Car buyers will receive €4,000 when they choose a purely electric vehicle and €3,000 for a plug-in hybrid, with the cost shared 50-50 between the public purse and car makers.
The programme starting next month aims to help Germany approach its goal of putting one million zero-emission cars on the road by 2020 -- up from just around 50,000 now out of Germany's 45 million cars.
So far, German car giants Volkswagen, Daimler and BMW have signed up to it, but the programme is open to all national and foreign brands.
The government has budgeted €600 million for the purchase subsidies, which are expected to run until 2019 at the latest.
The money will be disbursed on a first come, first served basis for cars priced no higher than €60,000, said Finance Minister Wolfgang Schäuble.
"If you want one, buy it quickly," he told a Berlin press conference.
The government has also budgeted €300 million to speed up building the infrastructure of electric car charging stations in cities and on Autobahn highway stops.
Another €100 million would go toward purchasing electric cars for federal government fleets.
Overall, the one-billion-euro government programme should subsidise 400,000 electric cars and boost the segment to the point where the e-car becomes "mass market capable", said Vice Chancellor and Economy Minister Sigmar Gabriel.
'A backward concept'
But the ADFC, the national cycling federation, loosed off a broadside against the programme, saying it would create more traffic problems on German streets.
“The government is pulling the wool over people's eyes with this initiative. Everyone knows that our traffic problems won't be solved through more cars, but with less,” ADFC manager Burkhard Stork said.
“More pedestrians, more bikes and more public transport, they are the real answers to the problem. A subsidy for private cars is a backward concept, and putting a big 'e' in front of the word car doesn't change that,” Stork added.
Stork suggest that a truly innovative subsidy would be for e-bikes in cities.
Citing EU studies which show that 51 percent of all motorized transport in European cities could be transferred to bicycles, Stork argued that “a €4.000 subsidy for electric bikes designed for carrying loads - that would be an innovative signal in transport policy.”
Critics have asked why auto companies that already make billions in profits - and especially embattled VW, gripped by the global emissions cheating scandal - should benefit from public subsidies.
Gabriel said the programme, which follows similar schemes in Norway and the Netherlands, would also help future-proof Germany's car sector in times of "the worldwide re-invention of individual mobility".