The proposed scheme was to curb carbon emissions from 14,000 British companies and public sector bodies by fixing a limit on their total carbon emissions and then allowing them to trade rights to pollute among themselves.

The Carbon Trust, a government-funded initiative to help drive the UK's move to a low carbon economy, published the proposal in December.

"This was the leading, the most cost-effective option to deliver carbon savings in an area where there is general agreement that something needs to be done," Grubb said.

Dropping the plan could jeopardise the UK's achievement of its domestic target of cutting carbon emissions by 20 percent on 1990 levels by 2010.

"You can play tunes that can still achieve the 20 percent target, but the government seems very reluctant to do what it would take," Grubb told Reuters.

The government says existing climate policy is heading towards only a 10 percent reduction by 2010.

The gap between 10 and 20 percent represents just over 12 million tons of carbon, Grubb says, and the Trust estimates the trading scheme would close that by up to a quarter.

The UK asked the Trust in 2004 to review how Britain can cut rising carbon dioxide (C02) emissions, which are widely blamed for climate change, the effects of which could include rising sea levels and more extreme weather.

Britain says it is on track to meet its separate, Kyoto Protocol carbon emission targets for 2008 to 2012.

Not meeting its 2010, self-imposed target would not represent any treaty violation but would be a huge embarrassment to Prime Minister Tony Blair, who has put tackling climate change high on his agenda.