If reports are accurate, this Volkswagen factory in Tennessee could start cranking out electric cars as part of a settlement between VW and the U.S. government. Image source: Volkswagen.

Will the Feds force Volkswagen (VWAGY -0.63%) to make electric cars in the United States as part of its punishment for cheating on emissions testing?

According to reports in a major German newspaper, that's one possibility that has been floated in VW's talks with the U.S. Environmental Protection Agency (EPA). The EPA is apparently taking a very tough line with VW -- in part, according to these reports, because they have reason to believe VW's top managers knew about the cheating long before they admitted it to regulators.

VW execs weren't forthcoming, and the Feds hate that
If there ever was a chance the EPA would let VW off with a recall and a moderate fine, that moment seems to have passed. Generally speaking, U.S. federal regulators (and prosecutors) will be more inclined to be lenient with a company if they think senior managers were willing to admit a problem in a timely way.

It's starting to look like that's not what happened with Volkswagen. 

Early last week, Germany's Bild am Sonntag newspaper reported that internal memos and emails from VW indicated that senior executives knew VW couldn't bring its cheating vehicles into compliance with air-pollution regulations in early 2014, long before they admitted it, and while they were leading EPA and California regulators to believe otherwise. 

The report, which was confirmed by The New York Times after it had a chance to review the VW documents, may have put VW in a very hot spot, and not just with environmental regulators. (Among other things, it's now open to charges that it failed to make appropriate disclosures to investors.)

That in turn gives the EPA a lot of leverage in settlement talks. And according to a report over the weekend in another German paper, Welt am Sonntag, it's using that leverage in interesting ways.

The Feds want VW to make a big commitment to "electric mobility" here
The Welt report says the EPA wants Volkswagen to make a large commitment to "electric mobility in the United States." According to that report, the commitment would have two major parts. 

First, VW would have to commit to building electric cars at its sole U.S. factory, in Chattanooga. VW has a new electric-vehicle architecture under development; it's expected to eventually underpin a whole range of battery-electric cars, from affordable small VWs to higher-end Audis and Porsches; the Feds want at least some of them to be built here in the United States.

Second, according to the report, the EPA is apparently pushing VW to help create a network of electric-vehicle recharging stations in the U.S. to help encourage the wider adoption of battery-electric vehicles by mainstream U.S. consumers. Right now, the closest thing to a national recharging network in the U.S. is Tesla Motors' (TSLA 9.45%) growing list of Supercharger stations. But Tesla uses a proprietary recharging system, and while CEO Elon Musk has offered to license it to other automakers, to date, none have taken him up on the offer. Presumably, the EPA is hoping that VW will help create a network of stations that use a universal standard. 

Taken together, the two commitments could well cost VW a billion dollars or more. But it looks likely the company is going to have to write a hefty check to the U.S. government no matter what else happens. It's possible the EPA is arguing that it will be cheaper for VW in the long run to take this alternative course, and it's possible that will turn out to be true.

We already knew this was going to cost VW a fortune
VW isn't going to get off cheap, no matter what happens. The Welt report also indicates that VW will probably be forced to repurchase about 100,000 of the roughly 600,000 diesel-powered VW Group products in the U.S. that the EPA says include emissions "defeat devices" coded into their software. 

Assuming an average value of $15,000 for those cars, that's $1.5 billion right there -- before the costs of the other recalls, and before any fines or penalties.

And that's just in the United States. VW also has to contend with irate regulators and prosecutors in Europe and elsewhere: Most recently, Reuters reported that South Korean prosecutors raided VW's local offices for emissions-related documents last week. 

Last fall, not long after the scandal broke, VW took a one-time charge of 6.5 billion euros (at the time, $7.4 billion) to cover the costs of the scandal. It seemed likely at the time that it wouldn't be enough. We still don't know how much all of this will cost. But it now seems certain that there are more big one-time charges yet to come.