On June 14, Reuters reported Munich, Home to BMW, Considers Diesel Ban to Tackle Pollution.

Today, with strong overtones of regulators hopping in bed with industries they are supposed to regulate, EU’s Car Regulator Warns Against Diesel Ban in Cities.

Munich, home to carmaker BMW, has become the latest German city to consider banning some diesel vehicles amid “shocking” nitrogen oxide emissions in the Bavarian capital.

“As much as I would welcome avoiding such bans, I think it is just as unlikely that we can continue to do without bans in the future,” Munich mayor Dieter Reiter was quoted as saying by the Sueddeutsche Zeitung newspaper on Wednesday.

Asked about the latest nitrogen oxide readings, which the paper said violated European air quality standards well beyond busy trunk roads, the mayor said: “The results are shocking, nobody expected this.”

The scandal over rigged diesel emission tests at Volkswagen has already thrown the future of diesel engines into doubt, and has highlighted carmakers’ struggle to comply with ever stricter rules on the nitrogen oxides emissions.

Regulators in Bed With Industry?

Flash forward to today.

Banning diesel cars in European cities could hamper automakers’ ability to invest in zero-emission vehicles, the European Union’s commissioner for industry has warned the bloc’s transport ministers.

In a letter seen by Reuters, Commissioner Elzbieta Bienkowska said there would be no benefit in a collapse of the market for diesel cars and that the short-term focus should be on forcing carmakers to bring dangerous nitrogen oxide emissions into line with EU regulations.

In the letter, Bienkowska told ministers she was concerned that the latest emissions violations at Audi and Porsche were discovered by prosecutors and not Germany’s vehicle and transport authorities.

Bienkowska’s letter also called for all cars with excessively high levels of nitrogen oxide emissions to be taken of European roads, but said carmakers should act on a voluntary basis.

Experts who have seen the letter to ministers say the commissioner appeared to be bowing to carmakers’ demands.

“Her letter contained some important statements that we believe show the industry’s lobbyists have scored a big win,” Bernstein analyst Max Warburton said in a report.

Diesel Job Math

The Center for Economic Studies (CESifo) produced a report on the German diesel industry for its stated client, the German Association of the Automotive Industry.

Let’s dive into the report on the Consequences of a Potential Ban on New Cars and Light Trucks with Combustion Engines.

Based on the structure of production in 2015, at least 457,000 employees are involved in producing types of products which would be directly affected by the ban (e.g., diesel engines). This is equivalent to 7.5% of overall manufacturing employment in Germany. The largest share of these employees (426,000) works in the automotive industry itself. If one includes product groups that would be indirectly affected (e.g., transmission systems, which are more complex in vehicles with combustion engines), the number of potentially affected jobs rises by 163,000 or an additional 3% of overall manufacturing employment. These jobs are mainly clustered in the metal industry: 102,000 employees in metal processing produce parts destined for vehicles with combustion engines. Taking the direct and indirect channel together, a total of at least 620,000 employees would be affected by the ban, which represents over 10% of total German manufacturing employment.

Among the 457,000 directly affected jobs, 31,000 jobs in small and medium-sized enterprises would be highly at risk. These firms can be expected to face larger difficulties than large companies in developing new alternative fields of business against the background of a major shift in propulsion technology. This share is substantially larger among indirectly affected jobs: Here 101,000 out of 163,000 jobs are situated in small and medium-sized enterprises and highly concentrated among automotive suppliers in the metal industry.

If value-added is considered instead of employment, these effects become even more pronounced. This is due to the exceptionally high average labour productivity in the automotive industry. If direct and indirect effects are combined, around 13% of German overall manufacturing value added would be affected by the ban. Based on the 2015 figures, this would represent a volume of 48 billion euros. In interpreting these figures, one has to bear in mind that not the entire workforce and value-added “at risk” would necessarily vanish. Some parts, for example, are also used in heavier trucks and buses, which would probably not be subject to the ban. In addition, new jobs in the areas of alternative propulsion technologies in Germany would help to limit employment reduction, at least in the aggregate.

Germany’s Over-Dependence On Diesel Technology

Eurointelligence discussed diesel in a recent article.

As we have noted time and again it is very hard for people to separate their expectations of the future from their fundamental beliefs. One of the unshakable beliefs in Germany is the virtue of the diesel car. It gives the German motor industry a competitive advantage that cannot be reversed.

Except, of course, through new technologies and shifting social trends.

We noted this tendency to wishful thinking again when we read a story in FAZ this week on the future of the diesel car in Germany, and the importance of the technology for the German economy. One of the statistics quoted is that one tenth of the jobs in German industry directly depends on the production of car engines. And so, the car-obsessed media reporters and German economists have a tendency to downplay technological, social, and political trends by insisting that diesel still has a future.

The Ifo institute has done the math on the impact of a diesel bans on the industry. It shows that 620,000 jobs in Germany directly and indirectly depend on the production of fuel engines for cars – about 1.5 percentage point of the labour force. This is about 10% of all jobs in German industry. These numbers would include suppliers, but presumably, do not take account of any multiplier effects one would observe if those jobs were to disappear.

The Ifo Institute made another important observation, according to FAZ. If fuel-driven engines were made illegal from 2030, Germany could reduce its carbon dioxide emission by one-third. But the study does not advocate such a strategy. Indeed the headline says that banning combustion engines is the wrong path to take. The Ifo institute favors free-market solutions to the problem. Ifo chief Clemens Fuest, who presented the study, argued that it would be a mistake to over regulate the industry because this would waste resources, which in turn would be bad for the goal of climate protection.

We also note confirmation bias among diesel advocates in that they only ever focus on carbon dioxide emissions, rather than the high levels of nitrogen oxides and other substances that are believed to be responsible for tens of thousands of death each year in Europe. This is the main reason why cities are now considering diesel bans.

The study also tried to correct the impression that German car makers are inactive when it comes to alternative technologies. According to the Ifo study, Germany registers around one-third of all global patents in the area of alternative engines – hybrid and electrical. We do not doubt that the German car giants are actively researching alternatives. But the point is that the competitive advantage of German motor manufacturing is predominantly based on its fuel-based engine technologies – an advantage that is bound to decline over time. They are not ahead of the game in the fields of hybrid and electric engines. There is an illusion in Germany that appears to equate the number of registered patents with future commercial success.

In the meantime, expect to see an increase in costs to maintain the diesel technology, and a fall in revenues. Diesel registrations in Germany are falling at a dramatic pace. And car companies are now paying for expensive recall operations, like Mercedes did this week, to upgrade existing cars with the latest software to optimize engines to reduce fuel emissions.

Protecting the Cheaters

My take is the focus on carbon dioxide is wrong. A focus on carcinogens and other pollutants would make more sense.

We can debate at length what pollution standards should be. What’s not debatable is German auto corporation lied and cheated their way to good results and now they are caught with their pants down, at least twice.

Either way, diesel is on the way out. And with that pending change, Germany’s vaunted lead in auto technology has turned into ashes.

Meanwhile, EU regulators are prepared to look the other way in an attempt to give German manufacturers time to catch up.

One can argue that letting the cheaters off the hook makes economic sense, but let’s be honest about what’s happening.

Mike “Mish” Shedlock