Oil was steady under $42 a barrel on Friday, after falling nearly two percent overnight, weighed down by another round of grim US economic data reflecting faltering demand in the world's top energy consumer.

Investors will focus on the release of advance fourth-quarter gross domestic product data due later in the day for more clues on the outlook of the US economy.

By 7.41am UAE time, US crude was up 27 cents a barrel at $41.71, off an intraday low of $41.31, while London Brent crude gained 25 cents to $45.65.

Oil has fallen about 10 percent over the week and is down 6.7 percent over the past month, which would be its best performance since end-August.

Oil sank 1.7 percent on Thursday after reports underscored a deepening recession in the United States.

The jobless rate rose to a record peak in January, while in December sales of new US single-family homes fell to the lowest level ever and new orders for durable long-lasting manufactured goods tumbled for a fifth month.

Shrinking demand for fuel has also contributed to the biggest four-month build-up in US crude stockpiles since 1990.

"The risk is still clearly on the downside. The economic data is going to confirm that things are still slowing down," said Mark Pervan, senior commodity strategist at ANZ Bank in Melbourne.

"Oil's big Achilles heel is the US market, and that's going to continue to weigh on prices."

All eyes will be trained on the government's first snapshot of the US economy in the fourth quarter, due at 5.30pm UAE time, which will show it at its weakest in 26 years.

The dismal forecast comes atop the International Monetary Fund's projection on Wednesday that world economic growth this year will fall to its slowest since World War Two.

Unemployment in Germany, Europe's largest economy, rose nearly twice as much as expected in January.

Asia's outlook was equally bleak. Data showed unemployment in Japan at a near three-year high and industrial output plunging by a record 10 percent last month, reinforcing expectations of a unprecedented contraction in the world's second-largest economy.

But oil's losses were limited by a potential US oil refinery worker strike that could affect gasoline and heating oil output, as well as Qatar's deepening supply curbs in March.

A possible strike by 30,000 US refinery workers threatened on Thursday to shutter more than half of the nation's oil refining capacity, though a top union negotiator expressed optimism a deal could be reached before Sunday's deadline.

Qatar, one of OPEC's smallest oil producers, has notified at least two Asian term buyers that it will deepen curbs on supplies of Qatar Marine crude in March compared with February levels, traders said on Friday.

OPEC's supply cuts since second-half 2008, in reaction to the fall of more than $100 in oil prices since July, have helped support the market.

OPEC Secretary General Abdullah al-Badri said at the World Economic Forum in Davos, Switzerland that the cartel would not hesitate to act again if the oil price remained low, after remarking earlier this week the group would fully enforce supply curbs by the end of this month.

The cartel next meets on March 15 to decide output policy.

Pervan expects oil to trade in the mid- to low-end of a $30 to $40 range through February, with firm support around $31-$32.

"There's a lot of sideline interest to get back into the market on the basis that there's actually a very strong long-term outlook for oil," he said.

"In the short to medium term, there's going to be more pain, and the volatility will continue through February, as we go through a run of pretty weak economic data out of the US"

Little more than a year ago PetroChina, the oil company largely owned by the Chinese government, surpassed ExxonMobil to become the world’s biggest listed energy group. It was the first time in oil’s history that a national oil company had boasted the industry’s largest market capitalisation.

Months later, Alexei Miller, chief executive of Gazprom, confidently asserted that within a decade the Kremlin-controlled gas monopoly he headed would be the world’s largest energy company with a market capitalisation of more than $1,000bn.

What a difference a credit crisis makes. By the end of 2008, after oil prices had fallen dramatically, ExxonMobil again found itself on the top rung as international oil companies started to see opportunities that had not existed a year ago.

Every international energy group in the top 10 of a study to be published on Monday by PFC Energy, the Washington-based consulting group – ExxonMobil, Royal Dutch Shell, Chevron, BP, and Total – gained in ranking.

Data set stage for cuts
ConocoPhillips, the third largest US oil company, set the stage for drastic cuts by the world’s international oil majors on the drop in fourth-quarter earnings to be reported this week following plunging oil prices, writes Sheila McNulty in Houston.

Conoco shocked the industry in January by laying off 1,300 in spite of an increasingly aggressive recruiting campaign for a big pipeline of projects. Schlumberger, the world’s biggest oil services company, followed suit on Friday by laying off 5,000.

The fall in oil prices to below $40 a barrel, from a high of just under $150 a barrel in 2008, coupled with the economic slowdown and credit squeeze has hit hard.

Conoco scaled back $2.8bn in capital spending over in 2008, and reported a $34bn writedown. More details of its financial health will come on Wednesday when it reports earnings, the same day as Royal Dutch Shell. Some analysts warn Royal Dutch Shell will report its largest quarterly fall in profits for a decade because of the oil price fall.

Chevron, the second biggest US oil major, has cut some development plans, and more details are expected with its financial results on Friday.

ExxonMobil, the world’s biggest listed western oil company, is also to report on Friday, but has said spending will remain steady.

While much of Conoco’s writedowns were linked to its investments including the Conoco and

Phillips merger, Burlington Resources buy-out and its 20 per cent investment in Lukoil, all the majors will be suffering from a drop in values.

Yet analysts guard against rushing to lay-offs and spending cutbacks, given future projections for energy demand growth and the difficulties in ramping up following retrenchments.

Amy Myers Jaffe, energy expert at Rice University said: “They’re acting pretty precipitously, given we don’t have a full picture. Is there a fundamental shift in thinking that demand is now capped at 100m barrels per day?”

The lay-offs, Conoco says, are to “position ourselves in the current business environment to live within our means”.

Daniel Yergin, an energy expert and the author of The Prize, an oil industry history, says that US petrol demand peaked in 2007 and ideas about global oil demand must be rethought.

The Obama administration will stress curbing carbon dioxide, expanding alternative energies and improving energy efficiencies – cutting into demand. However, needs will continue growing in emerging markets with growing populations.
In contrast, PetroChina, Petrobras, Gazprom and Sinopec all tumbled, with the last two companies slipping out of the top 10 altogether.

Their swift change in fortune increases the risk that some of the world’s biggest oil and gas projects will be delayed as technological requirements mount and funding becomes more difficult and expensive to secure.

This leaves some national oil companies’ customers worrying there will be too little oil and gas available in the middle of the next decade.

Gazprom controls 25 per cent of the world’s gas reserves. This includes the frigid and remote Yamal peninsula and the giant Shtokman field, arguably the world’s most promising new frontier, which the company insists it can develop without significant foreign help.

But Gazprom’s debt burden and the far higher cost of credit could delay necessary investments, analysts said.

All this means Europe, Russia’s biggest customer, will have to brace itself for gas shortages far more entrenched than gaps caused by the pricing dispute between Gazprom and Ukraine, analysts and European diplomats warn.

Oswald Clint, analyst at Sanford Bernstein, said possible two-year delays at Yamal were material enough to “tip the supply/demand dynamics across Russia and more importantly Europe firmly into a deficit position”.

He argues that credit crisis or not, Gazprom, faces such steep production declines at its older fields that it will struggle to grow at all in the next eight years.

Meanwhile, on the other side of the globe, Petrobras recently discovered the world’s most promising new oil deposits under thick layers of salt in the deep waters off its south-eastern coast.

After months of delays, Petrobras last week came out with its strategic review that paints an optimistic picture of the company's ability to tap its riches.

But some oil company executives are less sure and note that much will depend on the legal framework still being debated that will govern the field’s development.

Further exacerbating the issue is the downturn in the oil services sector. Shares of Schlumberger, the world’s biggest oil services company, have fallen 57 per cent.

Such a dramatic reversal in fortunes brings with it the potential of new opportunities for the relatively robust international oil companies.

Until recently, oil-rich countries aggressively rewrote their contracts with international oil companies ending their majority ownership, squeezing them out of leadership positions, reducing their profit share and denying them new opportunities.

