Volkswagen Chattanooga Plant

Volkswagen AG (ETR:VOW3) reached a deal to resolve the diesel emission rigging scandal involving 600,000 vehicles installed with software that defeats the emission standard of the U.S. Environmental Protection Agency (EPA).

The German automaker issued a statement confirming that an agreement in principle has been reached with the Department of Justice (DOJ), EPA, and the California Air Resources Board (CARB) with the full involvement of the Federal Trade Commission (FTC). According to Volkswagen, the settlement will be incorporated into binding consent decrees by the DOJ and the FTC in the coming weeks.

The automaker also reached an agreement on the basic features of the settlement with the plaintiffs on the class action lawsuit filed in San Francisco.

“This agreement will be incorporated into a comprehensive settlement in the coming weeks. The judge presiding over today’s court hearing in San Francisco, Charles R. Breyer, expressly welcomed this development,” said Volkswagen.

Buyback offers and fix for 482,000 Volkswagen vehicles

The deal in principle will include a buyback offer and a possible fix for 482,000 Volkswagens with 2.0-liter, four-cylinder engines, according to a federal judge in San Francisco on Thursday.

Senior U.S. District Judge Charles Breyer said a “substantial compensation” will be included in the settlement agreement, but he did not disclose the potential amount that would be received by car owners.  Volkswagen will also make a commitment for a separate funding to promote green automotive technologies.

“I am extremely pleased to report that the parties have come up with a concrete plan by today’s date, and I would like to publicly thank them,” said Judge Breyer.

The company hasn’t reached an agreement on the Volkswagen, Audi, and Porsche vehicles with 3-liter, six-cylinder engines (around 90,000 units. Consumers with leased VW Jetta, Golf, and Passat (since the 2009 model year) will be able to return the vehicles.

Yesterday, German newspaper Die Welt reported that Volkswagen agreed to pay $5,000 for each affected car owner. It will also separately shoulder the payment to fix their vehicles.

“The agreements in principle are an important step on the road to making things right. Volkswagen intends to compensate its customers fully and to remediate any impact on the environment from excess diesel emissions,” said Volkswagen spokeswoman Jeannine Ginivan as quoted by Reuters.

Financial impact

Some analysts and two people familiar with the matter suggested that Volkswagen would probably spend $10 billion to comply with the agreement.

Marc-Rene Tonn, an analyst at Warburg Research, estimated that the  financial impact of the emissions scandal worldwide on Volkswagen will be around €28.6 billion or $32.3 billion.

Last year, the German automaker told shareholders it allocated $7.3 billion to cover the potential costs of a recall and regulatory penalties. Market observers said the amount was too low since the penalties for violating the Clean Air Act alone would cost as much as $20 billion.