Volkswagen's Other Diesel Ruse: Premium Pricing

The markups on VW diesels were some of the biggest in the industry.

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In June, after a lengthy research process, Derek Sylvan paid about $13,500 for a 2010 Volkwagen Jetta Sportwagon TDI. Parking on Brooklyn streets, a plug-in model wasn't an option and Sylvan figured German diesel was the next-best environmentally sound choice. Plus Sylvan had some office optics to consider; he’s a strategy director for New York University’s Institute for Policy Integrity, a nonpartisan think-tank focused on energy policy.

“Essentially, the fuel economy was a major draw,” he said. “I don’t think I had considered the idea that one of the world’s largest carmakers was in a secret, sinister corporate plot.”

The kicker for Sylvan: Had he bought the same car with a standard gas engine, it could have arguably been cleaner, and would have cost about $3,000 less. It’s bad enough that Volkswagen pitched its “clean diesel” engines as game-changing technology. Pricing them as such exacerbated the ruse. 

For recent versions of the five car models targeted by the U.S. Environmental Protection Agency for gaming emissions tests, Volkswagen charged premiums of from 7 percent to 27 percent for the diesel model. Take the Passat: A version of the mid-sized sedan that burns old-fashioned gasoline started at $21,340, while the “clean-diesel” model fetched at least $27,100.

None of the few car companies dabbling in diesel in the U.S. stretched the premium as far as Volkswagen did. The diesel version of BMW's 328 commands a premium of just 4 percent, roughly $1,500. A diesel power plant on a Mercedes E-Class sedan is actually slightly cheaper than the gas-burning alternatives cost.

None of this is all that surprising. Diesel engines, like convertibles, have always cost a bit more. Because the combustion of the fuel is more violent, they have to be built to withstand higher pressures and more wear and tear. They also need mechanisms to scrub pollutants from the exhaust. Now we know that Volkswagen took short cuts on that front.

If Volkswagen's diesels had been both cleaner and cheaper than competing models, consumers such as Sylvan might have wondered whether the “people’s cars” were too good to be true. We’ll probably hear a lot more about these price premiums in the months ahead, as attorneys stuff class-action complaints with drivers short on fahrvergnugen.

The fallout will range beyond the courtroom. The math on diesel has never been tidy. The additional mileage is great, but unless one drives a lot, it doesn’t really cover the added expense for the engine and for the fuel itself. At current gas prices, the diesel premium on the Passat—some $5,755—would buy enough gas to drive the gas-burning model for about 88,000 miles. For the majority of diesel drivers, the factor that probably swung the decision was the apparent environmental benefit. The green aspect was the fulcrum.

Volkswagen no longer has that, and it may have burned the allure for other diesel engines as well.

When Jeep makes the case for its diesel Grand Cherokee, it doesn't dwell much on the price, or even the mileage, for that matter. It helps buyers calculate how much time they’ll save by not going to the gas station. There’s a thought for Volkswagen's chief executive officer—the next one, that is.

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