The countries turned instead to national oil companies and oil services groups, leaving international oil companies struggling to expand their production.

In Libya, that attitude appears not to have changed, with Muammer Gaddafi last week raising the possibility of nationalising the country's oil sector.

But other countries, including Venezuela, once the most aggressive oil-rich nation, have begun to approach international oil company executives for new deals.

Ironically, the success of national energy groups, such as Gazprom and Petrobras, lie largely in how quickly they realise the tide has turned against them. Whether the world has enough oil and gas to fuel its economic recovery could rest on their willingness to embrace technology and foreign expertise.

Fourth-quarter earnings came in at $4.8bn (£3.3bn) on a current cost of supplies (CCS) basis, which accounts for changes in the value of oil inventories currently held by the company. This is 28pc lower than profits in the equivalent period of 2007. Quarterly earnings per share fell 27pc to 78 cents.

However, the group still managed to post full-year earnings of $31.4bn, boosted by record oil prices in the first half of the year. The price of crude hit $147 a barrel in July before slumping to its current $41 as the economic crisis unfolded.

In a surprise move, the company increased its fourth quarter dividend by 11pc in dollar terms to 40 cents a share. However, the rise in sterling terms is even greater because of weakness in the pound over the last year.

The company also said it would raise its first-quarter dividend, which is due to be paid in April, by 5pc in dollar terms to 42 cents.

Full-year oil and gas production, including oil sands, was 3.2m barrels of oil equivalent per day (boepd), compared to 3.3m boepd in 2007 because of military action in Nigeria, asset sales and a fall in volumes from production-sharing deals.

Chief executive Jeroen van der Veer said that the fourth-quarter performance was "satisfactory" given the pressure on demand for oil and gas due to a weaker global economy.

He noted that industry conditions remained challenging, and the company was "continuing the focus on capital and cost disciplin".

Chief financial officer Peter Voser will take over from Mr van der Veer as chief executive in July when he retires. Mr Voser is Swiss and this will be the first time the company has been headed by a non-Dutch or UK national.

The company said it would maintain capital expenditure in 2009 close to 2008 levels at $31bn-$32bn.

In its strategic Canadian oil sands operations, fourth-quarter losses were came in at $30m, compared to earnings of $82m in the same quarter last year because of lower oil prices and higher costs. Full-year oil sands earnings were $941m compared to $582m in 2007. Mr van der Veer told Bloomberg that its Canadian oil sands operations were now profitable with oil at $38 a barrel.

Analysts at Credit Suisse said they though the numbers were in line with expectations if foreign currency effects were stripped out.

However, the broker argued that "with oil prices and chemicals margins running below expectations into the start of 2009, and with the downstream threatened by new capacity and weak demand, the business model will continue to come under strain." Credit Suisse maintained its "underperform" rating on the shares.

Merrill Lynch was more bullish. The broker maintained its "buy" stance, arguing that Shell was one of the most defensive plays in the sector and market.

"A very strong balance sheet and robust cash generation leave us confident in dividend sustainability even in a low oil price environment," it said.

Shell shares closed up 8 at £17.14.

ConocoPhillips said on Wednesday that it had swung to a huge quarterly loss after taking a $34bn writedown as falling oil and gas prices continue to take their toll on asset prices.

The US’s third-largest oil group had warned of the writedown, as well as 1,300 staff lay-offs and a reduction in capital spending this year to $12.5bn, from $15.3bn in 2008, in an interim report several weeks ago.

However, the fourth-quarter net loss of $31.8bn, compared with a $4.4bn profit in the year-ago period, prompted analysts on Wednesday to question how the company would cope if energy prices continued to fall.

The oil price peaked at $147 a barrel last July but has fallen dramatically since then, trading on Wednesday at $44.63. Natural gas has fallen from $13.50 per million British thermal unit in July to $4.47 on Wednesday.

“The company has a potentially tough task ahead of it persuading investors that it is well equipped to weather $45 oil and $5 natural gas prices,” said Mark Flannery, Credit Suisse global energy analyst. “Persistently weak natural gas prices in particular will cut further into earnings this year. In addition, lower capital expenditures will damage upstream volume growth.”

Jim Mulva, Conoco’s chief executive, sought to comfort investors, explaining that the cutbacks were to reduce costs and limit capital spending to “live within our means”.

“We are planning for a prolonged and difficult business environment,” said Mr Mulva. “[However], through organic growth and prior business transactions, we have the resources and opportunities for long-term growth.”

Conoco’s share price had risen 1.5 per cent to $50.24 by midday in New York on Wednesday.

Excluding the writedowns Conoco’s fourth-quarter adjusted earnings were $1.9bn, or $1.28 per share, down from $4.1bn, or $2.55 per share, a year earlier. Its revenues were $44.5bn, down from $52.7bn a year ago.

Oilfield services provider Schlumberger has reported a fall in quarterly profits and said it was cutting 5,000 jobs out of 87,000 worldwide.

The firm's net profit fell to $1.15bn (£850m) in the last three months of 2008 from $1.38bn a year earlier.

But its shares rose on investor optimism over its prospects.

Oil and gas producers around the world have cut spending amid falling crude prices, the ongoing credit crunch and declining energy consumption.

Analysts at Tudor Pickering Holt said Schlumberger's results were not good, but not a disaster.

Oil services analyst Longdley Zephirin at Zephirin Group said the market welcomed the fact that Schlumberger's "general tone" had not changed in recent quarters.

Schlumberger chief executive Andrew Gould said: "We expect 2009 activity to weaken across the board with the most significant declines occurring in North American gas drilling, Russian oil production enhancement and in mature offshore basins."

Schlumberger did not rule out further redundancies in the first half of 2009, if necessary.

Consumers agreed with producers in Davos that the oil price must eventually rise to ensure investment in future supply, while energy chiefs said more should be done now to protect the climate.

At its peak near $150 in July, oil was clearly taking a toll on the global economy and eroding demand for fuel. But a $100-plus collapse since then has slowed investment and raised the potential of tight supply when consumption picks up.

Many in the industry see $60-$80 as a more desireable level, up to double Thursday's price of around $41 a barrel.

"That seems to be what you need to get investment," BP Chief Executive Tony Hayward told the World Economic Forum in Davos on Thursday.

To help push prices back towards that range, the Organization of the Petroleum Exporting Countries agreed to cut 4.2 million barrels per day (bpd) from September output levels.

OPEC, supplier of about a third of the world's oil, has strictly enforced those curbs and said it was was ready to cut more if the price remained low. Ministers of the group meet on March 15 in Vienna.

"OPEC will not hesitate ... we are still reviewing," the group's Secretary-General, Abdullah al-Badri, said. "Even with $50 we cannot have a decent income for our members".

Nobuo Tanaka, executive director of the International Energy Agency, which advises 28 industrialised countries, agreed consumers would have to pay more.

But low prices were needed now by a world economy that the International Monetary Fund has said will be at a near standstill this year.

"To stimulate the economy, you need a low price, but to stimulate investment long-term the price should be higher," he said on the sidelines of the forum.

"In the mid to long term, oil prices will go up."

Any stimulus package for the world economy should be as environmentally friendly as possible, Tanaka said.

"If governments are spending ... for a stimulus package, why not spend it on renewables?" Tanaka added.

"It stimulates the economy short-term and in the long-term is sustainable. You kill two birds with one stone."

As part of the drive to ensure diverse and secure energy supplies, the world must establish a price for carbon emissions, BP's Hayward said.

"We need the world to put a price on carbon," he said.

Carbon pricing involves penalising every tonne of planet-warming greenhouse gas emissions, whether using a carbon tax or a carbon market. The European Union has a carbon trading scheme but there is as yet no comprehensive global mechanism.

The IEA's Tanaka said that to diversify supply and help prevent a repeat of the upheaval caused by the Ukraine-Russia pricing dispute, which disrupted Russian gas flows to western Europe this month, the European Union needed an improved grid and a single energy market.

