Diesel sales to suffer in France as parliament approves petrol VAT rebates

October 26, 2016

On Friday 21 October, the French parliament approved proposals which will allow companies to reclaim VAT on petrol consumption in the same way that they already do for diesel. 

Businesses can already claim back 80% of the VAT on their diesel consumption. The new scheme will see the share of VAT on petrol that can be reimbursed ramped up to the same level over a five-year period. Starting at 10% in 2017, this increases to 20% in 2018, 40% in 2019 and 60% in 2020 before ‘petrol parity’ with diesel is achieved in 2021. Given the ability to reclaim 80% of the VAT, in conjunction with greater efficiency and lower duty on diesel fuel, businesses naturally favour diesels over petrol cars and their penetration rate is higher than among private consumers. Overall, diesels accounted for 57% of new car registrations in France in 2015. However, this newly approved legislation, along with measures to increase fuel duty for diesel at a faster rate than petrol - and of course the detrimental impact of the Dieselgate emissions scandal - will invariably see the diesel share of the market fall. 

The declining share of diesel is, however, not just occurring in France. In fact, based on data for 17 markets in the first nine months of 2016, LMC Automotive expects that the diesel share in Europe will drop below 50% in 2016. As the Financial Times commented on Monday 24 October, this is ‘its lowest level since 2009 and the fastest rate of decline in almost a decade. 

The internal combustion engine faces extinction in the long term, with Daimler CEO Dieter Zetsche stating that ‘the future of propulsion is emission-free’ for example. He does, however, expect petrol and diesel engines to still account for 80-85% of the market mix in 2025. 

Nevertheless, the transition to e-mobility will impact diesel first. It is more expensive and requires significantly more development than petrol engines to meet increasingly stringent regulations, which will ‘increase the price disadvantage’ according to Stefan Braztel, an automotive expert at the University of Economics in Bergisch Gladbach. Furthermore, diesel is largely a European phenomenon and so the case for investment in development is further weakened. As a case in point, Toyota head of sales, Karl Schlicht, said at the Paris Motor Show that he would prefer that another hybrid powertrain is developed instead of a new diesel engine. Finally, emissions regulations are expected to render diesel cars less attractive in the future, hurting their residual values. 

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