Economic impact of emissions regulations on car manufacturers

¶ … economic cost of emissions regulations on car manufacturers and consumers. It shows that vehicle prices have risen over the past four decades since the inception of the Clean Air Act in America by up to 33% in order to cover emissions related costs. These costs are felt both by consumers and manufacturers -- and in some cases can lead to fees (for testing as well as for violations). The recent case of Volkswagen lying to regulators about its emissions controls in its diesel engine autos has been a clear example of the economic impact that emissions regulations can have on manufacturers who attempt to circumvent them. This paper concludes by asking just how long consumers and manufacturers will be willing to bear these costs before the industry as a whole starts to slowdown and/or collapse.

Economic Impact of Emissions Regulations on Car Manufacturers

Introduction

As Furth (2016) points out, the cost of owning a new car is rising thanks to government regulations -- specifically those of the Environmental Protection Agency (EPA), which has pushed for stricter fuel economy laws for auto manufacturers. The idea promoted by the EPA was intended to be both environmentally friendly and cost-saving for consumers (more gas-effective cars means dollars saved at the pump). Yet, as Furth (2016) reports, the true economic cost of emissions regulations is found not at the gas station but in the manufacturing/engineering plant, where auto makers must now tack on an additional $3,800 per vehicle in order to meet EPA requirements. In other words, consumer prices are rising because manufacturers themselves are having to spend more to be in conformity with government regulations. Most manufacturers are observing the new laws -- though some, like Volkswagen, have been circumventing them for years -- and are only recently being caught red-handed. The result is heavy fines for VW -- which has a negative impact both on the company and on shareholders, whose stock has plummeted in the wake of the scandal.

Why We Are Analyzing: Economic Impact

Clearly the economic impact of emissions regulations has been felt both by consumers and manufacturers -- as well as taxpayers, whose taxes go to supporting growing agencies like the EPA. Some citizens who refuse to pay the costs associated with testing have fought back by urging representatives to abolish testing practices -- as happened in Kentucky in 2005. However, some manufacturers also have attempted to circumvent costs associated with regulation by simply falsifying reports to the government agency and manufacturing and selling automobiles that did not meet the required emissions standards set forth by the government.

Volkswagen is one such manufacturer. In 2015, the EPA sent VW notice that it had violated the Clean Air Act. Volkswagen had rigged its turbocharged diesel engines to enact emissions controls only during lab testing -- i.e., the computer component in charge of regulating the car\'s emissions was used only for the emissions part of lab testing. Once testing was accomplished and the car passed, the control was deactivated. The diesel automobiles were then shipped out -- with no component in place to actually control emissions to the same degree that had been seen during testing. In fact, as Chappell (2015) reports, when the autos were driven in the real-world, the engines emitted approximately 40x more pollutants than they did in the lab. This was a case of VW attempting to look good on paper for a short time only so as to be able to ship large quantities of product and move it to retailers. In order to correct the situation, VW would have to spend more than $18 billion (Boston, 2016).

These costs of course do not come free of charge. From a high of 250 Euro per share in 2015, VW stock plummeted following the scandal, losing more than 50% of its value in a matter of months. Shareholders who held and did not sell have been crushed. The market\'s confidence in VW has evidently been shaken. The social cost of emissions regulation therefore can be quite large: it can lead to consumers feeling that they are shouldering an unfair portion of the blame as a result of state-wide testing; suspicion and paranoia can result as an effect of manufacturers duping regulators (VW is not the only manufacturer to do so -- many have). Yet in today\'s global economy and era of global awareness, environmental concerns continue to grow. The recent United Nations Climate Change Conference in 2015 showed how seriously the world\'s nations\' leaders want to appear to be taking climate change. However, as global prosperity retraces and economic slowdown manifests itself through slowdown in global shipping (Durden, 2016), societies may soon find themselves wondering if the economic costs are worth it in the end. On the one hand is the fate of the planet and the people on it; on the other hand is the grim reality that enforcing regulations may be more costly in economic terms than an already strained global economy can actually bear.

Conclusion

In conclusion, emissions regulations are an important part of auto manufacturing in today\'s world. The EPA is vigilant and manufacturers who are caught misleading regulators end up paying hefty fines. However, consumers are also feeling the pinch as costs associated with conforming to federal guidelines are passed on to retail buyers. Prices go up as protection does. Environmental awareness and safety may be good ideas on paper -- but when the paper is that which has Federal Reserve Note stamped on the front beside a picture of George Washington, citizens may find themselves if safety and awareness are really so valuable to them after all.