Azeri President Ilham Aliyev said Europe needed to show more political will and financial commitment to the planned Nabucco gas pipeline, which aims to cut western Europe's reliance on Russian gas supplies.

"There should be more political will, more financial commitment," said Aliyev, whose country is a major potential supplier of gas for the project bypassing Russia.

Sceptics of the Nabucco pipeline have voiced concern there will not be enough gas for the scheme.

Colonel Muammer Gaddafi, the Libyan leader, has threatened to nationalise the country’s vast hydrocarbon reserves as a measure against continued weakness in oil prices.

Mr Gaddafi told King Juan Carlos of Spain and a Spanish business delegation at the weekend that by taking full control of its energy assets, Libya could better adjust production and influence prices. He described as “very dangerous” the fact that oil prices had fallen so sharply last year, while the cost of Libyan imports had barely changed.

If we end up taking this decision, it will be because we didn’t have any choice,” he was quoted as saying in the Spanish press on Sunday.

It was the second time in less than a week that Mr Gaddafi had proposed such a move. He raised the issue in a video conference with Georgetown University in the US on Wednesday, telling students oil prices would have to rebound to $100 (€77, £73bn) a barrel before the threat of energy nationalisation was removed.

His latest comments, during a dinner in Tripoli, the Libyan capital, appeared directed at executives of Repsol, Spain’s biggest oil and gas group and the largest single investor in Libya’s hydrocarbons sector.

The company produces 300,000 barrels a day in the country, although it books about 50,000 of that under its royalty and tax agreement with the state. This is about 5 per cent of Repsol’s total world production.

The company’s upstream assets in Bolivia have already been nationalised and it has been forced by Buenos Aires to sell part of Argentine subsidiary YPF to local investors.

Antonio Brufau, Repsol chairman, played down the threat of nationalisation in Libya, describing Mr Gaddafi’s words as a “reflection spoken out loud”.

However, he did not discount the possibility of a policy change in the future.

After months of gradually closing the oil spigot, members of the OPEC cartel have managed to stop the slide in oil prices — at least for now.

Showing an unusual degree of discipline, members of the Organization of the Petroleum Exporting Countries have slashed their output by more than three million barrels a day in recent months as they sought to put a floor under oil prices, which have fallen by $100 a barrel since last summer. That is about 75 percent of the production cuts pledged by members of the cartel since September.

The cuts have been led by Saudi Arabia, the world’s top exporter, which has trimmed its production to eight million barrels a day this month, down from nearly 10 million barrels over the summer.

In September, OPEC producers vowed to reduce their output by 4.2 million barrels a day, or about 5 percent of global production.

“Compliance has been extremely high,” said Kevin Norrish, an oil analyst with Barclays Capital in London. “Most OPEC countries have done most of what they’d pledged to do.”

Oil lost 70 percent of its value in recent months as the global economy fizzled and oil consumption fell. In the United States, the world’s biggest consumer, demand has dropped nearly 8 percent, or 1.6 million barrels a day, from a year ago. Most experts believe global oil consumption will decline in 2009 for the second straight year.

But OPEC’s policy seems to be catching up with the economic downturn. After hitting a peak above $145 a barrel in July, and falling to $32 a barrel by December, their lowest level since the end of 2003, oil prices have stabilized in recent weeks. As the latest OPEC cuts have influenced the markets, prices have been trading in a range from $35 to $45 a barrel.

OPEC’s success has created the prospect of a rebound in prices — most oil-producing countries want prices well above $70 a barrel. But such a rebound could hobble the world economy further, making an eventual recovery more difficult.

Already, retail gasoline in the United States has bottomed out and begun to rise. It is still far below the high of $4.11 a gallon in July, but is up about 20 cents over the last month, to a national average of $1.86 a gallon.

On Friday, oil prices rose $2.80 a barrel, or 6.41 percent, to settle at $46.47. While that is well below last summer’s level, it remains relatively high by historical standards.

The precipitous slide in recent months had alarmed many producers, as well as some Western oil companies, which warned of lower investments for new energy supplies.

ConocoPhillips, for example, last week trimmed its investment program by 18 percent, or $2.8 billion, for this year. Suncor Energy, which produces oil from Canadian tar sands, slashed its investments for the second time in a few months. After posting a loss in the fourth quarter, Suncor cut its spending plans to $3 billion this year, down from $10 billion.

“Politically, it is better to say we need the lowest possible oil prices, but there are economic implications to low prices, and not just for OPEC producers,” said Olivier Jakob, the managing director of Petromatrix, an independent research firm in Zug, Switzerland. “Lower prices defer investments in the energy sector that could hurt Western economies in the longer term.”

The steep drop means that oil prices have returned to levels last seen before 2004. But given a rise in production costs, and vast government spending programs initiated by most oil-producing states, many oil exporters today need significantly higher prices to balance their budgets.

Saudi Arabia, for example, once seen as favoring low prices, recently said that it considered $75 a barrel to be a fair price.

Oil companies also say they need higher prices to develop complex and costly resources, like deepwater fields or tar sands, that have higher break-even costs.

“If economies recover, we will quickly face the same challenges on the supplies,” Helge Lund, the chief executive of StatoilHydro, a Norwegian oil company, said in a recent interview. “We won’t be able to meet the increase in demand.”

The drop in prices, if sustained, may lead to a realignment of policies even for the most nationalistic producers, analysts said. Kazakhstan and Venezuela, for example, recently indicated they might relax investment terms or seek new deals with foreign companies in a bid to bolster their production and increase revenues.

The OPEC cartel’s discipline reflects a more forceful stance taken by Saudi Arabia, the group’s most powerful producer, which has taken the lead in aggressively cutting production in recent weeks.

The country’s oil minister, Ali al-Naimi, said the kingdom would go even beyond its OPEC pledges with a unilateral cut that would bring its output next month below its official target. Analysts expect the kingdom to reduce its output by an additional 300,000 barrels a day below its OPEC quota.

“We are working hard to bring the market in balance,” Mr. Naimi said a few days ago in New Delhi.

Saudi Arabia’s economy is expected to shrink this year, and the country is planning to run a budget deficit because of the slump in oil prices.

OPEC has received some involuntary help from other producers. These include Mexico, where output from the country’s biggest oil field is declining sharply; Russia; and Canada, where producers of tar sands have shut down some operations that are becoming uneconomical at today’s lower oil prices.

The last time the cartel met, in December, its members pledged to reduce production by 2.2 million barrels a day. It was the group’s third agreement in four months to cut its output, after pledges of 500,000 barrels a day in September and 1.5 million barrels a day in October.

But not everyone believes that OPEC’s actions can keep prices from falling further, especially if the global economy continues to worsen.

OPEC has announced 12 quota reductions since 1993, and 80 percent of the time the cartel succeeded in defending a floor for oil prices, according to an analysis by Deutsche Bank. The times when the cartel failed was when global economic growth was falling sharply, as in 1998 and 2001.

OPEC’s president, José Maria Botelho de Vasconcelos, has said he expected oil prices to eventually recover to around $75 a barrel this year as a result of OPEC’s actions. The cartel is expected to meet again in March. At least one producer, Iran, has said the group might slash production even further to push up prices.

“If all the cuts are carried out within the established time frame, there will be an impact in the market that will lead to a positive trend in terms of oil prices,” Mr. de Vasconcelos told Reuters.

Central and southern European leaders have voiced strong backing for a major pipeline project that could reduce EU reliance on Russia for gas.

But the talks in the Hungarian capital Budapest did not result in a pledge of direct financing for the 3,300km (2,050-mile) Nabucco gas pipeline.

Nabucco would bring Central Asian gas to western Europe via Turkey and the Balkans, bypassing Russia.

It is expected to account for no more than 5% of EU gas needs.

