16 Oct 2015

(by Eugenio Miravete) VW stands accused of exceeding the US EPA’s NOx standards by a factor of 10 or up to 40. What makes VW’s deception especially culpable is a sophisticated device designed to instruct the engine to run on clean mode when it detects that the vehicle is under lab testing conditions. Outraged commentators compare this to the behavior of the financial industry that led to the 2008 crisis. How did VW come to this? A significant part of the answer can be found in my own research, though this was not the issue I was investigating at the time.

After years studying the diffusion of diesel automobiles in Europe during the 1990s, María J. Moral, Jeff Thurk, and I completed a paper on ‘’ last summer. As part of this research, we simulated a scenario supposing that European environmental authorities had adopted the same nitrogen oxides (NOx) emission standards as the U.S. Environmental Protection Agency (EPA) after the implementation of the 1991 U.S. Clean Air Act Amendments. Our aim was to identify the role of environmental policies as substitutes for industrial and trade policies. Using the EPA’s 2010 engineering cost estimates for retrofitting diesel engines to comply with those standards, we predicted that the sales of diesels in Europe would have been as rare an event as they currently are in the U.S. automobile market. In other words, if European environmental authorities had had the same aversion to NOx as their American counterparts, the explosive growth in sales of diesel vehicles witnessed in Europe during the 1990s would never have happened. Essentially, with strict NOx emissions standards, diesel vehicles are not a viable option.

Never in our wildest dreams, had we thought our analysis would be relevant to such a huge corporate scandal. A few days after VW’s emission deception device was discovered, VW stopped selling most diesel models in the U.S. and Swiss authorities banned the sales of numerous TDI-powered vehicles. Even German authorities appear to be inching towards a stricter enforcement of emissions, which could threaten the commercial viability of its own industry.

Our findings can also cast light on the role of governments who systematically turned a blind eye to all sorts of trickeries by automakers so that politicians could keep announcing greener and greener standards as if they were not costly to achieve. European politicians, perhaps moved by honest environmental concerns, reduced NOx emission standards by 84% between 2000 and 2014, from 0.5 to 0.08 g/km. However, technology apparently could not cope with the promised reduction, because on-road measured emissions fell by only 40%. In 2000 on-road emissions were double the limit, but in 2014 they exceeded it by a factor of eight. Why would European authorities behave this way? Why do they pass standards that they do not intend to enforce?

European regulators have never been as concerned about NOx emissions as American authorities. As compared with petrol engines, diesel vehicles save fuel, improve mileage, and have lower greenhouse gas emissions (so Europeans could set greenhouse gas standards that were substantially tighter than their American counterparts). Given current concerns about global warming, such a position is arguably sensible though it comes at the cost of more localized pollution and health hazards.

Whatever the relative merits of these environmental arguments, our research shows that by focusing on the reduction of greenhouse emissions, European legislators favoured production of diesel vehicles and strengthened the dominant position in the European automobile market. The press has reminded us of Angela Merkel’s pressure to postpone the enforcement of the EURO6 standards. The same was true of Gerhard Schröder and many other non-German politicians caring for their own national automobile manufacturers. The development of new diesel engines in the early 1990s gave European manufacturers a competitive edge over imports. Given the limited impact of automobile emissions (just a fraction of those coming from power generation), European regulators opted for lenient NOx standards. Indeed, the specifics of Europe’s emissions policies served to protect the European market by the equivalent of a 20% import tariff. This is significantly more protection than was conferred by the 10.4% explicit E.U. import tariff on automobiles in the year 2000.

The VW scandal creates an opportunity for European authorities to set emissions targets that are realistic, an issue that has been missing in the debate following the VW debacle. However, setting technically feasible regulations consistent with clearly stated environmental goals will have important economic consequences that we should not ignore. We all want less CO2. Emissions standards that target greenhouse gas reductions would continue to promote diesels, reduce overall fuel consumption, and secure the market share of European manufacturers. If we prefer lower NOx emissions Europeans will erode the competitive advantage of their automobile industry, destroy European manufacturing jobs, allow for more Asian imports, and increase Europe’s demand for oil. Finally, if we want clean air at all costs and ask for simultaneous NOx and greenhouse emission reductions that are not technological feasible, we are likely to induce more cheating and require politicians to close both eyes. The alternative is that we drive vehicles with much lower levels of performance. Hybrids and electric cars might then have a chance of becoming mainstream but society should recognise their high cost and that power generation and transmission are not emissions free. Sadly, given what we now know of the VW scandal, we remain skeptical that politicians and the public will engage in a sincere conversation about the limits and cost of regulations.

Eugenio J. Miravete is an Affiliated Professor at the Centre for Competition Policy at UEA and Rex G. Baker Jr. Professor of Political Economy at University of Texas at Austin.