• Talks continue on how to fix VW, Audi, Porsche vehicles
  • VW’s fix proposal labeled incomplete, substantially deficient

Volkswagen AG suffered a setback in its efforts to emerge from the 10-month-old emissions-cheating scandal as California regulators rejected a recall proposal for 85,000 diesel-powered vehicles, raising the prospect that the German carmaker will have to buy them back.

QuickTake Cleaner Cars

The manufacturer’s plan for fixing Volkswagen, Audi and Porsche models equipped with 3.0-liter engines rigged to cheat on emissions tests was inadequate, the California Air Resources Board said Wednesday in a statement. The regulator, along with the U.S. Environmental Protection Agency, will continue talks with Volkswagen in hopes of finding a fix, CARB said in letters dated Wednesday to Volkswagen executives and attorneys.

“It seems that a buyback is a definite possibility if there’s not a solution that makes them street legal,” Kelley Blue Book senior analyst Rebecca Lindland said via e-mail.

A buyback of cars with 3.0-liter engines would mean repurchasing luxury vehicles such as Audi’s top-of-the line A8 sedan and Q7 sport utility vehicle as well as Porsche Cayenne SUVs. That could add another $2 billion to $3 billion to Volkswagen’s costs related to the cheating in the U.S., said Juergen Pieper, a Frankfurt-based analyst at Bankhaus Metzler. The rejection shows the scandal that emerged in September is far from over, despite last month’s landmark $14.7 billion settlement covering 480,000 cars with 2.0-liter engines.

Procedural Step

Volkswagen downplayed the risk. The CARB announcement was a procedural step under state laws governing recalls, spokeswoman Jeannine Ginivan said in an e-mailed statement.

“We continue to work closely with the U.S. Environmental Protection Agency and CARB to try to secure approval of a technical resolution for our 3.0-liter TDI vehicles as quickly as possible,” Ginivan said.

Volkswagen rose 2.4 percent to 117.65 euros at 1:36 p.m. in Frankfurt. That pared the stock’s decline this year to 12 percent, compared to a 7 percent drop in the benchmark DAX Index.

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CARB has been in talks with the German company over the 3.0-liter engines since at least Feb. 2, when the manufacturer filed its first “single, incomplete recall plan,” according to the agency’s letters. Additional data submitted by Volkswagen as recently as June is also “incomplete” and “substantially deficient” for legal requirements, CARB said.

EPA Backing

The EPA backed CARB’s decision that the proposed fix isn’t adequate, said Julia Valentine, a spokeswoman for the agency. About 16,000 of the vehicles with polluting 3.0-liter engines are in California.

CARB’s letter to Volkswagen lists 10 specific failures of the proposed solutions. They include the carmaker’s inability to provide a full description of the so-called defeat devices, the impact the proposed fix would have on performance, the effects of repairs on emissions or even a description of the fix in a manner that would allow CARB to evaluate their feasibility, according to the letters.

“It is unfortunate for VW since they were probably hoping for a more positive resolution for this engine,” said Jessica Caldwell, director of industry analysis at Edmunds.com.

Criminal Probes

U.S. District Judge Charles Breyer, the San Francisco judge who demanded that Volkswagen reach a deal to get the polluting cars fixed or off the road, has set a July 26 hearing on preliminary approval for the settlement covering 2.0-liter engines. He has scheduled Aug. 25 for lawyers to report their progress in reaching an agreement for the 3.0-liter models.

VW still faces lawsuits by at least five states plus investors and dealerships in the U.S., as well as parallel lawsuits, including consumer complaints, in Germany, all of which could raise the scandal’s price tag for the automaker. Future expenses could also include hundreds of millions of dollars in fees for the lawyers representing car owners. More penalties, along with further damage to VW’s reputation, may yet spring from criminal probes in the U.S., Germany and South Korea.

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