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 retrofit, coalition parties have agreed, a paper seen by Reuters on Tuesday showed.

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

Initially there were no details of the deal but the document said German carmakers had agreed to offer an exchange programme with attractive trade-in incentives or discounts for owners of diesel vehicles of the Euro 4 and Euro 5 emissions standard.

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 for this, the document said.

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

There are 3.1 million diesel cars running to the Euro 4 standard, and 5.7 million Euro 5 diesels, out of a total of 46.5 million cars on the roads in Germany, according to official figures.