Green party politicians want the German government to grant tax relief of up to 600 euros for diesel vehicles that are fitted with soot particle filters.
The Association of the German Automotive Industry (VDA) believes the spread of soot particle filters in diesel-engine cars is "unstoppable," but is against tax relief for this technology.
VW chairman Bernd Pischetsrieder warned of job losses in the German auto industry if the tax relief plan gets the go ahead.
Industry insiders say VW is worried because it is not as far advanced in particulate filter technology as French automakers.
Pischetsrieder believes tax relief would give French automakers a commercial advantage in Germany.
Pischetsrieder outlined his concerns in a letter to Franz Muentefering, leader of the left-leaning SPD political party that runs the German government in alliance with the Green party.
VW's chief lobbyist Reinhold Kopp tried without success to postpone any possible introduction of tax relief for diesel-engine cars with particle filters from 2005 to 2007.
The SPD and its Green party allies will press ahead with the tax relief plans because they believe it will lead to cleaner diesel-engine cars on the roads and a reduction in exhaust emissions of diesel soot particles that are believed to be a health risk.
Environmental activists protested VW's initiative. "How many people have to die, because Mr Pischetsrieder has missed the particle filter technology by oversleeping?" was the reaction of the environmental group Greenpeace.
The environmental group Deutsche Umwelthilfe accused VW of "cynical behavior."