The government yesterday unveiled further details of its plans to auction off carbon credits as part of the current stage of the European Union Emissions Trading Scheme, confirming that the first auction will take place before the end of the year.

The Department of Environment, Food and Rural Affairs did not release the precise date for the auction, but said that participating firms would be given at least two months' notice.

In addition, Defra released new documentation setting out the conduct and terms of allocation for carbon allowances sold through the auction. These outline the design of the auctions and the requirements for those carbon-intensive firms that are obliged to participate.

The department also confirmed that it intends to auction seven per cent of the allowances available during the second phase of the EU ETS, which runs from 2008 to 2012, amounting to approximately 85 million allowances.

The move is likely to reopen the debate over what the government does with the revenue raised through the auctions.

An average price for carbon credits of £20 a tonne would allow the government to net over £1.6bn over the course of phase two, while some experts expect the Treasury to raise upwards of £2bn a year when it begins to increase the proportion of credits that are auctioned post 2012.

Leading business and environmental groups, including the CBI and the WWF, have called on the government to ring-fence the money raised and use it to increase investment in green initiatives.

Earlier this year, a group of leading business figures - including CBI director-general Richard Lambert, BT chief executive Ben Verwaayen, E.ON UK chief executive Paul Golby, and David Nussbaum, chief executive of WWF-UK – issued an open letter to the government urging it to ensure the revenue raised is used to help drive the transition to a low carbon economy.

The letter claimed that while the group supports the case for auctioning carbon credits it still represents a "substantial additional transfer of funds from business and consumers to government", and as such the government should announce "an equivalent scale investment in securing the transition to a low carbon economy".

The European Union has similarly ruled that revenue raised from credit auctions should be used to fund the fight against climate change.

However, the government has to date resisted calls to hypothecate the revenue, insisting that to do so would compromise Treasury flexibility.