An environmental “stealth tax” on business could raise hundreds of million of pounds for the taxman over the next five years through the auction of a large chunk of the next round of carbon emission permits.

Officials from the Debt Management Office, which handles among other things gilt auctions, have been quietly sounding out City experts over how to auction 7 per cent of the emission permits issued to industry over the next five years.

These will come from the portion of the permits that would have gone free to the “large electricity producers”, according to the Department of Environment, Food and Rural Affairs (Defra). If these are forced to put up prices as a consequence, the impact will be felt most by the large industrial users.

The auction is permissible under the EU rules that set up the scheme, which set a maximum of 10 per cent that could be retained by national governments for sale.

However, the British decision to auction 7 per cent represents the highest proportion retained by any EU country, business organisations complain.

The European Union Emissions Trading Scheme is designed to put pressure on those industries emitting carbon dioxide to cut emissions by constricting the number of allowances to produce the gas.

The next phase, Phase II, starts on January 1 and runs until the end of 2012. Next year the annual total of emission permits across the EU will be 1.9 million tonnes.

UK business is thought to get about a tenth of this, minus the Government’s 7 per cent.

There exists a forward market in CO2 permits at the European Climate Exchange in the City.

Permission to emit a tonne of CO2 is trading at €20 or more.

At this level the auction would raise hundreds of millions of pounds.

Some City sceptics question the Government’s ability to conduct such an auction, in the light of Gordon Brown’s bungled sale of the UK’s gold reserves.

One senior trader suggested the sale should be conducted through City institutions used to dealing in derivatives and other financial instruments.

Businesses will be keen to take part in the auction because the Government’s 7 per cent withholding will create an artificial shortage, meaning they would otherwise have to buy unwanted carbon permits on the exchange or elsewhere.

A document seen by The Timessuggests there is a degree of sensitivity in Whitehall over whether the proceeds of the auction should be regarded as a tax.

Defra said: “Greenhouse gas emissions cause damage to the environment that, without policy action, no one has to pay for. Business requires a price signal for carbon in order to take full account of the cost of their emissions and to drive reductions.”

When pressed, it said: “The classification of EU ETS auctioning receipts by Eurostat (the EU office that advises on statistics) will happen in due course.”

Defra refused to comment on the potential amount that could be raised, by deduction from the current price of carbon permits being traded.

A spokesman for the Debt Management Office confirmed: “There is some discussion about how the auction system may work.”

Employers’ organisations are known to be concerned at the added burden placed on them by the requirement to bid for permits.

In some sectors, such as power generation, this could rise to 50 per cent, says Gareth Stace, head of environmental affairs at the EEF.

If the consequent price rises are passed straight on to the consumer, these could make sectors such as steel less able to compete with other parts of the world.

Of the Phase II auction, he said: “It’s dead money. It does not in any way go to achieve what the EU is trying to achieve.”

Instead, says the EEF, the money raised could be spent on low carbon technology within the UK.

The EU emissions trading scheme: how it works

— Companies are issued 'permits to pollute'

— Covers power, cement, oil, steel and paper industries

— Total CO2 emissions allowed to reduce over time

— Unused permits can be sold

— Governments keep some permits back

— Not intended to be a tax

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