The European Commission has today managed to infuriate both the car industry and environmentalists after a compromise was reached over plans to cut emissions of carbon dioxide from cars.

After a week of intensive wrangling the Commission agreed a plan to cut car CO2 emissions to 130 grams per km by 2012, with an extra 10 gram cut coming from biofuels and measures to promote more fuel-efficient driving.

However, late last night it was agreed that fines for manufacturers that breach the new standards would be phased in over four years, giving automakers more leeway to comply with the new legislation.

In a statement the commission said that the fines would start at €20 for each excess gram per kilometre in 2012, and rise to €95 per g/km in 2015. The fines are to be applied across all cars sold, not just those over the limit. For example, a manufacturer selling a million cars across Europe in 2012 with average emissions exceeding the cap by 1g/km would be fined €20m.

"Cars are an important part of the everyday lives of a large number of Europeans," the statement said. "However, car use has significant impacts on climate change insofar as it accounts for 12 per cent of the overall EU emissions of carbon dioxide. Consequently, the EU has committed itself to ambitious greenhouse gas reduction and energy efficiency improvement targets to which all relevant sectors of the economy should contribute."

The proposals will also allow manufactures of bigger vehicles to pool their total automobiles sold with rival companies making lighter cars in order to comply with the emissions target.

Ivan Hodac, secretary-general of the European Automobile Manufacturers Association (ACEA), told news agency Reuters that he was "extremely disappointed with the process and disappointed with the content" of the legislation, adding that the level of fines were still "totally unacceptable".

A spokeman for Peugeot complained that the plans were "anti-competitive in relation to non-European Union carmakers", while BMW said the legislation would "distort the market" in favour of manufacturers of smaller cars.

Car makers, and in particular German firms that make heavier, less efficient models, have lobbied intensively against the new rules. However, the European Commission has largely stuck to its guns, arguing that the standards have only been introduced after manufacturers failed to adhere to a voluntary agreement to cut emissions to 140g/km by 2008. Current average emissions stand at about 160g/km.

However, environmentalists where also left frustrated by the compromise over the phasing in of fines with commentators accusing the Commission of hypocrisy after its vocal support for stringent environmental rules at last week's Bali conference.

"We were hoping for tough action on greener cars from Europe this Christmas, but all we have got is the same old fudge," said Friends of the Earth's transport campaigner Tony Bosworth. "The European Commission's plans would abandon a decade-old target for cutting emissions, give companies building heavier cars a favourable deal and impose inadequate penalties on manufacturers that do not meet their targets."

It remains unclear if the rules will be fully adopted as they still require approval from Member states and the European Parliament.