In 2015, Volkswagen admitted to engineering and rigging devices used on their diesel vehicles to skirt compliance with emissions testing and knowingly fouled the air by producing cars that were far out of compliance with emissions standards. Volkswagen’s befouling plot released 46,000 tons of nitrogen oxides, linked to an estimated 100+ deaths from the increased pollution. The repercussions for Volkswagen included pleading guilty to three criminal convictions resulting in a court-ordered criminal fine of $2.8 billion. The criminal fine was the largest ever imposed by the U.S. on an automaker. However, the criminal charges originated from the company’s acts of deceit and conspiracy against the U.S.; the charges did not stem from enforcement of the Clean Air Act (CAA) against polluters who knowingly violate it. The Act exempted “mobile source violators,” i.e., carmakers, from criminal culpability for emissions violations. In addition, thirteen executives and employees of the company and its subsidiaries faced criminal charges, with several receiving prison sentences.
In the end, the company has had to pay more than $34 billion in fines and settlements, including the costs for buybacks and modifications of their rigged diesel cars. However, arguably, the most significant sanction against Volkswagen has been the consent decree that they agreed to with the EPA and California. The decree committed Volkswagen to invest $2 billion in clean-emissions infrastructure. Precisely, Volkswagen had to create a nationwide charging network for electric vehicles (EV). At the time, the commitment to a charging network that could compete with Tesla’s infrastructure seemed far-fetched. However, that has been proven wrong. Today, Volkswagen stands as the traditional carmaker best positioned to take on Tesla. And they have created the largest public fast-charging network in the U.S. through their subsidiary, Electrify America. The result of the consent decree has put Volkswagen in a position to lead the automotive industry for the 21st century.
With the help of Electrify America, Volkswagen has turned its lemons into lemonade. Just one month after Volkswagen confessed to manufacturing the largest conspiracy the automotive industry has ever seen, company executives met, in October 2015, to decide the carmaker’s future. The company’s executives elected to adopt a new business model to help get through the impending storm as a result of the fallout. They decided to cease their naïve attempts to make diesel more appealing. Instead, they were going to be a company of the future by committing to stop the production of internal combustion engines by 2026. Fortunately, this correlated with the focus on Volkswagen’s consent decree that followed the meeting, which they finalized over the years. The new direction required Volkswagen’s commitment to spending over $30 billion on EV development by 2023. Volkswagen’s early turn to EV puts the carmaker in the likely and valuable position of producing an EV for less than the costs of an internal combustion model by the year 2025.
Analysts suggest that Volkswagen will be competing against Tesla in 2025–for reference, Tesla is the most valuable car company today. The analysts expect Volkswagen to profit $7 billion from their 2025 EV sales and have 3.5x greater profits than the next in line company, General Motors. Also, Volkswagen holds the promise of the Electrify America charging network. Electrify America is proving to be a successful punishment for the carmaker. The charging network has struck deals with several established carmakers to aid their EV innovations. Electrify America now has plans that stretch far beyond the consent decree, with the charging network also planning to double its already largest fast-charging public network in the U.S. Also, the charging network has built an infrastructure for EVs in Canada, with more expansion coming there as well. The charging network’s future shows so much promise that Volkswagen is looking for a co-investor for one billion dollars. An investment of this size would cover half of the consent decree’s required commitment for an EV charging network. Ultimately, Volkswagen has turned the company’s outlook around. Volkswagen’s focus on EVs positions the company to be not only one of the greenest automakers but also one of the biggest profit-makers of tomorrow. Yet, Volkswagen’s promising future is not surprising.
Tomorrow’s green technology shows the promise of reaching a global market size of $75 billion by 2030. Green technology and sustainability will boost profits for those companies which endorse the non-conventional technologies of the future. The prime example is Tesla which has become the most valuable car manufacturer in under 20 years of operation. Tesla has diverted vast volumes of customers away from traditional car manufacturers through selling desirable EVs of the future. However, the incredibly difficult part about this is the considerable start-up costs associated with mass manufacturing efficient battery cells with favorable profit margins. EV innovations require traditional carmakers to give up profits during the transition period for what has been an uncertain outlook on the earnings of EVs. Look no further than to Tesla for an example of the growing pains that come with creating products for a sustainable future. Tesla didn’t turn their first profitable year until 2020.
Nevertheless, as Volkswagen now demonstrates, if a company is “incentivized” to adopt sustainable products or green policies, it will be in a better economic position for the future because of those additions. The traditional companies of the past, which rely on fossil fuels, have dug their heels into the sand. And Volkswagen exemplifies how the privatization of America incentivizes fraudulent behavior and corner-cutting so big companies can stay entrenched in their ways and retain profits. The only time a traditional fossil fuel company will switch its model is when the market forces reach a threshold where manufacturing the new product will result in a net gain. But companies also may undergo change when the government incentivizes the change through policy. And unfortunately, we do not have the climatological allowance for such a long time to pass until manufacturing processes incentivize the big companies. Therefore, the best option moving forward is if the government moves away from individual adjudications of infractions and instead institutes market-wide subsidies for industries to adopt sustainable practices now. This approach will yield not only the cleaner earth that we desperately need, but it will also bring these companies into a world of new profits that they will be glad they didn’t wait any longer.
