News outlets all over the world not so long ago compiled their "best-ofs"—or more likely "worst-ofs"—lists for 2017. Here we hop on the bandwagon, albeit a bit late, and look back at the last year in the European vehicle market. Most developments in Europe were somewhat more encouraging than the global state of affairs: Demand for low emission vehicles continued to grow while diesel sales continued to fall, thanks in part to a smorgasbord of policies to clean up road transportation.
Diesel shares of new car registrations in Europe continued to decline throughout 2017. The chart below plots monthly shares of diesel new car registrations from January 2012 to December 2017 in France, Germany, Italy, Spain, and the UK. These five countries together accounted for three quarters of all 2016 new car registrations and are the largest diesel car markets in the EU. Because monthly data are noisy, we included 12-month rolling averages to smooth out monthly and seasonal trends.
Diesel shares of new car registrations in France, Germany, Italy, Spain, and the UK. (Sources: French Ministry of Ecology, Sustainable Development and Energy; German Motor Transport Authority; Italian Association of the Automotive Industry; Spanish Association of Manufacturers of Automobiles and Trucks; UK Society of Motor Manufacturers and Traders)
With the exception of Italy, diesel shares fell to 6-year lows at the end of 2017. Combining the five markets, monthly diesel shares declined by almost 8 percentage points since Dieselgate made the headlines in September 2015. Market shares in Germany took a nosedive in 2017, falling to roughly one-third of car registrations in December, followed by the UK with a 38% share in the same month. France has seen a relatively steady decline in diesel sales since 2012, while Spain experienced the largest drop of the five countries—16 percentage points in the rolling mean—since Dieselgate broke. Italy stands out as the only market with no appreciable decline in monthly diesel shares in 2017. Nonetheless, while diesel sales in Italy were still increasing in the first 1.5 years following Dieselgate, they seem to have flattened off in 2017.
Reasons for the decline in diesel sales are varied. Diesel fuel has traditionally enjoyed lower taxes in a number of EU member states. After Dieselgate, some countries are rethinking this practice. France began leveling out taxes on gasoline and diesel fuel in 2015, progressively making diesel fuel more expensive. With the latest adjustment, diesel fuel lost 3.7 cents per liter of its tax advantage compared to gasoline fuel, narrowing the gap to approximately 10 cents per liter. In Germany, the same gap is 18.4 cents per liter and costs almost 8 billion euros in annual tax revenue, leading the Federal Environment Agency (UBA) to call for a gradual alignment of taxes on diesel and gasoline fuel. Even Volkswagen Group CEO Matthias Müller famously questioned German diesel fuel subsidies.
Cities are also continuing to drive diesel out of the European car market. Since we published our last blog on diesel bans in cities, several other cities are taking measures to reduce air pollution levels. Copenhagen mayor Frank Jensen is pushing for a ban on new diesel cars (cars registered after 2018) as of 2019. Turin temporarily banned pre-Euro 6 diesel cars from its city center during pollution spikes at the end of 2017. London and Paris are taking the lead in measuring real-world pollution levels from vehicles on the road in order to inform efforts to improve air quality in these capitals.
Not everyone lives in cities, but the prospect of diesel vehicles being barred from urban areas seems to affect national resale values of diesel cars. According to the UK website Motorway.co.uk, the average value of used diesel cars fell by 5.7% in the first half of 2017 while the value of used gasoline vehicles increased by 5%, a story that was widely featured in UK newspapers like The Guardian and The Telegraph. In Germany, Focus reported that popular used diesel cars lost 9—17% of their value during the first half of 2017. Consumers will likely think twice about buying a new diesel vehicle after reading those headlines.
While diesel sales fell in 2017, electric vehicle (EV) sales continued to grow in key European markets. In the chart below, we plot the EV sales—battery electric vehicles (BEVs) and plug-in hybrid electric vehicles (PHEVs)—in four out of the five largest EV markets in the EU. We also included Norway, Europe's EV powerhouse.
Electric passenger car registrations over 12-month period in France, Germany, Norway, Sweden, and the UK. EV shares of 2017 registrations in parentheses. (Sources: French Ministry of Ecology, Sustainable Development and Energy; German Motor Transport Authority; Opplysningsrådet for Veitrafikken; Statistics Sweden; UK Society of Motor Manufacturers and Traders)
The two Scandinavian countries—Norway and Sweden—stand out with high numbers of EV sales despite having comparatively small vehicle markets. EVs accounted for 39% of Norwegian car registrations in 2017. Sweden placed distant second with a 5.2% EV share. Germany placed last in terms of EV share, 1.6% in 2017, but EV sales have taken off since a 3,000—4,000-euro subsidy for PHEVs and BEVs was introduced in mid-2016. As a result, Germany has become the largest EV market in the EU, overtaking France and the UK despite the steady growth in those markets throughout 2017.
Looking forward, we have no reason to expect that the upward trend in EV sales will slow down. The recent European Commission proposal for post-2021 CO2 standards incentivizes EV sales by awarding easier CO2 reduction targets to manufacturers that exceed EV sales targets. The proposal actually could have been more ambitious because several manufacturers already announced EV sales targets exceeding the proposal's targets (see our briefing on the proposal). Financial incentives at the national level—like the upcoming feebate system in Sweden—will also contribute to demand for low emission vehicles.
EV sales are expected to increase in coming years, but the jury is still out on diesel. Diesel market shares in the UK are expected to drop to 15% by 2025. In Germany, the government is struggling to prevent diesel bans in cities. Manufacturers banking on diesel now have to hope that vehicle recalls and the new real-driving emissions (RDE) regulation—the first European regulation to require on-road measurements of pollutant emissions—can restore public trust in diesel technology.