Have Diesel Reached Their Sell-By-Date? The Volkswagen Scandal and the Diesel Market

In the 1960s, before catalytic converters became standard fitment, the French government took a decision to promote diesel powered vehicles - which at the time, were considered to be cleaner than petrol alternatives. However the world and technology have changed, and today France is paying the price with high levels of NOx and harmful particulates emanating from diesel-exhaust emissions.

Despite the French experience Power Systems Research (PSR) forecasts that global engine production for all fuel types will grow steadily at a compound annual growth rate (CAGR) of 1.4% up to 2019, while in contrast, the company expects the diesel market to grow at 4.2% over the same period.

Interestingly PSR believe key drivers to this growth will be the implementation of emissions standards in line with local government legislation as well as a reduction in emissionised engine costs. This is expected to drive sales in many untapped markets such as Japan and the US.

Unfortunately Dieselgate may have put paid to these carefully researched forecasts. In the wake of Volkswagen AG’s emissions scandal France may be the first nation to take action after announcing plans to end tax breaks for diesel: To be fair, this decision was already announced in 2014, but undoubtedly the VW fiasco has lent credence to the decision.

Following two months of wave after wave of outrageous revelations surrounding cheat software, industry consultant LMC Automotive speculate that the scandal may result in the European diesel car market share tumbling to as little as 35 percent in 2022; from 53 percent in 2014.

Legislation and incentives will affect sales of diesel passenger cars

The French government’s decision is significant when one considers that about 68 percent of cars and light commercial vehicles on French roads as of Jan. 1 were running on diesel, according to the CCFA, the country’s carmakers’ association.

"The VW revelations strengthened the health and pollution concerns that had already begun to erode diesel’s popularity"

According to French Environment Minister, Segolene Royal, the decision was made in light of the questionable diesel exhaust emissions whilst these vehicles enjoy favourable tax breaks and incentives. This decision could well be the beginning of the end of passenger diesel vehicles in Europe, where four of the five biggest car markets impose lower taxes on diesel powered vehicles. This favorable treatment has helped diesel become the dominant technology for cars in Western Europe. But the VW revelations strengthened the health and pollution concerns that had already begun to erode diesel’s popularity.

While OEM’s have mostly remained silent on the future of diesel powered cars, Renault-Nissan CEO Carlos Ghosn, believes that the demand for diesel-powered cars has peaked in Europe. Ghosn recently told journalists: "It is very difficult for us to give numbers on how much it will decline and in which countries and which categories, but I would say that today is about the maximum we can expect for diesels in Europe."

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Contradicting PSR’s forecast, Ghosn believes tougher emissions standards will make diesels more expensive for customers in price-sensitive markets. In addition, anti-diesel sentiment is rising in major European cities such as London, Rotterdam and Paris because of smog and health risks from NOx emissions.

Ghosn believes the diesel's future will depend on the introduction of real-world emissions testing for new cars in the EU. These stringent requirements may escalate after-treatment costs with Selective Catalytic Reduction (SRC) and Diesel Exhaust Fluid (DEF) becoming the norm; even on small cost-sensitive vehicles.

The EU plans to introduce the EU6c regulation in 2017 demanding Real Driving Emissions (RDE) tests as an additional type approval requirement. This will make it more difficult for new cars to pass tests for pollutants such as NOx. Without expensive emissions control technology; diesel cars emit far more NOx than gasoline models.

Although the EU's technical committee of motor vehicles agreed on the 28th October to give automakers more flexibility on passing the RDE tests, industry association ACEA warned that it will be extremely difficult for automakers to conform to RDE standards in the proposed timeframe, leading to a "substantial" number of diesel models being phased out earlier than planned.

As for the future of diesel in other parts of the world, Ghosn believes that negative coverage of the VW diesel debacle will ultimately doom the technology. "This scandal will not make diesel more popular in the United States and Japan," Ghosn said. Diesels account for a 5 percent share of passenger vehicle sales in the U.S. and even less in Japan, and are unlikely to record any short to medium term gains.

Have European OEM’s and governments delayed the inevitable?

While Dieselgate was quite simply Volkswagen cheating the system to get its diesel cars to pass emissions tests in the USA, it didn’t do this with corporate malevolent intent. It did this because it couldn’t offer diesel cars to USA consumers that could comply with regulations and still meet the performance and cost expectations of the market.

In an interview with journalists Tesla CEO, Elon Musk, shared a broader auto industry perspective, pointing out that it was time to move beyond the antiquated and inefficient methods of propelling passenger cars with fossil fuels. Although the scandal has singled out VW diesels, it is common knowledge that several manufacturers are manipulating test CO emissions and fuel consumption claims.

Musk ventured that this scandal should lead automakers and legislators to speed up the move toward truly clean and high-performing electric vehicles. However, it’s important to understand that switching to electric vehicles poses a risk to the majority of large automakers where the customer base has become familiar with traditional forms of transport. Developing and selling electric cars and fossil-fuel burning cars under the same branding is like trying to mix oil and water.

"The problem is not that diesel engine exhaust emissions cannot be scrubbed clean"

Thus, it would probably make sense for these large automakers to follow the approach of some of the German utilities, which have adopted the approach of having two arms operating independently. Maybe it’s time to cut the ties with the past and invest whole-heartedly in the future of electrification.

It’s important to take note that the problem is not that diesel engine exhaust emissions cannot be scrubbed clean, but rather the cost of doing this may be prohibitive in the passenger car market: Unlike heavy commercial vehicles, the cost of after-treatment is relatively high when compared to the market related cost of the vehicle. Furthermore, with EV and hybrid technology maturing and costs coming down the increase in costs of green diesels will probably hasten the demise, post 2022.

