Some issues are sacrosanct for the German auto industry, and the subsidy on diesel fuel has traditionally been one of them. Volkswagen and its rivals have turned this €8 billion-tax break into a big selling point for diesel cars.
So it may seem surprising to hear calls for an end to that policy coming from the executive suite in Wolfsburg. But that’s exactly what Matthias Müller, Volkswagen’s CEO, suggested during an interview with Handelsblatt, saying the tax breaks should be gradually shifted toward environmentally friendly technologies.
“I’ve become convinced that we should question the sense and purpose of the diesel subsidies,” he said. “If the switch to environmentally friendly e-cars is to succeed, diesel combustion engines can’t continue to be subsidized the way they have been forever.”
Though Germany’s annual car tax is higher for diesel models, subsidies for diesel fuel generally offset those costs, since the tax on diesel is roughly 18 cents less per liter (68 cents per gallon) than on gasoline. Ending those subsidies would almost certainly reduce sales of diesel models, as well as revenues for VW and other carmakers.
My point is, how do we support the technological transition, the systemic change toward electromobility?
Particularly since 2015, when the Dieselgate affair came to light, diesel has lost its luster. Volkswagen ultimately admitted to installing illegal software on millions of diesel cars to beat emissions tests, and the company has since faced more than €20 billion of euros in fines and other costs.
Though diesel cars emit less carbon dioxide than petrol-powered models, they spew more nitrogen oxide, the toxic air pollutant at the center of the scandal over VW’s cheat devices. With a growing list of cities looking at local bans on diesel vehicles, customers are staying away: In November, diesel cars accounted for just over one-third of vehicle sales in Germany, compared to nearly 45 percent a year ago, according to government figures.
Mr. Müller told Handelsblatt that blanket bans would have serious consequences for Germany, and that politicians and carmakers should do everything possible to avoid them. The Volkswagen CEO instead endorsed a blue-sticker scheme for cars with acceptable levels of nitrogen oxide emissions. “Only those that are under [the limit] will be allowed to drive in cities in the future,” Mr. Müller said.
Environmental activists involved in efforts to control urban air pollution have long been calling for an end to diesel subsidies. Berlin’s annual budget for investments in electromobility is about €1 billion ($1.18 billion), but the tax breaks for diesel cost the government eight times that amount every year, according to Maria Krautzberger, the president of Germany’s federal environment agency, UBA.
Despite those numbers, Ms. Krautzberger has been unable to get politicians on board, and even Chancellor Angela Merkel has rebuffed calls for an end to the policy. Mr. Müller is the first CEO of a German carmaker to suggest that the government consider doing exactly that.
Volkswagen, he said, would be able to withstand the hit on sales of diesel models without having to worry about the company’s survival. “The past two years have shown that we’re quite a financially resilient company,” Mr. Müller told Handelsblatt.
But the VW CEO is likely to face resistance from elsewhere in the industry. In recent months, his competitors have restated their long-term commitment to producing diesel cars, with BMW boss Harald Krüger vowing to continue making them.
Daimler CEO Dieter Zetsche said the technology is critical to helping meet climate protection targets, since they emit less CO2 than petrol-powered cars. The head of Germany’s automotive industry association, VDA, made a similar argument at the IAA motor show in September. “Modern diesel is indispensable to reaching carbon dioxide goals in Europe,” Matthias Wissmann said.
Starting in 2020, manufacturers will be required to pay penalties if the average CO2 output of the cars they sell in Europe exceeds 95 grams per kilometer. In VW’s case, every gram above that limit would cost the company €400 million.
The fact that electric cars produce zero direct CO2 emissions gives the automotive industry all the more reason to embrace electromobility. By 2025, it’s estimated that electric cars will represent about a quarter of all vehicle sales.
Yet despite the billions of euros that carmakers are investing in electric cars, there’s a critical lack of infrastructure to support them, such as charging stations. “My point is, how do we support the technological transition, the systemic change toward electromobility?” Mr. Müller asked. “Cutting diesel subsidies, and in exchange incentives for electric cars would be the right signal.”
As it looks to repair its brand, VW has done a good deal of soul-searching on the diesel issue. A year after its emissions-rigging scandal first came to light, the carmaker set up a Sustainability Council to advise it on matters such as climate protection.
Chairman Georg Kell told Handelsblatt that he was skeptical at first about VW’s commitment to learning the hard lessons from Dieselgate. “In the end, I decided to participate,” he said. “Because I view the work of the Sustainability Council as a huge chance to see Europe’s largest industrial company through the transformation toward a new, better time.”
Mr. Kell said VW has an opportunity to lead the charge on the diesel subsidy issue, though he acknowledged that the tax break wouldn’t vanish overnight. “I do ask myself, though, why diesel is still subsidized in most European countries and at the same time politicians wonder why electric vehicle sales aren’t progressing quickly enough,” he said.
Mr. Müller said both private and commercial customers have grown accustomed to those privileges. “There’s no question that tax-related subsidies have made it much easier to sell diesel cars in Germany,” he said. The VW CEO pointed to the need for a more intensive but less ideological dialogue with politicians on the issue.
“Today there’s a need for a high degree of cognitive flexibility,” Mr. Müller said. “Anyone who doesn’t have it will lose – in business and in politics.”
Auto industry expert Ferdinand Dudenhöffer told news agency DPA he was impressed with Mr. Müller’s suggestion, saying he hadn’t expected such a proposal from the industry. “Finally, someone’s made the suggestion,” he said. Mr. Dudenhöffer, who heads the CAR center at Duisberg-Essen University, said he believed the proposal could give e-cars a much-needed boost.
Reactions were more mixed from politicians. Oliver Kirscher, deputy floor leader of the Green Party, said in a media interview that the next government should pursue Mr. Müller’s proposal. But the floor leader of the pro-business FDP party, Michael Theurer, criticized the blue-sticker scheme proposal, saying this opened up a whole new can of worms. He told Handelsblatt that VW was responsible for the Dieselgate scandal, which had proved costly for German car drivers.
Criticism also came from the industry, with one manager from a VW rival asking why the CEO had opened up a whole new set of problems. Such alarm in the sector is unsurprising as companies struggle to switch to e-car production. Carmakers are plunging billions into the transition to electric and some, including BMW and VW, have committed to generating up to a quarter of their sales with electric vehicles by 2025.
But this is a risky investment with ripples that go beyond carmakers as critical infrastructure is still lacking, from charging points to energy suppliers. Without this, the carmakers will not be able to achieve these sales targets. But if the government does switch the subsidy from diesel to electric, that would go a long way to helping.