The Budapest meeting followed serious disruption to European gas supplies during Russia's recent dispute with Ukraine.

Russian energy muscle

Czech Prime Minister Mirek Topolanek, whose country currently holds the EU presidency, insisted that Nabucco "is not an anti-Russian project".

Russia's plans for two alternative pipelines bypassing Ukraine - Nord Stream and South Stream - are well advanced.

Mr Topolanek said the Russian pipelines would "maintain the EU's high energy dependency on Russia" and called them "a direct threat to the Nabucco project".

Work is scheduled to start on Nabucco in 2011, with the first gas deliveries expected in 2014.

The major sources of gas for Nabucco are expected to be Azerbaijan, Kazakhstan and Turkmenistan.

But Mr Topolanek said "we should also ask ourselves whether we are capable of reaching an agreement with Iran on gas supplies for Nabucco".

The EU said it could not go beyond offering loans and credit guarantees for the pipeline, which is expected to cost about 10bn euros (£9bn; $12bn). It is planned to supply up to 31bn cubic metres of gas annually.

EU Energy Commissioner Andris Piebalgs, quoted by Reuters news agency, said the commission would avoid a bigger commitment to Nabucco "because then it's not anymore the consortium's project but a public-private partnership and I'm not ready at this stage to even consider such a type of option".

The consortium is led by Austria's OMV, and includes MOL of Hungary, Romania's Transgaz, Bulgargaz, Turkey's Botas and RWE of Germany.

The European Bank for Reconstruction and Development says it is ready to consider contributing to the project.

When complete, Nabucco will extend from an Austrian hub at Baumgarten to Turkey's eastern borders with Iran and Georgia.

The European commission today proposed earmarking €1.25bn to kickstart carbon capture and storage (CCS) at 11 coal-fired plants across Europe, including four in Britain.

The four British power stations – the controversial Kingsnorth plant in Kent, Longannet in Fife, Tilbury in Essex and Hatfield in Yorkshire – would share €250m under the two-year scheme.

CCS involves capturing CO2 at power stations and burying it in disused oil/gas fields or other undersea rock formations. It is seen by Gordon Brown and other EU leaders as vital to ensure Europe's energy security, while reducing emissions, in the wake of the recent Russian-Ukraine gas crisis and the emergence of "peak oil". Europe will get most of its gas from Russia by 2050 on current trends.

The €1.25bn for CCS is part of an EC proposal to use €5bn of unspent money in the EU budget on immediate investment in energy and rural development, including broadband infrastructure this year and next.

The overall package is designed to help reboot the EU economy in the deepening recession and EC officials hope it will be adopted at the bloc's March summit. Jose Manuel Barroso, EC president, called it "smart" investment – "a short-term stimulus targeted on long-term goals".

The four British coal-fired plants can generate 6.3GW of UK power, while a quarter of Britain's overall 78GW is under threat of closure under other EU plans to improve air quality. The government has warned these could lead to black-outs from 2015.

Wednesday's package would also earmark €1.75bn to improve gas and electricity interconnections between EU countries, including €100m for electricity links between Ireland and Wales, and €500m for offshore wind projects, including €40m for an 0.25GW wind farm near Aberdeen.

It also includes €150m set aside to develop an offshore wind grid in the North Sea to link Britain, Holland, Germany, Ireland and Denmark – a project backed by campaigners such as Greenpeace as well as governments.

The package would also provide €250m in loan guarantees, backed by the European Investment Bank, for the stalled Nabucco gas pipeline between the Caspian region and Europe.

The pipeline, a 3,300-km route from Anatolia in Turkey to Austria, has been dismissed as unrealistic and is said to face its "moment of truth" over the next few weeks because of lack of funding – and guaranteed gas supplies from Azerbaijan.

EC officials said today the aim was to create a "risk-sharing facility" with the EIB to raise loans for the project on better (cheaper) terms rather than providing direct subsidies.

Russia, which is building the rival South Stream pipeline, opposes Nabucco; the US has been a fervent supporter to reduce EU dependence on Gazprom gas.

Stuart Haszeldine, a CCS expert at the University of Edinburgh, said: "This is totally exceptional and unique, a major move on the part of Europe. It shows they're extremely serious about developing CCS and it's what the developers have been pressing for."

But Claude Turmes, the Green party's energy spokesman in the European Parliament, denounced the overall energy package as "inadequate and unbalanced" and "a handout to outdated energy sources and the companies that profit from them." He contrasted the "bloated" €3bn for coal and gas development and the "meagre" €500m for renewable wind energy.

"This represents a golden handshake from Barroso for technologies that should be on their way out instead of a much-needed commitment to clean energy and energy saving," he said.

A 10-mile barrage across the Severn is among five projects on a shortlist of potential schemes to harness the tidal power of the estuary published by the government today.

Two innovative "lagoon" schemes, which would trap water in a large section of the estuary without damming it, and two smaller barrages, are also on the list.

Publishing the proposed shortlist today, the energy and climate change secretary, Ed Miliband, said ministers had not "lost sight" of other innovative plans, including a huge "reef" project and tidal fences, which had been on a list of 10 schemes under consideration.

He announced £500,000 of funding to develop the new technologies such as the tidal reefs, which supporters say could harness the power of the estuary without causing the environmental damage associated with a barrage.

And he said progress on those technologies would be considered before any final decisions on a tidal power scheme for the Severn estuary were made.

The proposed shortlist, which is now being put out to public consultation, is as follows:

• The Cardiff-Weston barrage - a 10-mile scheme costing £14bn that would stretch from near Cardiff to near Weston-super-Mare. It could generate up to 8GW - 5% of the UK's energy needs

• Shoots barrage - a scheme further upstream which would generate around 1GW, equivalent to a large fossil fuel plant

• Beachley barrage - an even smaller scheme, just above the Wye River, which would generate around 625MW

• Bridgwater Bay lagoon - a proposal which would impound a section of the estuary on the coast between east of Hinkley Point and Weston-super-Mare, which could generate 1.36GW

• Fleming lagoon - a similar scheme which would generate the same amount of power from a section of the Welsh shore between Newport and the Severn road crossings.

"We have an internationally important habitat and also have a huge potential clean energy resource. How we approach this will set a precedent for every other country that's looking at the same thing in the EU and elsewhere," said Andrew Lee, chief executive of the Sustainable Development Commission, which advised the government on the feasibility of the various projects being considered.

The government is keen to harness the power of the Severn, which has the second highest tidal range in the world, to generate electricity as part of its commitment to source 20% of the UK's energy from renewable sources by 2020. It is believed to favour the large barrage projects. But many groups are concerned about the environmental impact of these proposals. Bristol-based group Stop the Barrage Now say that the largest barrage would add to local flooding, reduce fish stocks, damage bird life and destroy the Severn bore, as well as ruin mudflats across an area of more than 77 square miles.

Green groups favour tidal lagoons, which have lower impact but are unproven technologies. These artificial lagoons flood as the tides rise and then trap water as the tide falls. The water then passes through a hydropower turbine to generate electricity.

Martin Harper, Head of Sustainable Development at the RSPB said was "hugely disappointing" that the Cardiff-Weston barrage option was on the short list. "Harnessing the huge tidal power of the Severn has to be right, but it cannot be right to trash the natural environment in the process. The final scheme must be the one that generates as much clean energy as possible while minimising harm to the estuary and its wildlife."

"We know the Cardiff-Weston Barrage would destroy huge areas of estuary marsh and mudflats used by 69,000 birds each winter and block the migration routes of countless fish."

"Today's report recognises just how difficult, costly and environmentally damaging the project is likely to be and yet there is no sign of the cautious and cool-headed approach needed towards such a proposal," he added.

Friends of the Earth Cymru's energy campaigner, Neil Crumpton said, "Plans to build a Severn barrage are too big a threat to an internationally important wildlife site and must be scrapped - ministers must focus on developing the estuary's potential for tidal lagoons instead."

