A £1bn flagship government project for fighting climate change – the construction of a prototype carbon capture and storage (CCS) project at Longannet in Scotland – is on the verge of collapse, it emerged on Thursday.

Talks between the Department of Energy and Climate Change (Decc) and Scottish Power have run into deep trouble and the electricity supplier is expected to pull the plug on the government-promoted scheme, which hoped to bury carbon emissions from the coal power station in the North Sea.

The potential demise of the scheme comes amid growing fears among renewable power enthusiasts that David Cameron and George Osborne want to scale back the "green" agenda on the grounds that low-carbon energy schemes such as CCS and offshore wind cost too much at a time of austerity. Osborne told the Conservative party conference in Manchester that if he had his way the UK would cut "carbon emissions no slower but also no faster than our fellow countries in Europe".

Scottish Power, and its partners Shell and the National Grid, have just completed a detailed study of the CCS scheme and have deep concerns about its commercial viability without heavier public backing.

Decc had promised £1bn of public money but the developers are understood to be arguing that they cannot proceed without more money to trial the scheme, close to the Firth of Forth.

Both sides insist "talks are ongoing" but well-placed industry and political sources say the process is "pretty much over" and a statement to that effect could be expected shortly.

Jeff Chapman, the chief executive of the Carbon Capture and Storage Association, said the collapse of the Longannet scheme would be a "severe disappointment" for the wider hopes of the sector.

"Everybody knows the negotiations have been very difficult, so to that extent it's quite possible [the talks] don't come to a conclusion – although there are other projects coming through the system hopefully."

A senior Conservative backbencher with deep knowledge of the energy sector told the Guardian he expected the CCS deal to collapse within weeks. He said the underlying blame lay with the Labour government, which had dithered for so long in awarding the CCS demo contract that bidders dropped out until only one was left, leaving the government in an impossible negotiating position.

A Decc spokesman said Longannet was only one CCS project and the government still planned to choose by the end of the year another three that could be eligible for European Union funding.

In May, the department submitted seven UK CCS projects for European funding – including Longannet – but the Fife scheme was by far the most advanced and spearheaded the drive to develop this new technology in Britain.

Ministers have repeatedly stressed the importance of CCS as a way of keeping coal and potentially other fossil-fuel burning power stations in operation without undermining moves to cut CO 2 .

But they have already seen E.ON back out of plans to construct a new coal-fired power station with prototype CCS technology on the site of an existing plant at Kingsnorth in Kent.

Longannet is the third largest coal-fired power station in Europe at 2,400MW and was once highlighted as Scotland's biggest single polluter.

In 2009 at the launch of a small-scale pilot study, Ignacio Galán, chairman of Scottish Power and its parent group Iberdrola of Spain, highlighted the importance of the Fife scheme.

"We believe that the UK can lead the world with CCS technology, creating new skills, jobs and opportunities for growth. There is the potential to create an industry on the same scale as North Sea Oil, and we will invest in Scotland and the UK to help realise this potential. Iberdrola will set up its global Centre of Excellence for CCS in the UK to help accelerate the deployment of full-scale CCS," he said.

No CCS projects have yet been successfully built at a large scale.

Charles Hendry, the energy minister said in May that Longannet and other CCS schemes in Britain showed the UK was "at the cutting edge of the low-carbon agenda."

But an industrialist embedded in his department told the Guardian that ministers were now internally questioning renewable power and other schemes that involved substantial public subsidies. Ministers have come under sustained lobbying from traditional power companies and energy-intensive manufacturers to concentrate on lower price but higher carbon alternatives such as gas.