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Europe's diesel drivers beware: heftier tax is coming your way

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Across the EU, diesel's average tax discount to gasoline has eroded by about a third since 2015, to 12.5 euro cents a liter, according to Bloomberg calculations from European Commission data.

[LONDON] Here's another reason not to buy a diesel-powered car, and why consumption of the fuel could ebb in one of the world's biggest demand centers: tax.

For decades governments within the European Union have taxed diesel at a lower rate than rival gasoline, but that advantage is eroding fast as they seek to clean up the environment, and the fallout from Dieselgate rumbles on more than three years after it happened. The shift illustrates a fundamental change in the treatment of a transport fuel that has long been favored across the continent.

"We expect diesel tax to continue to go up in Europe," said Mark Williams, an analyst at energy consultancy Wood Mackenzie in London. "The bigger markets are going that way, where diesel tax is increasing at a faster rate than gasoline."

Across the EU, diesel's average tax discount to gasoline has eroded by about a third since 2015, to 12.5 euro cents a liter, according to Bloomberg calculations from European Commission data. At the pump, gasoline's average price premium across the EU has shrunk to just 3 cents a liter, the lowest since 2008, separate data show.

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Within the past year, diesel taxes in countries including Belgium, France, Lithuania, Poland and Portugal have risen by more the price change in gasoline taxes. In the UK, diesel and gasoline taxes as a share of the total cost of fuel are nearly equal, according to the EU.

Since the 1970s, gasoline has attracted higher taxes than diesel in Europe, according to Fuels Europe, which represents the continent's oil refiners. Governments favored lower diesel taxes as a way to help European automakers compete against gasoline-vehicle imports, to support the commercial trucking industry and because of the greater fuel efficiency of diesel engines, according to Alain Mathuren, a spokesman for the group.

Dieselgate

However, public perception has started to turn against diesel, amid rising concerns about the health and environmental effects of fuel emissions. In recent years, some local governments, notably in Germany, have discouraged the use of diesel vehicles to focus on improving air quality.

In addition, the 2015 Dieselgate scandal -- when it emerged that Volkswagen AG had been misleading regulators and buyers by using software to suppress emissions during tests -- has muted demand for diesel vehicles.

"Dieselgate and the related urban air quality concerns have totally changed the picture," said Mathuren. "The demonization of diesel is a reality which in our opinion is totally unjustified" for engines that comply with EU emissions limits, he said.

He noted that while diesel prices have risen within the last year, those for gasoline have declined amid a global glut of the latter fuel.

While the convergence of tax rates on gasoline and diesel is a possibility, consumers are pushing back on higher costs, according to Koen Wessels, an analyst at London-based Energy Aspects Ltd. "France is already trying to implement it -- though not without resistance."

In December, France dropped plans to introduce more fossil-fuel taxes after fuel taxes levied last year helped spark widespread protests by the so-called Yellow Vests. The measures were also criticized by industry group UFIP, which said fuel sales fell in France in 2018 as drivers crossed into neighboring countries to fill up their tanks and avoid paying the higher taxes.

Because the price of diesel at the pump is volatile and influenced by swings in the global oil market, a tax increase may not always translate to a higher pump price, according to Wessels.

"Governments are trending towards discouraging the use of diesel, and rising fuel duty will definitely play a part in this, but whether this will lead to a visible effect at the pump remains to be seen," he said.

BLOOMBERG