His concerns are echoed by Martin Harper, head of sustainable development at the RSPB, who is concerned at the potential loss of habitat if the mudflats disappear as a result of one of the bigger barrage projects. He wants today's announcement by Miliband to send a signal to engineers to build something "that maximises clean energy while minimising harm to the natural environment at an affordable cost. As they proceed we really want them to think about how they do that."

Steph Merry, head of marine renewables at the Renewable Energy Association, thinks only the bigger projects such as the 10-mile-long Cardiff-Weston barrage - capable of producing as much power as several fossil-fuel power stations - make sense. "You need something that is a large-scale project on the same scale as a power station in order to meet the renewables targets. The Severn barrage, or something similar, is the only way of achieving that. It's much bigger than any other marine renewable or solar or wind ."

She added: "You've got to decide what the balance is between local and global environmental issues. You can protect the environment of a Severn estuary and not do anything about climate change and then climate change comes along and destroys the environment of the Severn estuary anyway in the future."

Earlier this month, the Guardian revealed allegations that the government's engineering consultants, Parsons Brinckerhoff, had miscalculated the costs of a tidal lagoon project. The report sent by PB to ministers said the tidal lagoon option would be eight times more expensive than the barrage scheme and would not generate as much power.

Lord Turner of Ecchinswell is to investigate the collapse of funding for renewable energy projects in Britain after the recent exit of a string of companies, including BP and Shell.

Speaking on the sidelines of the World Economic Forum, Lord Turner, chairman of the Financial Services Authority (FSA) and of the Government’s Committee on Climate Change, said that the study was a response to mounting scepticism over the Government’s plans for a huge expansion of wind and tidal power.

He said he was concerned that a number of key projects had been thrown into jeopardy, including London Array, a £3 billion scheme to build the world’s largest offshore wind park in the Thames Estuary. “We have to make sure that the present climate does not set back our plans,” he said.

Doubts have surfaced over the Government’s commitment to cut UK greenhouse gas emissions by at least 34 per cent by 2020 as falling oil prices and the global credit crisis have triggered a funding crisis. Last week E.ON, the German utility group, and Masdar, a fund controlled by Abu Dhabi, said that they were reconsidering the viability of the London Array.

Shell pulled out of the scheme last year, citing spiralling costs, while BP also said it was abandoning the UK’s renewable energy sector, blaming a lack of incentives. Gordon Brown has put the creation of thousands of “green-collar” jobs at the centre of his plans for an economic recovery.

Lord Turner said that his findings would be published in September, alongside details of the Government’s progress so far on meeting newly established annual carbon budgets. The comments came after James Rogers, the chairman of Duke Energy, one of America’s largest utility companies, said that the credit crunch was forcing power companies to develop new funding models to make the investments necessary to tackle climate change, a key focus in Davos.

Mr Rogers said that a revolution in the way in which America produces and uses energy had the potential to lead the world out of recession, but energy companies would need to tap into new sources of nonbank funding, including sovereign wealth funds and rich investors from the Middle East and Asia.

Duke, which plans to invest $25 billion (£17.5billion) over the next five years in wind, solar and nuclear power stations, is seeking to bypass banks altogether by establishing an in-house team to build long-term direct relationships with potential investors in Asia, and China, including national banks, wealthy individuals and pooled funds.

Mr Rogers said: “I don’t think it is going to go back to business as usual. The crisis has really motivated a rethink about how we raise finance. In some ways this is a return to the pre1980s’ model of investment where it will be about a set of long-term relationships.”

It is available for free in huge quantities, is not owned by Saudi Arabia and it contributes minimally towards climate change. The latest green fuel might seem like the dream answer to climate crisis, but until recently raw sewage has been seen as a waste disposal problem rather than a power source. Now Norway's capital city is proving that its citizens can contribute to the city's green credentials without even realising it.

In Oslo, air pollution from public and private transport has increased by approximately 10% since 2000, contributing to more than 50% of total CO2 emissions in the city. With Norway's ambitious target of being carbon neutral by 2050 Oslo City Council began investigating alternatives to fossil fuel-powered public transport and decided on biomethane.

Biomethane is a by-product of treated sewage. Microbes break down the raw material and release the gas, which can then be used in slightly modified engines. Previously at one of the sewage plants in the city half of the gas was flared off, emitting 17,00 tonnes of CO2. From September 2009, this gas will be trapped and converted into biomethane to run 200 of the city's public buses.

Project leader, Ole Jakob Johansen said: "The city of Oslo has great visions for Oslo as a green capital. Oslo aims to be one of the most environmentally sustainable capitals of the world. Using biomethane makes sense. Not only would the biomethane otherwise be wasted, but the reduction in emissions per bus will go a long way to achieving our carbon-neutral target. What's more, aside from the intial set-up costs, we expect to see an average saving of €0.40 per litre of fuel (based on an average diesel price of €0.67 per litre compared with biomethane at €0.27 per litre)".

The city's diesel public buses will only require minor modifications to their engines to run on methane, which is stored on tanks on top of the vehicles. The only noticeable difference will be how quietly they drive.

"Biogas is popular in Sweden, but they have very few vehicles powered by biomethane. We chose to focus on biomethane as this emits less carbon and is easier and cheaper to produce," said Johansen.

The net emissions from a biomethane operated bus are zero, because the carbon originally came from the atmosphere rather than fossil fuels, but electricity is used at the sewage plant to convert the gas from the waste into fuel for the buses. Oslo city council is taking the electricity used to generate the fuel into consideration and calculate that carbon emissions per bus are 18 tonnes per year, a saving of 44 tonnes of C02 per bus per year.

The city's two sewage plants have enough biomethane to provide fuel for the 80 buses, but if the trial is successful Oslo city council plans to convert all 400 of the public buses to run on biogas. The biogas will be created from a mixture of biomethane and biogas from the incineration of kitchen waste from the capital's restaurants and domestic kitchens. Eventually, the council hopes that cars will also be able to run on biogas sourced locally from biomethane and converted kitchen waste.

What do you think? Should this be deployed more widely?

Britain’s coastal waters have space for up to 7,000 more wind turbines than are already planned, according to an environmental audit of the likely impact of offshore wind farms on wildlife.

The assessment was made as part of preparations for the third phase of offshore wind farm development around the country.

The 5,000 to 7,000 turbines recommended by the report would be enough to supply almost every home in Britain with electricity.

They are intended to form part of a 33-gigawatt offshore electricity supply planned by the Government to ensure that Britain meets it renewable energy and carbon-emission reduction targets. However, the future of the project has been cast into doubt recently because of concerns about rising costs.

Plans for 341 turbines in the Thames Estuary, the London Array project, could cost more per megawatt produced than a nuclear plant. Shell pulled out last year and there were further doubts about the project’s likely profitability last week.

Ed Miliband, the Energy Secretary, was nevertheless bullish about the prospects of offshore wind farms as the government-commissioned report into the environmental impact was launched.

“In terms of electricity, offshore wind power could potentially make the single biggest contribution to our 2020 renewable energy target so it’s vital we maximise the UK’s natural resources to help in the fight against climate change,” he said.

“This report provides a real advance in our understanding of the ecology and geology of the UK marine environment so we can continue to ensure that projects like wind farms are built in the most suitable places.”

The Environment Report is now the subject of a 12-week period of public consultation. It addressed a variety of issues, including the likely impact of the turbines on the seabed, birds, seals, and fish stocks.

Rob Hastings, director of the marine estate at the Crown Estate, which is the landlord of the seabed, said: “The publication of the study at this time ensures that as an industry we are well prepared to take on the challenges that will come as part of the round-three offshore wind farm leasing process.”

Seven offshore wind farms have been built in British waters and five more are under construction. A further nine have been approved.

Wind farms are seen as a crucial element in Britain’s effort to meet its target of providing 15 per cent of energy from renewable sources because the technology is tried and tested. The country and its waters are among the windiest in Europe.

