Grandstanding politicians are to blame for the VW scandal

For sceptics, the Volkswagen imbroglio looks like a typical corporate scandal.

Cynically duping not only the consumer, but the authorities too, VW has really gone to town this time. Analysts at JP Morgan reckon it could cost upwards of £26bn. But frankly, nobody knows – it all depends on how many vehicles were truly affected. And should consumers start demanding their money back à la PPI, then it really could be lights out.

Sure, PPI (payment protection insurance) miss-selling was a cynical corporate ruse – but a fool and his money have always been swiftly parted. The VW affair is somewhat different. It was built on an outright lie – on data manipulation. In short, this is much more serious – and it could be on a global basis.

But it’s different in other ways too. As I’ll explain, the authorities cannot stand on the sidelines wagging their collective finger. Least of all, claiming to be victims too.

This episode gives critics a chance to slander the profit motive – but they shouldn’t be so quick to judge. It’ll take the corporate profit motive to get us out of this fine mess.

Whose bright idea was this, really?

Go back a few decades, and there was barely a diesel car on the road. Yet, over the last 15-odd years, we’ve got to a point where they make up nearly half of UK car sales. Take a trip over the Channel and it’s an even higher proportion.

There are two reasons for the uptake. First, the oil price. It’s been up and down, but it’s fair to say that the consumer has mostly noticed the ups. So they want to squeeze more mileage out of a tank. And given that diesel is said to be around 30% more efficient than petrol, it’s a no-brainer for many.

And the reason why a falling oil price has barely been perceptible for the punter brings us onto the second reason for the dash to diesel: the ever-increasing green taxes on fuel.

And the reason for that? In Europe, the European Union wanted its members to sign up to the Kyoto agreement back in 1997, which they duly did. But it’s important to realise that Kyoto is a global ambition to reduce CO2 emissions. And that’s not the same thing as reducing pollution (all the chemical nasties) on a local level.

Clearly, shifting motors toward diesel, with its 30% efficiencies, could mean less CO2. But at what cost?

You don’t need to be a lab scientist to know that diesels chuck out more particulates than your average petrol motor. In fact, as it turns out, the lab scientists were the last to realise it. But let’s not get side-tracked. Diesel-ification causes a bit of local pollution, in order to satisfy the greater goal of lowering global CO2.

So having signed up to Kyoto, governments had to find a way of delivering the plan. Diesel was an easy way of shifting the problem over to someone else. In Britain, they tinkered with the road tax system. By aligning the tax rates to CO2 emissions, it clearly favoured diesel. On top of that, the Blair government put in place incentives for company car buyers to go diesel. To top it all, they brought diesel fuel duty in line with petrol. Ditto these sorts of steps across the EU.

The German government now stands accused of knowing in advance that the lab tests were phoney. They deny it of course, and I don’t know who’s telling the truth. But whether by omission (ie, the authorities didn’t want to investigate), or by commission (ie, they went along with the phoney data), they surely stand culpable.

Not only that, but the authorities, all over, also went along with another devious plan. And that comes by way of the 1998 Digital Millennium Copyright Act, making it illegal for anyone to tamper with software enshrined in such places as the modern car.

Remember – the way that VW got around emissions standards was to bury a bit of coding deep within the car’s central computer. This allowed the exhaust system to bypass the particulates cleaning element, at all times other than when it was being tested. The problem being, the cleaning process saps energy and performance from the vehicle. Something that’s not particularly important when the car’s in a lab.

I reckon that the authorities in Europe simply didn’t want to throw a spanner in the works of their grand CO2 reduction plan. So they went along with the ruse. That’s my opinion anyway.

But not so in the USA. The US authorities didn’t sign up to Kyoto, precisely because they thought it implausible. Not only that, but in the US, they’re more worried about environmental pollution on their own doorstep. Smog has been a huge problem in places such as California.

And this is precisely why it was testing in California that finally got to the bottom of the bogus lab analysis provided by the not-so-independent analytical services offered by the European car industry.

The VW scandal is good news for electric cars

The VW affair highlights all that is bad when large corporations refuse to play by the rules. But more importantly, it highlights all that is bad when large public bodies get too grandiose.

We have always been told that we need behemoths like the EU to tackle global issues such as pollution.

But what you actually end up with are politicians who love nothing more than showboating their great achievements, without ever really having a plausible plan for implementation. Worse, the system allows large incumbent corporations to cosy up to the politicians (by way of political funding), in return for their connivance.

This isn’t capitalism. It’s not the fault of the profit motive. So let’s not join the cynics.

At this very moment, capitalism is busy seeking its response to greenhouse emissions. Electric cars, together with renewable energy and battery storage, are red-hot sectors for investment right now.

BMW has promised to go all-electric within a decade. VW has made a looser pledge – but, perhaps we should expect them to accelerate that now. And Tesla is bringing a mainstream model to the market within a couple of years.

I covered this the other week in MoneyWeek magazine, and I shall be sure to continue to bring you the latest in what I think is the most exciting investing sector for at least the next 20 years.