Is Germany's seemingly never-ending diesel debate edging towards its endgame?

On Friday, German government ministers for transport, finance, the economy and the environment met at the offices of German Chancellor Angela Merkel to try and reach an agreement on the thorny subject of how to reduce pollution from diesel cars as quickly as possible.

Read more: New analysis reveals deadly scale of diesel emissions

Last weekend, German government figures and car manufacturers were in talks over potential hardware retrofits for older diesels, but no deal was reached. 

With diesel bans allowed in Germany since rulings earlier this year, the debate has entered a decisive phase. Hamburg began a partial ban in May, while Stuttgart, Frankfurt and Düsseldorf are among the other cities expected to follow. Car manufacturers are vehemently opposed to such bans, as they have added to uncertainty over diesel's future and hit sales.

The debate in the Chancellery once more centered on a few key questions around whether older diesels should be banned outright, retrofitted with new hardware or gradually phased out through incentivized buyback schemes. On top of that is the fundamental issue of who pays to make things better.

The politics of diesel

This debate has been in full flow since news of the emissions cheating scandal broke three years ago, with considerable disagreement on the issue between Germany's coalition partners, the center-right CDU and the center-left SPD. Car manufacturers and environmental groups have also been lobbying intensely on the issue. 

With a total of 66 German cities breaking EU levels for air quality in 2017, the political urgency for Germany to act has grown sharply. Diesel-specific emissions of nitrogen oxide (NOx) are seen as a major contributor to poor urban air quality in the country.

Merkel set a deadline of the end of September to reach an agreement on how best to tackle the issue. As no clear compromise was found, the talks are expected to resume and end on Monday. So what are the possible options available to the German government?

Option 1: Hardware fixes

The costliest option is the introduction of mandatory hardware retrofits of older diesel vehicles, primarily the Euro 4 and Euro 5 diesel models. The newest Euro 6 diesels (cars from 2014 on) have far lower emission levels but hardware overhauls of the older diesels could cost as much as €3,000 ($3,484) per vehicle.

A previous, much cheaper deal agreed on with car manufacturers last year only focused on software upgrades of emissions systems. That has proven insufficient in curbing NOx emissions. Hardware retrofits would see the installation of equipment that could help to neutralize the level of harmful emissions.

A costly, complex and potentially time-consuming option, carmakers and German Transport Minister Andreas Scheuer, from the conservative Bavarian CSU party, are not keen. SPD Environment Minister Svenja Schulze believes retrofits are needed, however.

Merkel, speaking at an event in the southern city of Augsburg on Thursday, said: "The door can be opened for retrofits on some vehicles. And if and when that happens, we believe the customer shouldn't have to pay for it." That suggests some kind of retrofit deal may be in the offing.

Option 2: Trade-in deals and incentives

Merkel herself appeared to give this option a partial seal of approval as well in Augsburg. "The quick and overall better way is to replace the old fleet with a new one," she said, chiming with other government noises made on the need to replace "the fleet" as soon as possible.

This option would aim to encourage older diesel owners to trade in their old cars for new, much lower-emission models, on very generous terms. Various car manufacturers have been offering such rebates for a while now but any new agreement is likely to see significantly wider and better terms offered to car owners, to encourage them to trade in. The carmakers are proposing to offer up to €10,000 as trade-in premiums, the Bild am Sonntag newspaper reported.

This solution is favored by Scheuer. The car manufacturers generally prefer this option, too, as it centers on customers buying new vehicles. For the government it is the quickest fix, but the SPD have shown some opposition to it as the primary solution.

Option 3: Buybacks

Perhaps the most unlikely outcome is one whereby owners of older diesels could return their cars on generous terms without the purchase of an alternative vehicle being part of the bargain. In this situation, they would be free to simply pocket the money or buy a new car elsewhere, meaning car manufacturers and dealers would incur the financial cost. This option is particularly unpopular with car manufacturers.

Option 4: A mixture?

In the finest traditions of political compromise, a mix of some or all of the above options is possible. Given the split between the SPD and the CDU over retrofits and trade-in schemes, some kind of hybrid scenario involving both those options looks likely. A limited retrofit scheme combined with an extensive trade-in scheme could be enough to keep both political sides, as well as the car manufacturing industry, content.

Read more: German diesel pumps still flowing despite retrofit talk

Who foots the bill?

While both the environmental and political need for Germany to reduce its urban pollution is real, perhaps of most concern to ordinary drivers and consumers is who will ultimately foot the bill for any dramatic new diesel policy.

Environment Minister Schulze said this week that she believed it was important that carmakers financed the solution, as they caused the crisis over diesel. However, despite the scale of that crisis, the power of the car manufacturing lobby is hard to overstate. There is no single item which Germany exports more than cars and the sector is a huge employer. The industry is unlikely to agree to any deal that does not involve some kind of appeasement.

One report this week in the Handelsblatt newspaper suggested that in the event of hardware retrofits, car owners would have to foot at least some of the bill. Such a move would likely enrage German voters, long frustrated by the diesel crisis and the implications it has had across many areas.

The issue is febrile, and politicians have had to tread carefully. 

"My concept is currently based on needing no taxpayer money and that the car owners won't have to pay for it. That means that German car manufacturers would have to build a framework that helps to rebuild trust," Transport Minister Scheuer said.

The final agreement, whenever it arrives, may not be quite so simple.