German diesel deal gives drivers choice of hardware fix or trade-in (UPDATE 3)

Owners of older diesel cars in German cities where the air is particularly polluted should be able to choose between trade-in incentives and a hardware upgrade, coalition parties have agreed according to a paper seen by Reuters on Tuesday.

After marathon talks, Chancellor Angela Merkel and leaders of her coalition partners announced in the early hours they had agreed on a way to cut pollution in cities while avoiding unpopular driving bans.

The document, seen ahead of an official announcement of the deal, said German carmakers had agreed to offer an exchange programme with attractive trade-in incentives or discounts for owners of diesel vehicles meeting the older Euro 4 and Euro 5 emissions standards. The current standard is Euro 6.

The coalition parties said in the document that the immediate introduction of such trade-in incentives for diesel vehicles could ensure that all affected drivers of the Euro 4 and 5 standard could get another vehicle before possible driving bans are introduced.

Germany's big carmakers -- Volkswagen, Daimler and BMW -- had no immediate comment on the deal. If the majority of car owners were to opt for retrofits -- hardware upgrades -- it could cost the industry billions of euros.

The coalition parties said they expected foreign carmakers to make similar offers to their customers.

France's Renault said earlier on Tuesday it was offering owners of older diesel vehicles in Germany incentives of up to 10,000 euros to trade in their cars for newer ones.

"We are obviously headed for the end of diesel," Renault Nissan Chief Executive Carlos Ghosn told reporters at the Paris auto show where electric cars are in the spotlight.

"It's the end of the game," he added.

Sweden's Volvo had said on Monday it could also consider offering incentives, but that it was not considering any hardware retrofits for diesel vehicles in Germany.

BILL TO BE PAID

The coalition document said that if owners of a Euro 5 model wanted a hardware retrofit with a so-called selective catalytic reduction (SCR) system and if this was available and appropriate, the German government expects the carmakers to shoulder the costs.

On delivery vehicles and trade vans, the government would subsidise hardware retrofits with SCR systems by up to 80 per cent, the document said.

There are 3.1 million diesel cars running to the Euro 4 standard, and 5.7 million Euro 5 types of diesel, out of a total of 46.5 million cars on the roads in Germany, according to figures from the German KBA transport authority.

Carmakers have said they expect only a small proportion of owners of the affected vehicles to opt for a retrofit rather than a trade-in.

Volkswagen's admission in 2015 that it cheated U.S. diesel emissions tests led to the discovery that diesel vehicles from several manufacturers routinely exceeded pollution limits in normal driving conditions, prompting a regulatory crackdown.

At the same time, the German courts have paved the way for city driving bans to tackle levels of nitrogen oxide that exceed European safety levels.

The city of Hamburg banned older diesel from two of its roads in May, and a ban in Frankfurt, the financial capital, is due to take effect next February.