July 11, 2022

Environmental Protection Agency Salary

Volkswagen VW AP

Volkswagen is accused of cheating on emissions tests and violating US clean-air standards.

It's a serious allegation: EPA officials say nearly 500, 000 cars from across VW's major brands and models (Passat, Beetle, Audi A3, Jetta) were at fault.

Business Insider spoke with Michael Steel, an environmental lawyer at Morrison Foerster, about what to expect next.

According to EPA officials, each of the 482, 000 offending VW cars could be subject to a maximum fine of $37, 500.

That adds up to about $18 billion in total fines should the federal government decide to throw the book at the German auto giant. But in truth it won't get close to that, and the company may already be in talks with the EPA on how to resolve the issue, Steel, who is based in San Francisco, said in an interview.

"The maximum is almost never reached, " Steel said. "The EPA will determine an appropriate amount that makes violating the regulation no longer financially worthwhile."

To determine VW's fine, the federal government will consider such factors as the egregiousness of the offense, the amount of harm done, and how cooperative the offending party has been.

According to Steel, the EPA has been cracking down on parties that actively circumvent its environmental-protection measures and is taking VW's sophisticated scheme very seriously.

The EPA accused VW of using hidden software — called a "defeat device" — to dodge clean-air standards during emissions testing.

"Using a defeat device in cars to evade clean-air standards is illegal and a threat to public health, " Cynthia Giles, assistant administrator for the Office of Enforcement and Compliance Assurance, said in a statement on Friday.

Volkswagen Jetta TDI engine Volkswagen TDI engine. AP

The EPA said in a "Notice of Violation" that VW installed software that detects when the car is undergoing emissions testing, at which point the software will turn on all of the car's emissions-control systems. But the EPA says the software greatly reduces the cars' pollution-control systems during normal driving conditions.

"This results in cars that meet emissions standards in the laboratory or testing station, but during normal operation, emit nitrogen oxides, or NOx, at up to 40 times the standard, " the EPA said in a statement.

So what's next for Volkswagen?

"The NOV is an invitation to enter into settlement negotiations, " Steel said. "I wouldn't be surprised if VW and the EPA have already held preliminary talks on the matter."

In the end, Steel — based on the information he has seen — believes VW and the EPA will most likely end up with a settlement that could include a civil penalty of around $1 billion. Steel believes that in addition to the fine, the settlement will include some sort of compliance component as well.

Even that would be a record for a civil fine. The highest civil fine levied against an automaker is the $300 million that Hyundai and Kia paid last year. The EPA fined the Korean automakers after coming to the conclusion that they sold 1 million vehicles with higher emissions than had been certified with the government agency.

VW Jetta TDI. Volkswagen

Earlier this month, General Motors agreed to pay $900 million to settle a criminal investigation over its failure to recall cars with faulty ignitions linked to more than 100 fatalities.

In reaction to the EPA's allegations, VW CEO Martin Winterkorn issued the following statement:

The U.S. Environmental Protection Agency and the California Air Resources Board (EPA and CARB) revealed their findings that while testing diesel cars of the Volkswagen Group they have detected manipulations that violate American environmental standards.

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.

Volkswagen stock plummeted 20% on Monday as a result of the EPA allegations along with the company's announcement that it will halt the US sales of its small-displacement TDI, or turbocharged direct injection, diesel cars. The models affected account for roughly 20% of the company's sales in the US.

According to the EPA, the violation covers roughly 482, 000 diesel-powered cars sold in the US since 2008. They include: