Volkswagen chief faces grilling by board over diesel scandal

General view of a Volkswagen logo in Wolfsburg, Germany September 22, 2015. [Photo/Agencies]

SHOCKWAVES

Diesel engines account for less than 3 percent of new cars sold in the United States but around half of cars in Europe.

One of their selling points is their fuel economy and low carbon emissions compared to standard gasoline engines, but they also emit more nitrogen dioxide, a toxic gas blamed for some health problems. The suggestion that their emissions in real world conditions are worse than they appear in tests could harm the whole sector and alter the future of Europe's auto industry.

The US Environmental Protection Agency (EPA) said on Friday Volkswagen could face penalties of up to $18 billion for cheating emissions tests on some of its diesel cars.

The story has sent shockwaves through the car market, with dealers in the United States reporting people holding back from buying diesel cars and "#dieselgate" trending on Twitter.

Volkswagen said on Tuesday it was setting aside 6.5 billion euros ($7.3 billion) to help cover the costs of the crisis.

But some analysts are sceptical that will be enough, with the company disclosing that 11 million of its cars were fitted with Type EA 189 engines that had shown a "noticeable deviation" in emission levels between testing and road use.

Commerzbank analyst Sascha Gommel said if these cars had to be recalled and modified, the cost of that alone could top 6 billion euros.

And the company could still face the potential cost of regulatory fines, lawsuits, criminal investigations and a possible hit to sales from a damaged reputation.

The US Justice Department has launched a criminal probe, a source familiar with the matter said.

New York and other state attorneys general are forming a group to investigate too, New York Attorney General Eric Schneiderman said, while other countries in Europe and Asia say they will investigate Volkswagens and other vehicles as well.

Richard Leedham, a partner at London law firm Mishcon de Reya, said there was little prospect of Volkswagen clawing back costs from its insurers.

"Given their apparent internal knowledge, it seems unlikely that VW will be able to claim any insurance for product recall or for product liability cover, so they won't be able to pass on their losses," he said.