Nick Rau, of Friends of the Earth, said: “We’re delighted that the Government has confirmed the massive potential for offshore wind energy — it must now make sure that it becomes a reality.”

A new international body to promote renewable energy is to be established today, in a move that its supporters insist has the potential to replace the global dominance of conventional power with wind, solar and other sustainable sources within a matter of years.

Fifty-five governments have said they will commit themselves to full membership of the International Renewable Energy Agency (Irena), at its founding conference in Bonn today. A total of 116 countries will take part.

The US has not joined, but is widely expected to do so under the new administration. Britain, however, has not signed up to Irena, although it is understood to be sending officials as observers.

Officials in the new Department for Energy and Climate Change (DECC) said: "We are certainly supportive and are interested in joining but we need to make sure that what we're joining has the right focus. There needs to be more focus on the deployment of renewables rather than just talking policy and issuing papers - and there needs to be a wider membership."

The DECC is hyper-sensitive to persistent criticism that Britain is dragging its feet on renewable energy and clinging to old coal - and gas-fired - generating plants to prevent the lights going out in the middle of the next decade.

Headed by Ed Miliband, the department wants to see the US and Asian countries such as China and Japan indicate they will join too before it signs up to Irena.

Irena aims to help both developing and industrialised countries transfer to renewable energy with practical advice to those who lack the knowhow.

Its founders see it as an institutional counterbalance to the International Energy Agency which has been accused of not doing enough to promote alternative energy. Irena's initiator, Hermann Scheer, who is president of the World Council for Renewable Energy and a German MP, told the Guardian: "Irena is the single-most important step for a speedy global introduction of renewable energies. It will give an enormous push to the use of renewables around the globe."

With an initial budget of €25m (£23.8m), gathered from a means-tested membership subscription, Irena will give financial, practical and technological support to member countries such as Chad, which has a constant solar supply, but is almost wholly dependent on conventional energies such as gas and oil, to build solar power plants.

Other countries which have signed up include France, the Netherlands, Spain, Denmark, Vietnam, Paraguay, Mali, Ethiopia and Eritrea.

The Danish climate minister, Connie Hedegaard, told the Guardian that Irena would enable the proper coordination of renewable energy usage across the world. "Renewables have been homeless in the energy family until now," she said. "We have a chance to spread their use, particularly in the developing world, to spread best practices, deliver useful statistics and calculations and share the knowhow about what pays off and what doesn't.

"There's a growing understanding that renewables are important on many levels, from energy security to growth and development.

"Even Saudi Arabia, an oil-producing country and member of Opec, has just announced it wants to have 7% of renewables by 2020."

President Barack Obama may find it harder to increase renewable energy than his predecessor during a financial crisis that has sidelined Lehman Brothers Holdings Inc. and other financiers of alternative power, investors said.

New loans to harness the wind, sun and biodegradable waste will need extra government backing in a deepening recession, said Clayt Tabor, finance director at Midwest Wind Finance, a wind-farm developer in Minneapolis. Obama’s goal to double U.S. renewable- energy by 2012 may take years longer because even fully funded projects take at least three years to develop, he said.

Obama, more supportive of clean energy than George W. Bush, may struggle to shift quickly from coal-burning plants that spew global-warming gases. In Bush’s last three years, solar and wind production doubled, helped by easier financing and tax breaks that attracted loans from Lehman, now bankrupt, and insurer American International Group Inc., later taken over by the government.

“The project-development cycle is three to five years, so you can’t just stop and start on a dime” in a tough environment, said Brian Redmond, managing director of CP Energy Group LLC, a Boston-based renewable-energy advisory firm, in an interview.

The new president repeated his call to double renewable power capacity in three years during his first weekly radio and video address as president on Jan. 24. He’s pressing Congress to pass an $825 billion economic-recovery package with provisions to aid green energy. House Democrats have begun work on the legislation.

The bill, devised to avoid the longest and deepest U.S. recession in a quarter century, includes $20 billion in new tax breaks for green-energy investors, data from the Joint Committee on Taxation show.

No Lehman, No AIG

If approved, they will come on top of $7.7 billion in tax breaks already available. These incentives, part of the October bank rescue, are only offered to investors earning profits.

Under the stimulus bill, eligibility for the $7.7 billion will be broadened to include investors with losses, a growing group in the recession. Lehman, in bankruptcy court, and AIG have stopped lending on renewable-energy projects.

House Speaker Nancy Pelosi has said she will bring the stimulus package to the full House by Jan. 28. The Senate released portions of its proposal Jan. 23.

The U.S. had renewable-energy generators capable of producing 28,721 megawatts of power in 2007, not counting hydroelectric dams, according to Energy Department data. A megawatt can supply about 800 average U.S. homes.

Doubling that may cost $150 billion, estimated Scott Brown, chief executive officer of Hanover, New Hampshire-based New Energy Capital. Brown’s firm has invested more than $50 million in the last three years in renewable energy.

Cost Estimates

Industry cost estimates for Obama’s plan are based on past budgets. It costs about $2 million to install 1 megawatt of wind power. Solar power costs about $4 million to $8 million a megawatt. Acciona SA, a Spanish builder, last year completed a 64- megawatt solar plant in the Nevada desert for $266 million.

“There’s been debate about whether it is realistic to expect new construction in that time frame no matter how much money the government throws at it,” Brown said in an interview. He said Obama’s target is realistic if new aid comes through and U.S. sets quotas for production, as Texas did.

In 1999, then-Governor Bush signed a Texas law requiring utilities to buy renewable power from small generators. In 2005, the Texas legislature increased the quota to 5,880 megawatts by 2015 and 10,000 megawatts in 2025.

“I think it’s very optimistic,” Midwest Wind’s Tabor said of Obama’s target to double green power, in an interview. “These projects take a lot longer than everybody realizes.”

‘Leverage $100 Billion’

The administration wants financial incentives “to leverage $100 billion in private sector clean-energy investments over three years,” a report released with Obama’s radio address said. Obama spokesman Tommy Vietor declined to comment. Political analysts said the new president may get Congress to approve the aid.

“With the new balance of power in the House and Senate, I would be surprised if they couldn’t write their own ticket when it comes to renewable energy,” said Jerry Taylor, senior fellow at the Cato Institute, a Washington-based policy research group.

Green investment start from a standstill. Solar-energy developers already have projects under way to produce about 5,400 megawatts in three to five years, the Washington-based Solar Energy Industry Association trade group said. Solar power more than tripled in the past three years to 4,400 megawatts.

Wind developers added 7,500 megawatts in 2008 to bring total generating capacity to 24,000 megawatts, according to the American Wind Energy Association. Projects in 2009 could fall by half without the right financial aid from Congress, said Denise Bode, the group’s chief executive.

Reducing Taxes

Tax credits have been used by investors with gains to recover 30 percent of the cost of a solar project by lowering their tax bill by the same amount. For financiers of wind energy, taxes can be reduced by 2.1 cents a kilowatt-hour. A kilowatt-hour will light 10 bulbs of 100 watts for an hour.

Renewable energy is “very capital-intensive,” Redmond said. “The ability to mobilize that amount of megawatts is going to depend on how quickly we can get financial institutions to support projects that are on the drawing board.”

In recent years, First Wind of Newton, Massachusetts, Houston-based Horizon Wind Energy LLC and other developers gained financing from outside investors who were attracted by the tax incentives, called “tax equity.”

Horizon owns or operates wind turbines that can produce 3,500 megawatts and is developing another 10,500 megawatts, its Web site says, without giving completion dates.

Michael Morris, chief executive officer of American Electric Power Co., the biggest U.S. producer of electricity from coal, said “as a practical matter,” Obama’s target is too ambitious.

“I’m not anti-wind at all, and I’m not anti-solar,” Morris said in an interview. “I’m just not sure we can double it so quickly. The supply chain is incapable of handing it. And I don’t think there is enough capital available today to put into that space."

