volkswagen

The recent allegation that VW has been cheating on emissions testing for the last six years, if true, is fantastic news.

It's fantastic for consumers, fantastic for the environment, and fantastic for Volkswagen.

Volkswagen may now be on the hook for fines of up to $18 billion dollars, according to the Washington Post, and the full cost of a recall effort of nearly half a million cars. That's all before VW begins tangling with a half a million current owners and millions more prospective owners.

How is this good? This is good because it creates a fabulous space for a deal. Here's one idea for a deal that I think could work for everyone:

Point 1: VW re-captures those vehicles which are still on lease, modifies their software, and leases them back out with penalties for high mileage. The mileage restrictions and reduced performance on these leases will make the cars nearly worthless. VW offers them cheaply in exchange for a cash-for-clunkers style trade that takes a grosser polluter off the road. This captures the sunk costs of building these cars in the first place, preserves a role for VW dealers, and gets some worse cars off the road. Perhaps VW also buys back cars in private hands and gets them into low-mileage fleets to blunt the environmental impact without the pointless work of a recall. If my impression of the residuals on VWs is in the right ballpark, this could cost less than $2 billion over the next three years.

Point 2: VW inks a deal to manufacture and sell a million electric cars in the U.S. over the next ten years. For each car eligible for the (up to) $7500 refund from the feds, VW pays the Treasury $7500. For every state and locality that waives excise or registration taxes for electrics, VW pays. This could cost less than $10 billion over ten years. For each car not sold below the target of a million, VW pays the original $37500 fine for the diesel cars plus a new fine of $37500. The cars are built in the US so that EPA inspectors can oversee the loading of the critical powertrain management software that has recently been difficult for VW.

Point 3: The VW pays an additional $1 billion dollars over ten years into the highway trust fund to offset the (presumed) lost gas tax revenue for these million cars over their service lives.

Point 4: VW claws back five cents a mile in penalty fees (up to $3750 per car) for miles driven beyond 100k miles per car in the first three years or for miles above 200k per car over ten years.

Point 5: VW builds $1 billion in SAE DC fast charge stations in the US over the next three years.

This plan could cost VW about $14 billion over ten years to build and sell the lineup of electric cars they have already designed -- some of which are already available for sale. It would blunt the environmental impact of the offending cars by reducing their total mileage, using them to displace worse cars, and putting new electrics into service. This plan would protect the investment of existing owners and protect the investment of VW franchise owners.

This guaranteed production of electrics will ensure that investment in electric-appropriate subassemblies, like electric air conditioning compressors, continues through today's dip in crude oil prices. The truth of large-scale electric adoption is that electric cars aren't mainstream until Magna and Bosch and Valmet and Nippondenso and ZF and dozens of other suppliers are ready.

Point 4, the clawback, will help ensure that these new electric cars are actually used on roads and displace real miles driven by gas and diesel cars. The investment in fast chargers and the economics of the claw-back could work to make these VWs easy choices for drivers with ride sharing services like Uber and in traditional taxi fleets.

The American public get a net environmental benefit at no cost to the Treasury, no cost to the highway trust fund, without a single new EPA rule, and perhaps without any action by Congress.

VW will look back in 15 years and see this as the best thing that ever happened to them in the US. VW could take these licks while establishing this as the prescribed remedy for similar transgressions by other automakers in the US and elsewhere. In three years, we'll find out that VW was not the only automaker who fudged the numbers and then we lather, rinse, repeat.