On the road to more trouble.

Photographer: Miles Willis/Bloomberg

VW's Diesel Crisis Is Now a Global Threat

Edward Niedermeyer, an auto-industry analyst, is the co-founder of Daily Kanban and the former editor of the blog The Truth About Cars.
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If Volkswagen was hoping that its $10 billion buyback settlement with U.S. officials would bring some closure to months of hand-wringing over diesel emissions, its timing couldn't have been worse. A flood of news over the past week showed that what was once a single company's scandal has grown into a global regulatory crisis. As world leaders gathered in New York to sign the Paris climate accord on Friday, a cloud of doubt settled over one of the most hotly debated areas of environmental regulation.

As the face of auto-emissions cheating, VW has taken the brunt of the scandal's impact: it has budgeted $18.2 billion to cover the cost of repairs and buybacks associated with its U.S. settlement and recalls in Europe. Its stock is down some 40 percent over the last year.

But the emissions problem is now more than just a VW scandal.  Mitsubishi has admitted that it overstated fuel efficiency in more than half a million cars, drawing a raid by Japanese authorities and an investigation by US regulators. Only the second company to admit active cheating on emissions compliance, the Japanese automaker has lost about 40 percent of its market value in the last week of trading.

In Europe, the scandal has widened dramatically, sucking in a number of automakers who deny cheating but whose emissions are nonetheless dramatically out of compliance with EU regulations in real-world driving. U.K. authorities announced this week that their testing shows diesel cars emitting an average of six times the legal limit of nitrous oxides, an air pollutant, in real-world conditions. Germany's transport minister announced similar findings, leading to a voluntary recall of 630,000 vehicles by VW, Daimler and GM's Opel division.

Daimler could be the third automaker to be found actively cheating, after the U.S. Justice Department ordered it to investigate its own emissions certification process in the wake of lawsuits alleging non-compliance in its Mercedes-Benz diesel engines. The French automaker PSA Peugeot-Citroen could also find itself crossing the ill-defined line between non-compliance and active cheating, as French fraud authorities raided five of its facilities. Meanwhile, the German environmental group DUH, whose testing was instrumental in demonstrating that emissions compliance issues exist beyond Volkswagen, is pressuring the German transport minister to get tougher on the automakers it insists must be actively cheating.

Yet all this might only be the tip of the iceberg. Thus far investigations and prosecutions have focused largely on nitrous oxide emissions from diesel engines. But given the scope of the problems and cheating exposed, there's little reason to believe the scandal won't spread to gasoline engines and carbon dioxide emissions, which are considered a prime cause of climate change. In fact, VW was already caught falsifying CO2 emissions, and testing by the International Council on Clean Transportation, which first discovered the company's diesel cheating, shows there are major gaps between carbon dioxide lab results and real-world driving. 

Manufacturers are reeling from the current scandal, even though diesel makes up just 20 percent of global new-car sales. It's clear that global recalls and buybacks of gas engines would threaten to put any of them out of business.

The public impact of automakers bending or breaking the rules on nitrous-oxide emissions are local: High concentrations of the pollutant are linked to elevated rates of respiratory diseases and cancer in cities with large diesel fleets. But the very real possibility that carbon dioxide emissions, too, are skewed points to a global problem: all the carefully-negotiated terms of the Paris climate accord, for instance, will fall well short of their desired goals if real-world emissions are higher than the lab test scores used in negotiations.

With global carbon dioxide targets at stake, one hopes that governments will be motivated to collaborate on new real-world emissions testing standards that will cut down on rule-bending and outright cheating. Such an initiative could have economic benefits as well, opening the way for more broadly harmonized regulations that could lower barriers to free trade in automobiles.

The auto-emissions scandal is only going to grow, destroying the capital and credibility of automakers in the U.S., Europe and Asia. The question is whether it will broaden to the point where a coordinated global response becomes politically possible. If so, there may be an opportunity to make some good out of an otherwise shameful episode.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Edward Niedermeyer at eniedermeye1@bloomberg.net

To contact the editor responsible for this story:
Tobin Harshaw at tharshaw@bloomberg.net