That sounds like a problem with your city. I've not seen a diesel car or truck belching smoke out here in decades. San Francisco phased out the two stroke diesels in the late 00s, and even those were a lot cleaner than the two strokes of my youth.

  still do heavy damage to the road surface: rutting and exacerbating potholes.

Sure, the wear goes up exponentially with the weight (and axle loading). OTOH you need significantly more cars than buses to move people around. Investing in mixed-use development and better pedestrian infrastructure means that fewer people need to use mechanized transport.

Look at lord Elno's autonomous vehicle tunnel – individual vehicles simply don't scale.

This is probably my mistake, they may not be diesel, but there is a lot of sooty exhaust, so they're probably burning oil.

There shouldn't be a lot of sooty exhaust. Well, there doesn't have to be. San Francisco's run diesel-electric hybrids for about fifteen years now and California is far more stringent about diesel emissions than most of the rest of the country. So, sure, it's entirely believable that you're seeing buses belch smoke but it's also mandatory.

Unleaded gasoline will leave a nasty residue on your exhaust but that's about as bad as it (should) get. Alcohol and gas will burn cleaner but come with their own drawbacks. Trolley buses, of course, don't have tailpipe emissions but not everyone is willing to put up with the overhead infrastructure.

And hey, battery EV buses are starting to become a thing too (e.g. SF is trialing ones from a few different manufacturers).