light trucks and SUVs, and based on public announcements, we are expecting that there will be 54 choices of clean diesel cars, trucks and SUVs in 2016 for consumers; up from today’s 38 choices.”

How Could this Affect Electrification?

As the dust settles, opinions are being formed. We’ve seen the most outspoken say they will boycott VW for life, and others admit they hope this will drive a coffin nail into diesel, and turn positive attention to hybrids, plug-in hybrids, and EVs.

But while some in the public are paying attention, some have not even seen the news, and some have said they’re unfazed.

Chevrolet Unveils Bolt EV and Next -Generation Volt

Among alternative energy proponents, diesel is a solution, and VW had been most outspoken in advocating it as a green alternative.

A car driven on battery power is also a solution, and electric motors emit no tailpipe emissions, though there are upstream emissions that research has shown are usually less than internal combustion tailpipe emissions.

The plug-in electrified market is actually smaller in the U.S. than for diesels, and in Europe and other markets, diesels enjoy a huge edge.

Last year diesels accounted for 0.84 percent of a 16.5 million U.S. vehicle market, whereas EVs took 0.39 percent, PHEVs took .34 percent, and hybrids accounted for 2.75 percent.

The Obama administration and the EPA and CARB have been more in favor of electrification, offering subsidies where diesels get none.

Now as though to validate regulators’ treatment of what VW once decried as an un-level playing field, the country’s most popular diesels have beed disgraced.

Many are making prediction of what this will mean, undoubtedly the industry has received a major shake-up, and more outcomes have yet to be revealed.