It is not surprising that the past few months have been rocky for Ed Miliband. After all, Gordon Brown saddled him with one of the most difficult briefs in government when he appointed the 39-year-old former Cabinet Office minister in October to lead the newly created Department of Energy and Climate Change.

The government was being pilloried for its failure to rein in record-high household energy bills. The industry gave him little time to settle in, quickly criticising the new minister for not understanding the sector he was dropped in to oversee. Russia’s decision to cut gas supplies to Europe, meanwhile, stoked fresh concerns that Britain’s ageing infrastructure, much of it built in the 1950s and 1960s, would be shut down long before clean, reliable alternatives were built to replace it.

Yet Miliband - younger brother of the foreign secretary David - seems unbowed by the challenge. Indeed, he is set to take his nascent department into the most interventionist state role since the industry was privatised in the early 1990s.

“There are big opportunities here, but it does require a strategic role for government,” he said in an interview with The Sunday Times. “Part of it is what Lord Mandelson [the business secretary] has been talking about, which is having a more active industrial policy.”

It is up to Miliband to get the best out of the expected £100 billion that will be needed over the next decade to reshape Britain’s energy infrastructure for a low-carbon world. He is not convinced that, left to their own devices, companies will get it right.

“There are too many uncertainties associated with these investments for markets to do them on their own, even with a price on carbon, and that’s what we are working on,” he said.

This week he will make the first of a flurry of announcements that he says will keep Britain on track towards taming the three-headed hydra of energy security, pollution reduction and affordability.

Tomorrow he will unveil a short list of five proposals for the Severn Barrage, the controversial tidal scheme that has been knocking around for three decades but been repeatedly rejected over cost and environmental concerns. On Tuesday he will push ahead with Britain’s new nuclear building programme when he invites the industry to propose sites on which to build new nuclear reactors.

In recent weeks all the big six utilities have formed consortiums as they prepare to build what would be the world’s first new generation of nuclear reactors, outside France, in decades. The industry’s interest has been spurred largely by a concerted government effort to remove many of the obstacles that had for so long held back development here.

“We are not about subsidising new nuclear, but we are about breaking down the barriers,” said Miliband, referring to the recently passed energy and planning bills. “When you see the companies that are coming forward, there is a pretty clear enthusiasm that new nukes make economic sense for them.”

It is a model that Miliband hopes to replicate with the renewables industry. “The low-carbon future is in my view around nuclear, renewables and clean fossil fuels, but we need to create a top-down framework to incentivise the market,” he said. “We have shown on nuclear that we can deliver on these things, and we are seeking to do the same on renewables,” he added.

In the spring the Department of Energy will publish its low-carbon industrial strategy paper, detailing a comprehensive approach that will include subsidies for new technologies and that aims to create thousands of new “green” jobs.

But won’t all this lead to ever-higher household bills? Not necessarily, he argues. “The best answer to upward pressure on energy prices is energy efficiency and we are in the foothills of what we need to achieve in this area,” he said. “In the 1970s Britain converted to North Sea gas. I confess I don’t remember it that well - I was very young - but that sort of house-by-house, street-by-street programme is what we need to think about for energy efficiency.”

Yet, with roughly a third of Britain’s generating capacity set to close over the next 15 years, the industry has warned that renewables will not be enough and that without new fossil-fuel plants the country faces the real possibility of the lights going out.

It is in this context that Miliband will have to make what will surely be one of his most controversial decisions: whether to approve an application by Eon to build a new coal-fired power station at Kingsnorth, near Ashford in Kent.

The plant would be the first coal-fired station to be built in Britain for more than three decades. Eon has entered the project into a competition under which the government will award one company several hundred million pounds to build a carbon capture and storage (CCS) plant to demonstrate a technology that promises to strip carbon out of power-station exhaust and bury it underground.

Miliband refused to say if he would award the CCS money to Eon, or if he would approve the plant if it lost the competition. “It is very difficult to reconcile security of supply with our low-carbon obligations, but I don’t want to anticipate what I have to announce to parliament in the coming weeks and months on our approach to this issue because it is a very sensitive matter.”

He admitted, however, that he thinks “Britain should lead by example on CCS”. Giving the green light to a dirty new coal plant would not be seen as setting a good example.

The government must boost subsidies for renewable energy projects urgently to have any chance of meeting its 2020 targets, the chief executive of Centrica, owner of British Gas, has warned.

In an interview with the Guardian, the chief executive, Sam Laidlaw, said that the UK faces a energy crunch in as little as two years because companies are shelving their investment plans.

The cut-backs by firms, Laidlaw said, would lead to much higher electricity and gas prices and threaten security of energy supply. He believed the UK could struggle to cope unless the government soon put together a financial support package for new power plants, particularly for offshore wind farms.

Executives from the "big six" utility firms in the UK recently met Gordon Brown to discuss the issue. The government is relying on the big utility companies to invest £140bn in new energy infrastructure and power plants; about £100bn of this is needed to build enough wind farms to meet the government's 2020 renewable energy targets.

However, plunging carbon and electricity prices, and the credit crunch, have made companies nervous about massive offshore wind farms. This week, Paul Golby, the chief executive of E.ON UK, warned that the economics of the building of the world's largest offshore wind farm, the London Array, were on a knife edge.

Laidlaw said: "Investment is starting to fall off quite quickly. The big fear I have is that in two or three years' time the next cycle [of high energy prices] will repeat, and security of supply ... will actually go right back on to the top of the agenda, and we will be even less prepared to cope with it unless we make the investment now."

Talking about the recession, he added: "We have to find some solutions in the next few months."

The "big six" suppliers were brainstorming with government officials on how to create incentives for greater investment in renewables, Laidlaw said. Proposals could include introducing a feed-in tariff for the offshore wind farms, which would guarantee operators a higher fixed price for the electricity they generate.

Meat-free menus are to be promoted in hospitals as part of a strategy to cut global warming emissions across the National Health Service.

The plan to offer patients menus that would have no meat option is part of a strategy to be published tomorrow that will cover proposals ranging from more phone-in GP surgeries to closing outpatient departments and instead asking surgeons to visit people at their local doctor's surgery.

Some suggestions are likely to be controversial with patients' groups, especially attempts to curb meat eating and car use. Plans to reuse more equipment could raise concern about infection with superbugs such as MRSA.

Dr David Pencheon, director of the NHS sustainable development unit, said the amount of NHS emissions meant it had to act to make cuts, and the changes would save money, which could be spent on better services for patients.

"This is not just about doing things more efficiently, it's about doing things differently, because efficiency is not going to get us to big cuts," said Pencheon. "What will healthcare look like in 2030-2040 in a very low carbon society? It will not look anything like it looks now."

Last year the NHS published what it believes is the biggest public sector analysis of carbon dioxide, the biggest greenhouse gas, which showed the organisation's emissions in 2004 were 18.6m tonnes and rising. This accounts for more than 3% of all emissions in England, and if the NHS was a country it would have been ranked as the 81st biggest polluter in the world that year, between Estonia and Bahrain.

One-fifth of the emissions were from transport, one-fifth from buildings, and the remainder from procurement, including drugs, medical equipment and food.

On Tuesday, Pencheon and the NHS chief executive, David Nicholson, will publish the strategy - Saving Carbon, Improving Health - which will set targets to cut the organisation's carbon footprint, and proposals to meet them. It follows a government pledge last year to cut greenhouse gas emissions by 80% by 2050.

The plans cover all aspects of patients' care, from building design to transport, waste, food, water and energy use.

