Diesel Vehicle Sales Discrepancies Between Europe and the United States By Tyler Huebner [email protected] Daniel Díaz Sáez Universidad Técnica Federico Santa María, Valparaíso, Chile [email protected] For BIOWA Development Association

Abstract In 2005, 49% of new vehicles purchased in Europe were diesel vehicles. In the United States, only 3% were.1,2 This paper presents facts surrounding this discrepancy, including fuel costs, fuel quality, and possible non-economic reasons for the difference. The two major things that are contributing to the large number of diesel vehicle purchases in Europe are: 1) diesel is cheaper than gasoline in Europe and 2) diesel vehicles are more fuel-efficient. Taxes contribute to the overall higher fuel costs in Europe compared to the United States, and European taxes on diesel are lower than gasoline. In this manner, governments are encouraging consumers to opt for diesels. (For the purpose of this paper, ‘vehicle’ refers to a light-duty automobile that weighs less than 8,500 pounds.)

Diesel Vehicle Characteristics and Sales Trends Diesel vehicles have some significant advantages over gasoline vehicles. They average 30-50% better fuel economy due to the inherent efficiency of the engine and thermodynamic cycles. Diesels have slightly better speed and torque performance, and with clean diesel fuels, they emit comparable levels of pollutants, all for an increased initial cost of $300-$2,000. Finally, diesel engines are built to last over 200,000 miles.3,4 Compared to the diesels of the 1970s and 1980s, modern diesel vehicles have better engines, fuel mixes, and pollution controls. In 1981, in response to increased oil prices, diesels accounted for 6% of U.S. vehicles and 10% of Europe due to their better fuel economy. But health risks due to particulate emission, diesel noise, exhaust smoke, and poor engine performance drove Americans back to gasoline vehicles when oil prices stabilized.5 The percentage of diesels purchased in Europe has been increasing significantly over the last 10 years, whereas U.S. growth has been minimal. Table I shows the data:

1

Table I. Percentage of New Diesel Vehicles in Europe and the United States.6 Percentage of New Diesel Vehicles Year Europe U.S. 1997 21.7 <1 2001 35.9 <1 2005 49 3.2

However, diesel popularity varies among European Union countries. Belgium leads at 72%, France at 70%, with four more countries above 50%, nine between 20% and 50%, and four below 20% with Switzerland at 9% and Greece at 1%. This percentage of diesels, which have better fuel economy, contributes greatly to the International Energy Agency’s finding that average fuel economy is 32.1 miles per gallon (m.p.g.) in Europe and only 21.6 m.p.g. in the United States.7

Fuel Cost Discrepancies The most obvious reason for the 49% to 3% discrepancy is fuel cost. In Europe, diesel fuel is $0.70 – $1.40 (U.S. Dollars) cheaper per gallon than gasoline, but it is slightly more expensive in the United States. Figures 1 (gasoline) and 2 (diesel) show fuel prices for the United Kingdom, France, Spain, and the United States.8,9 (For comparison of other European countries, prices in Germany and Italy are about 5% higher than France for gasoline and 7% higher for diesel.) Fuel prices in Europe are two to three times more expensive than the U.S., so fuel economy and cost are more critical— and consumers are choosing the cheaper fuel, diesel, to combat the high fuel costs.

Figure 1. Average End-Use Gasoline Price per Gallon (USD)

Figure 2. Average End-Use Diesel Price per Gallon (USD)

The reason for the disparity in fuel costs is not usage or demand, but rather governmental policy in the form of taxes. Figures 3 and 4 show the taxes (adjusted to U.S. dollars) that consumers pay for each gallon of gasoline and diesel, respectively, in the United Kingdom, France, Spain, and the United States. In the legends, the numbers in the parenthesis show the percentage that taxes represent of the total fuel price.

2

Figure 3. Taxes on Gasoline per Gallon (USD)

Figure 4. Taxes on Diesel per Gallon (USD)

Figures 3 and 4 show that European governments are charging very high taxes on fuels, which causes consumers to purchase more fuel-efficient vehicles (and probably drive less and use more public transportation). According to the IEA stat, it’s working: vehicles in Europe are getting 11 m.p.g. better than their U.S. counterparts. In addition, European governments are taxing diesel fuel less than gasoline, which encourages consumers to purchase the more fuel-efficient diesel vehicles. (One interesting report on this difference in fuel taxes comes from a 2004 article which examined ‘optimal’ taxes in the United States and United Kingdom, taking into account unpriced pollution, congestion, accident externalities, and interactions with the broader fiscal system. The results showed that U.S. fuel tax is about half the optimal tax, but the UK tax is about double the optimal level.10)

