Finally it came to my attention as well, this is directly from the US Environmental Protection Agency (EPA), originally published 18 September 2015: vw

EPA is issuing a notice of violation (NOV) of the Clean Air Act (CAA) to Volkswagen AG, Audi AG, and Volkswagen Group of America, Inc. (collectively referred to as Volkswagen). The NOV alleges that four-cylinder Volkswagen and Audi diesel cars from model years 2009-2015 include software that circumvents EPA emissions standards for certain air pollutants…

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 allegations cover roughly 482,000 diesel passenger cars sold in the United States since 2008.

What is the implication of this?

According to Maximilian Auffhammer, “[t]he EPA can ask for $37,500 per incident, which amounts to roughly $18 billion in fines.” According to him, if the US government wants to set an example, then the fines may turn out to be much higher.

John Whitehead at summarizes this rather well: “Yikes.”

If you now talk to an economist, most would say: yeah, this is to be expected. Companies try to get around regulation, and some in any way they can. It all depends on the probability of being caught, the expected fine, and the benefit from circumventing the regulation. So just increase the probability of getting caught or the expected fine and there should be some additional level of deterrence.

But seriously, if one wants to increase the probability of getting caught for every conceivable situation where a company (or individual) can cheat or circumvent regulation, then the costs are going to be extreme.

In fact, there is a much deeper problem here: That companies cheat to extends such as the VW Dieselgate scandal right now means that they still do everything to maximize their profits without worrying about the externalities that they create. Is it the competitive pressure that pushes them to act this way? Is it the fact that capitalism is simply not a system that allows to deal well with externalities? Is it only because of some crooks that are clinging on to their executive seats? Or is our way of introducing regulations simply sub-optimal as Michael Greenstone claims?

There is an additional point unfortunately. To pull off such a huge feat as VW did, namely to have cheated on the car emission standards since 2008 without anyone noticing, requires substantial coordination – and acceptance of this – amongst a large number of people: Technicians who are able to programm this so-called `defeat device’, executives who ordered this, engineers who built these devices, etc. This simply shows that there is a lack of social norms still out there which helps in covering up these scandals. This of course means that one should expect much more cheating on similar, but certainly also smaller scales, too. In addition, and this shouldn’t come as a surprise, it also implies that we are likely to get additional news in the near future about similar issues being pulled off by VW in other countries, or by other car producers.

When do these companies learn that low-emission cars are the future? Amazing…

Finally, how does the market value VW’s Dieselgate? There are roughly 480,000,000 VW shares. Before the incident became known VW’s shares traded at 170 euro, and they currently stand at roughly 130. Thus the market believes that the expected costs to VW of this incident amounts to roughly 20 billion euros. This is roughly in line with the fine that the US EPA may levy on Volkswagen. However, it does not yet figure in that all these affected cars need to be returned to VW to clear out the `defeat device’. Then, of course, these cars will not adhere to the regulations anymore, but consumers bought these cars in the belief that they did originally adhere to the regulation. How will the legislative side treat this problem? And it will obviously impact future sales by VW. And is it entirely clear yet that VW only inserted this `defeat device’ in US cars? Given all these questions, expect further declines in the share price of Volkswagen and a potentially serious impact on future US sales.

Honestly, Volkswagen, this is really shameful.