Friday, October 09, 2015

What the Congressional Hearing on VW Missed

I made time in my schedule to watch yesterday's Congressional hearing on the VW scandal on C-SPAN. It left me with very much the same sense tweeted by Amy Harder of the Wall Street Journal, though perhaps for different reasons:

Similarly to the Deepwater Horizon hearing, some of the Members of the House Energy and Commerce Committee used the occasion to demonstrate that their outrage over this event equaled or exceeded that of their constituents back home. This is par for the course. But just as when confronted with the highly technical issues of a well blowout in the deep water of the Gulf of Mexico, the committee's members would also have benefited from more technical advice prior to and during the hearing.

In particular, I thought they missed key opportunities to follow up on answers given by the CEO of Volskwagen's US subsidiary, Michael Horn. One example followed Mr. Horn's response to a question about the timeline for attempting to fix the company's non-complying diesel cars from model years 2009-2015.

He explained that the affected models included three generations of engine and emissions treatment technology. The oldest, which he described as "Gen-1" would be the hardest to fix and was clearly not amenable to merely updating the engine management software to remove the "defeat device" code. However, he also indicated that the newest generation might be fixed in exactly that way. That's because they already incorporate the Selective Catalytic Reduction and urea technology used in bigger, more expensive models. The question left hanging in the air but never asked was why VW would have abandoned the exhaust-gas-recirculation (EGR) technology that had been matched to the 2-liter diesel engine since 2009, if it was convinced the cheaper technology was doing the job.

Several members of the committee pointed out to both Mr. Horn and Christopher Grundler, the EPA official responsible for emissions compliance, that although the EPA had indicated these cars were safe to drive and would not be pulled off the road, they would be emitting unacceptable levels of NOx until they were recalled and repaired.  Mr. Horn had already indicated that might take up to two years, which seemed quite realistic.

Despite Mr. Grundler's expertise, everyone seemed to treat these emissions as an unalterable circumstance, ignoring the fact that NOx is a traded commodity in the US. In fact, the markets for NOx and SOx emissions credits--overseen by the EPA--have been so effective that they provided the intellectual spark for the whole idea of CO2 cap-and-trade. In light of that, I was surprised that no one suggested that VW, either voluntarily or at the direction of the EPA, should immediately purchase NOx credits equivalent to the excess emissions of the affected cars until they have been brought into compliance.

Of course that wouldn't be a perfect substitute for tailpipe compliance. Unlike CO2, NOx acts locally, rather than globally. However, as I understand it the NOx markets function regionally, and I would be surprised if there wasn't a reasonable overlap between the geographic concentrations of VW diesel car sales and the focus of the NOx markets in the Northeast, Midwest and California. Buying large blocks of  NOx credits would push  up the price for these instruments and prompt more emissions reductions from power plants and other participants in these markets, leaving the air cleaner.

I am sure many of those watching the hearings shook their heads when Mr. Horn expressed his belief that the responsibility for circumventing the cars' emission controls likely rested with a few software engineers, rather than a corporate decision. Representative Chris Collins (R-NY) channeled a lot of frustration when he rejected that idea on the basis that if VW had found software to fix diesel emissions it would have rushed to patent the idea. I'm less certain of that in this age of widespread technology outsourcing. For VW's diesels, much of the key hardware came from vendors, and I would expect the same to be true for software. I was hoping someone would ask whether the "defeat device" software itself had been sourced from a vendor.

Either way, it was clear that Mr. Horn was struggling with the disconnect between his own beliefs about the situation and the facts that had emerged. I experienced something similar when my former employer, Texaco Inc., was embroiled in a scandal over diversity in the 1990s. The newspaper accounts I read of blatant discrimination in closed-door meetings were at odds with everything I knew about a company for which I had worked for two decades. Mr. Horn expressed similar feelings, but I doubt they provided much consolation to those whom VW's actions have harmed.

In that vein, there was a lot of speculation about damages and remedies at yesterday's hearing.  It was clear that most of the committee shared the view of one member, who advised VW to be "aggressively compliant" in responding to its customers and dealers. However, suggestions that the company offer "loaners" to all 500,000 affected customers seemed detached from reality, as did the notion that VW should voluntarily refund the full purchase price of these cars. A quick calculation puts the price tag on that idea in the $10-20 billion range, before paying any of the fines and penalties that seem inevitable in this case. I don't know what compensation I'd want if I had bought a diesel VW, instead of a gasoline model, but I don't think I'd be counting on getting my purchase price back.

Yesterday's hearing had its share of posturing, but on balance I thought it contributed to our understanding of the scandal and the next steps in the process. The panel treated Mr. Horn with remarkable civility, under the circumstances. That is likely attributable to his having been among the first to admit that the company had "screwed up." Perhaps his most telling remark yesterday was that they would have to figure out how to manage a company of 600,000 people differently, after this. "This company has to bloody learn," was how he put it. I imagine we'll be hearing a lot more in the weeks and months ahead about exactly what those lessons are, and how much they will cost.

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