Blair angers the green lobby by defying Brussels on emissions

The government increased the amount of that industrial plants can emit by about 20 million tonnes above the limit approved by the European Union executive in July.

Ironically, Mr Blair has made fighting climate change a key theme of Britain’s presidency of the G8 major industrialised nations this year, and is a major greenhouse gas that many scientists blame for causing global warming.

The EU emissions trading system aims to cut output as part of the 25-nation bloc’s commitments under the Kyoto Protocol, the global environmental treaty which comes into force tomorrow.

Under the scheme, companies have to meet targets to cut or buy allowances to emit more; 20 countries have had their plans approved by the EC and trading in those states has begun.

Britain said it increased this country’s allocations because of new projections of power demand and revisions to the actual and projected emissions caused by burning gas and coal.

The government said its changes were legal but the EU executive disagreed and warned it could take action that may end up at the European Court of Justice.

The Department of Trade and Industry said it believed "the proposed amendment to the national allocation plan is compatible with the requirements of the EU emissions trading legislation".

But an EC spokeswoman said: "If the UK launches its emissions trading system and if the allowances that it places into the system match the allowances foreseen in the [original] plan, we are very happy. If not, then that we consider illegal."

Dealers said the stand-off with the commission could damage the EU’s scheme by delaying the entry of Britain - one of its most important countries. "It’s a pity we have no clarity because this will stifle market activity," Louis Redshaw, an associate director at Barclays Capital in London, said.

Britain has also threatened litigation. An EU source said that Margaret Beckett, the Environment Secretary, had written to the EC saying the UK would take it to court if approval of the revisions was refused.

But Stavros Dimas, the environment commissioner, told Mrs Beckett the new allocations were not in line with the conditions set for the approved plan. "Amendments such as an increase of the total allocation by 19.8 million tonnes do not aim at addressing the incompatibilities identified in the decision and are therefore not acceptable," he wrote.

The government said it was pressing its case with the EC and "taking steps to protect its legal position". However, it warned that, if the total number of allocated emissions in the revised plan ultimately had to be reduced, then the power industry, the biggest polluter, would be given fewer allowances.

Friends of the Earth Scotland accused the government of bowing to "short-sighted and ill-informed business pressure". Dr Dan Barlow, its head of research, said: "The European Commission must resist the UK’s attempts to backtrack on its commitments. Failure to do so could see a queue of other countries looking for similar opt-outs.

"It is high time the government had the guts to stand up to CBI scaremongering and instead adopted a progressive and forward-thinking approach.

"Doing so would not only help tackle climate change but also bring business benefits through stimulating improved efficiency and opportunities for developing non-carbon and low- carbon technologies."

Greenpeace pointed to the inconsistency of Mr Blair promoting climate change on the global stage while Britain watered down its own goals.

But Sir Digby Jones, the CBI’s director general, said: "UK businesses need the government to fight as hard as it can to make sure companies here are not handicapped with onerous targets when other states are not making the same commitment.

"Reverting to the original allocation total would reduce allowances for power generators, threatening to increase further the energy prices paid only by UK businesses. In a globalised economy, UK jobs would be unfairly at risk."