Industrial firms that do the most to cut their carbon emissions could enjoy major financial gains after the European Commission this week ordered an overhaul to the EU's Emissions Trading Scheme (ETS) that is likely to drive up the market value of carbon credits.

Under the scheme, which was introduced last year, heavy industrial and energy firms are allocated carbon dioxide emission allowances. Those that don't use up their full allocation can sell the remainder to those firms that exceed their allocation in the form of carbon credits. Any firm found to be exceeding their allocation with out having acquired the extra credits required will face EU fines.

The EC had hoped the creation of a carbon market would provide the ideal mechanism to ensure it meets its emission reduction requirements under the Kyoto protocol. However, the scheme has faced criticism during its first year with member countries being accused of setting their emission caps too high, ensuring the EU will not meet its Kyoto targets and reportedly leading to a slump in the price of carbon credits to as little as £6 a tonne.

Other critics argued too many firms were buying carbon credits from offsetting projects in the developing world, rather than taking action at home.

The EC has now moved to make the scheme more stringent proposing a limit on the number of credits firms can buy from the developing world and this week instructing nine countries, including Germany, Ireland and Sweden, to reduce the carbon allowances they are planning to grant for 2008 to 2012 by almost seven percent.

Of the 10 EU nations presenting their plans for the second stage of ETS only the UK was granted approval. France, meanwhile, withdrew its plans before they were reviewed, pledging to come back with a tougher emissions allowances.

The EC's actions are expected to increase the scarcity of carbon credits, driving up prices and providing a greater incentive for firms that cut their carbon emissions and higher penalties for those that fail to do so. 

Stavros Dimas, the environment commissioner, said that the decision sent "a strong signal that Europe is fully committed to achieving the Kyoto target and making the EU ETS a success".

Gordon Brown, meanwhile, is expected to next week announce plans to expand the trading scheme in the UK to incorporate other sectors besides heavy industry as part of his pre-budget report.

However, environmentalists argued that while the latest news was encouraging emissions allowances needed to be cut still further if Europe is to meet its Kyoto targets. Keith Allott, head of climate change at WWF-UK, argued that the UK still needed to do more to tackle emissions. "Whilst the UK was the best of a bad bunch the government has ducked a key opportunity to tackle its rising carbon dioxide emissions," he said.  "Failure to get tough on industry has meant that the UK will not meet its long standing domestic target to reduce emissions by 20 per cent by 2010."

Meanwhile, some critics would be forgiven for asking if everyone at the EC is on the same page when it comes to tackling climate change after the European Parliament this week approved a €54bn science research fund but made less than €4bn available to energy and environmental technologies.

Over €9bn has been made available to IT R&D with the EC arguing that investment here is likely to underpin improvements in many different sectors. However, firms developing specifically environmental and renewable energy technologies are likely to be disappointed.

The move also comes just days after the Corporate Leaders Group on Climate Change, which represents 25 major companies, wrote to EC president José Manuel Barroso urging greater support and improved incentives for firms developing low-carbon technologies.