Coming Clean on Emissions: An Assessment of the Impact of Regulatory Incentives on Volkswagen’s Decision to Cheat

Abstract

In September 2015, Volkswagen (VW) admitted to cheating by installing defeat devices prohibited by the Clean Air Act (CAA) in nearly 600,000 diesel vehicles sold in the United States and over 11 million vehicles around the world. These defeat devices programmed the affected vehicles to produce as much as 40 times over the legal limit of harmful NOx emissions. Why was VW incentivized to cheat on such a grand scale? This thesis explores various internal and external catalysts and incentives that the company was motivated by to begin and continue installing such illegal devices for over 6 years without ever raising regulatory suspicion. Internally, VW’s corporate culture bred by the authoritarian management of Ferdinand Piëch and Martin Winterkorn, motivated the company’s engineers to justify using any means to achieve management’s desired end of building affordable diesel vehicles with unprecedented fuel efficiency and performance. Externally, both the U.S. and the European Union have continued to demonstrate regulatory leniency toward automotive violators of the CAA and regulatory tolerance for significant discrepancies between manufacturer claimed and real-world figures of emission output in Europe respectively. To contextualize this idea of regulatory leniency, this thesis analyzes the key differences in methods for emissions testing of light-duty vehicles (LDVs) between the U.S. and the European Union. Through this comparison, this thesis finds that a lack of a real world emissions testing component for both jurisdictions served as a key catalyst for automakers such as VW to exceed prescribed NOx emission limits. Additionally, in light of VW’s announcement in March 2016 that it had referred to past EPA settlements with automotive violators of the CAA before disclosing to authorities its use of illegal defeat devices, this thesis analyzes two major EPA cases specifically involving automakers implicated with the use of similar defeat devices. Through this analysis, this thesis argues that the EPA’s pattern of insufficient civil enforcement for dealing with automakers violating the CAA incentivized Volkswagen to cheat to the great extent it has done so. To prescribe a potentially more effective approach for the EPA in dealing with VW, this thesis refers to the EPA’s settlement in 1998 with seven major manufacturers of heavy-duty diesel engines that were also implicated for the use of illegal defeat devices. Considering the effectiveness of the EPA’s use of regulation-by-litigation in preventing further similar violations in the heavy-duty vehicles segment from occurring since then, this thesis recommends that the EPA exercise a similar approach of regulation-by-litigation towards VW to not only bring the company into more expedient compliance, but also to accelerate the critically necessary reformation of emission testing methods for all applicable light-duty vehicles in the United States and hopefully prevent such violations from ever recurring.