On September 18, 2015, the Volkswagen Group (VW) was served with a notice of violation of the US Clean Air Act by the US Environmental Protection Agency (EPA). The EPA had discovered that VW had deliberately programmed turbocharged direct injection of its diesel engines to activate certain emissions controls only during laboratory emissions testing. This “defeat device,” as it came to be known, allowed the cars’ nitrogen oxide (NOx) output to meet US standards during regulatory testing but emit up to 40 times more NOx in actual onroad circumstances—violating the standards of the Clean Air Act. When the cars were operating under controlled laboratory conditions, which typically involve putting them on a stationary test rig, the device appeared to have put the vehicle into a sort of safety mode in which the engine ran below normal power and performance. Once on the road, however, the engines switched out of this test mode and emitted the nitrogen oxide pollutants. VW was also accused by the EPA of modifying software on the three-liter diesel engines fitted to some Porsche and Audi cars as well as VW models.

VW had put this deceptive programming in about 11 million cars worldwide (including 500,000 in the United States) during model years 2009 through 2015.

In November 2015, VW admitted that it had found “irregularities” in tests to measure carbon dioxide emissions levels that could affect about 800,000 cars in Europe, including petrol vehicles. However, in December 2015 it said that following investigations, it had established that this had only affected about 36,000 of the cars it produced each year.

How the Deception was Unearthed 

In 2014, US regulators were already raising red flags about VW emissions levels. However, VW dismissed these as “technical issues” and “unexpected” real-world conditions. An analysis of emissions inconsistencies between European and US automobiles had been commissioned in 2014 by the International Council on Clean Transportation (ICCT). Among the groups doing the analysis was one of five scientists from West Virginia University, who detected additional emissions during live road tests on two out of three diesel cars. The scientists provided their data to ICCT, which also purchased data from two other sources.

ICCT then provided all the findings to the California Air Resources Board in May 2014. Following this, VW became subject to regulatory investigations in various countries.

The news of these investigations caused a major VW stock price drop by one-third immediately following the disclosure. The widening scandal also prompted Moody’s Investors Service to cut the rating on VW’s debt, which could make borrowing money more expensive for the company.

The company cited “mounting risks to Volkswagen’s reputation and future earnings.”

Corporate Fallout 

It is clear that top management must have known about and approved fitting cheating devices onto the vehicle’s engines. Implications for the chain-of-command deception resulted in the resignation of senior executives in VW. VW Group CEO Martin Winterkorn resigned, saying that his company had “broken the trust of our customers and the public.” The VW Group brand development head Heinz-Jakob Neusser, Audi research and development head Ulrich Hackenberg, and Porsche research and development head Wolfgang Hatz were fired. VW announced plans to spend $7.3 billion on rectifying the emissions issues and planned to refit the affected vehicles as part of a recall campaign. The Volkswagen emissions scandal raised awareness over the higher levels of pollution being emitted by all vehicles built by a wide range of automakers, which under real-world driving conditions were prone to exceed legal emission limits. A study conducted by ICCT and Allgemeiner Deutscher Automobil-Club showed that the biggest deviations were from Citroën, Fiat, Hyundai, Jeep, Renault, and Volvo. A discussion was sparked that software-controlled machinery would generally be prone to cheating, and one way out would be to make the software source code accessible to the public. Matthias Mueller, the former boss of Porsche and the new CEO of VW, stated on taking up his new position, “My most urgent task is to win back trust for the Volkswagen Group—by leaving no stone unturned.” VW also launched an internal inquiry.

With VW recalling millions of cars worldwide from early 2016, it set aside $7.3 billion to cover costs. That resulted in the company posting its first quarterly loss in 15 years of $2.7 billion in late October 2015. The financial impact would continue to plague VW. The EPA has the power to fine a company up to $37,500 for each vehicle that breaches standards—up to a maximum fine of about $18 billion.

Impact on the Diesel Auto Industry

Under the assumption that diesel is better for the environment, governments over the last ten years had promoted the production of diesel cars, and the automobile industry had poured its money into their manufacture. Scientific evidence indicated that this was untrue. As a result, there was greater push to reduce diesel cars in some localities.

Throughout the world, decision makers in political, regulatory, and environmental sectors were examining the validity of VW’s emissions testing, and the investigations by the US EPA created concerns in countries such as Britain, France, Germany, Italy, and South Korea. In the European Union alone, VW would recall 8.5 million cars.

