A funny thing happened on the way to the Paris Agreement. On September 18, 2015, just six weeks before the most anticipated UN climate negotiations since Kyoto were slated to begin, the world’s most powerful environmental regulatory agency threw down the gauntlet to the world’s largest automaker. In a scathing Notice of Violation made immediately public, the US EPA detailed shocking allegations of blatant impropriety by Volkswagen, a company that had finally begun flourishing in the lucrative US market under the guise of being “green.” Just as 195 countries were finalizing their individualized commitments to address climate change by reducing emissions, the VW emissions scandal exploded. Environmentalists cheered as the sins of their chief nemesis, multinational corporations, were exposed. Free market proponents huddled up, ready to prove that inconsistent regulatory schemes were all that stood in the way of the innovations that would bring about global prosperity. The stage was set for an epic battle, and Paris was going to be one side’s Waterloo.
But as we mentioned, a funny thing happened. Globalization, environmentalism’s worst enemy, became the planet’s best hope.
Those of us who work at the intersection of environmental and economic policy have long tried to counter the perception that integrated capital markets and global trade are anathema to protecting Earth’s natural resources. Despite overwhelming evidence that interdependence leads to increased efficiencies, hyperbole and anecdotes have framed the debate, causing collaboration and compromise to be seen as Faustian deceptions. But Paris opened the door by linking the goals of environmentalism to international cooperation, and the VW scandal unexpectedly provided the blueprint.
For all the efforts by the EU and Germany over the years to develop strategies to combat climate change and promote sustainable development, companies, particularly large manufacturers, have benefited from inconsistent regulatory compliance mechanisms. In the name of consensus, certification by one EU Member State is certification by all, creating a loophole that critics refer to as the “Race to the Bottom.” Companies such as Volkswagen can build factories in countries that agree to relax standards without jeopardizing their ability to sell to customers in countries with rigid requirements. This form of roving protectionism makes enforcement of ambitious targets nearly impossible, especially when those targets conspicuously excepted the known contaminants emitted from “clean diesel” engines, VW’s revolutionary way of reducing the carbon and environmental footprint of their cars.
The US, however, has a different set of standards when it comes to regulating environmental impact. Yes, carbon emissions are important, but human health has always been the leading factor in turning environmental ambitions into political action. For that reason, the noxious fumes caused by diesel combustion are more tightly monitored, especially in California, where questions began to arise as to how clean VW’s diesel engines really were. When initial tests didn’t seem to match real-world experiences, the EPA contracted an independent research institute, the International Council on Clean Transport, to run a more exhaustive study. ICCT worked with a group of scientists from West Virginia University who uncovered the scandal.
It’s been one year since the scandal broke, and there has been no shortage of drama. Volkswagen agreed to a massive settlement with the US Department of Justice that could amount to $15 billion, a VW engineer has pleaded guilty to conspiracy to violate the Clean Air Act, and investigations continue both in the US and Germany to determine where the buck stops. From an environmental standpoint, VW has signaled it will drop its clean diesel program in favor of electric vehicles.
But the goal here is not to recount Volkswagen’s deceptions and determine if the punishments fit the crimes. Instead, we want to show that globalization enabled the discovery of VW’s crime. There are millions of clean diesel engines on the roads of Europe, and there likely would have been millions more, were it not for the variations in sovereign regulatory policies in the US and EU. Were it not for strong compliance and enforcement mechanisms at the EPA, the health of Americans and Europeans alike would have continued to suffer. It is the integrated global market that produced the transparency necessary to achieve this watershed moment for environmentalism.
Transparency and diversity, the hallmarks of sustainable globalization, are most easily observed as functions of corporate governance. Volkswagen’s position of privilege within Germany and the EU does not serve its investors well in the global marketplace. Questions have been raised as to whether VW will ever be able to be a leader in innovation as long as the national government’s priorities supersede the demands, and opportunities, of the global market. As investors look for companies prepared to meet those demands and take advantage of those opportunities, they will find that organizations which prioritize transparency and diversity, no matter the size, will be the innovators leading the way toward sustainable globalization.
Brendan O’Donnell is a Fellow at Ecologic Institute. His work focuses on sustainable urban development, especially the visibility and accessibility of diverse communities in the decision-making process; post-carbon finance, including the development of vehicles and policies to support sustainable investing; and the future of environmentalism, particularly how art and other cultural influences inform the concept of nature and inspire environmental policy.
Max Gruenig is the President of Ecologic Institute US and has been with the Institute since 2007. His work focuses on sustainable development in the energy and transport sector, as well as urban sustainability and resilient cities. Max Gruenig has lived and worked in Germany, the United States, Iceland, and Japan.