3p Weekend: Your Cheat-Sheet to the VW Emissions Scandal

With a busy week behind you and the weekend within reach, there’s no shame in taking things a bit easy on Friday afternoon. With this in mind, every Friday TriplePundit will give you a fun, easy read on a topic you care about. So, take a break from those endless email threads and spend five minutes catching up on the latest trends in sustainability and business.

Over the past few weeks, the headlines often centered around Volkswagen, which found itself mired in an emissions scandal that culminated in the resignation of its CEO and a free-fall in its stock price.

But what exactly is the scandal, and why is it such a big deal? Spend a few minutes consulting our cheat-sheet, and you'll have all the information you need to keep up with those conversations at the water cooler.

So, what is the scandal?

About three weeks ago, Volkswagen halted the sales of many of its diesel-powered automobiles. That decision came after the Environmental Protection Agency (EPA) accused the company of rigging its vehicles with software that “cheated” mandated U.S. emissions testing.

After inquiries from the EPA and the California Air and Resources Board (CARB), Volkswagen originally admitted to the installation of so-called 'defeat devices' on approximately 482,000 vehicles. But only a few days later, information was revealed indicating as many as 11 million vehicles could have been affected by the fraudulent software.

What is a 'defeat device,' anyway?

The EPA and CARB accused Volkswagen of installing defeat devices in four-cylinder Volkswagen and Audi automobiles from model years 2009 to 2015, which really just means they installed software to manipulate information transmitted during vehicle emissions testing.

The EPA’s investigation alleges that Volkswagen’s software algorithm could detect when an automobile was undergoing an emissions inspection. The software would turn on the vehicle’s full emissions controls only during such a test; otherwise, it would shut off such mechanisms when the car was driving in normal street or highway conditions.

For drivers, the benefit would be greater performance, especially on torque and mileage. For the environment, however, the EPA charges that Volkswagen’s software trick resulted in nitrogen oxide (NOx) emissions spiking as much as 40 times more than acceptable EPA levels.

Who discovered the problem?

While accusations from the EPA and CARB broke the news, neither organization was the first to discover the discrepancy in VW vehicle emissions. The sleuths who caught the problem? A team of researchers from the International Council on Clean Transportation and West Virginia University.

Peter Mock, Europe managing director of the council, and John German, a senior fellow, teamed up with researchers from WVU to test Volkswagen vehicles for the U.S. market. Their aim wasn't to blow the whistle on the automaker, but rather to convince European regulators to tighten up their emissions standards. If VW could make clean diesel for America, why couldn’t it do the same for Europe?

The researchers were stunned by what they found: The made-for-the-U.S. VW diesels scored acceptably low for emissions during tests but spewed noxious pollutants on long road trips. The researchers made their study public at a forum in San Diego in May 2014, with officials from the EPA and the tough California Air Resources Board present -- leading many to wonder why it took so long for the regulatory bodies to act. Many also pointed to the automaker's recent corporate social responsibility (CSR) reports, saying the absence of data on emissions should have been a tip-off.

Why does it matter?

Okay, so Volkswagen fessed up to intentionally engineering its cars to trick emissions testing. But why is this such a big deal?

An analysis by the Guardian found that those U.S. VW vehicles “would have spewed between 10,392 and 41,571 tons of [nitrogen oxides (NOx)] into the air each year if they had covered the average annual U.S. mileage.” Complying with the EPA’s standards would have meant those vehicles would only have emitted 1,039 tons of NOx per year.

NOx contributes to ozone and fine particulate matter (PM2.5) pollution, which are both linked to smog and human health problems like asthma and other respiratory ailments. Now that the company has been caught with its hand in the proverbial cookie jar, it said it would set aside half a year’s profits of about $7.3 billion to fix the cars, pay fines and settle customers’ lawsuits.

Volkswagen will feel a huge pinch in the pursestrings, as well as a crippling blow to its reputation. But defrauded customers will feel the pain, too. As Philip E. Ross of Spectrum magazine wrote, “Even after VW pays the multibillion-dollar bill to refit its diesel cars to meet EPA standards, its customers will have to pay a price, too. Because their cars will get worse mileage, they will command a lower resale price.”

What's the fallout?

Volkswagen will have to pay billions to rectify the situation, but that's far from the only fallout of this scandal. The company's CEO resigned a few days after the scandal broke. Since then, Volkswagen and Audi agreed to return “Green Car of the Year” awards bestowed upon their 2009 and 2010 “clean diesel” models.

The U.S. Justice Department’s Environment and Natural Resources Division is opening a criminal investigation, which means that FBI agents will soon be flashing badges at VW plants in the U.S. and asking their counterparts for help at the company’s main office in Wolfsburg, Germany.

This week, two high-ranking U.S. senators announced that they would initiate a separate investigation to determine if Volkswagen intentionally deceived the Internal Revenue Service out of more than $50 million in tax credits its vehicles would not have qualified for without fraudulent emissions results.

Things got worse for the company on Thursday, when German prosecutors raided its headquarters in Wolfsburg in the hopes of learning the origin and use of the defeat device. The raid was further bad news for VW shares, which continue to drop.

Is Volkswagen alone?

Volkswagen isn’t the only company that is under the microscope for allegedly deceiving consumers about vehicle emission results, says the Europe-based organization Transportation and Environment. According to road tests conducted by the organization, a number of Mercedes, BMW and Peugeot vehicles guzzled, in some cases, as much as 50 percent more fuel than was stated in company-run lab tests.

“The gap between official and real-world performance found in many car models has grown so wide that it cannot be explained through known factors including test manipulations,” Transportation and Environment concluded in a new report.

The bottom line

As information continues to emerge about Volkswagen and other automakers falsifying emissions results and essentially defrauding consumers, the auto industry -- and indeed business as a whole -- will need to ask some tough questions.

How is it that what appears to be a few rogue executives could tarnish the reputation of what was once considered one of the world's most environmentally friendly automakers? When did companies decide that lying to customers was worth the risk? And how did Volkswagen escape the watchful eye of regulatory bodies, while winning environmental performance awards and topping rankings like the Dow Jones Sustainability Index?

The scandal may be just as much an indictment of the current state of CSR as it is a commentary on the inner-workings of Volkswagen. The conversation will likely continue in the coming weeks, and we'll have our eyes open.

Image credit: Flickr/Dave Humphreys