How to Avoid Another VW Scandal: The Right Mix of Carrots and Sticks?

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The scandal around the revelations that Volkswagen manipulated emissions monitors on its cars to give falsely low readings damaged the company’s image and its stock market value, which dropped 40 percent within two days of the news breaking. This damage threatens to have tremendous effects on the German economy, where 1 in 7 workplaces is directly or indirectly dependent on the automotive industry.

Looking at why and how VW committed the fraud is also an opportunity to examine practices related to environmental monitoring in the automotive industry and whether the reaction to the scandal is really likely to prevent another one from occurring. For many experts involved in the devising of monitoring methods, the scandal has some obvious roots—the desire for more profits. But they also note that governments and consumers themselves perhaps also share some complicity in the deception that’s now costing VW so dearly.

“Environmental monitoring regulations and adaptation are costs, so there’s a tendency to avoid them,” says Arthur ten Wolde, manager of circular economy public affairs at De Groene Zaak, a Dutch business-lobbying group that advocates for a circular economy. He spoke to Pro Journo at October’s World Resources Forum in Davos, Switzerland.

Estimates by Transport & Environment (T&E), a Brussels-based green research and lobby group, calculate that at a cost of 50 euros per car, they could upgrade most Euro 5 emissions standards vehicles to equip them with selective catalytic reduction systems (known as SCRs). According to the group’s tests, these systems would reduce nitrogen oxide emissions so that the cars meet EU environmental norms.

But to avoid those costs, the industry is lobbying against stricter regulations. Based on the EU transparency register, in 2014 Volkswagen alone spent more than 3.3 million euros and employed over 43 registered lobbyists, followed by Daimler, with 2.5 million euros and 14 lobbyists, and far ahead of BMW, with approximately 1.4 million euros and eight lobbyists.

Reuters has reported that VW plans to recall 8.5 million affected vehicles in the EU. Assuming that all the engines meet the Euro 5 norm, if these vehicles were to be equipped with a SCR system, the total cost could amount to a maximum of 4.25 billion euros. VW’s calculation is perhaps easy, then, to understand.

The Economist has drawn attention to some of the testing practices developed by allegedly independent testing organizations “to win clients.” Among other things, they include the removal of wing mirrors and sound systems, taped cracks between panels and the use of high-performance lubricants and tires to save weight and reduce drag.

In the case of the current manipulation scandal, the most important cheat is that testing takes place on a rolling road under laboratory conditions, which are far from being realistic. The software installed in VW cars was able to detect these conditions, making it possible for the car manufacturers to deceive the testing regime, as well as customers and regulators.

In a letter submitted recently to the EU’s Technical Committee on Motor Vehicles, Transport & Environment asked for stricter testing regimes under real-life conditions and complained that when driven on the open road, the vehicles exceeded test values by a factor of nearly five.

“The main answer why we haven’t done monitoring under real-life conditions yet is cost,” says Paul Ekins, a professor of resources and environmental policy, and director of the UCL Institute for Sustainable Resources, at University College London.

According to Ekins, this is also due to governments’ various interests. “As with everything to do with government regulation, there is a tension between wanting to keep the cost down and wanting the regulation to be observed, he says, noting that governments are reluctant to insist on regulation that will push up cars’ consumer prices. There is often an assumption that companies just want to maximize profits. But Cornis van der Lugt, a senior research fellow with the Centre for Corporate Governance in Africa at the University of Stellenbosch Business School, says that “real financial decision-makers are quite often more sophisticated. Many decent investors will tell you it’s not just about short-term profit; more importantly, it’s about the doability of longer-term cash flows.”

Van der Lugt also says that “business is not against regulation per se” and that there are good examples of business self-regulation in the form of setting industrial and reporting standards, such as the Global Reporting Initiative. Still, he notes, it is mostly governments that introduce the requirements for reporting in the first place, but the regulator often “leaves it up to the market” as to how the companies report and which indicators they use.

“The EU has a very long-standing process of increasing the stringency of emission standards from vehicles,” says Ekins. “That in itself means nothing at all, unless those standards are enforced.”

The extent to which the EU and especially the German government are actually interested in enforcing stricter regulations is questionable.

The Guardian recently revealed that the U.K., France and Germany, while publicly calling for investigations, were lobbying to keep the testing loopholes The Guardian report suggested these loopholes would increase real-world carbon dioxide emissions by 14 percent above those being claimed by manufacturers. This was particularly noteworthy in light of the recently concluded COP21 climate summit in Paris, where the international community negotiated on binding targets for emissions.

There are suspicions that some in Germany’s government, in a country where so many jobs are connected to the car industry, must have been aware of the fraud committed by VW. Elkins calls that “pure speculation.” Still, he says, it is “understandable that the scandal was first discovered in the United States rather than in Germany.”

Environmental monitoring is meant to be tool that determines whether an environment is fit to live in and detects when problems occur. But there are many conflicts between different interest groups, ranging from citizens and consumers to businesses and governments, that undermine environmental monitoring efforts. Increased transparency on all levels, the right mix of incentives and regulations and participatory processes in setting standards are key to overcoming these conflicts. In the end, it’s a question of finding the right mix of rewards and punishments.

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