The British government has been warned that it must spend all of a £1.6bn windfall on new technology to combat climate change.

The money will come from the auction of carbon emission permits over the next four years aimed at cutting CO2 emissions.

The government has been urged to tackle climate change by developing green technologies Under the EU Emissions Trading Scheme (EU ETS) the government sells permits to industry which sets a limit on the amount of emissions. If they exceed their allowance they have to buy extra permits from other companies.

The organisers of the cap-and-trade scheme, set up in 2005, hope that it will halt and then progressively lower CO2 emissions across Europe. In an open letter to Gordon Brown a coalition of environment and business leaders said the government must show its commitment to tackling climate change by spending the money raised on developing green technologies.

The CBI, WWF-UK and the Energy Research Partnership said the UK could meet its targets for cutting emissions but it would require imagination, innovation and investment.