Authors: Ryan M. Couture and John Auers
It seems as if there are new developments every day in the story of how Volkswagen circumvented U.S. emissions regulations. In our blog last week, we began our own look at the VW scandal and potential implications, focusing first on the roots of the targeted push toward dieselization in Europe in response to the Kyoto protocol and concerns over global warming. European governments decided that diesel was to be a key component of the push to reduce carbon intensity and global warming, and European carmakers like Volkswagen went all out to produce better and more efficient diesel engines. In many ways they were very successful in this pursuit and the diesel engines they developed have many advantages over gasoline engines, even for use in relatively small passenger vehicles. But they also have some structural limitations and disadvantages, particularly when it comes to meeting certain emissions standards, and this is what led to Volkswagen’s troubles. In this week’s blog, we will discuss some of these issues; particularly the technical challenges that diesel engines face causing them to be fundamentally worse NOx emitters. In addition, we will look at some key aspects of emissions regulations, including what hurdles legislators have when developing emissions programs, outline a brief history of other cases of emissions cheating and identify some important differences in the U.S. and EU emissions regulations. Altogether, this should provide us some clues as to what circumstances inspired the actions that led to the indiscretions perpetrated by the “Wolves of Wolfsburg.”
Diesel and NOx
The modern diesel engine is a true engineering feat, evolving from a dirty, noisy and rough “oil burner” into a modern, refined, quiet and compact package. By the nature of burning hydrocarbons, all internal combustion engines produce some levels of emissions, in the form carbon monoxide, nitrogen oxide (NOx), particulates (PM), and unburnt hydrocarbons. Today’s gasoline engines can meet even the strictest emissions regulations through the use of relatively inexpensive and easy to operate conventional catalytic converters. Engines burning heavier diesel fuel, on the other hand, naturally produce higher quantities of certain pollutants, particularly NOx and PM. This has to do with the way a diesel engine operates.
Gasoline engines mix fuel before it enters the combustion chamber (with the exception of newer direct injection engines), compress the air and fuel mixture, and use an outside ignition source (spark plug) to ignite the fuel mixture. The mixture is typically run close to the optimal air/fuel ratio, so there is little excess oxygen. Diesel engines operate differently, compressing the air and then injecting fuel into the cylinder at the top of the stroke. The heat generated from the compression of air works to ignite the fuel. Diesel engines therefore have to run much higher compression ratios and leaner air/fuel mixtures, both of which lead to the production of more NOx and PM.
There are ways to reduce the PM and NOx. NOx production in diesel engines can be reduced by adjusting the amount of fuel that is burned (as the amount of air cannot be adjusted, it is based on the volume in the cylinder). But by increasing the amount of fuel, thus consuming more of the available oxygen, performance and fuel economy are impacted. In addition, by increasing the fuel, you also tend to increase the PM that is produced. PM emissions are reduced using a form of ceramic catalyzed particulate filter. These filters are in common use on vehicles today, although their use increases backpressure on the engine and reduces engine efficiency.
The software “defeat device” VW used was able to manipulate the amount of fuel that was burned (as well as selectively using NOx traps in the emissions system), to minimize NOx while being tested, albeit at the expense of fuel economy and engine power. In order to produce the most efficient diesel engine that meets emissions, manufacturers typically have to use a selective catalytic reduction (SCR) system. An SCR is a type of catalytic converter, similar to what is used on a gasoline automobile but requires the use of urea (sold as Diesel Exhaust Fluid, or DEF). The DEF is held in a separate tank and injected into the exhaust before the SCR. The catalyst is then able to convert the NOx to nitrogen and water.
SCR systems are common on larger diesel engines, but are costly, bulky, and require DEF levels to be monitored by the user. The DEF (mostly urea) smells very bad, and in addition to the already messier diesel fuel (which doesn’t dry like gasoline if spilled, but leaves an oily residue), tends to be off-putting to most consumers. The DEF fluid can freeze in cold temperatures (requiring a tank heater) and the SCR systems add a lot of cost to the vehicle, which is harder to recoup in the smaller, cheaper consumer vehicle market. In addition, like most emissions systems, the additional weight and backpressure does reduce engine efficiency and power.
