Germany's coalition government has agreed on plans to tax new vehicles based on how much they pollute rather than engine size in a bid to encourage the production of greener cars.
Merkel is a driving force in cutting carbon emissions
Under the accord between Chancellor Angela Merkel's Christian Democrats and the Social Democrats, who have been in an acrimonious "grand coalition" since 2005, the tax on new cars will take effect in 2010.
It will be paid into the coffers of the federal government in Berlin, as opposed to those of the nation's 16 states, senior officials from the two parties said as they announced the deal on Thursday, June 12.
Berlin will then pay the states about 8.9 billion euros ($13.7 billion) to compensate for the loss of revenue.
The new tax system was proposed last year by Environment Minister Sigmar Gabriel, who said it would encourage automakers to design cars that emit less carbon dioxide, which are blamed for global warming.
The government also hopes it will prompt consumers to buy greener vehicles.
Europe-wide bid to cut emissions
In order to lower harmful emissions across the whole European Union, Brussels has also set out plans to sharply reduce the level of CO2 emitted by new cars by introducing a Europe-wide target of 120 grams per kilometer from 2012.
Berlin and the powerful German auto industry baulked at the plan, saying it would penalize local producers who build cars that use far more fuel than the smaller models made in Italy and France.
Merkel and French President Nicolas Sarkozy reached a compromise at a summit this week, proposing to the rest of the EU that carmakers be given until 2015 to reach the target for models that are already in production.