THE priorities of America’s Environmental Protection Agency (EPA) will doubtless change under Donald Trump. Mr Trump may well relax emissions rules for carmakers in return for concessions, such as keeping production in America rather than relocating to Mexico or other lower-cost countries. So it is perhaps no coincidence that on January 12th, before conditions change, the agency took action against Fiat Chrysler Automobile. It accused FCA (whose chairman, John Elkann, sits on the board of The Economist’s parent company) of using software in 104,000 Dodge pickups and Jeeps that allowed them to exceed legal limits on toxic emissions of nitrogen-oxide (NOx) gases from their diesel engines.
Nervous investors feared a repeat of the huge penalty imposed on Germany’s Volkswagen (VW) for cheating American emissions laws. FCA’s shares plummeted by 16%, though they have since recovered slightly. A day earlier VW had agreed to pay a criminal fine of $4.3bn for selling around 500,000 cars in America fitted with so-called “defeat devices” designed to reduce NOx emissions under test conditions. That pushes its total bill for the scandal above $20bn. If FCA were fined on the same basis it would have to pay over $4bn.
Yet the Italian-American carmaker may not suffer so severely. VW admitted that it had employed an illegal defeat device. FCA’s engines used undisclosed software that, under some circumstances, alters the characteristics of emissions controls to exceed NOx limits. Crucially, however, the EPA has not determined whether these bits of software constitute a defeat device. Failure to disclose this type of software also breaks the rules, however. The firm must now demonstrate that it is not illegal. Important to its argument will be the fact that excessive emissions are permitted for limited periods, in circumstances where the engine may be damaged without allowing them, such as cold-weather starts.
Any wrongdoing is strongly denied by the company. Its chief executive, Sergio Marchionne, suggested that anyone drawing parallels with the VW scandal was “smoking something illegal”. He called the dispute a “difference of opinion” over whether the engine’s “calibrations met the regulations”, insisting that FCA “may be technically deficient but not immoral”. The complexities mean it will be hard to prosecute. If FCA is right it can expect a fine but nothing as severe as VW’s punishment.
The Italian-American carmaker is also in the firing line in Europe. A spat with Germany’s regulators has intensified. In April German authorities concluded that emissions controls were timed to turn down after 22 minutes of the engine starting in some of FCA’s cars. Europe’s test cycle lasts around 20 minutes. Italy’s testing agency, which certifies the cars for the European market, dismissed the complaints, saying it was part of a “modulation” of the controls designed to protect the engine. Yet on January 15th Germany’s transport minister insisted that it amounted to an “illegal shut-off device” and said the cars should be withdrawn for sale.
FCA is not alone. A day after the EPA announced its investigation of FCA, French prosecutors said that they were probing Renault over abnormally high emissions from some of its diesel engines. The French carmaker’s shares also dipped, but by only 6% and have since rebounded slightly too. Europe’s watchdogs are much less of a threat than the EPA, largely because the continent’s emissions rules are open to rather wide interpretation. Indeed, VW has reached the conclusion that its “defeat device” does not actually contravene European regulations.
Many diesels emit far more noxious gases than under test conditions. Transport & Environment, an NGO based in Brussels, reckons that new models from the worst offenders produce on average 15 times more NOx on the road than when tested. Enforcement, however, is almost non-existent in Europe and no penalties have ever been issued for carmakers contravening emissions rules. The EU is beefing up its testing system but there will still be lots of grey areas for carmakers to exploit.
FCA’s biggest worry, therefore, remains the EPA. Even in the worst case—ie, its software is deemed a defeat device—a fine exceeding $4 billion would not “break its neck in the current environment”, explains Patrick Hummel of UBS, a bank. But it would scupper Mr Marchionne’s target of shedding debt and having cash in the bank by 2018 in order to weather any downturn in the global car market, now widely assumed to be at a peak. It would also complicate any attempts to merge with a big carmaker, another of his ambitions, even if he can find a willing partner. Emissions can have far-reaching consequences.