In North America the slow increase in the sales of hybrids, plug-in hybrids, and fully electric cars, which currently account for about three percent of car sales, is likely to gain momentum over the next 10 years. Charging will get easier as infrastructure spreads, whilst drivers will get used to plugging in instead of pumping.

The VW Diesel emissions scandal has dominated auto news over recent months, the consequences of which are still unfolding on a regular basis. While VW are embroiled in an immediate furore over the recall and modification of millions of vehicles, there may well be far-reaching ramifications for the industry as a whole – particularly in the US market where VW had led the return and growing reputation of ‘clean diesel’ passenger cars.

All of that good work is under threat of being completely undone, and this scandal might just have tarnished the name of diesel enough in the US to signal its death knell.

America’s Thorny Relationship with Diesel

While diesel passenger cars are commonplace in Europe, the US market has never really taken to diesel for a number of reasons. Many Americans remember GM’s failed Oldsmobile engine of the early 1980’s which spawned the reputation of diesel cars being noisy, dirty and foul-smelling. As emission standards were increased over the years the market collapsed and by 2007 sales of light-duty diesel vehicles in the US had fallen to below 20,000.

Over the same period in Europe there was huge investment from both OEM’s and governments to develop diesel as a ‘greener’ alternative to petrol, as it produces less CO2; and subsidies in road tax, fuel prices and vehicle purchase prices made it an attractive option for consumers.

There was no such development in the US where investment was steered much more towards electric and hybrid vehicles, and diesels were generally more expensive in terms of purchase price and fuel costs, making them unattractive despite the additional torque diesel engines could deliver.

VW in particular had led an assault on the poor reputation of diesel in the US, promising ‘clean diesel’ vehicles with better fuel economy, less emissions, and excellent performance. It is true that diesel engine technology had developed beyond recognition since the 1980’s and the American market was beginning to warm to the idea again. According to the diesel technology Forum only 13% of consumers looking for a new car would consider diesel in 2006, a figure which had risen to 40% by 2015.

In 2013 VW was responsible for 70% of sales in the ‘clean diesel’ market, and its name has become synonymous with diesel in the US. The news that emissions from certain engines are nowhere near acceptable standards may cause irreparable damage to the industry, even if other diesel engines are within the regulations.

EPA to Probe other Diesel Vehicles

The US Environment Protection Agency has already stated its intention to extend its probe further to other manufacturers, saying it will also scrutinise more than two dozen models from BMW, Chrysler, General Motors, Land Rover and Mercedes-Benz. There is no accusation that these companies were using ‘cheat’ devices such as those discovered in VW’s, but it is a sign of the suspicion this scandal has caused in the US.

The EPA will initially test one used vehicle of each model, and subsequently widen the probe if it uncovers anything potentially untoward.

Industry Predicts Tough Times

Currently diesels only account for around 3% of the US market, but it was earmarked by VW and many others as a key area of growth, with industry analysts predicting 7.5% penetration in the future. Many analysts have changed tune considerably with some arguing this will effectively end America’s brief flirtation with diesel for the second – and last – time.

Sales of light-duty diesel vehicles in the US had risen to 163,200 last year according to AutoPacific Inc., but a downward turn is inevitable after the reputational damage, and unlike in Europe, there is very little to encourage US consumers to opt for a diesel car.

Effect on Testing and the European Market

With over half the vehicles on the road in Europe of the diesel variety, there is clearly a much wider issue for European OEM’s. Let’s not forget that the vast majority of diesel engines on the road do meet current emission targets, but this issue has been regarded as a ticking time bomb by some analysts for quite some time. The EU is set to introduce new on-road testing methods in 2017, which will evaluate ‘real-world’ performance as well as laboratory performance. It has been known for some time that there are significant discrepancies between the two, and the impact that the new testing regime will have is not easy to predict.

Diesel has been so well supported by government and industry in the EU, and manufacturers were actively encouraged by government to invest in and develop diesel engines to meet environmental targets. The notion that these engines are producing unacceptably high levels of NOx, and contributing significantly to air pollution is not a comfortable one.

The signs are there however, and the European Environment Agency estimates that 20-30% of urban residents in Europe are exposed to particle levels – mainly from diesel exhaust fumes – above those considered acceptable by the European Union.

In addition approximately 10% are exposed to unsafe levels of nitrogen oxides. Indeed, the smog levels were so bad in Paris in March 2015 that authorities had to temporarily limit the number of cars on the road each day.

Those are sobering figures and the onus is now on the European automotive industry to prove that it can produce diesel engines that can meet emission reduction targets from 2017 – not just in the mid-range and premium sections where higher price points allow the use of expensive particulate and catalytic reduction systems – but also in mass production ‘affordable’ vehicles.

It may be too little too late for the US market, with quotes from the heads of Tesla and Renault-Nissan neatly summing up business and political attitudes on either side of the pond.

Carlos Ghosn, Chief of Renault-Nissan is reported by the Financial Times to have said in a letter to the EU’s competitiveness council, "All manufacturers have heavily invested in innovation, developing advanced diesel technology which consumes less fuel, thus reducing CO2 emissions." He added that, "we should avoid measures which could undermine the competitiveness of our sector which accounts for 12.1m jobs in Europe."

Meanwhile, Tesla Motors CEO Elon Musk, told reporters, "What Volkswagen is really showing is that we've reached the limit of what's possible with diesel and gasoline. The time I think has come to move to a new generation of technology".