The U.S. has more stringent standards on NOx emissions than the EU under the Euro 5 regulations. Euro 6 regulations, which took effect for passenger vehicles in September 2014, help to close that gap, as shown in Table 1. Because of these fundamental limitations of diesel engines, it is expected that in order to meet emissions in the U.S. without dramatically impacting fuel economy, a selective catalytic reduction system would need to be installed on each vehicle, a complicated and expensive process. In Europe, where the emissions are not as strict under Euro 5 (which many of these vehicles were sold under), software upgrades may allow for continued operation as-is, albeit with slightly reduced performance or decreased fuel economy.
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Testing Inaccuracies
Automotive manufacturers have for years “designed to” the emissions testing, and over the decades, several have been fined for various violations. In 1973, Chrysler, Ford, GM, Toyota and VW were required to remove ambient temperature sensors which affected emissions at low temperatures. The companies claimed no wrongdoing, and were handed modest fines. In 1996, GM was fined $11 million for ECU software that was programmed to disengage emissions controls when not under testing (when the heater or air conditioner was on) since that was not part of the test. In 1998, both Honda and Ford saw fines, for disabling of misfire monitoring device and for disabling emissions controls during normal highway cruising, respectively. In addition, several heavy truck manufacturers programed trucks to keep NOx emissions low during testing cycles.
Still, to date, none were as egregious as VWs, or as widespread. Independent testing of other diesel vehicles in Europe, by a large group of manufacturers, turned up vehicles that in real world driving exceeded the NOx emissions by up to 10x, despite passing the emissions tests. Moves toward focusing on real-world testing of emissions is in the works, and the VW scandal has only expedited the move. Only four months before the news broke, the EU’s three largest countries, UK, France and Germany, lobbied to carry over loopholes in car tests from the 1970-era NEDC test to the new World Light Vehicles Test Procedure (WLTP), which was to replace it in 2017. These loopholes helped to reduce measured emissions, or reduce measured numbers by several percent, in order to give manufacturers extra leeway. In the aftermath of the VW news, the EU lawmakers have voted for this legislation with no loopholes, showing that there is a shift in mindset.
The U.S. EPA and California Air Resources Board (CARB) have had stricter requirements in place for passenger vehicle emissions. While the EPA does regulate NOx and particulate emissions more strictly than Europe (as well as regulating carbon monoxide, formaldehyde and various hydrocarbon measurements), it does not directly regulate CO2 emissions. Instead, the EPA regulates the Corporate Average Fuel Economy (CAFE) standards for individual manufacturers. The U.S. and Canada, on average, have much larger vehicles, and thus produce more CO2. California and other states that follow CARB regulations have begun to pass stricter regulations. This has become a battle in the courts, but as CAFE and CARB regulations tighten down, manufacturers will be forced to build increasingly smaller and more efficient engines. The ultimate question is: Will consumers, who are accustomed to large SUVs at a time of low fuel prices, want them?
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Conclusion
While diesel engines may produce less CO2 than gasoline engines, the fundamentals of diesel engines put them at a disadvantage from an emissions standpoint when it comes to both particulates and NOx. While it is technically feasible to make such engines compliant with even the most stringent emission standards, it becomes cost-prohibitive versus gasoline and non-hydrocarbon alternatives for small, low-cost passenger vehicles. Coupled with the push toward more “real world” emission testing schemes that better define the emissions during normal driving, instead of the prescribed tests that automakers have “designed to” for decades, increasing use of hybrid and electric vehicles will come into use. This will ultimately bring in increased competition and lower prices for consumers across the globe. We will look next week at what the impact of these higher emissions standards has had on smog and what impacts they will have on diesel demand as it becomes a more difficult fuel to use for passenger vehicles.
Turner, Mason & Company takes into account these market and policy shifts as we look to the challenges the petroleum industry will face in the coming years. Events such as the VW emissions scandal feed into our long-term forecasting, and our analysis is also applied in our consulting engagements and multi-client studies. In addition to our Crude and Refined Products Outlook released at the end of August, we recently released a new study, The Evolving New World Order: Rebalancing Global Oil Supply in the Next Decade. As part of a joint collaboration with Schlumberger Business Consulting, we look at how current and future price environments will affect crude production, trade flows and refining activities on a global basis. The prospectus and a subscription form can be found by clicking here, and we are happy to answer any questions by phone or email.