Volkswagen AG will pay owners of its polluting diesel cars up to $7,000, and agree to fund a grant program to offset air pollution, under a $10 billion settlement being negotiated for submission to a federal judge next week, people familiar with the talks said.

VW will provide cash payments worth between $1,000 and $7,000, depending on the vehicle’s age and other factors, to compensate consumers, the people said. All spoke on the condition they not be identified because U.S. District Judge Charles Breyer, who is supervising the settlement discussions, has imposed a gag order.

The environmental remediation program is a key priority for regulators looking to undo the damage of 482,000 diesel cars that emit up to 40 times the permitted amounts of smog-forming nitrogen oxides. VW isn’t expected to be able to repair all of the cars affected to the satisfaction of the EPA, which may result in buybacks or extra payments to the environmental fund.

The Wolfsburg, Germany-based carmaker has admitted that since 2009 it rigged cars to pass U.S. Environmental Protection Agency and California Air Resources Board emission tests. VW, the EPA, CARB and the Justice Department, and attorneys representing affected consumers are scheduled to present a settlement agreement June 28.

Talks Continuing

The parties reached a tentative agreement in April though discussions on the details are still continuing and may change before being submitted, the people said.

Jeannine Ginivan, a spokeswoman for Volkswagen, and Nick Conger, a spokesman for the EPA, declined to comment.

Car owners will be faced with complex calculations to figure out how much cash they might receive from Volkswagen, two of the people said, which could upset them and harm the carmaker’s relationship with buyers even further.

Regulators are looking at a small but popular diesel-emissions clean-up program as a model for a VW remediation fund, according to the people. The Diesel Emissions Reduction Act grant program is funded by the EPA but partially administered by states with severe diesel pollution. The so-called DERA program funded projects like retrofitting older diesel buses or scrapping and replacing fleets of diesel-powered drayage trucks at ports.

New Fund

The new fund will have an administrator hired by the Justice Department, one person said. States will be allocated funds, but they’ll have to submit projects for approval based on criteria laid out in the court agreement. The fund administrator will audit projects. VW hasn’t had any input into details regarding the remediation plan, the person said.

The cost of the settlement will exceed $10 billion, a person familiar with the matter said. The deal is expected to include penalties for breaking U.S. clean-air laws, money to buy back vehicles, to compensate consumers and to settle class-action claims. The company also faces a Federal Trade Commission action for false advertising.

It’s likely that VW won’t have a final sign-off on its plan to fix the 2-liter cars, the person said. That’s making the plan to compensate for environmental damage more important to regulators, since the diesel-powered cars remain on the road exceeding pollution limits.

Smog Assessment

The amount of money VW will pay into the fund will depend on a technical assessment by the regulators of how much excess smog-forming gases the non-compliant diesel cars emitted going back to 2009. They’ll also estimate how much pollution to expect going forward from consumers who don’t sell their cars back to VW or don’t follow up on the recall repairs.

Lawyers for car owners are due to submit the proposed deal to the San Francisco federal judge overseeing U.S. lawsuits by June 28. The settlement will include options for car owners to sell their vehicles back to Volkswagen or to terminate their leases early.

The case is In Re: Volkswagen “Clean Diesel” Marketing, Sales Practices and Products Liability Litigation, MDL 2672, U.S. District Court, Northern District of California (San Francisco).