Kia and Hyundai Agree to Record Settlement with EPA in Fuel Economy Lawsuit

Korean automakers Kia Motors and Hyundai Motor Co have agreed to a financial settlement with the United States government in the amount of $350 million for overstating economy ratings in vehicles. The settlement is the largest punishment administered under the Clean Air Act, and US government officials hope the penalty paid by Kia and Hyundai will send a message to other vehicle manufacturers about the importance of accurately promoting mile per gallon ratings.

Hyundai and Kia Overstate Fuel Economy Ratings

The settlement wraps up a lawsuit filed by the government against the auto manufacturers that was initiated after the November 2012 admission that the mile per gallon estimates had been overstated by between 1 and 6 miles.  Following an EPA audit on Hyundai and Kia models from 2011 to 2013 that found 13 errors on fuel economy reporting, both companies admitted that their testing engineers, “chose favorable results rather than average results from a large number of [MPG] tests.”  The overstatement of fuel economy applied to 1.2 million vehicles for Hyundai alone, representing roughly one quarter of the company’s 2011 – 2013 sales.

Although both companies stated that the fuel economy overestimates were the results of mistakes, both Kia and Hyundai responded to the EPA investigation by lowering the mileage claims and offering compensation to the owners of the affected models.  Last December, Hyundai and Kia settled with owners of the vehicles with overinflated mile per gallon ratings for $395 million. 

After the results of its audit resulted in the 2012 admission, the EPA and the Justice Department opened a probe into the fuel efficiency overestimates that continued for two years prior to culminating in this week’s settlement, which brought the total payout from Kia and Hyundai to more than $700 million.

Kia and Hyundai Settle with US Government

In an effort to avoid ongoing civil and criminal prosecution from the US government, Kia and Hyundai agreed to close the fuel economy probe for $350 million. Government officials expressed satisfaction at the penalties, which are the largest ever under the Clean Air Act.  Outgoing Attorney General Eric Holder said, “This will send an important message to automakers around the world that they must comply with the law,” and EPA Administrator Gina McCarthy echoed Holder’s position by saying that Hyundai and Kia had committed an “egregious violation of reporting standards” that tilted the rules in their favor.

David Zuchowski, chief executive of Hyundai in the US, issued a statement saying, “Hyundai has acted transparently, reimbursed affected customers and fully cooperated with the EPA throughout the course of its investigation. We are pleased to put this behind us, and gratified that even with our adjusted fuel economy ratings, Hyundai continues to lead the automotive industry in fuel efficiency and environmental performance.”  Kia responded to the settlement with a statement saying in part that the company’s priority, “”remains making things right for our customers through our fair and transparent reimbursement program.”

Fuel Economy Settlement Includes Emission Credits

Although the deal is worth $350 million, the payout will not be strictly cash.  Instead, the companies will pay $100 million in penalties, spend $50 million to ensure there are no more future violations, and then forfeit emissions credits worth more than $200 million.  The emissions portion of the payout is explained by the Wall Street Journal:

Under the agreement with U.S. regulators, Hyundai and Kia will surrender 4.75 million of the greenhouse gas credits they built up under the U.S. corporate average fuel-economy system for 2012 and 2013 models. These are effectively bonus points that allow the companies to sell larger, less efficient but usually more profitable models such as sport-utility vehicles or luxury cars. The EPA valued these credits at more than $200 million.

The EPA added that these credits that Kia and Hyundai would have been afforded are equal to the emissions powering 433,000 homes for a year – making the forfeiture a sizable hit to both companies.

Auto Manufacturers’ Settlement Sends Message to Industry

The significant settlement agreed to by Kia and Hyundai will not only send a message to other auto manufacturers that the federal government is increasing its scrutiny on fuel economy estimates, but also sets a precedent for future violations.  Ford Motor Company is currently facing an investigation for similar practices, and other auto manufacturers are likely to follow.  The settlement and related cases may also lead the EPA to become more involved in fuel economy testing, a practice which is currently conducted by the automobile manufacturers separate from government involvement.