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U.S. officials blast Volkswagen for emissions scandal, impose record payments

The U.S. Justice Department and Environmental Protection Agency says Volkswagen will set aside $10.033 billion to cover buybacks and fixes. (Video: Reuters)
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Federal regulators blasted German automaker Volkswagen on Tuesday after announcing the company will pay up to $15.3 billion to settle its emission scandal, the biggest payout by an automaker in U.S. history.

Calling the deal “unprecedented” and “historic,” Environmental Protection Agency Administrator Gina McCarthy warned car manufacturers her department will continue to investigate companies suspected of breaking the law and levy harsh penalties.

“When you break the laws designed to protect public health in this country, there are serious consequences,” she said at a morning news conference.

“The cost of breaking our consumer and environmental laws is high,” added Edith Ramirez, chair of the Federal Trade Commission.

Volkswagen will a pay a total of $14.7 billion to consumers and federal agencies. Separately, the carmaker will pay $600 million to settle with 44 states, Puerto Rico and the District.

More than $10 billion of the settlement will go to consumers to buy back or repair 475,000 Volkswagens with two-liter diesel engines that were programmed to turn off emission measurement data outside of laboratory settings. Those engines spewed 40 times the legal limit of harmful nitrogen oxides. Consumers will receive between $5,100 and $10,000 in compensation if they choose to fix their cars or between $12,500 and $44,000 if they choose to sell their cars back to Volkswagen.

“By duping the regulators, Volkswagen turned half a million drivers into unwitting accomplices in an unprecedented assault on our environment,” said Deputy Attorney General Sally Q. Yates.

Cars bought back by Volkswagen are required to be fixed or scrapped, according to the settlement agreement. They cannot be sold in overseas markets with less stringent emissions standards.

“We can’t undo the damage that Volkswagen caused to our air quality,” Yates said. “You can’t suck the [nitrogen oxide] out of the air. But we can offset that damage by reducing emission from future sources.”

Another $2.7 billion will go into an EPA trust fund for environmental remediation, and the German automaker will spend $2 billion more on developing clean energy technology in the United States.

A criminal investigation into the 2015 “diesel-gate” scandal, one that impacted 11 million vehicles worldwide, is pending, as are civil penalties assessed under the Clean Air Act. Federal regulators are negotiating a separate settlement between VW and owners of cars with three-liter diesel engines. European regulators have also signaled additional fines are on their way.

This settlement ties together agreements among VW, the EPA, the California Air Resources Board, the Federal Trade Commission and owners of Volkswagens with two-liter diesel engines.

“It’s a remarkable deal for consumers,” said David Uhlmann, a professor of law at the University of Michigan and the former chief of the environmental crimes section at the Justice Department. “There has never been a case quite like this.”

The settlement is the latest massive fine imposed by federal environmental and safety regulators on big companies, dating back to the $20.8 billion settlement with BP over the 2010 Deepwater Horizon oil rig explosion. BP also paid $4 billion in criminal fines.

In 2012, Toyota paid $1.1 billion after after its gas-pedal recall.

In 2015, General Motors agreed to pay $900 million after an ignition-switch defect.

Takata has yet to reach a settlement with regulators over its massive air bag recall.

“I think Toyota and VW and these other companies, they don’t understand or underestimate the American legal and regulatory system,” said Carl Tobias, a professor of law at the University of Richmond. “Well, it caught up with them this time.”

“We take our commitment to make things right very seriously and believe these agreements are a significant step forward,” Volkswagen chief executive Matthias Müller said in a statement. “We appreciate the constructive engagement of all the parties, and are very grateful to our customers for their continued patience as the settlement approval process moves ahead. We know that we still have a great deal of work to do to earn back the trust of the American people.”

The company’s statement also noted it does not consider the settlement an “admission of liability.”

"We are so honored to be able to be part of a collection of settlements that is actually designed to achieve not just economic justice, but justice for the environment," said Elizabeth Cabraser, head of the plaintiff steering committee. "It's a tremendous opportunity and it's a responsibility we take very seriously. Sometimes money serves as a proxy for justice. Sometimes money is the most we can do. And other times money can do justice, but litigation can do more."

Volkswagen shares were trading up 3.2 percent early in the day after the settlement was filed in the U.S. District Court of Northern California.

Volkswagen executives have begun evaluating where to make spending cuts in the wake of the fines, which account for nearly one-fifth of the company’s value, targeting first wages for German workers and research and development of new models.

Those are drastic cuts for an automaker, said Erik Gordon, a professor at the University of Michigan Ross School of Business, because without new models, sales can decline, making investors hesitant to bankroll the company.

“This has dragged on long enough and the sooner VW puts this behind them, the better,” said Rebecca Lindland, senior analyst at Kelley Blue Book. “They need to concentrate on launching the product-led renaissance that will revitalize the brand and its reputation.”