The European Parliament and the UK government are reportedly at loggerheads over the plan to bring the aviation industry into the European Union's emissions trading scheme (ETS) with the UK expected to reject outright any attempt to ring-fence the revenue raised from the scheme.

Last month, MEPs voted in favour of controversial proposals to bring airlines into the ETS. Under the plan, all flights starting and/or landing in Europe are to be included in the trading scheme from 2012 with airlines having to meet emission caps or buy in extra carbon credits.

MEPs also agreed that 15 per cent of the emission allowances required by airlines should be bought at auction and that the revenue raised as a result by EU governments should be used to fund climate change mitigation programmes, research into cleaner aircraft, other forms of low-emission transport and anti-deforestation measures in the developing world.

The deal stated that while member states will determine how revenue generated from the auctioning of allowances would be spent those revenues "should be used to tackle climate change in the EU and third countries, inter alia, to reduce greenhouse gas emissions, to adapt to the impacts of climate change in the EU and third countries, especially developing countries, to fund research and development for mitigation and adaptation, including in particular in the fields of aeronautics and air transport, to reduce emissions through low-emissions transport, and to cover the cost of administering the scheme".

However, the ruling is now being opposed by the UK government, which has repeatedly resisted attempts to ring-fence or hypothecate revenue raised from green taxes to spend on environmental initiatives.

A spokesman for the Department for the Environment, Food and Rural Affairs said that the government remained fully committed to bringing airlines into the ETS and insisted that talks to finalise the necessary legislation were making good progress.

But he said that there was little chance of a compromise on the issue of ring-fencing the revenue raised through auctions. "As the government has maintained throughout it does not hypothecate revenue," he said. "That does not mean we do not spend on green initiatives, but we do not assign different pots of revenue to do that. It is important that government has flexibility to make spending decisions and decide upon its priorities."

The European Parliament is just the latest body to call into question the government's opposition to hypothecation. Earlier this year, a coalition of green and business groups, including the CBI, urged the government to ring-fence the £1.6bn it is expected to raise through credit auctions up to 2012 to fund low-carbon programmes. They argued that the move would not only help accelerate the transition to a low-carbon economy but reassure businesses that carbon credit auctions were not simply a "stealth tax".

Meanwhile, many of the airlines while opposing plans to pull them into the ETS have urged governments to help tackle the sector's carbon emissions through greater funding of research and development and an overhaul of the continent's air traffic control systems, both of which could feasibly be funded from the revenue raised from auctioning.