Germany Paves Way for Diesel Ban, Dealing Blow to Auto Makers

BERLIN—A German court rang the death knell for certain diesel cars on Tuesday, striking a blow to the country’s flagship auto industry that could now be forced to spend billions to upgrade or replace millions of cars.

Rejecting an appeal of a lower court decision, the Federal Administrative Court in Leipzig ruled the German cities Stuttgart and Düsseldorf could ban diesel vehicles from urban traffic as a way to reduce pollution.

Ultimately, the ruling could result in the hometowns of auto icons Mercedes-Benz, BMWAG BMW -0.06% and Audi banning some of those manufacturers’ flagship products.

Germany’s blue chip DAX index fell sharply on the news as the stocks of auto makersVolkswagen AG VLKAY -2.76% , Daimler AG DMLRY -0.51% , and BMW AG came under pressure.

The closely watched ruling is likely to accelerate the demise of a technology that German auto makers have pushed as a panacea that provides solid driving performance, fuel economy and low greenhouse gas emissions, but which has been largely been discredited in the wake of widespread emissions-cheating scandals at Volkswagen and other car makers.

The next German government also will face a tough decision in the wake of the ruling. The government may have to force car makers to shoulder an estimated €8 billion in costs to refit diesel vehicles, weakening the country’s flagship industry at a time when it must invest heavily in electric vehicles and self-driving car technology—potentially endangering a crucial segment of the German economy. Or the government may make the unpopular decision to use taxpayer money to finance the repairs, potentially alienating voters.

The fumes from diesel fuel, which enjoys tax subsidies across Europe, have also been revealed to be more damaging to health than thought years ago.

Before the 2015 Volkswagen affair, more than half of new cars sold in Europe were equipped with diesel engines. Now, it is around 44%, largely made up of corporate fleet cars, craftsmen and delivery businesses, according to analysts, who predict that by 2025 just 20% of new cars sold in Europe will have a diesel engine.