The government has given British Steel an emergency £120m loan to cover an EU bill for carbon dioxide emissions, after the delay in reaching a Brexit withdrawal deal forced it to intervene.

The business secretary, Greg Clark, told parliament that British Steel would have faced a bill of more than £600m from EU regulators if the government had not given it the support.

British Steel has been unable to obtain its free carbon emissions credits for this year under the EU’s Emissions Trading System, after the European Commission suspended the UK from the scheme in December in preparation for a possible no-deal Brexit.

While the UK’s membership of the EU has been extended until October, parliament’s inability to vote through a withdrawal agreement has meant that British companies, including British Steel, are still locked out of the system.

British Steel faced a fine of £500m from the European commission, on top of the £120m cost of buying the allowances, which polluting industries must have if they continue to emit greenhouse gases.

The company, which has an annual turnover of £1.4bn, approached the government earlier this year, saying it was unable to pay for enough allowances before the deadline of midnight on Tuesday. Clark said a liability of that size would have put the company under “significant financial strain”.

The government expects to recoup all of the money loaned to British Steel plus interest by taking over British Steel’s allowances and selling them on. British Steel has committed to cover the difference if the price of allowances falls by the time it eventually receives them.

The scramble to pay the carbon bill underlines the struggles faced by the UK steel industry in recent years. British Steel, which currently employs 4,200 people directly in the UK, in Scunthorpe, Skinningrove and Redcar, was bought for £1 from India’s Tata Steel by investment firm Greybull Capital in June 2016. However, in September it cut the jobs of a tenth of its employees, blaming a weak pound.

Anna Turley, the Labour MP for Redcar, welcomed the announcement, but tweeted that the announcement showed that the government could have intervened when the company was struggling in 2015.

Steve Turner, assistant general secretary for manufacturing at Unite, the union, said the company’s workers “will be breathing a sigh of relief”. However, he warned that the relief “could be short lived” without wider support for the steel industry.

The union has argued that the government should mandate the use of British steel in UK warships, as well as giving support on energy costs.