Is Fiat heading for an emissions scandal of VW’s magnitude?

At first glance, the similarities between the new emissions allegations swirling around Fiat Chrysler Automobiles and the global pollution scandal that rocked Volkswagen seem strong.

On Thursday, the US Environmental Protection Agency said Fiat faced a fine of up to $4.6 billion after the regulator accused the carmaker of violating laws in relation to emissions by 104,000 vehicles. The previous day, VW agreed to pay $4.3 billion in a US settlement aimed at trying to draw a line under its emissions scandal, which was first revealed by the EPA in September 2015.

In both the Fiat and VW cases, the EPA’s focus is on diesel engines, and the question of whether cheating software was installed in the two companies’ cars that enabled them to emit much higher levels of harmful nitrogen oxides while on the road than in official tests. The underlying concern of the regulator in its actions with both companies is the risk to public health posed by air pollution, and NOx in particular.

But in spite of the parallels, there are important differences between the two companies’ cases, especially around the nature of the alleged wrongdoing.

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On Wednesday, VW pleaded guilty to criminal charges, including conspiracy to defraud the US, after the EPA said in 2015 the carmaker had installed illegal software dubbed a defeat device in 585,000 diesel vehicles that served to understate NOx emissions in official tests. On the road, the cars emitted NOx at up to 40 times permitted levels.

Differences

But Fiat has so far only been accused by the EPA of violating the US Clean Air Act by failing to declare the use of software in 104,000 diesel cars that enabled the vehicles to turn off emission controls in certain circumstances on the road. The EPA stopped short of alleging that Fiat had installed an illegal defeat device, although it is still investigating this question. Fiat acknowledged yesterday that it had also been in talks with the US Department of Justice for several months over the same issues.

Sergio Marchionne, Fiat's chief executive, insisted on Thursday "there was nothing that was designed to defeat the testing process" in its vehicles.

Noting these differences between the two cases, car industry experts say Fiat may therefore avoid seeing its name demonised in the same way as VW.

"The [FIAT CASE]is quite different from VW," says John German, a former EPA official who is now a senior fellow at the International Council on Clean Transportation, a non-profit organisation that played an important role in exposing VW's wrongdoing.

“VW programmed the [emissions control] software to look for the official test . . . and if you were not on the official test . . . it shut off the emissions controls all the time.”

But with Fiat, “we don’t know how often the emissions controls were shut off, we know [FIAT’S]emissions were higher in the real world [than during official tests] but we don’t know how often, and they were not shut off all the time as in the case of VW”, adds Mr German.

Auxiliary emission device

The software being scrutinised by the EPA in the Fiat case is called an auxiliary emission control device, or AECD. In the VW scandal, the EPA labelled VW’s AECD an illegal defeat device.

Carmakers say AECDs have legitimate functions: for example, the software can protect a vehicle’s engine from damage by turning off emissions controls in certain circumstances, such as during very low temperatures.

However, the Clean Air Act requires carmakers to demonstrate to the EPA through a certification process that their products comply with emissions standards to curb air pollution, and the regulator accused Fiat of breaching the legislation by failing to disclose the use of eight AECDs in Jeep Grand Cherokees and Dodge Ram trucks.

This is a less serious alleged violation than VW’s deliberate emissions cheating. But in its detailed “notice of violation” against Fiat, the EPA listed four examples where the Fiat AECDs served to shut off the diesel cars’ emissions controls during normal driving conditions. The EPA also said Fiat’s AECDs may not be justified in terms of protecting the cars against damage.

“Therefore, one or more of the AECDs . . . may be defeat devices,” added the regulator. “To date, despite having the opportunity to do so, [FIAT]has failed to establish that these are not defeat devices.”

In summary, the EPA is putting the onus on Fiat to prove its innocence. The company’s Milan-listed shares plunged 16 per cent on Thursday but rose almost 5 per cent yesterday.

Car industry experts say the EPA clearly suspects that Fiat’s aim was for its diesel cars to beat official tests, but it cannot yet prove this.

Mr Marchionne said the case was a “difference of opinion” between Fiat and the EPA that has “been blown out of all proportion” by the regulator in order to put on a final show of strength in the last days of the Obama administration.

Trump factor

One person with knowledge of the EPA’s practices says the timing of Thursday’s announcement “suggests the EPA is afraid the new [TRUMP] administration might force them to drop the investigation”.

Bringing the case into the public domain with such aplomb makes it harder for the incoming Trump administration to back out quietly.

President-elect Donald Trump has picked Scott Pruitt, Oklahoma's attorney-general, to lead the EPA. Mr Pruitt has repeatedly excoriated the regulator.

Fiat said on Thursday that its US business “intends to work with the incoming administration to present its case and resolve this matter fairly and equitably and to assure the EPA and [FIAT’S]US customers that the company’s diesel-powered vehicles meet all applicable regulatory requirements”.

Fiat has a strong interest in resolving its differences with the EPA quickly because, unlike VW, it has large exposure to the US market. While fewer than 10 per cent of VW group’s global car sales are in the US, the market accounts for almost half of Fiat’s.

It is far from clear what the cost of the EPA’s intervention could be for Fiat, especially if the DoJ decides to bring a criminal case against the company and civil lawsuits by car owners ensue.

Mr Marchionne described the $4.6bn potential fine suggested by the EPA as “hogwash”. And some analysts agree a figure that high is unlikely. “Well over 50 per cent of the costs incurred [BY VW]related to remedy/fixing the vehicles in question,” says Arndt Ellinghorst, analyst at Evercore ISI.

Fiat’s potential fine “should not be compared with costs incurred by Volkswagen”, he adds.

VW has so far accumulated up to $21bn of costs in the US alone relating to its diesel emissions scandal, the biggest portion of which relates to an offer to buy back affected cars from owners.

- (c) 2017 The Financial Times Limited