Government ministers are close to conceding that tax penalties against diesel cars – due to be introduced from next March – may have to be dropped.

The move comes after a period of intense lobbying from carmakers, led by Peugeot. The manufacturers say the penalties do not take account of the latest developments in diesel technology and fly in the face of Government policy designed to reward fuel-efficient, low CO2 cars.

Transport minister Lord Whitty said the penalties were in place because of fears over particulate emissions. “If the particulates could be removed in all diesel cars, then there would no longer be any need for the tax penalties,” he said.

In the next two years diesel drivers will be hit by two additional tax burdens as car taxation shifts over to a system based on CO2 emissions. One new tax will be introduced in March 2001 and the other from April 2002.

The first comes when road tax is banded by CO2 and type of fuel. Diesels will be penalised £10 while alternative fuel cars will get a £10 concession.

The Government acknowledges £10 a year is not a huge amount but believes the penalty sends a signal to motorists. Lord Whitty thought it would be noticed particularly by fleet managers who ran several cars and were most concerned about residual values. The extra cost could depress diesel residuals due to reduced demand from used car buyers.

From April 2002, company car drivers will also be taxed on the basis of the CO2 output of their car rather than on business mileage – as is the case at present. Once again diesels have been penalised with a 3% loading, designed to negate their greater fuel efficiency.

Tod Evans, Peugeot managing director, said: “The Government is sending out confusing messages which are being interpreted as 'don't buy diesel'. The industry is spending billions making diesel engines some of the cleanest and most fuel efficient on the road.”

Peugeot, the UK No3 car seller, has much to lose. It is the market leader in diesel, which accounts for around 18% of its sales.

This month Peugeot invited a delegation of senior Government advisors to Coventry to meet diesel engine experts and see the effects of new particulate filters. Peugeot has fitted filters to its new 607 range and to some 406s. Citroen will have the filter on its new C5 when it is launched next year.

The problem for the Government is that clean diesels from PSA Peugeot Citroen do not mean clean diesels from all. Unless PSA is prepared to license its technology, the tax system could be seen to favour one or two companies over the rest – a message no government would want to send.