Diesel Fuel Quality Another component of lagging U.S. diesel sales is due to pollution and pollution standards. Diesels do not meet the California Air Resources Board (CARB) emissions standards, which are adopted in California, New York, Massachusetts, New Jersey, Connecticut, Vermont, Rhode Island, and Maine. Therefore, diesel sales are prohibited in these states, and domestic manufacturers do not want to invest in diesel car production if they can’t sell them in every state. However, an upcoming improvement in diesel fuel have leading automobile agencies projecting large increases in diesel vehicles in the United States. In September and October 2006, low-sulfur diesel will reach diesel fuel pumps throughout the entire United States. This fuel has particulate levels of only 15 parts per million (ppm), down from the current 500 ppm levels. Along with moderate improvements in the vehicles, the cleaner fuel will allow diesels to meet CARB pollution restrictions meaning new diesels can be sold in all 50 states. Europe moved to cleaner diesel fuel in 1990 and has seen increasing diesel vehicle sales since then. Ricardo, a leading provider of technology, product innovation, engineering solutions and strategic consulting to the world’s automotive industries, predicts a large increase in diesel vehicle sales in the U.S. as shown in Figure 5.11

3

Figure 5. Ricardo projections of U.S. diesel vehicle sales Already, 56% of U.S. trucks in the 3/4 to 1 ton capacities are diesels, but lighter duty vehicles are not competing on price with gasoline vehicles. Ricardo predicts such a large increase in 2009 U.S. diesel sales in anticipation of emission technology improvements. They also predict increases in European diesel sales in the immediate future, including diesels reaching 52% of sales next year. J.D. Power and Associates also predicts large increases in U.S. diesel purchases. They report that by 2015, 10% of new light-duty vehicles purchased in the United States will be diesels. Worldwide diesel share is projected to increase from 18% today to 26% in 2015.12

Non-economic Explanations In addition to higher diesel fuel cost in the U.S. and poor fuel quality keeping diesels out of some states, there may be many more social and cultural aspects to the discrepancy between diesel vehicles and gasoline vehicles. Consumer decisions are incredibly hard to understand, and this paper will only touch on a few possibilities. First, Americans seem to still have reservations about diesel vehicle’s performance—their smell, ability to start in cold weather, and speed performance—problems which the new diesel vehicles have mostly solved. Second, European countries seem to be adopting renewable energy sources more quickly. Germany and Spain lead the United States in wind energy capacity, Denmark gets more than half its energy from wind farms, and Germany is aggressively pursuing solar power. This may indicate their government’s and citizens’ sensitivity to the environmental and social implications of using fossil fuels, and their ability to better utilize available resources.

4

Conclusions Fuel taxes are the biggest reason for the 49% to 3% discrepancy between percentage of diesel vehicles purchased in Europe and the United States. Consumers in the U.S. pay about $0.50 in taxes per gallon of gasoline or diesel, or 20% of the total fuel cost. European consumers pay $2.50-$4.50 per gallon of gasoline in taxes (55-68% of total gasoline cost), and $1.50-$3.50 per gallon of diesel in taxes (38-60% of total diesel cost). Along with better fuel economy of diesels, and better quality diesel fuels which meet emission standards, Europeans are buying more diesels than ever and the trend is expected to continue. In the U.S., improved fuel quality starting in fall 2006 and estimates of increasing fuel prices have leading automobile agencies predicting large increases in diesel vehicle sales in the United States, from 3% today to 10% in 2015.

Resources 1

“Diesel Car Sales Set to Overtake Petrol in Europe.” Price Waterhouse Coopers News Release, Jan 30, 2006. Accessed online at www.dieselnet.org 2 “JD Power & Associates Reports Global Demand for Diesel-Fueled Light Vehicles to Nearly Double During the Next 10 Years.” April 13, 2006. Accessed Online at http://www.jdpower.com/news/releases/pressrelease.asp?ID=2006057 3 Valdes-Dapena, P. “With gas high, it might be time for diesel.” CNN Money Online Sept. 1, 2005. Accessed online at http://money.cnn.com/2005/08/29/Autos/tipsandadvice/diesels/index.htm 4 “Carmakers see stronger sales of diesel vehicles.” MSNBC Online. Jan. 13, 2006. Accessed online at http://www.msnbc.msn.com/id/10838071/from/RL.1/ 5 “Report shows small US shift to diesel.” Engineering Talk Online. Edited on May 21, 2003. Accessed Online at http://www.engineeringtalk.com/news/rca/rca117.html 6 diesel % in Europe 7 Ford, Peter. “Gas Prices Too High? Try Europe.” The Christian Science Monitor. Aug 26, 2005. Accessed online at http://www.csmonitor.com/2005/0826/p01s03-woeu.html 8 “End-User Petroleum Product Prices and Average Crude Oil Import Costs, February 2006.” International Energy Agency, Paris, France. Accessed online from the Energy Information Agency at http://library.iea.org/Textbase/stats/surveys/mps.pdf 9 Exchange Rate Data obtained from http://www.x-rates.com 10 Parry, I.W.H., and Small, K.A. “Does Britain or the United States Have the Right Gas Tax?” American Economic Review, 2005. 11 “Ricardo Predicts Rapid Expansion in US Light-Duty Diesel Market.” June 29, 2005. Graphic and content accessed Online at http://www.greencarcongress.com/2005/06/ricardo_predict.html 12 See source 2, JD Power and Associates.

5