Volkswagen's US diesel emissions settlement to cost $15 billion

The settlement includes $10.033 billion to offer buybacks to owners of about 475,000 polluting vehicles
A new e-Golf vehicle of German car maker Volkswagen. (Ronny Hartmann/AFP/Getty Images)
By Reuters
Tue 28 Jun 2016 11:10 AM

Volkswagen AG's settlement with nearly 500,000 US diesel
owners and government regulators over polluting vehicles is valued at more than
$15 billion cash, two sources briefed on the matter said on Monday.

The settlement, to be announced on Tuesday in Washington,
includes $10.033 billion to offer buybacks to owners of about 475,000 polluting
vehicles and nearly $5 billion in funds to offset excess diesel emissions and
boost zero emission vehicles, the sources said.

A separate settlement with nearly all US state attorneys
general over excess diesel emissions will be announced on Tuesday and is
expected to be more than $500 million and will push the total to over $15
billion, a separate source briefed on the matter said.

Spokeswomen for US Environmental Protection Agency and
Volkswagen declined to comment.

Speaking on condition of anonymity, due to court-imposed gag
rules, the first sources said that owners of 2.0 litre diesel VW 2009-2015 cars
will receive at least $5,100 compensation along with the estimated value of the
vehicles as of September 2015, before the scandal erupted. Some owners will get
as much as $10,000 in compensation, the first sources said, depending on the
value of the car.

The $10.033 billion is the maximum VW could pay if it had to
buyback all vehicles, but the actual amount VW will pay could be significantly
less if a large number of owners take buybacks.

Prior owners will get half of current owners, while people
who leased cars will also get compensation, said the first sources.

Owners would also receive the same compensation if they
choose to have the vehicles repaired, assuming US regulators approve a fix at a
later date.

The settlement includes $2.7 billion in funds to offset
excess diesel emissions and $2 billion in VW investments in green energy and
zero emission vehicle efforts, the first sources said. The diesel offset fund
could rise if VW has not fixed or bought back 85 percent of the vehicles by
mid-2019, the first sources said.

The $2 billion in green energy and zero emission efforts
will be spent over 10 years, the first sources said, and will include zero
emission vehicle infrastructure.

The settlement, the largest ever automotive buyback offer in
US history and most expensive auto industry scandal, stems from the German
automaker's admission in September 2015 that it intentionally misled regulators
by installing secret software that allowed US vehicles to emit up to 40 times
legally allowable pollution.

The company's top US executive, Michael Horn, was summoned
to testify before Congress and in the days after the emissions scandal broke he
said the company had been dishonest. "In my German words: We totally
screwed up. We must fix those cars," said Horn, who left the company in

VW still must reach agreement with regulators on whether it
will offer to buyback 85,000 larger 3.0 litre Porsche, Audi and VW cars and
SUVs that emitted up to nine times legally allowable pollution and how much it
may face in civil fines for admitting to violating the Clean Air Act.

Erik Gordon, a University of Michigan business professor,
said "VW had little negotiating power, given the evidence. The costs of
the remedies should make automakers cautious about misleading people in ways
that give prosecutors the ability to bring criminal charges. Potential criminal
charges mean you open your wallet in the civil actions, hoping to receive
leniency instead of jail time."

Reuters reported earlier the initial VW settlement would not
include civil penalties under the US Clean Air Act or address about 85,000
larger 3.0 litre Audi, Porsche and VW vehicles that emitted less pollution than
2.0 litre vehicles. A deal covering the 3.0 litre vehicles may still be months

The settlement does not address lawsuits from investors or a
criminal investigation by the Justice Department.

Regulators will not immediately approve fixes for the 2.0 litre
vehicles – and may not approve fixes for all three generations of the polluting
2009-2015 vehicles, sources previously told Reuters.

Owners will have until December 2018 to decide whether to
sell back vehicles and fixes may not eliminate all excess emissions.

Volkswagen chief executive Matthias Mueller

VW cannot resell or export the vehicles bought back unless
EPA approves a fix, Reuters reported last week.

VW, the world's second largest automaker, has seen US VW
brand sales suffer in the wake of the crisis. VW brand sales are down 13
percent in the United States in 2016, while sales of its luxury Audi and
Porsche units have risen.

US District Judge Charles Breyer in San Francisco will hold
a hearing on July 26 to decide on whether to grant preliminary approval to the
settlements. If granted he would hold a later hearing to give final approval.
Buybacks are likely to start no earlier than October, the first sources said.

In April, VW set aside $18.2 billion to account for the
emissions scandal.

VW had said the scandal impacted 11 million vehicles
worldwide and led to the departure of CEO Martin Winterkorn.

Last week, Germany's financial watchdog called on
prosecutors to investigate VW's entire former management board over the time it
took to disclose the carmaker's emissions test cheating, a person familiar with
the matter told Reuters.

German prosecutors said this month they are investigating
Winterkorn and a second unidentified executive over whether they effectively
manipulated markets by delaying the release of information about the firm's
emissions test cheating.

For all the latest transport news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.

Last Updated: Sat 28 Jan 2017 11:51 AM GST

Subscribe to our Newsletter

Subscribe to Arabian Business' newsletter to receive the latest breaking news and business stories in Dubai,the UAE and the GCC straight to your inbox.