Ministers said they planned to launch a competition for a funding award in November - described by the oil giant as "an extension too far" for its ambitious plans to succeed. It has already spent £25m on the project.

A spokesman for the company defended the decision, insisting that it did not mark a decision to draw back from the green initiatives that were put in place by the former chief executive Lord Browne of Madingley.

There have been suggestions that his successor, Tony Hayward, is less keen than his predessor on attempts to make BP a green energy provider. But the spokesman said: "It was always going to be a challenge to match the development of the Peterhead project and the development of policy. We had originally planned to get a final decision at the end of 2006 and we extended that until the end of 2007 but obviously as the competition is not starting until November, there will not be a decision until after that and we decided that was a step too far."

The spokesman insisted that BP remained committed to carbon capture technology and said the company was working on projects in both Australia and California. But its decision to scrap the Peterhead project will still be seen as a blow to the Government, whose paper drew a mixed reaction from business leaders yesterday.

They have become increasingly dismayed by what has been seen as the Government's slow response to potential energy crisis facing the country. All but one of the UK's ageing and increasingly temperamental suite of nuclear plants are due to close over the next few years, just as natural gas runs out and a bellicose Russia uses its energy reserves as an instrument of foreign policy.

Business leaders, while positive about parts of the paper, warned the Government not to dilly dally if Britain was to avoid the nightmare scenario of power black outs. Richard Lambert, the CBI's director general, said yesterday: "Only a combination of nuclear and renewable sources, alongside more efficient gas, coal and oil generation, can deliver the reliable energy supply we need whilst tackling carbon emissions. With a third of UK power plants due to be replaced by 2025, time is against us if we are to avoid power shortages. "The White Paper suggests the Government understands what is needed to avoid this energy crunch, and to make the UK system more secure and more environmentally sustainable. The real test now will be in delivering these proposals."

Tony Ward, the director of utilities at Ernst & Young, warned that companies needed to be certain that they could invest with confidence in new energy projects - which have often been dogged by delays, planning hold ups and objections from local residents. He said: "If the White Paper's recommendations are to be translated into real investment in a more sustainable, diverse and lower carbon generation mix, then the private sector needs to be assured that their next steps can be taken with confidence ??? The time for assessing options is short."

Brian Robinson, the head of energy, environment and climate change at the Institute of Mechanical Engineers, said: "This Government must produce a tangible framework from this document. It is down to them to deliver the results that the 2003 White Paper didn't ??? There must be a balanced portfolio of renewable energies in place, right now."

Jake Ulrich, Centrica's managing director, said his company would push ahead with its carbon capture project on Teesside. But he warned: "Without these badly needed incentives to reflect the higher cost of going offshore and to support greater investment in larger scale wind farms, the escalating costs of development could blow many wind farm projects right off the map."

British Energy said it was pleased a date had been set for a decision on new nuclear plants. Bill Coley, the chief executive, has long argued nuclear must be a part of the equation to make the UK a truly low-carbon economy. He said: "We believe our sites will be in a very good position if new build goes ahead. We have access to skills and established links with the local communities which are key factors in siting decisions."