German court to rule on whether cities can ban heavily polluting vehicles in pivotal moment for country's car makers

Case brought against Stuttgart and Dusseldorf by environmental group DUH could have far-reaching consequences for diesel auto manufacturers

Investors were told about VW's systematic emissions test cheating using illegal software on 18 September 2015 (Reuters)

A court will decide on Thursday whether German cities can ban heavily polluting cars, potentially wiping hundreds of millions of euros off the value of diesel cars on the country’s roads.

Environmental group DUH has sued Stuttgart in Germany’s car-making heartland and Dusseldorf over levels of particulate matter exceeding European Union (EU) limits after Volkswagen's (VW) 2015 admission to cheating diesel exhaust tests.

The scandal led politicians across the world to scrutinise diesel emissions, which contain the matter and nitrogen oxide (NOx) and are known to cause respiratory disease.

There are around 15 million diesel vehicles on German streets and environmental groups say levels of particulates exceed the EU threshold in at least 90 German towns and cities.

Local courts ordered them to bar diesel cars that did not conform to the latest standards on days when pollution is heavy, startling German car makers because an outright ban could trigger a fall in vehicle resale prices, and a rise in the cost of leasing contracts, which are priced on assumed residual values.

The German states concerned, where the car makers and their suppliers have a strong influence, appealed against the decisions, leaving Germany’s federal administrative court - the court of last resort for such matters - to rule on whether such bans can legally be imposed at local level.

“The key question is whether bans can already be considered to be legal instruments,” said Remo Klinger, a lawyer for DUH. “It’s a completely open question of law.”

Paris, Madrid, Mexico City and Athens have said they plan to ban diesel vehicles from city centres by 2025, while the mayor of Copenhagen wants to ban new diesel cars from entering the city as soon as next year. France and Britain will ban new petrol and diesel cars by 2040 in a shift to electric vehicles.

Evercore ISI forecasts a 5 per cent fall in diesel residual values could result in a drop of €1.6bn (£1.4bn) in operating profit across eight European and US car makers.

Analysts at Bernstein Research have said that diesel bans in Europe would hit French car maker Peugeot hardest, followed by Renault. Among German car makers, Daimler’s global fleet exposure to diesel is around 38 per cent, BMW’s 35 per cent and VW’s 26 per cent, Bernstein said in a report from 2016.

Car makers have sought to avert total bans by updating engine management systems to improve exhaust-treatment filters, a step only possible on vehicles equipped with software-based engine-management systems.

Environmental groups have called software updates insufficient and have lobbied for cars with Euro-6 and Euro-5 emissions standards to receive hardware updates of their exhaust treatment systems, costing at least €1,500 per vehicle.

Europe’s love affair with diesel is already fading, with its market share in the EU falling from 53.6 per cent at the end of 2014 to 49.9 per cent at the end of 2016, European automotive association ACEA’s most recent data shows.

Reuters