But the annual petrol subsidy has angered green groups and industry, which say it will encourage motorists to drive more and increase emissions until at least 2025.

In economic work done by the Australian Conservation Foundation, the environmental group found that by using price increases in diesel, which emits more carbon, as the baseline for cutting taxes on petrol, the Government will reduce the price of petrol more than it would normally cost without emissions trading.

The ACF's modelling shows that the subsidy to motorists using petrol will be $150 million a year based on a $20-a-tonne carbon price. That subsidy will increase as the price of carbon rises under a trading scheme.

ACF economic adviser Simon O'Connor said yesterday the measure removed the price incentive for motorists to use their cars less and reduce emissions.

A spokesman for Assistant Treasurer Chris Bowen said the additional funding would be paid for with cash raised from the sale carbon permits in the emissions trading scheme and would not add to the budget deficit.

The Government has also committed to making cuts to fuel taxes permanent, meaning if the cost of carbon later falls — making fuel cheaper to refine — it will not increase the tax to original levels.

The ACF found an ally for its complaints yesterday in petrol company Caltex, which called for the fuel tax cut to be scrapped.

Caltex also wants the transport sector to be removed from emissions trading altogether and replaced with voluntary "complementary measures".

Caltex's government relations manager, Frank Topham, told a Senate committee hearing on climate change in Sydney that, by Caltex's calculation, the fuel tax reduction measures meant emissions from cars would rise in the first 15 years of a trading scheme, rather than fall.

"The price of petrol goes down so emissions will go up for the next few years," the manager of government affairs for Caltex, Frank Topham, told a Senate committee investigating the scheme.

Mr Topham called for private motorists and small vehicle users to be permanently excluded from the scheme.

Caltex estimates emissions will continue to rise until 2025.

But Caltex wants a delay to the scheme, scheduled to begin in July 2010, until the end of the global economic crisis and 100 per cent free permits until an international agreement of carbon is reached.