Gordon Brown’s plan to help families struggling with rising fuel bills was in tatters last night after a scheme to make energy companies pay more for pollution permits was dismissed as unworkable, The Times has learnt.

The Prime Minister had hoped the scheme would raise about £500 million, which could be used to help to fund fuel vouchers for vulnerable families faced with big increases in gas and electricity bills this winter.

The initiative was expected to form the centrepiece of Mr Brown’s second big effort to restore his political fortunes after a lukewarm response to his housing measures this week.

But The Times understands that those plans have now been scrapped after senior government figures were told that Britain would not be allowed to increase the number of emissions permits it plans to sell under EU regulations.

“The EU have said that they are not prepared to reopen the book on that,” one source familiar with the negotiations said.

Initially, the permits were given away but ministers announced proposals in March to auction 7 per cent of them – a measure that could raise £2 billion over four years. The plan had been to increase that figure to 10 per cent, the maximum amount under EU rules, for an extra £500 million.

Ministers had already committed to 7 per cent this year, however, so it was deemed too late for them to change their minds, only two months before the auctions are due to begin. “It would be very tricky,” one government source said.

The collapse of the scheme will be a blow to Mr Brown and will no doubt renew pressure on him to impose a windfall tax on energy companies’ profits. Already about 90 Labour MPs have called on the Prime Minister to impose the tax.

Mr Brown is reluctant to do so because he believes that the energy companies will simply pass on the cost to consumers.

The Prime Minister is also under pressure from the Chancellor, Alistair Darling, and John Hutton, the Business Secretary, who have said that the levy would damage relations with the energy companies at precisely the time government is relying on them to help to fund Britain’s £100 billion investment in renewables.

Negotiations with the “big six” energy companies: Centrica, which owns British Gas, EDF, of France, E.ON, of Germany, and Scottish-Power, Scottish and Southern Energy and npower, have been going on all week. The fuel package was to be announced yesterday, but this has been put back to early next week.

“Things have moved up and down and from side to side,” a source at one of the “big six” said.

Mr Brown is refocusing efforts on expanding measures to help families to make homes more energy efficient as a way of cutting bills. He wants energy companies to commit to more money under the carbon emissions reduction target (Cert) scheme, to which companies have pledged £900 million a year for the next three years.

It is thought Mr Brown will increase that total by about 30 per cent, or £270 million, and the extra funding will be used to help the most needy households. As well as the “big six” companies, which both generate and supply energy, Mr Brown wants to include generation-only groups, such as Drax and International Power, which have benefited in the past from the free pollution permits.

Jeremy Nicholson, the director of the Energy Intensive Users Group, said that energy companies would be relieved that the sale of emissions permits was off. Consumers would want reassurances, though, that the scheme “was a genuine net benefit to consumers paid for out of the windfall profit of the energy companies, not simply a cross-subsidy for the vulnerable paid for by other consumers, as is the case with Cert at the moment”.

Times Recommends

• Swine flu vaccine for all as drug rushed through
• Artificial sperm and the race to build a baby
• BBC jets out stars to tout for prizes