German car-makers to bear most of diesel upgrade costs - minister (UPDATE 2)

German carmakers are willing to bear most of the cost of upgrading old diesel cars to reduce urban air pollution, Transport Minister Andreas Scheuer said ahead of make-or-break coalition talks on the issue on Monday.

A way still needs to be found to cover the rest of the cost without drivers having to foot the bill, Scheuer added, as the clock ticked down on a deadline to find a solution to avert driving bans in several cities.

Volkswagen, Germany's largest carmaker, has agreed to cover 2,400 euros ($2,780) of the estimated 3,000-euro cost of hardware retrofits on its diesel cars, Scheuer said on a live video chat on Instagram.

"Now we have to discuss in the coalition how we handle the gap of 600 euros," he added.

Chancellor Angela Merkel's grand coalition was due to convene on Monday evening to finalise a plan after a rocky few weeks that has seen support slide to all-time lows for both her conservative party and its Social Democrat (SPD) partners.

Her government has been split on how best to tackle the problem, with Scheuer siding with carmakers in also calling for incentives to encourage owners of older models to trade them in for newer, cleaner ones.

Environment Minister Svenja Schulze, an SPD member, meanwhile favours hardware retrofits - an option the industry says is only feasible in some models and which would fuel consumption and performance in others.

A compromise is likely to feature both, with Scheuer saying Volkswagen was willing to offer trade-in deals worth up to 8,000 euros, BMW 6,000 euros and Daimler 5,000 euros, as well as leasing options.

NO COST TO DRIVERS

Scheuer also said his Christian Social Union, the Bavarian sister party to Merkel's Christian Democrats - did not want diesel drivers to face any additional expense.

The SPD's Schulze said a deal must include hardware upgrades and that the entire cost should be borne by the industry: "The car industry caused the problem, and now they have to fix it," she told SWR Radio in an interview.

Volkswagen's admission in 2015 that it cheated U.S. diesel emissions tests led to the discovery that diesel vehicles from several manufacturers routinely exceed 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 first, in financial capital Frankfurt, is due to take effect next February.

Asked about the time range in which the exchange premiums would be offered, Scheuer said this would vary: "I have very good messages. For example, BMW wants to start immediately, already in October, November and this will continue for one year," he said.

Volkswagen doubts that hardware retrofits on older diesel are technically feasible and is only willing to foot the bill if it does not have to bear liability for any engine damage that may result, a company source said.

This person, speaking on condition of anonymity, said suppliers were unwilling to assume liability, and that car manufacturers also rejected guarantees for hardware changes.

A spokesman for Volkswagen said the company was prepared to compromise. "Basically, we're interested in meaningful solutions that help prevent bans in cities," said the spokesman.

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