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You've pretty much nailed it.Through all of this I keep thinking: are the metrics expected by the EPA in any way realistic or achievable at all with a reasonably priced internal combustion engine? Seems to me like they're asking the impossible from manufacturers and, in turn, manufacturers answer in the most cost-efficient way possible even if it's unethical by cheating.
However, the emissions targets aren't impossible, they just require compromises to things like performance and usability that companies don't want to make, because they've lifted expectations so high with technology developed before the emissions regs tightened.
VW has spent the last 20 years or so making Golf TDIs that feel as quick as their petrol equivalents, but it's getting harder to do that without excessive cost when the engines also have to be clean - which, despite the claims of some, has never really been the case.
It's also a difficult engineering job because making improvements in one area doesn't always help in another. Catalytic converters are a good example of this. They were very effective at reducing two key pollutants from combustion, carbon monoxide and hydrocarbons, but the process increased carbon dioxide emissions. Then governments became concerned about CO2, and manufacturers figured the best way of meeting these targets was with diesels. Diesel engines actually produce more CO2 from combustion, per unit, than petrol engines (a 50mpg diesel will have a higher CO2 figure than a 50mpg petrol), but they tend to use less fuel in the first place so overall figures are lower.
...and then everyone realises that diesels produce other unwelcome emissions like particulates and oxides of nitrogen (the latter of which cause smog, which is why diesel-friendly Paris looks like Beijing some days). But to reduce those without knackering the CO2 benefits, you have to either spend a lot of money on things like urea injection systems, or adjust the car's electronics to compensate, which can harm the way the car delivers its power.
There's no real getting around it though. Cleaner air is absolutely something worthwhile to work towards, and there's always pressure from consumers to have something bigger, faster, more luxurious, more economical, cheaper. It'd probably be much easier to make emissions-compliant cars if consumers stopped asking for the moon on a stick (profit margins on small cars are tiny these days because small cars effectively have to be as well built, and perform as well as bigger ones) but the average consumer will never stand for a smaller, slower and lighter version of the car they're currently driving just because it gets a few more MPGs and produces lower emissions.