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Affluent Christian Investor | August 21, 2017

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The Volkswagen Scandal Is An EPA Scandal

United States E.P.A. Logo

The United States Enviromental Protection Agency’s Logo

One of the laws of the universe is, “Without integrity, nothing works.” Volkswagen will pay a high price, both financially and in terms of market standing, for its deceptions regarding the nitrogen oxides (NOx) emissions of its diesel cars. However, it’s important to realize that Volkswagen’s lies were an outgrowth of the much more damaging lies that underlie progressive government and its instrumentality, the Environmental Protection Administration (EPA).

Volkswagen should never have done what it did, but VW’s lies were engendered by, and in many ways suborned by, the government’s lies. And, the government’s lies are far more costly and damaging to the nation than anything that VW did, or ever could do.

One of the legitimate functions of government is to deal with economic “externalities.” Externalities exist where economic activities generate costs that are not born by the same people that receive the benefits of those activities. Unfortunately, the EPA’s approach to dealing with the air pollution generated by cars and trucks is based upon a pyramid of lies.

The EPA’s foundational lie is the falsehood that underlies progressivism itself: that “experts” can manage the economy better than can “We, the People,” acting through free markets. Against all evidence and experience, progressivism holds that transferring power from markets to central planners will produce net benefits for society.

As Friedrich Hayek showed conclusively in his seminal book, The Fatal Conceit, the progressives’ faith in central planning is, well, a fatal conceit. If it were not, communism would have worked, and the Soviet Union would have won the Cold War.

The market-based way to control pollution is to tax emissions (and to subsidize, at the same “price,” activities that remove pollutants from the environment). This is also the constitutional solution. A tax schedule for various kinds of emissions is something that Congress could actually debate and vote on. This would avoid the need to delegate life-and-death regulatory powers over the economy to unelected “experts” at the EPA.

Appropriate pricing of pollution would deliver an economically optimum solution: the cleanest environment at the lowest cost. In contrast, the EPA’s “regulatory limits” approach to pollution control concentrates tremendous arbitrary power in the hands of unaccountable bureaucrats, who can never access all of the information required to make wise decisions.

“Regulating” (in this case) the NOx emissions of vehicles, rather than simply taxing NOx emissions from all sources, subjects the economy to the damaging impact of the following lies:

Progressive/EPA lie number 1: Government decrees can produce benefits without costs.

No, they can’t. Everything has a cost. Also, because everything in the economy trades off against everything else, it is essentially impossible for central planners to do accurate cost-benefit analyses of proposed rules. The information required to do so simply does not exist.

As Hayek observed, markets create, rather than merely transmit, information. The information required to calculate an optimum deployment of resources either exists in the form of market prices, or it does not exist at all.

The bottom line is that there is no way, even in principle, for regulators to know whether their actions are producing net benefits for society. The only certainty is that whatever rules the bureaucrats come up with will not produce an economically optimum solution. Only putting accurate prices on externalities, and then letting the free market sort things out, can achieve that.

As a simple example, electric cars could actually increase CO2 emissions vs. gasoline vehicles, if the electricity required to power them is generated by burning coal.

Progressive/EPA lie number 2: Trade-offs don’t matter.

VW’s aggressive diesel engine program was a response to the efforts of governments, both in the U.S. and in Europe, to fight so-called “climate change” by mandating reductions in automotive CO2 emissions. Diesel engines have a number of drawbacks in light-duty applications (weight and cost among them), and it is not clear that there would be any diesel powered cars in the U.S. right now if we were controlling emissions by taxing them.

In adopting its 54.5 MPG corporate average fuel economy (CAFE) standard, the Obama Administration ignored the trade-offs between fuel economy, NOx emissions, cost, and usability. However, these trade-offs exist, and they seduced VW (or, rather, a handful of people within VW) into starting down the road to perdition.

While the EPA can ignore cost and usability issues, auto makers cannot. If new vehicles are perceived as too expensive or too annoying, people will simply extend the life of their existing cars and trucks. Given that all a car is, legally, is its VIN number, there is no reason that a 2015 Chevy Suburban could not be kept in service forever.

It is very probable that some engineers within VW persuaded management to “bet the company” on diesels as a way of meeting CO2 limits with marketable, profitable cars. If so, when technological reality did not cooperate, those engineers would have found themselves in a very difficult position.

Does this excuse deception? No. However, nothing like this would have happened under a tax-based emissions control regime.

Progressive/EPA lie number 3: Every gram of NOx emitted below the regulatory ceiling imposes no cost on society, and every gram of NOx above the limit imposes an infinite cost.

Obviously all grams of NOx impose the same cost. Taxing NOx emissions (and subsidizing activities that incrementally remove NOx from the air at the same rate) would result in less air pollution at a much lower economic cost. This is because investment would be directed toward approaches that offer the most “bang for the buck.”

The quickest way to reduce automotive emissions has always been to buy up and retire older, poorly maintained vehicles. Who among us has not gasped for breath while following a clunker that was limping down the road while spewing a plume of blue smoke? However the EPA provides no incentive to reduce emissions via this approach.

NOx emission limits for diesel trucks have been getting progressively tighter over the years. One 1988 model year diesel engine is permitted to emit as much NOx as 500 engines from the 2015 model year. And yet, VW would not get any NOx reduction credit for removing old diesel trucks from the road.

Progressive/EPA lie number 4: Auto companies (and the jobs that they support) can survive having governments force them to make vehicles that their customers don’t want to buy.

They can’t. On the margin, CAFE is what drove GM into bankruptcy in 2009.

Under tax-based emissions control regime, GM would have devoted its U.S. factories to producing large vehicles, which they could have sold profitably, despite the high cost of UAW labor.

Progressive/EPA lie number 5: Private businesses can be destroyed for any transgression, but government can do no wrong.

It is not clear that the extra NOx emitted by VW’s diesel cars over the past few years did more harm than the EPA’s own Gold King mine toxic waste spill. Despite this, there have been no reports of bureaucrats losing their jobs as a result of this environmental disaster. Meanwhile, thousands of innocent VW employees (it employs almost 600,000 people world wide, many of them in the U.S.) could face layoffs, as a result of punitive actions by the EPA.

Conclusion

VW’s deceptions were criminal acts, and only people can commit crimes. The individuals that perpetrated the emissions fraud should be identified and prosecuted. Meanwhile, there is no logic to imposing massive costs on VW that produce no benefits to society.

The vast majority of VW employees, as well as all of its shareholders (which include pension funds), are just as much innocent victims of the diesel deception as is the public at large. There is no reason to punish them for actions in which they played no part, and for which a seductive environment was created by government.

The real solution to the VW problem is to move to a tax-based emissions control regime. It is stupid to tax things that we want more of (work, savings, and investment) when we could be taxing things that we want less of (e.g., pollution). And, it is stupid to continue a pollution control approach that enhances the power of unaccountable bureaucrats, while imposing huge economic costs on the rest of us.

 

Originally posted on Real Clear Markets.

I am a software entrepreneur that is currently an investor and board member in three startup companies. I have a B.S. in mechanical engineering. I was born in 1948, and I live in Houston, Texas.

This chapter of my life is about trying to help people make their dreams come true. I started writing about economics because I hate the way that our dysfunctional economy is crushing the dreams of so many people. Young people are delaying getting married and having children because of unstable jobs and incomes. It doesn’t have to be this way, and I want to contribute to solving the problem.

I believe that prosperity is possible, with correct government policies.

 

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