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18 Jun 18

Diesel is dead. Long live Diesel

Dramatic predictions about the death of diesel are almost certainly premature, but the powertrain mix is on the brink of significant change according to PwC Tax Partner Alexander Unfried (pictured).

If you believe what you read in the European newspapers, this time next year, we’ll all have scrapped our dirty, polluting diesel cars and traded them in for zero-emission electric vehicles. Diesel cars will be worth nothing and fleets will have to give them away – incurring huge losses and bankrupting dozens of leasing companies.

“The truth is actually much less dramatic,” says Alexander Unfried. “Diesel residual values haven’t fallen that far yet – between 4 - 6%. If they continue to fall at this rate year-on-year, that might become an issue, but I predict that they will stabilise over the coming year or so.”

In any case, the falls in sales aren’t uniform across Europe: Germany, France and the UK saw sharp falls last year, but in Italy, sales actually increased 10 per cent!

Private buyers reaction

Much of the drop in demand has been among private buyers worried by the scare stories in the press. But this trend started in 2011/12 and dieselgate simply accelerated it. The fact remains that for most fleets, there still isn’t a viable alternative to diesel for high intensity users outside of urban areas.

However, the pressure on residual values and uncertainty about future residual values may force some leasing companies to increase their rental rates because the cost of hedging against further falls in values will increase. This in turn might encourage some fleet managers to move away from diesel, but for most fleets, diesel is still the most efficient and affordable means of getting from A to B and that is unlikely to change in the near future.

Government reaction

Much will depend on how the member states’ governments react. They have made a lot of noise about diesel bans in German cities, Paris and Rome. London has gone even further, introducing the Toxicity Charge on older diesels, while Hamburg has introduced a limited ban on older diesels. Governments are also looking at fiscal disincentives for using diesel, but if they manage to tax diesel out of existence they will need to find those taxes elsewhere.

“I think a blanket ban on all diesels in cities would be too extreme, says Mr Unfried, “but it may be that – as in London – more sophisticated bans will focus on excluding older, more polluting diesels.”

This could create a more complex situation with residual values in which Euro 4 and 5 diesels suffer more dramatic falls in value, while Euro 6-compliant vehicles continue to enjoy strong demand on the used market.

All aboard electric vehicles?

There has been a lot of talk about electric vehicles and governments in many member states are offering quite generous subsidies to encourage uptake. But the transition to electric vehicles won’t happen as quickly as some people are predicting.

The charging infrastructure will take years to build and in some countries there are quite serious questions about whether the power grid will be able to cope with the increased demand from millions of people wanting to charge their cars at home overnight.

For most high-mileage fleet users, the limited range of most EVs still isn’t practical for their needs, so some of the dire predictions that diesel will be extinct within 10 years are almost certainly premature.

Step back and think

“Some politicians have over-reacted to the dramatic headlines about dieselgate and rushed to be seen to be doing something about emissions and air quality, but I would recommend that they take a step back and carefully consider how they want to tackle these challenges,” comments Mr Unfried.

If they introduce bans and raise taxes on diesels, while incentivising electric vehicles, and if people start buying more petrol, hybrid and electric vehicles, the governments will need to increase the taxes on these to compensate for the loss of revenue from the diesel vehicle park.

“I think if you speak to most fleet managers and – also to private individuals – they will continue to buy diesel cars because they are the most affordable and most efficient way of getting from A to B and going about their business,” he continued.

Market shares

So, by 2025, when some people have predicted the death of diesel, the market won’t have changed dramatically. “I expect petrol will reclaim some of the market share it has lost to diesel over the last two decades and that sales of electric vehicles will continue to grow rapidly in member states where governments are happy to continue to subsidise them,” said Mr Unfried.

The overall market breakdown is still difficult to pin down, but Mr Unfried believes it would resemble this:

  • Petrol: 60%
  • Diesel: 30-35%
  • Alternative Fuels: 5-10%

When the panic subsides and the headlines are forgotten, diesel will definitely live on. The composition of the powertrain mix will change, but the death of diesel has almost certainly been exaggerated.

Over the last year, much of the reaction has been psychological, and the coverage in the media and the attitude of politicians has shaped a change in sentiment towards diesel. 

“But for lots of complex technical reasons, the idea that we can junk our efficient and economical diesels for trendy electric cars is fundamentally flawed. This transition will take much longer to happen and diesel will continue to be an important part of the powertrain mix for at least another decade,” concludes Mr Unfried.

Image: traffic sign banning older diesel vehicles in Hamburg, Germany.

Author: Mark Sutcliffe