Deadly Diesel Is Going to Cost the Car Industry Billions Commentary

Deadly Diesel Is Going to Cost the Car Industry Billions: Commentary

Since 2010, carmakers in Europe have sold almost 30 million vehicles that emit levels of NOx more than three times over the regulatory test limit when actually driven by customers, according to  the Transport & Environment group.

Diesels make up about half of Europe's car sales. In 10 years time, I'd wager the percentage will be far closer to zero and that diesel's demise is going to cost the autos industry billions.

In Britain, the government is toying with the idea of a diesel scrappage plan to tackle the nitrogen oxide (NOx) emissions that kill about 75,000 Europeans prematurely each year.

It’s the latest in a succession of European measures which could see diesel cars barred from cities, their fuel incentives removed and parking made more expensive.  Last month London issued a “black" alert because of high air pollution, prompting one school to restrict the time kids were able to play outside. Diesel is becoming stigmatized: sales have started to decline in the U.K. and Germany, albeit slowly. 

Volkswagen AG's emissions cheating has highlighted the big gap between diesel cars' nitrogen oxide emissions when driven on streets compared to when they were tested in laboratories. The scandal has already cost the carmaker more than $23 billion in North America.

But the emissions discrepancies go well beyond VW. Since 2010, carmakers in Europe have sold almost 30 million vehicles that emit levels of NOx more than three times over the regulatory test limit when actually driven by customers. That's according to Transport & Environment, a lobby group that compiled data from various government tests published last year after the VW scandal. Here are some of the worst performers -- you'll note that VW's new models are, surprisingly, among the cleanest.

Last month, Fiat Chrysler Automobiles NV became the latest automaker to be accused by the U.S. of violating pollution laws over its diesel emissions. Meanwhile, France has referred Peugeot and Renault to prosecutors. Elzbieta Bienkowska, the EU industry commissioner overseeing the VW scandal told the Financial Times that her patience was wearing thin with national regulators over their lack of haste in examining carmakers other than VW.

VW's rivals all deny wrongdoing, and it's possible none has broken the law. "Existing models comply with the EU law against which they were approved," the European Automobile Manufacturers' Association (ACEA) says of the large discrepancies between laboratory and real-world emissions. 

But given the deaths from disease linked to air pollution, it seems a little arcane to be arguing about whether technology that -- for example -- switches off NOx emission controls at low temperature  fits the legal definition of a "defeat device". At the very least, carmakers have done a poor job of explaining that diesel cars are much dirtier than the public had reason to expect.

As a result, there's a risk of diesel inflicting reputational and financial damage on the car industry, in a similar way to the Libor scandal did to banks.

New emission tests will eventually force carmakers to cut real-world NOx emissions to just 1.5 times the permissible laboratory maximum (80 mg/km). So, at a minimum, carmakers will have to pay more to make new engines compliant. For small cars that will probably be too expensive. Some manufacturers may just decide to leap directly into electric vehicles instead.

Indeed, there's an argument that diesel is probably already beyond saving. When consumers cotton on, carmakers face another hefty bill. That's because resale values could fall if cities start banning polluting vehicles. That's not just a problem for customers, the carmakers could lose too.  

Nowadays many drivers lease their cars. That means it's up to the finance company (typically a subsidiary of the carmaker) to find another buyer when the customer trades in the vehicle after three years.

In other words, some automakers are carrying billions of euros of diesel vehicles on their balance sheets whose value could fall much more than anticipated. BMW is particularly exposed, according to UBS, because it has a large car finance operation and sells lots of diesels.

That's not all. As I explained here, carmakers might also be forced to write down the value of diesel engine plants, some of which have only just been upgraded.

Meanwhile, if carmakers try to replace diesel sales by selling more gasoline cars instead, their carbon dioxide emissions could rise again. Under EU rules carmakers who miss CO2 targets in 2021 face billions of euros in fines. In other words, they're stuck between a rock (NOx) and a hard place (CO2). Selling more hybrid and electric vehicles would mitigate that, of course.

Finally, there's a risk that governments will force more carmakers to fix their most polluting vehicles. Last year Germany asked the industry to recall more than 600,000 diesel vehicles to upgrade their emissions management systems. Fiat and Renault have announced voluntary diesel fixes but mostly carmakers and national governments have sat on their hands.

Should this change, and as a European city-dweller I hope it does, the cost to the industry will rise even more.

By Chris Bryant

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