The VW scandal has had far-reaching impacts. Environmental activists in Europe maintained that emissions standards were being defied there. “Diesel cars in Europe operate with worse technology on average than that in the US. Our latest report demonstrated that almost 90% of diesel vehicles didn’t meet emission limits when they drive on the road. We are talking about millions of vehicles,” said Jos Dings of the nongovernmental organization Transport and Environment. Car analysts at the financial research firm Bernstein LP agreed that European standards are not as rigorous as those in the United States. However, they noted that as a consequence of the lax standards there has been “less need to cheat.” Bernstein also argued that if other European carmakers’ results were called into question,

“consequences are likely to be a change in the test cycle rather than legal action and fines.” Sales of diesel cars were already slowing when the VW emissions scandal erupted.

“The revelations are likely to lead to a sharp fall in demand for diesel engine cars,” said Richard Gane, automotive expert at consultant firm Vendigital. The UK trade body for the car industry, the Society of Motor Manufacturers & Traders

(SMMT), said: “The EU operates a fundamentally different system to the US—with all European tests performed in strict conditions as required by EU law and witnessed by a government-appointed independent approval agency.” The SMMT went on to say, “The industry acknowledges that the current test method is outdated and is seeking agreement from the European Commission for a new emissions test that embraces new testing technologies and is more representative of on-road conditions.”

“Dieselgate” Continues to Assail Volkswagen 

VW’s troubles with its “Dieselgate” scandal never seem to cease. On March 15, 2019, the US Securities and Exchange Commission charged former CEO Martin Winterkorn and two of VW’s subsidiaries “for defrauding US investors, raising billions of dollars through the corporate bond and fixed income markets while making a series of deceptive claims about the environmental impact of the company’s ‘clean diesel’ fleet.”

One after another, the elements in the aftermath of the Dieselgate scandal continue to bubble up. On January 2, 2020, the Guardian newspaper reported that VW was in negotiations about an out-of-court settlement with 40,000 German car owners who were affected by the emissions cheating scandal. The Associated Press reported on January 14, 2020, that VW continued to be hounded by German prosecutors. Six additional executives, who were part of the original scandal, were cited by prosecutors, bringing the total number to eleven corporate leaders. Of these executives, three were accused of direct illegalities and three of being accessories. Prosecutors, however, made it clear that this was not the end of their investigations and revealed that 32 additional individuals were under scrutiny.

The VW scandal just keeps popping up in diverse locations and never seems to die, primarily because a whopping 11 million cars are involved. As reported in the Guardian in April 2020, the World Health Organization (WHO) put out a forceful statement to the effect that VW had subverted key air pollution tests “to deliberately hide this toxicity.”

It also stated that the environmental hazard of diesel emissions worldwide “cannot go on.” The WHO then took another threatening swipe at the diesel car industry, stating forcefully that the sale of all diesel and petrol cars and vans should be banned by 2030.

According to a Reuters report, in December 2019 British VW car owners had launched a class-action lawsuit against the corporation for cheating on emissions tests. Then on April 6, 2020, the Guardian reported that the British High Court affirmed that VW had indeed subverted key airpollution tests. This verdict was seen as a shot in the arm for UK petitioners and campaigners to force the carmaker to address the lung-damaging effects of its cars, which emitted air toxicities at greater levels than legally allowed.

The Guardian also reported that 91,000 plaintiffs were taking the car manufacturer to court in what was said to be one of the biggest class-action cases—or group litigations—in England and Wales.

Although VW has been found guilty in the United States and in Europe, the company continues to deny that it cheated on emissions tests. However, the carmaker’s arguments continue to be seen as preposterous by the general public, and it will predictably face a steep climb to repair its corporate reputation in the coming years.

Case Discussion Questions 

1. ON ETHICS: What were the ethical issues underlying the VW scandal?

2. ON ETHICS: VW recalled cars with the diesel device. In your opinion, does this reduce VW’s responsibility?

3. ON ETHICS: Did the fact that VW’s profit goals seemed immediate and concrete while the victims of pollution seemed very distant impact the decision making of the company’s leadership? Explain.

4. ON ETHICS: Volkswagen engineers and leaders argued that environmental measures are intolerably harsh. In what ways did emissions tests and regulation standards embolden car manufacturers to game the system when testing their automobiles?
How might these factors lead companies’ ethical frameworks to fade from view?

5. ON ETHICS: Besides economic costs, what other costs did VW generate for itself?

6. ON ETHICS: What fallout concerns have resulted for the diesel auto industry as a whole?