DIVEM will measure and publish emissions, with measurements carried out in real traffic for more realistic conditions, the transport ministry said (link in German).
"We want emissions to fall across Germany," Transport Minister Alexander Dobrindt said.
Earlier this week, sources told Reuters news agency that the transport ministry was pushing carmakers to improve their engine management software to cut pollution.
The sources told Reuters that the software update could cost €1.5 billion to €2.5 billion and HSBC analysts said hardware might be needed that could mean costs of up to €10 billion, the news agency said.
The transport ministry also said it is setting up a new institute to improve "transparency and reliability" in vehicle tests.
The German government's moves come in the wake of Volkswagen's 2015 admission that it used "defeat device" software in 11 million cars that allowed it to give false results in tests for nitrogen oxide emissions.
In June 2016, Germany called on the EU to improve rules on vehicle emission testing to cover the range of adaptations to emissions control systems used by vehicle manufacturers.
While no other manufacturer was using a similar system to Volkswagen's, "it became clear that for many vehicle types, real driving emissions are significantly higher than on the dynamometer", Germany told the European Transport Council.
