The scandal over Volkswagen’s doctored diesels might reflect an amoral corporate culture back at company headquarters in Wolfsburg. But it also illustrates the law of unintended consequences flowing from decisions by regulators in Brussels. By adopting emissions standards that focused on carbon dioxide instead of nitrogen oxide, European Union officials created the equivalent of an import tariff favoring the fuel-efficient diesel engines that VW pioneered.
Had Europe adopted the same emissions standards as the U.S., write a trio of economists in a recent paper, the diesel market may never have taken off and we wouldn’t be talking about the potential for criminal indictments at the world’s second-biggest automobile manufacturer. Similar regulation-driven distortions pervade U.S. markets, from a distaste for diesels – after all, they still produce lower CO2 emissions than gas cars, supposedly an important goal – to our love of ethanol, even though it does little besides give an electoral boost to presidential candidates in the square states.
Automotive diesels were pretty much dead until VW revived the technology with its turbocharged direct injection, or TDI, engines in the late 1980s. Efficient, torquey and seemingly clean, small diesels rapidly climbed to some 60% of the European passenger-car market by 2000. That rise was remarkable for a product that had turned off consumers and regulators in the 1970s and 1980s because of its poor performance and sooty exhaust, especially since fuel prices were relatively low in the 1990s, reducing the competitive advantage of diesel’s high mileage ratings.
“It’s fascinating that this essentially transformed the market in Europe and nobody paid attention to it,” said Eugenio J. Miravete, a professor of political economy at the University of Texas and co-author, with Maria J. Moral of UNED in Madrid and Jeff Thurk of the University of Notre Dame, of a study on the rise of the diesel in Europe.
After closely examining diesel sales statistics in Spain, which mirrored the rest of Europe, Miravete and his colleagues identified a potential cause: European emissions standards, which favored high-mileage vehicles and in particular the diesel technology that VW and its French competitor
Europe’s CO2 emissions standards were 30% lower than U.S. regs in 2000, according to Miravete, while its NOx standards were more than five times higher. This may reflect Europe’s concern about oil supplies, Miravete said, since it is heavily dependent on imports from Russia and the Middle East. European regulators were less concerned about NOx, which contributes to acid rain and ozone, he said, perhaps because any gains they made with NOx could be undone by their less regulated neighbors in Eastern Europe and Russia.
The EU regulations gave an advantage to diesel manufacturers, who were selling a product consumers liked anyway because of its high mileage and peppy performance. By forcing additional costs and restrictions on gas car makers, especially Asian exporters, Miravete and his colleagues estimated the benefit was equivalent to a 20% import tariff on imports for less expensive passenger cars.
Their study illustrates a fact about regulation: It almost always benefits somebody, and even if officials don’t intend that result the beneficiaries take advantage of it and will lobby to keep the rules that help them against competitors. When Congress enacted Corporate Average Fuel Economy or CAFE standards in 1975 to reduce our reliance on imported crude, it left a glaring loophole for Detroit automakers to produce heavy, gas-guzzling cars that became known as sport utility vehicles under the looser standards for light trucks. Had Congress taken the more logical step of raising gasoline taxes, Japanese automakers would have had an advantage with their small, fuel-efficient cars.
“In practice, environmental regulations in particular can be used as a substitute for a tariff policy,” Miravete told me. “It is not clear this was done on purpose, but this was the result.”
A similar process happened with diesel fuel taxes in Europe, which have also been proposed as a cause for the rapid proliferation of diesel automobiles. In the wake of the Middle East oil crisis of 1973, EU officials gathered in Copenhagen to try and harmonize fuel taxes to discourage companies from moving to low-tax nations. They worried that higher taxes would hurt farmers and trucking companies, two vocal constituencies, so they proposed lower diesel taxes since diesel was a small portion of the passenger vehicle market.
Despite that cost advantage, however, diesel’s penetration of the passenger car market was only 10% by 1990. It was the introduction of TDI and stricter emissions regulations in the 1990s that drove the adoption of diesels, Miravete said.
In the U.S., meanwhile, Congress passed stricter air regulations in 1991 targeting NOx, which drove most German diesels out of the passenger car market.
“In Europe they still say these were tricks the Americans are using to protect their industry,” Miravete said. “There is no evidence it is true. But you can see very clearly how environmental regulations can be used to protect local industry. The Europeans can no longer compete in the U.S. with their most successful and fuel efficient vehicles.”
Of course, VW ended up trying another approach. It has admitted to inserting software code into its engine control computers to turn on NOx emissions controls when the cars were being tested and turning them off to enhance performance and mileage on the open road.
Now European regulators are in a real pickle. If they lower NOx emissions standards to come closer to the U.S., Miravete said, “they are putting 50% of their auto industry in peril.”
In the U.S., meanwhile, Obama administration policy seems to be designed to help out the White House’s venture capitalist friends on the left coast. The president’s Clean Power Plan would push a significant portion of coal-fired power generation off the grid, opening huge opportunities for wind and solar entrepreneurs and larger utility companies with diverse generating assets. Meanwhile the administration is dialing down CAFE standards on automakers to levels that will be hard to meet with existing technology.
“Now we’ve gone a little crazy,” Miravete said. “The only way of meeting CAFE standards by 2025 is for GM to buy Tesla.”
Not that anybody intended that result.
