# This is Why Volkswagen Won’t Pay \$18 Billion

By on September 25, 2015

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.

## 38 Comments on “This is Why Volkswagen Won’t Pay \$18 Billion...”

• Fines are the least of VW’s worries. The bulk will be about compensating VW diesel owners for performance loss and necessary fixes. Btw, the debacle is not limited to cars. Vans and small trucks need to be included too. Last but not least, VW shareholders will sue VW for mismanagement and the subsequent drop in stock value. I’d be surprised if the total damage will be limited to 15 billion or so, and I’d wait a little while if I were a VW Board member before I let go of Winterkorn with the 60 million or so TTAC estimated.

• John Franklin Mason

Thing is Aaron, if you figure in the “Cadillac depreciation factor” the lost to VW may well exceed 18 billion dollars.

• WhiskeyRiver

The EPA ought to force them to purchase the cars back at full window sticker plus taxes and tags then junk them in the manner dealers were forced to do during cash for clunkers.

• BDT

If the cars can’t be made compliant, they just might do that. Kind of the nuclear option really

• th009

In the end, I believe they CAN be made compliant, by simply running them in “EPA test mode” all the time. The question is what the downsides are of operating in this mode. (We can speculate, but no real information is pubic yet.)

• WhiskeyRiver

If you design a vehicle to purposely circumvent the law, nuclear ought to be the first option, not the last.

Even if they fix these turds the long term resale value has been killed. Dead. Remember the Audi 5000?

No owner should be financially harmed by this debacle.

A big fine that the EPA will waste on millions of dollars in new furniture does not make it right.

• th009

EPA doesn’t get the money from the fines. It’ll go to general revenues, from where it can be handed out by the fine gentlemen of the Congress.

• WhiskeyRiver

Whatever the mechanism may be that funds the EPA, The Washington Times reported yesterday that the EPA over the last ten years spent “\$92.4 million to purchase, rent, install and store office furniture ranging from fancy hickory chairs and a hexagonal wooden table, worth thousands of dollars each, to a simple drawer to store pencils that cost \$813.57.”

Those “fine gentlemen” are enablers for junkies with a serious habit.

• th009

Those fine gentlemen are also enablers of bridges to nowhere and other fine examples of efficient spending.

• Pch101

There’s a big difference between what is effectively a CAFE violation, which is what Hyundai-Kia did when it misrepresented its fuel economy ratings, and NOx emissions. C02 emissions and NOx emissions pose different problems.

That being said, VAG won’t pay maximum penalties because the US government is more business-friendly than that. Make the penalty too large, and VW will figure out a way to bankrupt that entity so that it pays nothing.

• wsn

“ake the penalty too large, and VW will figure out a way to bankrupt that entity so that it pays nothing.”

Well, if the US government really want to do that, VW can’t get off the hook so easily. The US can simply target VW as a group, not an individual brand. Meaning VW can’t dodge it if it still wants to sell Audi and Porsche.

• Pch101

Once again, you do a fine job of proving that you don’t know what you’re talking about. At least you’re consistent.

• JD321

How So?

…Or are you just being your normal insufferable parasitic brat?

• CoastieLenn

PCH- As I admittedly know less than a 5th grader about economics and business law, if this debacle includes engines sold under the VW brand and the Audi brand, wouldn’t the parent company be the target of the violation instead of a brand-specific penalty? Could this just end up being a GM type situation when/if the fines get too high and VW just electively bankrupt’s themselves to avoid payment of the penalty as you described?

I know you know a lot about how all these things can/do play out so I’m curious to see what could happen if the EPA decides to go all out and make an example of VAG. Highly unlikely, I know, but a “white knight” dream none the less.

• Pch101

Brands don’t file bankruptcy, companies do. The always-inaccurate WSN is the one who brought up that idea, not me.

The EPA is already going after VAG, Audi AG and VWoA. That is a given.

Companies with excessive liabilities file bankruptcy. Make the penalties too large, and VW and its subsidiaries will have an incentive to file BK. (Case in point: Exide, which filed twice in order to reduce its environmental liabilities.)

Accordingly, the government has an interest in negotiating a compromise. In the big picture, the EPA’s goal should be to impose enough penalties and create enough bad press that other automakers aren’t tempted to cheat. Giving VW the death penalty isn’t on the table.

• CJinSD

> C02 emissions and NOx emissions pose different problems. <

Would these be imaginary, agenda-driven problems vs. real, perceptible problems?

• th009

Mark, how is the non-remediation factor calculated? Engine penalty x # of years not remedied x 30% x # of cars?

If I assume an average of three years of non-remediation (VW’s recent sales are much higher than around 2009), the non-remediation would increase the per-car penalty by 90% (or 119% if they do compound interest), or around \$10M in total.

What am I missing?

• Aaron Cole

I’ll try to answer as best I can, if that works:

The non-remediation penalty was calculated at maximum penalty (30 percent) x engine plus egregiousness (\$21,775) x 482,000 engines.

• th009

Sorry, it was Aaron, not Mark!

So the scaling does not apply to non-remediation?

• Aaron Cole

As near as I can tell, scaling doesn’t apply to the penalty for non-remediation. From the penalty advisory for calculating non-remediation:

“To make this adjustment, multiply the average per vehicle/engine gravity (calculated in the previous sections) times the number of vehicles/engines not remediated times the non-remediation percentage increase assigned by the litigation team.”

• jkross22

https://www.volkswagenfraudlawsuit.com/

Looks like it went live today.

• bball40dtw

That factory always makes me think of Pink Floyd’s Animals album cover. I know it’s actually Battersea Power Plant on the cover, but it gives me the same vibe.

• seth1065

My guess would be triple what Kia paid, 1/2 as many cars but seems like not only did they lie but they dragged the feet on a fix, There is no way VW will buy back all the cars at full sticker , as I have said all week if they have to do something it will be on the 09-14 cars so idea how many that is but it will be enhanced trade in value and I guess 25% of TDi owners would not take it or do the repair if they live in a state that does not test.

• APaGttH

My wild ass guess – \$1.8 billion.

• Big Al From 'Murica

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.

• 87 Morgan

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.

• Drzhivago138

If the SEC comes after the board of directors in police boats as they try to escape Newport Beach in the stolen Queen Mary, this will all have been worth it.

• mchan1

The IRS can’t force taxpayers to amend the old returns once the 3 year statute of limitations ends.

The open tax years are 2012-2014, provided all returns were filed annually by the taxpayers.

What the government/US Treasury can do is go after VW for fraud by claiming that its diesel cars were “clean” when it wasn’t for those tax credits.

• th009

Stock is traded outside the US so outside SEC’s scope. In any case, C-level managers were not aware of this, SEC wouldn’t really have a case.

In the end few dealers will actually go to court, I think. That’s a last resort and probably would result in losing the franchise (VWoA could simply not review their dealer agreements), and thus having basically zero value for the dealership.

Consumers … much remains to be seen, we don’t know what the remedy will be yet. Class action suit could be strong or could be frivolous, depending on what the remedy is.

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