The Volkswagen diesel emissions scandal is in the first instance a case of market failure, because the harm from vehicle emissions to public health and to the environment is neither internalized by car producers nor by car drivers. This market failure is neither corrected by public regulation nor by civil liability. There is regulatory failure because the control of nitrogen oxide (NOx) emissions by the German automobile regulatory agency (Kraftfahrt-bundesamt) was lenient. There is also corporate governance failure within Volkswagen through the fraud of installing manipulative software. And there is dysfunctional law, which, as a result of industrial lobbying, does not allow for class actions or similar types of lawsuits.

It seems that the civil courts kept their full independence in this matter. Courts of lower instance in their large majority decided that owners should get their money back. However so far less than 50,000 out of 2.4 million car owners have taken action against Volkswagen or Volkswagen car dealers. The others shy away from risky litigation. The procedures take much time. It is unlikely that the German Supreme Court (Bundesgerichtshof) will take a decision before the end of 2018. After that date, all limitation periods will expire. The strong signal of a Supreme Court decision, which would end legal uncertainty, will most probably only be given after the end of the limitation period. For Volkswagen, the likely consequence is that it will have to pay some hundred million Euros as compared with more than 14 billion Euros if all affected car owners would have made their claim before the end of the limitation period.

Since the 1990s, European legislators have supported modern, turbocharged direct injection diesel engines by applying laxer standards for NOx emissions and particulate matter as compared to gasoline cars. Miravete et al. (2017) estimate that this special treatment for diesel vehicles in Europe, combined with preferential fuel taxes for diesel, corresponds to an implicit import tariff of two to three times the official rate with respect to non-diesel car exporters, such as the USA and Japan. This policy was well perceived by European car producers with their comparatively large share of diesel cars and made it easier for politicians to comply with European CO2 emission standards.

In the US, where politicians have little interest in supporting diesel cars, a very different position was taken. On the one hand, reduction of CO2 emissions has never been the highest priority in the USA, probably because the relevant stakeholders have been afraid of losing competitiveness with respect to emerging market economies like China and India. On the other hand, for many decades, politicians have been facing strong pressure from large parts of the urban population suffering from ambient air pollution. Thus, it is no wonder that US car manufacturers are not familiar with modern diesel technology, and the share of diesel passenger cars remains low, NOx emission standards are high and law enforcement stricter.

The interest of car manufacturers carries enormous weight in German politics and must be balanced through permanent and increasing pressure by the victims of emission standard infringements. The (inefficient) bias in favour of car producers’ interests could be mitigated by shifting the competence for type approval from the Federal Ministry of Transport, which is tightly connected to the car industry, to the Federal Ministry for the Environment, which arguably has a stronger commitment to protecting air quality. Moreover, the removal of legal obstacles to coordinated court actions by affected car owners would improve their chance to enforce their interests via civil liability actions.

This post is based on a recent article available here.

Thomas Eger is a Professor of Law and Economics at the University of Hamburg – Institute of Law and Economics and a guest contributor to the Oxford Business Law Blog.

Hans-Bernd Schäfer is a Professor of Law and Economics at the Bucerius Law School and the University of Hamburg, and a guest contributor to the Oxford Business Law Blog.