The government has been warned that it risks costing the UK economy £46 billion over the next five years unless it makes substantial changes to its Regulation of Investigatory Powers (RIP) Bill.

The legislation, at the committee stage in the House of Lords, will cost Internet service providers (ISPs) £640 million over the next five years, much more than the government's estimate of £20 million a year, according to research carried out by the London School of Economics (LSE) and commissioned by the British Chambers of Commerce (BCC). The report says ministers seriously underestimated the impact the Bill will have on ISPs.

Mark Sharman, head of policy at the BCC, said the Bill will result in "the erosion of UK share of ecommerce revenues over the next five years."

He added: "The figures are very concerning. The costs will come through businesses moving overseas, new business ventures starting abroad, instead of in the UK, and through businesses investing overseas because it gives them the best opportunity to maximise returns."

If the Bill becomes law, it would force ISPs to install equipment that allows law enforcement agencies to intercept suspicious email, resulting in a string of indirect costs the government did not anticipate. Sharman predicts a five per cent to 10% increase in software licence costs for ISPs, because products would have to be able to function alongside monitoring equipment. Managing encryption keys would also cost more.

The editor of the research, Simon Davies, visiting fellow at the LSE, accused the government of arrogance. "We have an absence of guarantees relating to the security and storage of keys obtained by the authorities. Something like 20% of investment in ecommerce will simply go off-shore, with countries such as Ireland and Germany reaping the rewards," he said. "The Bill is untenable and has to be withdrawn because there are too many baseline problems that can't be resolved."

The government has no intention of withdrawing the legislation. Labour peer Lord Bassam, speaking in the House of Lords RIP Bill debate this week, said ministers will "not be deflected from our course", despite opposition criticism. Tory peer Lord Cope of Berkeley said that when the Bill went through the Commons it was seen as of serious concern only to the ecommunity, but that now "opposition had become much wider".

Opposition peers are demanding a series of amendments, presenting the prospect of the Bill being thrown back to the House of Commons for further consideration.