Volkswagen’s Emissions Scandal Shows EPA Incompetency and Failure of Standards

Volkswagen was recently ousted for purposefully cheating US emissions test on their clean diesel cars. They manipulated results using a computerized sensor that altered emissions during tests. As you might expect, many pundits are immediately blaming the market and capitalism. If anything, the VW scandal points to a failure of government and success of market forces.

First of all, the government had nothing to do with originally investigating Volkswagen. The International Council on Clean Transportation discovered the fraudulent emissions results. After testing numerous VWs, the results were 15 to 35 times to legal US limit of NO2 emissions. US standards are actually stricter than the European counterparts.

It wasn’t until after the ICCT testing that the EPA and California Air Resources Board began their investigation.

Volkswagen estimates that 482,000 were sold in the US since 2009. They likely would have continued to be sold if not for the ICCT. EPA regulators, however, failed to maintain practices that ensure these standards are respected. Whether they are worthwhile standards or not is beside the point; they are meaningless if they are not enforced.

Both government and private enterprise failed, but how they are respectively treated proves a notable difference between them.

Immediately following the announcement, Volkswagen stock collapsed. As of 9/24, their stock price was around $113 – which is down from $162 before the scandal. On Monday 9/21, they lost 20% value. Volkswagen’s stock price hasn’t been this low since 2010.

Investors will lose a lot of money and the company’s reputation is damaged. However, the penalties will continue to mount. They could face fines up to $37K per vehicle – or $18 billion . The EPA has not announced a full recall, but it is expected. VW will have to cover all of those costs. They will also likely face numerous class-action lawsuits.

What will happen to the EPA? More than likely, nothing. The head emissions bureaucrat will keep their job. There may be some scapegoats in the lower ranks, but it will generally be business as usual. Don’t be surprised when the “underfunded” rhetoric begins – as if an $8 billion budget isn’t enough money. Whenever bureaucracies fail, they inevitably require more money to “fix” the problem.

Emission standards do not come without unintended consequences or added costs. Their effectiveness is limited by how the market reacts. Economists from Penn-Wharton and UC-San Diego determined how emission standards affect the market.

One unintended consequence is the “rebound effect”. According to researcher Arthur van Benthem, this effects comes when drivers of more fuel-efficient cars decide to take advantage of their lower per-mile fuel costs by driving more than they did in the past. They found that people drive 10% to 15% more in mileage because it costs less per mile. Additionally, the increased driving results in more traffic congestion.

Furthermore, emission standards suffer from a leakage effect that impacts both new and used cars. Most vehicles in the US are “used cars” and they are not subject to emission standards. When standards are imposed, it drives up the cost of new cars, thus the demand for used cars increases.

Indeed, per their research, “about 15% of the emissions reductions [resulting from higher standards imposed on] new vehicles come back as a result of the increased consumption of fuel on the part of older vehicles still on the road.”

In other words, when the Obama administration estimated that new standards will save 2.2 million barrels of oil per day by 2025, the real number may be significantly lower.

Emission standards should be scrapped in favor of a gasoline tax. It is not as susceptible to unintended consequences. In fact, the University of Chicago found that 93% of economists favor a gas tax over emissions standards, whereas only 23% of non-economists felt this way.

If the gasoline price increases by one dollar per gallon, the value of a 15-mpg vehicle [of average age] goes down by almost $800, while the value of an efficient 40-mpg vehicle [of average age] increases by about $600. Cars with fuel-economy above 25 mpg tend to increase in value when gasoline prices go up.

Volkswagen defrauded customers, investors, and regulators. They should be held responsible and punished accordingly. We should not, however, overlook the failure of third party regulators as this case highlights their incompetency. VW will certainly take a loss for their dishonesty, but bureaucratic failure will go unresolved. With regulatory failure and other unintended consequences, emission standards may not be as much of a net gain as originally intended.

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