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A catalytic converter serves a crucial role in reducing harmful emissions from an internal combustion engine by converting toxic gases like carbon monoxide, hydrocarbons, and nitrogen oxides into less harmful substances such as carbon dioxide and nitrogen. When a catalytic converter fails, its ability to perform this function diminishes significantly. This failure results in higher levels of harmful pollutants being released into the exhaust stream, contributing to environmental pollution and potentially failing emissions testing requirements.

While other factors like engine power, fuel efficiency, and engine temperature may be impacted by a failing catalytic converter in various indirect ways, the primary and most immediate consequence is the increase in harmful emissions. The catalytic converter is essential for compliance with environmental regulations, and its failure directly contravenes those standards by permitting increased emissions of pollutants. This makes the second option the most accurate response to how a catalytic converter failure impacts exhaust emissions.