The agreement, which saw an £8.1m regional selective assistance grant awarded by the Scottish government, follows the introduction of the Large Combustion Plants Directive (LCPD) which came into force in the UK on 1 January 2008.

Tullis' incumbent coal plant was in breach of the ruling, which bans the use of coal to combustion plants with a thermal input of more than 50mw, and will be replaced with the new 45mw plant that is expected to be operational by 2011.

Tullis chief executive Chris Parr said that March 2010 is the deadline under LCPD for shutting down its coal boilers as they do not comply with LCPD revised air quality standards.

He said: "We are currently investigating all the options open to us during this transitional phase and the best way to use the remaining 20,000 hours we have beyond 2008, prior to the new plant coming online in 2011."

Tullis' new plant will also reduce 250,000 tonnes of the company's annual carbon emissions, lowering its carbon footprint by 70% per annum.

The full construction phase is due to begin in May 2009.

Simon Fairclough, director of the Scottish Print Employers Federation, said: "In the past, when economic confidence has been put under severe pressure – as now – environmental concerns have often slipped down the corporate priority list.

"The drive to deliver on our carbon emission targets, however, is unstoppable.

"The Tullis Russell collaborative venture will make a significant contribution and must be enthusiastically applauded."