This is Why Volkswagen Won't Pay $18 Billion

Aaron Cole
by Aaron Cole

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.

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7 of 38 comments
  • Art Vandelay Art Vandelay on Sep 25, 2015

    So, would now be a good time to look at a used tdi? Seriously, as they sit they are known to be reliable, I'd just never do the fix or keep a seperare ecm in case I ever move somewhere where they test. Seems like a good time to score a nice car for peanuts so long as you intend to drive it into the ground.

    • Th009 Th009 on Sep 25, 2015

      From a technical point of view, they are exactly the same as they were two weeks ago. If the price is much less, the value may be much better, too.

  • 87 Morgan 87 Morgan on Sep 25, 2015

    What makes this particularly fascinating is all of the different agencies and stakeholders who have been defrauded, in my mind the following are going to file suit. EPA: a given. IRS: their were tax incentives/credits for buying low emission high fuel mileage cars. However many used those credits now **may** have to file amended tax returns individually or the IRS settles with VW for penalties plus interest. If each individual who claimed the green credit has to amend their tax return, you can bet yet another class action lawsuit to be filed regarding this. FTC: they clearly advertised 'clean diesel' almost as a brand in and of itself. Clearly this was false advertising on a grand scale. SEC (perhaps): how much of their stock price was traded based on profits from selling world class clean diesels that were perhaps not. This one may be a stretch as I don't think the vw stock trades on a US platform. Someone who has way more knowledge than me on this subject can feel free to weigh in. Shareholders: for sure will file suit. Owners: multiple class action suits have already been filed most likely for fraud and diminished value claims, for once a class action law suit that is not borderline frivolous. Dealers: they have been building new stores like crazy to get image compliant, have tons of inventory that can't be sold, and again, diminished value of their businesses. This one could be a biggie. State attorneys general: it is just not a good practice to lie to the constituents of MY state.... The federal gubment can't stop or intervene in most of these suits to apply a cap to each of them. Back to my thought on Monday, which was this can and most likely will get out of control for VW and I peg the total cost of litigation, fines, fees, penalties and diminished stock value to be shy of 100b, but not too far.

    • See 3 previous
    • Drzhivago138 Drzhivago138 on Sep 25, 2015

      @th009 There's always money in the banana stand.

  • Raven65 This was basically my first car - although mine was a '76. My Dad bought it new to use as a commuter for his whopping 15-minute drive to work (gas is too expensive!) - but it was given to my sister when she left for college a couple of years later - and then she passed it down to me when I got my license in 1981. It was a base model... and I mean BASE... as in NO options. Manual 4-speed (no o/d) transmission, rubber floor (no carpet), no A/C, and no RADIO (though I remedied that within a week of taking ownership). Dad paid just over three grand for it. Mine was a slightly darker shade of yellow than this one (VW called it "Rallye Yellow") with the same black vinyl "leatherette" seat covers. Let me tell you, the combination of no A/C and that black vinyl interior was BRUTAL in the SC summers! Instrumentation was sparse to say the least, but who needs a tach when you have those cool little orange dots on the speedo to indicate redline in gears (one dot for redline in 1st gear, two dots for redline in 2nd gear, three for 3rd). LOL! It wasn't much, but it was MINE... and I LOVED it! It served me well through the remainder of high school and all the way through college and into my first "real job" where I started making actual money and finally traded it in on a brand new '89 Nissan 240SX. They gave me $300 for it!!!. I wish I still had it. Thanks for the trip down memory lane!
  • Analoggrotto Telluride is still better
  • Arthur Dailey So how much more unreliable is a 50 year old Italian made vehicle in comparison to a 5 year old Italian made vehicle? After 50 years wouldn't most of the parts and areas most prone to failure have been fixed, replaced and/or addressed?Asking for a friend? ;-)
  • Pig_Iron This is happy news for everyone in the industry. 🙂
  • Dukeisduke Globally-speaking, in August, BYD was the fourth best-selling brand name. They pushed Ford (which had been fourth) to sixth, behind Hyundai.