This is Why Volkswagen Won't Pay $18 Billion

It’s entirely possible that the Environmental Protection Agency could levy the largest ever civil penalty for Clean Air Act violations against Volkswagen after the automaker lied about emissions from their diesel engines.

In 2014, the government agency fined Hyundai and Kia $100 million for spewing 4.75 million metric tons of greenhouse gases above what they reported for 1.1 million cars.

For Volkswagen, using the EPA’s own penalty worksheet (which is apparently a thing), the fine may be substantially more than that levied against the Korean automakers — about $3.15 billion more.

Here’s how we got that number.

It should be noted that by applying the same logic and math, Hyundai and Kia’s fine would have been substantially more than it was. The EPA eventually fined the Korean automakers $79.25 per engine, much less than the possible $37,500 per violation standard, and $21,775 (before multipliers) they could have. It’s clear that there is plenty of flexibility under the guidelines.

But a by-the-numbers breakdown pegs VW’s civil penalty at $3,262,518,776.

For rule-of-thumb purposes, the EPA classifies car and truck engines at 250 horsepower for “gravity” so we’ll start from there. From the worksheet:

In the case of automobiles and light-duty trucks, gravity is calculated based upon the assumed engine size of 250 horsepower, as discussed above.

For each horsepower up to 10 hp, the EPA fines $80. For horsepower between 11-100, the fine is $20, and the final 150 horsepower up to 250, the fine is $5. That works out to an adjusted penalty of $3,350 per engine.

The EPA adds a multiplier based on the egregiousness of the infraction. A “major” infraction — such as, say, lying or installing a defeat device — adds a 6.5 multiplier. Multiplying the major infraction to each engine penalty, each VW engine would be penalized $21,775 before scaling.

According to the worksheet, scaling and number of engines is considered when applying any penalties, which means that for a mass producer like VW, the penalty is scaled down significantly.

For the first 10 engines, VW would be penalized the full boat: $21,775 for each car. For the next 90 cars, VW is penalized 20 percent of the penalty per engine; 4 percent for the next 900 cars; 0.8 percent for the next 9,000 cars; 0.16 percent for the next 90,000 cars; and, finally 0.032 percent for the final 382,000 cars. After scaling, VW’s penalty would be $8,758,776 for 482,000 engines.

(The EPA builds in multiple events for discretionary penalties that could substantially change VW’s fine, but we’ll just go by the book.)

For non-remediation — or several years of lying — VW would be penalized up to 30 percent for each engine, for 482,000 engines. That’s the chunk of VW’s penalty: $3.14 billion could be assessed for non-remediation of 482,000 engines.

From there, the EPA tacks on a fine for company size. Given VW’s May 2015 $126 billion market cap, the EPA could add $105,095,000 in fines for VW’s size.

Totaling up the penalties:
• Non-remediation: $3,148,665,000
• Engine Penalties (after scaling and egregiousness): $8,758,776
• Incremental Gravity for Business Size: $105,095,000
Total: $3,262,518,776

Of course, Hyundai and Kia paid significantly less than the worksheet indicated they should, and even Volkswagen’s per car penalty of $6,768.51 for non-remediation dwarfs the eventual $79.25 per car penalty the Korean automakers eventually paid in civil penalties.

The EPA’s own worksheet alters its base formula for a laundry list of issues including history of compliance (or noncompliance), degree of cooperation and even the company’s ability to pay.

From the section on cooperation:

The degree of cooperation or non-cooperation of the violator in resolving the violation is inappropriate factor to consider in adjusting the gravity-based portion of the penalty. Such adjustments are based on both the goals of equitable treatment and swift resolution of environmental problems.

And VW’s (recently sinking) financials could be considered:

The financial ability to pay adjustment normally will require a significant amount of financial information specific to the violator. If this information is available prior to commencement of negotiations, it should be assessed as part of the initial penalty target figure. If it is not available pre-negotiation, the litigation team should assess this factor after commencement of negotiations with the violator.

This isn’t a prediction of VW’s future penalty. Rather, it’s a by-the-book start — before mitigation, aggravation and negotiation — at what VW’s eventual penalty could be.

And $3.26 billion — not $18 billion — may be a good place to start when talking about what could happen.