Europe's Carmakers Cough Love Choke Their Diesels

They're sleeker and cleaner--but clean enough?

Those who think diesel-powered cars are noisy, smelly, and slow haven't driven Europe's latest models. Auto makers there have been modernizing this clunky old technology, with breathtaking results: smooth-running cars that are almost as quiet and peppy as their gasoline stablemates, yet burn up to 30% less fuel. And since diesel fuel costs less than gasoline throughout most of Europe, car buyers have been switching to diesel in droves (chart).

Yet Europe's diesel renaissance is posing a touchy dilemma for policymakers. Car executives fear its resolution may threaten the one automotive segment in which Europe leads the world.

For starters, the switch to diesel is shrinking tax revenues--a blow to budget-cutters trying to meet Europe's single-currency targets. The tax gap is greatest in France, Europe's biggest diesel market, where diesel fuel costs about 80 cents a liter vs. $1.20 for gasoline. And since diesel owners buy less fuel than gas-guzzlers, the French Treasury's annual tax loss adds up--to $2 billion. This fall, the French Parliament will debate a hike in the diesel fuel tax, a move auto makers and farm and trucking lobbies alike strongly oppose.

On top of budget damage, health experts are alarmed by a growing pall of diesel fumes over Europe's cities. Although new diesels produce fewer hydrocarbons and other pollutants than gasoline cars, they spew out far more nitrogen oxides, a main ingredient of ground-level ozone, commonly called smog. Diesels also spout particles of soot, which research shows may cause cancer. In Paris, a report says diesel exhaust accounts for most of the city's smog.

Europe's auto makers are caught in a pinch. German manufacturers agreed with regulators in 1990 to cut their cars' average fuel consumption 25% by 2005. And other companies are probably going to follow suit. The industry has pumped several billion dollars into diesels, thinking that's the best way to meet consumption goals. Further research should produce more gains in fuel efficiency, while gasoline engines have reached their economy limit, Volkswagen Chairman Ferdinand Piech has said. Yet VW engineers say that they can barely meet Europe's planned nitrogen oxide standards for 2000 and can't make those proposed for 2005.

"STUPEFYING." Auto makers argue that diesel cars are actually the environment's friend. They say diesels' reduced fuel appetite and lower carbon dioxide emissions fight global warming. "If the greenhouse effect is truly a serious problem, diesel is the way to go," says Carole Desnost, head of diesel policy issues at Peugeot, the world's largest diesel maker.


For most car buyers, though, the lure of a diesel is its lower operating costs. Consumers worried about higher fuel taxes--and health issues as well-- are beginning to back off, and diesel sales have dipped this year as a result. But sexy new models such as direct-injection diesels are bidding to win buyers back. Built by VW, Fiat, and Rover, they further reduce fuel burn and add zip. VW's new direct-injection Golf GT is winning raves from car magazines: France's L'Auto Journal calls its performance "stupefying." The $24,000 compact accelerates from 0 to 100 kilometers an hour in 10.8 seconds--about equal with its gasoline rivals--yet burns fewer than 6 liters of fuel per 100 kilometers. Unfortunately, direct injection triples the nitrogen oxide output.

Diesel's future will be a momentous call for legislators--and there's no way of telling where they stand. Europe's grip on diesel technology gives its carmakers a trump in global car markets, especially in poor countries where fuel economy counts. At home, better diesels have helped Europe blunt competition from Japanese carmakers, which lag in the technology. And Europe's auto companies will be lobbying legislators and working in laboratories to preserve one of their rare competitive advantages.

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