The chancellor made the announcement in his pre-budget report and the reduction will affect the rate of relief from CCL for business with Climate Change Agreements from 1 April 2011.

According to CPI, the government wants to make the reduction to avoid State Aids notifications and save a compliance cost for business and government of around £6.5m.

It also claims the relief could contribute to saving 200,000 tonnes of carbon dioxide over the next five years.

CPI said that while it is true that the rate of CCL levy reliefs on gas and solid fuels would have had to reduce in 2011 to avoid a State Aids notification, the rate of levy relief for electricity could have been increased to compensate.

David Morgan, CPI's head of regulatory affairs, said Climate Change Agreements have been proven to work well in improving energy efficiency.

"Reducing the incentive associated with the agreements, particularly in light of the current economic downturn, makes no sense whatsoever," he said.

"CPI proposed to government that it should make a revenue neutral adjustment of CCL reliefs and supplied data to support this argument, but regrettably government appears to have found the lure of garnering extra revenue by taxing the manufacturing industry irresistible."

He added the move is at odds with the stated intention of the new European Commission to encourage the manufacturing industry.

"The UK papermaking sector has reduced its CO2 emissions since 1990 by 37%.

"This decision will cost us an additional £3m annually at a time when we can least afford it."