Revenue from the Carbon Reduction Commitment, instead of being used to reward good environmental stewardship by those participants, will instead go to fill the hole that is the budget deficit.
This has come as a big surprise for participating organisations, especially as it was not even mentioned in Chancellor George Osborne's speech on the spending review.
This means that, for the first time, the UK has been introduced to a carbon tax by the back door.
It will hit all organisations that use large amounts of electricity, from supermarket and banking chains to hospitals, counsel and universities.
There was no consultation before the announcement of the measure. It is currently uncertain how participants are going to respond, and whether they will be so willing to participate.
The Treasury statement says that it expects to receive about £3.5 billion over the next four fiscal years.
British Retail Consortium director general Stephen Robertson said: "We are surprised and dismayed that the £1bn per year that businesses will put in to the CRC scheme is to be pocketed by the Exchequer.
"This is a stealth tax on business... a tax of this size surely merits a mention in the Chancellor's speech. It is appalling the Government is sneaking this in."
Richard Lambert, CBI DG, said: "Businesses that have just signed up to the flagship Carbon Reduction Commitment energy efficiency scheme will be very let down by the Government's unexpected announcement that it will remove the cash-back incentive. A scheme that was meant to change behaviour by encouraging energy efficiency has now become another stealth tax.
"By contrast, the commitment to clean coal technology, manufacturing off-shore wind turbines, and renewable heat and flood defences will boost private sector confidence in investing in low-carbon technology. Plans for a Green Investment Bank are also welcome, but the Government must get the design right to make it attractive to private investors."
Climate Minister Greg Barker said that the decision had not been taken lightly. It will increase costs for businesses but he argued that it made the structure simpler to administrate, and that “progressive businesses that act to improve energy efficiency will be able to minimise their exposure".
"This is a fundamental change to the scheme, with major consequences for the bottom line of those companies that are in the CRC," Craig Lowrey, an energy consultant at J.C. Rathbone Associates Ltd., said. This "is now another tax on industry in all but name."
The CRC was designed to cover about 10% of UK climate gas emissions and include up to 5000 companies, many of whom are not covered by the European Union Emissions Trading Scheme. They will have to buy credits equal to their emissions from April next year.
Allowances will cost £12 per tonne of carbon dioxide in the first place, but according to Treasury calculations the assumption is that it will rise to £16 in the tax year ending 2014.
This 'stick' is meant to act as an incentive for them to reduce emissions and increase efficiency. Those who fail to do so will pay more, and participating companies, when they signed up, were told they would receive this money as a 'carrot' to reward successful efforts.
The government was advised last month by its Climate Change Committee to simplify the programme by dividing it into public and private sector participants.
“This is effectively a tax on companies taking part," said Harry Manisty, environmental tax specialist in London at the accountancy firm PricewaterhouseCoopers.
Greg Barker added:“ I want to hear from business on how we can simplify and improve the scheme."