Since 2015, a storm has raged in Germany in the worlds of cars and politics. The regulation of exhaust emission cleaning systems for diesel motors has not led to the attainment of targets for reduced levels of contaminants. The industry is being accused of deceiving both government and citizens in classic capitalist style. What is actually involved is a tangle of deception and regulatory failure. This distinction is of crucial importance, and if we are to draw lessons from this affair, it is essential to understand the failings of regulation. Let us be clear: the problem of an entire industry, not single firms and systemic causes can be identified in the relevant regulatory framework. 

The story began with the introduction of emission standards for motor vehicles. These standards represented, and still represent, the upper limit of what is technically feasible. As the industry could not attain them through a reduction of fuel consumption alone, they led to the development of additional catalytic converters.

Since the passage of an EU regulation in 2007, politicians were faced with the challenge of formulating requirements in such a way that, despite the greatest disparities amongst motors, development concepts and requirements of use, they would be generally accepted, capable of implementation and verifiable. The emission of contaminants is indeed different in each of a car’s operational modes, be it a cold start, rapid acceleration, driving in mountainous terrain, driving on the motorway, winter driving or summer driving.

In the face of such problems and contradictions, it was decided to opt for a single specific value for contaminant emission, which motors would have to maintain under precisely defined conditions (on the test bench). In defining environmental conditions, the outside temperature was the guide value. Concretely speaking: with an outside temperature between 23 and 27 degrees Celsius, a defined value, staggered by year, was not to be exceeded. Once this value was met, everything was in order. The regulator also prescribed that the technical settings which contributed to obtaining this value could not be switched off under varying environmental conditions. This gave rise to the notion of so-called illegal defeat systems

From the very beginning, the regulation itself made a decisive contribution to the aberration of the past decade: namely, the core concept consisting of a ‘thermal window’ static procedures and so-called defeat systems. This concept, which was crystal clear to lawyers, was from the start a nightmare for engineers and at the same time an open door for manipulation. 

A catalytic converter cannot be continuously in operation. It functions only at certain emission and environmental temperatures; it requires a certain amount of oxygen and polluting gases of a certain composition. If this is not observed, the motor will splutter. Rock-hard carbon layers will form, clogging and ultimately ruining the catalytic converter (sooting). And these are only the most frequent examples of possible damage. Precisely for this reason, the EU regulation states that, for reasons of ‘engine protection’, the catalytic converter may be ‘shut off’ under certain conditions. 

Operating a catalytic converter lowers performance and increases fuel consumption. Thus, the more often the catalytic converter is not in operation, the better the car’s performance values. And it is precisely these performance values in which the consumer is primarily interested. Which is why, from the standpoint of automotive development engineers, the contest was about acceleration and consumption, not contaminant emissions. Put succinctly: the less often the catalytic converter operated, the more attractive a car’s specs were. But of course, the catalytic converter was not supposed to be switched off. This led to motor protection becoming more and more important. And additional reasons for motor protection kept on coming: excessively high or low outside temperatures, excessively high temperatures during acceleration, too little oxygen when driving in mountainous terrain – the list was endless. Taking advantage of the discretionary power granted to it by the regulation, the automotive industry virtually made the exception the rule, which was supposed to be attained with the help of the concept of ‘thermal windows’ Whilst rapid acceleration to 2200 revolutions undeniably justified shut-off, several manufacturers adjusted the catalytic converter not to start up again until 1200 revolutions. Which could take a long time on a level route. Several catalytic converters already reduced their performance when the outside temperature had cooled to 17 degrees Celsius, others with a cooling to 12, but all substantially above zero degrees Celsius. 

So, were all motor development engineers unscrupulous law breakers? Certainly not. They used the discretionary space created by the regulation, to be sure, at times far above the limits intended by the regulators. With these ‘optimisations’, there was no cause to really have a bad conscience: as fascinating and unambiguous as the term defeat systems was to lawyers, it was just as ambiguous and absurd to the developers – only no one had noticed.

The concept of a defeat systemactually has no application to a modern, electronically controlled motor. The motors in question have between 15,000 and 20,000 electronic control points, which makes programming them a masterwork. Every tenth of a second, new functions are switched on and off, to guide the motor calmly through all of the different stress situations to which it is subjected, with efficiency and without spluttering or a broken catalytic converter. Today, no car motor can function without this constant process of switching off and on again. And with each successive year, the developers lost more respect for the concept of a defeat system. Behind the scenes, the combination of ‘thermal window’ and defeat system was undergoing a creeping process of erosion.

Naturally, everybody is now wondering how this could happen. All of the vehicles had received operational approval from the Federal Motor Transport Authority. All of the developers’ discretionary decisions, as provided for in the regulation, were assessed by a competent governmental authority. Why was the regulatory concept not implemented, and why, indeed, did its being undermined not become a topic of discussion? Answering these questions is important, but will not be easy. Moreover, there is not a single answer. Officials relied on the reports of technical experts, who were entrusted with evaluating the suitability and reliability of each individual case. The competent authority never considered itself cleverer than the engineers carrying out the assessments. The creeping process of erosion had become the recognised state of the art without those responsible for making the rules noticing it.

The regulators are now forced to rethink their entire regulatory structure. The fundamental intention of creating a regulation that is universal, verifiable and capable of implementation, and that does not limit the speed of innovation, was, in the case of exhaust regulation, indeed correct. However, the attempt to create a regulation scheme which removed the technological attainment of the goal (microgram corrosive gas in the insulating glass) from the actual ultimate objective (less contaminant at the roadside), induced manufacturers to take steps which in any case contradicted the spirit of the regulation. This mistake is now being eliminated through the new ‘RED’ (Real Driving Emmissions) testing procedures (test in actual road traffic). The ‘thermal window’ was in any case, in terms of its design, unsuitable (it should at least have been placed at more realistic outside temperatures, i.e., between 10 and 15 degrees Celsius), and led its self-interested users astray. The impact analysis at the time of introducing the regulation was poor – and possibly too strongly influenced by the industry itself.

This negative experience should however not lead to an overly technocratic and detailed stipulation of regulation targets in future and, as a result, to limiting of the speed of innovation and the competitive search for alternative paths. The ability of public institutions to predict future technological developments remains poor. But the limited foresight of the regulators in the case in question must not become a justification for a new wave of detail-obsessed regulations. 

Industry – not just the automotive one – must adopt and embrace the switch, now in full swing, from a norm-oriented to a goal-oriented type of regulation. Should it fail to do so, the regulators (be they parliaments or authorities) will find themselves forced to institute increasingly detailed regulations with increasingly intensive test and authorisation procedures. 

The Diesel Affair represents losses in the billions. It affects the German value proposition in international competition and shakes the trust of consumers and citizens. It is incumbent upon those responsible for necessary state regulation, as well as industry, to learn lessons within their respective fields of responsibility.

Roland Koch is a former prime minister of the state of Hesse (Germany), a former CEO of Bilfinger SE, and today an attorney and adjunct professor at the Frankfurt School of Finance and Management.