America and China face trade protection measures from Europe if they fail to join a global climate deal to replace the Kyoto Protocol, EU leaders will caution at their summit in Brussels today.

Nations that refuse to curb greenhouse gases will be told that they face “appropriate measures” — code for trade sanctions — if they try to gain a competitive advantage by continuing to allow cheap, high-pollution production.

EU leaders are particularly concerned to try to stop big companies relocating from Europe to countries that refuse to join a post-2012 climate change agreement in order to avoid the EU's tough CO2 targets.

The two-day European Council will concentrate on financial issues, including calls for greater transparency to head off catastrophes such as the collapse of Northern Rock, as well as a voluntary code of conduct for powerful sovereign wealth funds.

Gordon Brown is planning to urge the leaders today to consider reduced VAT rates for “green” goods such as low-energy fridges and washing machines. The Prime Minister believes that VAT should be used as another part of the EU's drive towards a low-carbon economy, although several other countries will resist fiscal measures.

Speaking to The Times, José Manuel Barroso, the European Commission President, said that the EU could take protective measures sector by sector to safeguard European production of cement or steel.

“We do not want to put our energy-intensive industries in a situation of disadvantage in competition terms, so that is why we will have measures that we are ready to take if there is not a global [climate] agreement,” Mr Barroso said.

“We want a binding decision now that we will take measures to protect these industries in 2012 in case there is not agreement. It would be completely foolish for the Europe Union to export the pollution and the jobs because globally the effects on climate change will be just the same, only we lose the jobs and our industry.”

An international summit will be held in Copenhagen next year to set out a global post-Kyoto framework.

Mr Barroso strongly defended the EU target for 10 per cent of all fuel to be biofuels by 2020 and rejected arguments that it had contributed to food price rises and shortages. In January Stavros Dimas, the EU Environment Commissioner, gave warning that biofuels were causing larger than expected environmental and social problems and there have been calls for the target, agreed last year, to be scrapped.

“Some of the arguments that have been advanced about the rise of food prices coming from biofuels are really exaggerated - the rise is mainly due to a structural increase in demand and it will continue with or without biofuels,” Mr Barroso said.

“The problem of hunger in Africa has nothing to do with biofuels. The idea that, if you have more production of food near you, you can eat better is a complete mistake.”

Mr Barroso called for international agreement on the types of biofuels that should be allowed but insisted that the EU targets would increase their sustainability. “The only alternative we have for biofuels today is oil. And there is no question, the impact on the environment of oil is much greater than for biofuels.”

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