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VW settles U.S. diesel emissions case for $14.7 billion

FILE - In this Oct. 13, 2015, file photo, a Volkswagen Touareg diesel is tested in the Environmental Protection Agency's cold temperature test facility in Ann Arbor, Mich. Volkswagen will spend more than $15 billion to settle consumer lawsuits and government allegations that it cheated on emissions tests in what lawyers are calling the largest auto-related class-action settlement in U.S. history. The settlement was revealed Tuesday, June 28, 2016, by a U.S. District Court in San Francisco.
FILE - In this Oct. 13, 2015, file photo, a Volkswagen Touareg diesel is tested in the Environmental Protection Agency's cold temperature test facility in Ann Arbor, Mich. Volkswagen will spend more than $15 billion to settle consumer lawsuits and government allegations that it cheated on emissions tests in what lawyers are calling the largest auto-related class-action settlement in U.S. history. The settlement was revealed Tuesday, June 28, 2016, by a U.S. District Court in San Francisco. AP

Volkswagen has solved one big problem stemming from its diesel emissions deception, as the carmaker agreed Tuesday to pay up to $14.7 billion to settle claims in the United States.

But the final financial toll — once the company deals with a long list of fines, lawsuits and criminal investigations around the world — will be far higher. The continuing fallout could leave Volkswagen vulnerable to billions of dollars more in expenses, at a time when profit is already under pressure and the industry is facing a period of technological upheaval.

So far, Volkswagen has set aside 16.2 billion euros, or about $17.9 billion, for costs related to its public admission last September that its supposed “clean diesel” cars had been deliberately designed to cheat on air-quality tests. Matthias Mueller the Volkswagen chief executive, said less than two weeks ago that the amount was adequate.

But the U.S. settlement, with the government and car owners, will consume most of that money. And Volkswagen still faces more scrutiny in the United States and around the world, most notably as authorities pursue criminal investigations against the company and executives.

The Volkswagen scandal is “one of the most flagrant violations of environmental and consumer laws” ever in the United States, Deputy Attorney General Sally Q. Yates said at a news conference in Washington on Tuesday.

“We can’t suck the nitrous oxide out of the air,” she said.

The settlement would go toward repairing the damage, she said. The deal includes $10.03 billion to buy back affected cars at their pre-scandal values and additional cash compensation for owners. Additionally, the company has agreed to pay $2.7 billion into a government fund to compensate for the environmental impact of the cars, and to spend $2 billion on cleaner-vehicle projects.

“This is by no means the last step,” Yates cautioned. “The settlements do not address any potential criminal liability, though I can assure you our criminal investigation is active and ongoing.” She added that the United States was aggressively pursuing a criminal investigation, both of the company and of individuals.

Volkswagen acknowledged on Tuesday that it may have to raise the amount of money allocated to deal with the scandal. “Due to the complexities and legal uncertainties associated with resolving the diesel matter, a future assessment of the risks may be different,” the company said in a statement.

Risk in Europe

One of the biggest risks to the carmaker is in Europe, where the affected Volkswagen diesels vastly outnumber those in the United States.

The U.S. deal focuses on nearly 500,000 Volkswagen vehicles. But the carmaker admitted to installing the cheating device on more than 11 million cars worldwide, with 8.5 million in Europe.

While European legal systems do not favor consumers as much as those in the United States, Volkswagen may still have to pony up. There is an increasing outcry from European owners and politicians who also want compensation.

“Now that this is done, attention should turn to Europe,” said Michael Hausfeld, a Washington lawyer whose firm represents aggrieved owners and shareholders on both sides of the Atlantic. The settlement “is a strong foundation for what Volkswagen needs to do for European owners as well as for the environment.”

In addition, how much Volkswagen will ultimately have to pay to U.S. car owners may not be clear for many months.

Just over $10 billion has been allocated in the settlement. But the actual cost to Volkswagen will depend on how many owners exercise their option to sell their cars back to the company at the prescandal value, which will vary according to the age and mileage of the cars.

The terms

Volkswagen is set to offer buybacks based on prescandal, “clean trade” values, which assume that all cars are in an excellent condition. The Federal Trade Commission said consumers can expect to get $12,500 for an older-model Jetta to as much as $44,000 for a 2014 Audi. The settlement works out to about $21,000 a car. (Owners can look up their potential payout on a special settlement website.)

If Volkswagen is lucky, the total paid to car owners could turn out to be less than $10 billion. Analysts at Kelley Blue Book estimate that the cost of buying back all the offending diesels would be $7.3 billion. Volkswagen also owes owners additional compensation of $5,100 to $10,000, or at least another $2.4 billion.

Then there is the issue of what Volkswagen will do with all the cars it buys back from owners in the United States.

The settlement bars Volkswagen from simply exporting the cars, without fixes, to countries with less stringent emissions standards. Gina McCarthy, the Environmental Protection Agency administrator, said on Tuesday that Volkswagen was required to fix the cars that it bought back or to scrap them, and was encouraged to recycle any scrapped parts.

“These are not going to be shipped elsewhere in their current form,” she said. “We are not shipping the air pollution elsewhere.”

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