Yet, the reality is that the preconceived opinions about the costs of going green have taken hold and led businesses and even governments to resist the transition. Public policy can play a crucial role in green initiatives adopted domestically and abroad. However, the critical role of the government and its policy regulating the private industry is one that our country has not seen before. Green policy must employ distinct and innovative ways of furthering the economy. Specifically, green policy initiatives will have to support the development of new technologies that will lay the foundation for industries generally and the benefit of all. And policy regulating demand through quota setting and feed-in tariffs will help stabilize the big questions surrounding the supply and demand issue. Lastly, government oversight of sustainable operations and infrastructure will be vital to achieving development goals and organizational problems that arise from the new economy.
The recently passed Infrastructure Investment and Jobs Act adopts policies like these. The Act will invest in the production of renewable energies and EVs. Another provision of the Act includes the $7.5 billion for the government’s adoption of zero-emission transit buses supported by government spending of $7.5 billion towards a national charging network. The government intends to focus the investments into installing EV infrastructure in low-income neighborhoods, which private industry might otherwise overlook. Low-income and disadvantaged neighborhoods could have quick charging subsidized for them with the help of this Act and, even in part, Volkswagen. Otherwise, without some support, these communities will be disparately affected. Electric charging could cost those communities 3x more if they use public charging at retail price versus charging rates at home. An additional obstacle to consider is the large up-front costs that accompany the installation of a charger at an EV user’s home. Pair this with the fact that many of the poorest Americans rely on renting their homes, making installing a charger out of the question. And these are just the obstacles to charging an EV. The starting costs of an EV are, at best, around $30,000. But regardless, many people don’t need a new car, especially not a brand new one with large costs accompanying both those who buy or lease.
The answer to these difficulties lies in proactive policy-making. Volkswagen has poured millions of dollars into creating EV-based car share programs located in low-income neighborhoods. Using these Electrify America car shares range from $9 to $15 an hour. Clearly, Volkswagen has not been forced to surrender the ability to make profits in these equitable programs that they have installed to comply with the consent decree. But the government should limit its profit-focus in equitable investment plans where Volkswagen is supposed to provide reliable and clean transportation to those who need it most. As a result of the lack of success from the investment in the low-income neighborhoods of Sacramento, Volkswagen is now spending around $100 million in affluent neighborhoods of Southern California versus only $2 million going to the communities in need. Corporate behavior like this comes from a lack of independent and government oversight. Proactive formal channels of regulation and policy could help counteract the issues that Volkswagen faces in not wanting to give up profits. Government coordination can make companies’ investment in marginal communities a worthy investment through industry-wide coordination, leading to the broad adoption of EVs. Planned adoption of EVs is needed to ensure equitable distributions of this foreign way of life. Calculated allocations equally amongst the country will limit inequalities some communities face and even make the adoption of EVs practical for the middle-class by making EVs practical and easy to use.
Volkswagen is no different from its peers either. Companies are most concerned with the bottom line, and they will take their time adopting a new practice that cuts into their profits. The key is creating effective policy and capable oversight mechanisms to help traditional companies do the right thing. Ultimately, if the Infrastructure Act can truly accomplish what it has set out to, our country will be on the right track. But otherwise, private industry will continue their slow transition to green practices, refuse to give up any more profits than they have to, and continue to cheat the system if significant changes don’t originate from the top. Even though the promise of green, sustainable technologies shows a future of profits, traditional companies like Toyota continue to lobby for a slow-down to the transition to EVs. Government pushes to spark the change through investment, subsidies, and oversight will counteract the foot-dragging of big industry. The harm of a failure to act will result in green, private companies only proliferating the wealthy market base and affluent neighborhoods, which can afford the expensive new technology. If not corrected, this will further solidify the economic inequalities that already affect low-income and working-class Americans, which make up the majority of our country. If these Americans cannot transition to sustainable energies over the next 30 years, then the profits of Volkswagen and the companies like it will have been for nothing.
About the Author: Cody Colton is a 2L at Cornell Law School. He graduated from the University of California Irvine, where he majored in political science with an emphasis on legal studies. Cody is interested in securities litigation and white-collar crime. He is an associate for Cornell Law School’s Journal of Public Policy and its online publication, The Issue Spotter.
Suggested Citation: Cody Colton, Crime and Profits? The Story of the Most Profitable Punishment in American History, Cornell J.L. & Pub. Pol’y, The Issue Spotter, (February 15, 2022), http://jlpp.org/blogzine/crime-and-profits-the-story-of-the-most-profitable-punishment-in-american-history/. (opens in a new tab)