2-28-18 2:47 AM EST | Email Article

In blow to car makers, ruling clears way for cities to ban certain vehicles to cut pollution

By William Boston 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (February 28, 2018).

BERLIN -- A German court on Tuesday rang the death knell for certain diesel cars in a blow to the country's flagship auto industry, which could now be forced to spend billions to upgrade or replace millions of cars.

In a landmark decision, a federal court ruled that German cities Stuttgart and Düsseldorf could ban diesel vehicles from their streets as a way to reduce pollution, rejecting an appeal of a lower-court ruling. Ultimately, the ruling clears the way for any German city to ban older diesel vehicles and could inspire similar measures in cities around Europe, analysts said.

Germany's blue chip DAX index fell sharply on the news as the stocks of auto makers Volkswagen AG, Daimler AG, and BMW AG came under pressure.

The closely watched ruling on Tuesday by the Federal Administrative Court in Leipzig is likely to accelerate the demise of a technology that German auto makers have long promoted as combining solid driving performance with fuel economy and low greenhouse-gas emissions, but which has been largely been discredited in the wake of the emissions-cheating scandals at Volkswagen and other car makers.

The fumes from diesel fuel, which enjoys tax subsidies across Europe, have also been found to be more damaging to health than thought years ago.

German Chancellor Angela Merkel now faces pressure to establish federal regulation to avoid what auto industry lobbyists warned could become a "patchwork of conflicting rules" in cities across the country. Ms. Merkel on Tuesday said she would meet with local mayors to determine the best course of action.

A tough choice awaits the incoming German government. It could force car makers to shoulder an estimated EUR8 billion ($9.8 billion) in costs to refit diesel vehicles, weakening a key economic contributor at a time when it must invest heavily in electric vehicles and self-driving car technology. Or the government could decide to use taxpayer money to finance the repairs, potentially alienating voters.

Diesel vehicles in Germany certified between 2009 and 2014 under the so-called Euro 5 emissions standard, numbering about 5.9 million vehicles, wouldn't be subject to a ban until September 2019, the Leipzig court ruled. Vehicles certified later under the Euro 6 regime would likely be exempt from any bans.

But all other diesels in the country certified before 2009, nearly 7 million vehicles in operation today, could be subject to bans at any time. Those individuals hit hardest will be owners of the oldest diesels on the road that don't adhere to Euro 6. That segment accounts for 2.7 million of the 15 million diesels in use, according to the German Automotive Industry Association.

Environmental groups called on the federal government to create legislation that would allow cities to issue stickers that would be awarded only to vehicles that met current emissions standards.

Within hours of the court's ruling, the northern city Hamburg said it was acting on a previous decision to bar diesel-powered vehicles that predate the Euro 6 standard from certain thoroughfares in the city. Additional cities are expected to follow.

Before the 2015 Volkswagen emissions scandal, more than half of new cars sold in Europe were equipped with diesel engines. Now, the share is around 44%, consisting largely of vehicles used by craftsmen and in corporate and delivery fleets, according to analysts, who predict that by 2025 just 20% of new cars sold in Europe will have a diesel engine.

The Leipzig ruling in support of diesel bans "will accelerate that decline," said Liam Butterworth, chief executive of auto supplier Delphi Technologies LLC, saying auto makers will likely move faster to replace diesel engines with gasoline engines, electric cars and hybrids. "The majority of diesel engines below 2-liters will just go away," he said in an interview.

Mr. Butterworth said Delphi has already begun to dramatically scale back its diesel business and expand development of smaller gasoline engines, hybrid technology, and electric-car powertrains.

In 2016, a state court in Düsseldorf backed a lawsuit by the nonprofit Environmental Action Germany and explicitly ruled that driving bans are allowed to reduce nitrogen oxide, or NOx, pollution, a byproduct of diesel emissions. A court in Stuttgart, where Porsche and Daimler's Mercedes brand are based, followed suit last July.

The respective state governments, North Rhine Westphalia and Baden-Wurttemberg, appealed the ruling, putting the issue in hands of federal judges in Leipzig. By setting a federal precedent, the Leipzig court leaves cities with little recourse but to ban diesel vehicles.

"We expect that the first diesel bans will be implemented within the next three to six months as a result of this ruling," said Jürgen Resch, director of Environmental Action Germany.

Germany's VDMA engineering association said "driving bans for diesel vehicles are the wrong way" to curb pollution, saying service industries and craftsmen who use diesel delivery vans would suffer. VDMA called instead for improved traffic control systems and better public transportation.

A widespread ban on diesel also would affect buses, taxis and other municipal services that rely on diesel vehicles.

With millions of car owners affected, the auto industry is under enormous pressure to foot the bill to get the dirty diesel vehicles off the road. Meanwhile, car dealers are already finding it more difficult to sell the cars.

Diesel vehicles on average remain on German dealers' lots for 102 days, and resale values for diesel cars have fallen 6% over the past year in Germany, largely on fears of diesel bans. Lower resale values could hit leases that assume higher residual values and could force car makers to provide financial support for their dealers.

Write to William Boston at william.boston@wsj.com


(END) Dow Jones Newswires

February 28, 2018 02:47 ET (07:47 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.
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