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The Law of the Test: Performance-Based Regulation and Diesel Emissions Control

The Volkswagen diesel emissions scandal of 2015 not only pushed that company’s stock and retail sales into freefall, but also raised serious questions about the efficacy of existing regulatory controls. The same furtive actions taken by Volkswagen had been taken nearly twenty years earlier by other firms in the diesel industry. In that previous scandal, the U.S. Environmental Protection Agency (EPA) discovered that diesel truck engine manufacturers had, like Volkswagen would later do, programmed on-board computers to calibrate their engines one way to satisfy the required emissions test. Those manufacturers had also programmed the on-board computers to re-calibrate the engines automatically to achieve better fuel economy and responsiveness when the trucks were on the road, even though doing so increased emissions above the mandated level. This paper provides an in-depth retrospective study of the federal government’s efforts to regulate diesel emissions. In particular, it chronicles the earlier saga over heavy-duty diesel truck engines to reveal important lessons for regulators who use a regulatory strategy known as performance-based regulation. Endorsed around the world and used in many settings, performance-based regulation mandates the attainment of outcomes — the passing of a test — but leaves the means for doing so up to the regulated entities. In theory, performance standards are highly appealing, but their actual performance in practice has remained virtually unstudied by scholars of regulation. This paper’s extensive analysis of U.S. diesel emissions control provides a new basis to learn how performance-based regulation works in action, revealing some of its previously unacknowledged limitations. Precisely because performance-based regulation offers flexibility, it facilitates, if not invites, private-sector firms to innovate in ways that allow them to pass mandated tests while confounding regulators’ broader policy objectives. When regulating the diesel industry or any other aspect of the economy, policymakers should temper their enthusiasm for performance standards and, when they use them, maintain constant vigilance for private-sector tactics that run counter to proper regulatory goals.