Wink and Nod Regulation Needs Reform
Volkswagen has learned that the cost of getting caught with your hand in the cookie jar, or in this case, with your software not being clever enough, is $15 billion. Much has been made about the VW emissions cheating scandal, as it should. An iconic company breaking the law is a big deal. But VW is not unique.
What has not received enough attention is why VW and other manufacturers engage in schemes to beat the required certification tests.
In the VW case, there are at least two explanations. One is that VW wanted to capture greater market share for its diesel cars sold in the United States and boosting performance was a key part of the strategy. VW chose to focus on diesels instead of hybrids to achieve carbon dioxide objectives because absent the cheating, diesels would have failed the tests.
The second explanation involves a history of gaming the certification test requirements by all manufacturers. The incentives for such actions increase as environmental performance standards become more stringent and the Environmental Protection Agency continues to believe that if it demands the impossible, manufacturers will find a way to comply.
Since emissions and mileage testing have been required by EPA, manufacturers have been periodically fined for noncompliance. For most of the past 40 years, it has been an open secret that regulatory compliance tests do not reflect real-world conditions, with certification test results rarely being achieved once vehicles are operated on highways and city streets. In some cases the vehicles tested bear little resemblance to those that are actually sold.
As mileage and emission requirements have become more stringent, the gap between laboratory test results and on-road performance has increased. This has been documented by several publications after the VW scandal became public. A report by the International Council on Clean Transportation reported that the gap between laboratory and on road performance has grown from 8 percent to over 38 percent.
Once regulations are issued, manufacturers have an incentive to find the least costly way of meeting them. The economics of the auto industry make it profitable to game the system, according to University of Denver professor Donald Stedman. Strict compliance with regulations can add thousands of dollars to a vehicle's price and reduce the performance that buyers demand. In the VW case, reducing NOx emissions would have degraded performance or increased vehicle cost. In a highly competitive market, those are not attractive options.
Since gaming the certification and testing system has been going on for years, wink and nod regulation created a culture that led VW engineers to think that their software gimmick was acceptable.
Ever more stringent but dubious environmental regulations will continue to reward gaming and regulatory capture. The solution to this and other regulatory abuses is to reform the system so that it relies on a stronger scientific foundation, objective and transparent analyses, and defensible cost-effectiveness in outcomes.
William O'Keefe is the President of Solutions Consulting. You can follow him on Twitter here.
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