Among the most talked-about is likely to be the suggestion that hospitals could cut carbon emissions from food and drink by offering fewer meat and dairy products. Last year, the United Nations climate chief, Rajendra Pachauri, provoked a global debate when he said having a meat-free day every week was the biggest single contribution people could make to curbing climate change in their personal lives, because of the chemicals sprayed on feed crops and the methane emitted by cattle and sheep. Last week, the German federal environment agency went further, advising people to eat meat only on special occasions. Pencheon said the move would cut the relatively high carbon emissions from rearing animals and poultry, and improve health. Last year the NHS served 129m main meals, costing £312m, according to Department of Health figures. "We should not expect to see meat on every menu," said Pencheon. "We'd like higher levels of fresh food, and probably higher levels of fresh fruit and veg, and more investment in a local economy."

Other proposals that will impact directly on patients include urging people to drink less bottled water, more phone-in surgeries by GPs, greater sterilisation and reuse of equipment, and encouraging patients, visitors and staff to leave their car at home.

Many ideas are already being pioneered by one or a few trusts but will be spread more widely, including automatic lights and taps, renewable energy such as biomass and wind turbines, and green travel plans - such as facilities for cycling or new bus routes and bus stations at hospitals. A blueprint for low-carbon buildings is also being considered, and longer term the NHS could develop its own energy grid supplied by renewables on its land.

Staff will also be encouraged to work from home more often, incentives could be introduced for workers to use smaller-engined cars for business mileage, departments could be given their own energy bills with the offer that employees can keep a share of cost savings they make, and hospital pharmacies could hold lower stocks and courier in specialist drugs on demand to cut waste.

The NHS will also use its massive purchasing power - £20bn a year - to persuade suppliers to cut emissions, and pharmaceutical companies will be asked to make drugs with a longer shelf-life to reduce the amount of out-of-date stocks.

Longer term, to make bigger cuts, the NHS will have to make more radical changes, in particular giving more healthcare in or closer to patients' homes, said Pencheon. One idea being examined was for surgeons to travel to GP surgeries for follow-up consultations, to reduce the need for many patients to travel to outpatients departments, said Pencheon.

"If you're going to get me radical I say the default place for health is in the home, and the person who delivers it is yourself: that's the ultimate low-carbon health service," he said.

The report will argue that reducing carbon emissions will cut bills for equipment, medicines, energy, water and waste services, and improve health - in the short-term for example by encouraging people to walk, in the long-term by helping to reduce the impacts of climate change.

"Unless we all take effective action now, millions of people around the world will suffer hunger, water shortages and coastal flooding as the climate changes," it says.

"As one of the world's largest organisations, the NHS has a national and international imperative to act in order to make a real difference and to set an important example."

View full report, which references peak oil and ODAC, here

Airline passenger growth nearly ground to a halt last year as the latest industry figures registered a "shocking" 22.6% drop in air cargo in the last month of 2008.

The International Air Transport Association (IATA) said passenger numbers grew 1.6% last year, down from an increase of 7.4% in 2007. International passenger traffic tumbled by 4.6% in December, however, as the downturn took hold.

IATA said international cargo traffic fell by 4% across 2008 but slipped into a marked decline in December as it decreased by 22.6%.

Giovanni Bisignani, the IATA chief executive, said the cargo decline exceeded the aftermath of the 11 September attacks and underlined the severity of the global downturn. "The 22.6% freefall in global cargo is unprecedented and shocking," he said. There is no clearer description of the slowdown in world trade. Even in September 2001, when much of the global fleet was grounded, the decline was only 13.9%."

IATA says air cargo accounts for about a third of the value of goods traded internationally.

Business travel is also suffering, according to the IATA data, with an 11.5% drop in the number of premium tickets issued in November. The decline in business-class sales will contribute to a projected industry loss of $2.5bn (£1.7bn) this year, bringing the total loss over 2008 and 2009 to $7.5bn. The latest 2009 estimates are based on a 3% fall in passenger numbers.

A record oil price contributed to the bankruptcy of more than 30 airlines last year, including Silverjet and XL Airways in the UK, but a decline in fuel costs has been offset by a global downturn that has hit demand.

"This is shaping up to be one of the toughest years ever for international aviation," Bisignani said. "The 22.6% drop in international cargo traffic in December puts us in uncharted territory and the bottom is nowhere in sight. Keep your seatbelts fastened and prepare for a bumpy ride and a hard landing."

Mervyn King, the governor of the Bank of England, has been given the green light to spend £50bn of taxpayers' money, buying company debts and other assets, in the clearest signal yet that Britain is moving towards the desperate recession-busting tactics of "quantitative easing".

In an exchange of open letters with King, made public today, the chancellor, Alistair Darling, set the rules for the £50bn "asset-purchase facility" he announced as part of the Treasury's latest bank bail-out plan last week. He made it clear that the same approach could be used to turn on the cash taps once interest rates get close to zero.

"This facility provides a framework for the monetary policy committee of the Bank of England to use asset purchases for monetary policy purposes, should the [committee] conclude that this would be useful for meeting the inflation target," the chancellor said.

King and his colleagues have already slashed borrowing costs to 1.5%; another rate cut is widely expected when the nine-member monetary policy committee meets next week. Both King and the chancellor want to send a powerful message to financial markets about not yet having run out of weapons.

Darling also indicated that he was preparing to keep King on a close rein, as the boundaries between government spending and monetary policy blur in the coming months.

Full-blown quantitative easing would mean buying billions of pounds of government bonds to pump cash into fragile banks and drive down interest rates. If the MPC decides on this, King will have to go back to No 11 Downing Street, and ask for specific permission.

Details of the plans emerged as David Blanchflower, the maverick outgoing MPC member who voted for rate cuts throughout 2008, issued a stern critique of economists – including those inside the Bank's headquarters in Threadneedle Street – who failed to see the crisis coming.

In a speech in Nottingham, the labour market expert warned that the downturn could well be worse than that of the 1980s recession; he pointed out that even once the credit crunch was under way last summer, the Bank failed to grasp the seriousness of its potential consequences.

"There was no mention at all of the word 'recession' in the monetary policy committee's August 2008 inflation report. The central projection was for output to be 'broadly flat over the next year or so, after which growth gradually recovers'," he said.

The governor defended the Bank's handling of the crisis in a speech last week, pointing to the collapse of Lehman Brothers last September as the key shock that drove the world economy over the brink. But Blanchflower stressed that, "of course, economic output in the UK, and in many other economies, had started to contract long before" Lehman went bust. Blanchflower made it clear that he would be voting for another rate reduction at February's MPC meeting, saying: "I believe monetary policy needs to be loosened further and quickly."

The Bank is expected to release more details of exactly what it will buy under the £50bn asset purchase scheme as soon as next week. It will set up a new, arms-length company to hold the assets and report quarterly to the Treasury about how the scheme is going.

Business groups have warned that large companies are struggling to finance their day-to-day operations, as banks rein in lending and rebuild their shattered ­balance sheets.

By buying corporate bonds, and the "commercial paper" some firms use to borrow funds, as well as asset-backed securities, the Bank hopes to unlock the frozen markets for these assets and make it easier for firms to borrow.

King will have to agree the list of eligible assets he can buy under the scheme with the Treasury, and refer any changes to officials.

"Asset transactions by the Bank could increase liquidity and trading activity in some UK financial markets, and could stimulate issuance by corporate borrowers and the resumption of capital market flows," the chancellor says in his letter.

For the moment, the scheme will be funded by issuing government bonds. That means the government will not be "printing money" but raising it in the financial markets.

Graham Turner, of the consultancy GFC Economics, said that by insisting on only buying the highest quality corporate bonds, the Bank would be protecting taxpayers' money – but at the risk of the policy being less effective. "High-quality assets are not where the problem is," he said, pointing out that corporate bond yields have actually risen since the £50bn facility was first announced.

Britain's approach echoes that of the US, where the Federal Reserve chairman, Ben Bernanke, has coined the phrase "credit easing" for his multibillion-pound spree in the financial markets. The Fed has bought asset-backed securities, commercial paper and a range of other hard-to-sell securities in an effort to get lending flowing again.