The German government said it would issue certificates allowing 482 million tonnes of carbon dioxide emissions per year between 2008 and 2012, requiring industrial companies to lower their emissions by 1.25% and power utilities by 15%.

The government said the reduction wasn't greater because it had to take into account that emissions in 2005 were lower than expected. It also said it was handing out emission permits free of charge, and was exempting new power plants from the limits for 14 years from 2008.

Critics poured scorn on the plan. "The German position is ridiculous - their emissions had been coming down over a long period of time - last year's figures are definitely not a blip and this agreement is certainly nothing to do with protecting the climate," Professor Michael Grubb of the UK Carbon Trust, set up by the British government to help create a low-carbon economy, told the BBC.

Environmental groups said Germany was at risk of undermining the EU's carbon market, or Emissions Trading Scheme (ETS), the centrepiece of its strategy to lower carbon emissions that have been blamed for global warming.

The market works by initially handing industry free pollution permits, but fewer than their expected emissions, forcing them either to clean up or buy extra permits.

Germany's decision to hand all permits out free also runs counter to an EU recommendation that it auction off 10% of permits. It may mean that other EU member states will follow suit to avoid putting their respective industry at a competitive disadvantage to German businesses.

German Environment Minister Sigmar Gabriel had argued that selling the pollution permits would have led to further increases in electricity prices, already high as a result of surging oil prices.

However, power suppliers already factor the market price of pollution permits into their electricity prices, even though they get them for free. That in itself is costing power consumers billions of euros, critics say.

Grubb said: "I have been a big supporter of the EU ETS, but hearing the German news I feel more depressed than I ever have done about our ability to tackle climate change. I really believed that Europe would lead the way through the EU ETS, but now I wonder whether this will ever happen."

Other critics warned that a lax treatment of carbon emissions in Europe would strengthen those sceptics in the USA who doubt the link between pollution and global warming.