BERLIN, GERMANY - The German government said on Thursday it planned to eliminate taxes on new cars with low greenhouse gas emissions for the first two years of ownership, but environmentalists said the scheme would backfire.

"We want to introduce an automobile tax exemption for cars that are particularly clean," Environment Minister Sigmar Gabriel told ARD public television.

"That is the proposal that the finance minister (Peer Steinbrueck) will present. But we still need the approval of the federal states."

Older cars would not be affected by the new exemption, which Gabriel said the cabinet planned to approve next Wednesday and roll out on January 1.

Gabriel said Berlin aimed to eventually introduce a sliding scale for the automobile tax pegged to the amount of carbon emissions, which are blamed for driving global warming.

Automobile taxes are levied by Germany's 16 states. Gabriel said finance minister Steinbrueck would negotiate with the states about how to compensate for the tax shortfall that would come with the exemption.

"We of course do not want the states to shoulder the burden on their own," Gabriel said.

The daily Rheinische Post had reported the tax break on Thursday and said it would likely cost 2.0 billion euros (2.6 billion dollars) in 2009, citing government sources.

The VDA, the German automobile industry's biggest interest group, welcomed the plan as a shot in the arm for a sector on edge over the global financial crisis.

"The tax holiday proposed today for new cars can prov ide an impetus to spur sales of vehicles, stabilise the economy and thus ensure jobs in Germany," VDA President Matthias Wissmann said in a statement.

He said the industry would welcome a tax based on the level of CO2 emissions.

The proposal, however, was slammed by environmentalists, who said the criteria for the tax exemption were so loose they would include most new cars including gas guzzlers such as sport utility vehicles, which since 2005 have had to meet new emissions standards.

"Petrol-thirsty automobiles with big motors will benefit," the NGO German Environmental Aid said in a statement, calling the left-right "grand coalition" government partial to industry and "car-driven".

"This is a giant purchase incentive for climate killers," it said.

The automobile sector is a key pillar of Europe's biggest economy, home to giants including Volkswagen, BMW and Porsche.

But the industry has been slow to move away from its renowned muscle cars, which burn through fuel at a breakneck pace as they zip down the country's famous autobahns without a speed limit.

The European car sector has said it is struggling to make costly investments in developing greener cars at a time that credit is scarce and sales are plunging.

EU Industry Commissioner Guenter Verheugen raised the possibility in Brussels Wednesday of making loans available to carmakers on favourable conditions to help them finance costly investments in greener cars.

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