The primary environmental focus over the last 20 years has been on Greenhouse Gas (GHG) emissions and more specifically Carbon Dioxide (CO2). As a result, an uneven playing field in favour of diesel has been introduced in Europe. The CO2 based approach, which is directly linked to fuel consumption efficiency, coupled with rising fuel prices overall, has significantly increased the market share of diesel vehicles across Europe, at the expense of petrol cars.
Recently there has been growing awareness around the discrepancies between the the out of date New European Drive Cycle (NEDC) laboratory test values for fuel consumption, CO2 as well as air pollutants (particularly Nitrogen Oxides - NOx) and those achieved in real life tests measured on the road. The VW emissions scandal in 2015 and the understanding that urban air pollution, in reality, has not improved as much as expected, has accelerated the debate around the environmental impact of different fuel types in particular diesel cars.
As a result, some governments have announced (such as France and the UK) to end the sale of new conventional petrol and diesel cars and vans by 2040, as well as the introduction of Low Emissions Zones (LEZs) in a number of major cities. It should be noted that, in our view, LEZs will not ban all diesel vehicles overnight, but will initially impact older generations first, significantly limiting any negative effects on fleets in the coming years, since fleet vehicles are generally younger.
The NEDC has been replaced with the Worldwide Harmonised Light Vehicle Test Procedure (WLTP) and the Real Drive Emission Test Procedure (RDE). The emission figures produced from these new tests should better reflect real driving conditions. A transition period until 1st January 2019 should allow OEMs (Original Equipment Manufacturers) and local governments enough time to adapt, whilst the resulting values should in the eyes of the European commission not directly lead to a higher tax impact, even though it is already known today that variances of 20% (but up to 80%) will exist compared to todays values.
In order to achieve the 2021 average CO2 reduction targets, all the mainstream OEMs have been adapting their strategies by introducing new technologies, in combination with and sometimes the substitution of diesel and even petrol. Many of these strategies, however, still imply the use of diesel vehicles, some of which will be upgraded and include hybrid versions, the main reason being that such strategies require high investment and time to be executed. It is very likely that diesel will not just disappear overnight since alternative fuel investment costs are high and take a considerable amount of time to execute. Stakeholders should take this into account.
Even though the reputation of diesel has suffered in the eyes of the public in recent months, it is important to understand that much of the recent diesel shift in corporate fleets has moved into petrol, especially in the smaller vehicle segments. This is mainly due to the removal of a more expensive diesel offering from the OEMs in these segments and a partial move into electrified vehicles (essentially hybrid and plug-in hybrid) due to the fiscal incentives.
Evidence suggests that the general public across Europe is shifting away from diesel, so over time, offer and demand will need to be reconciled in the second hand markets as well. There is likely to be pressure on diesel Residual Values (RVs) going forward to the benefit of alternatives available in the short term, mainly petrol, hybrids (including plug-in hybrids) and, to a lesser extent, full electric vehicles.