A surge in the burning of coal to generate Britain's electricity last year helped reverse years of steadily declining carbon dioxide emissions, according to data released on Thursday.

Coal produced 39% of the UK's electricity in 2012, the Department of Energy and Climate Change said, up from 29% in 2011, as cheap supplies and the collapse of the price of carbon permits sent power firms rushing back to their ageing coal-fired stations.

With industrial and domestic use added into the figures, overall coal consumption was up by a quarter over 2011. In the same period, carbon dioxide emissions rose by about 4%, after years of steady falls. This will make it harder to achieve the government's climate change targets.

DECC's data also revealed a rapid increase in the proportion of diesel-fuelled vehicles, which has triggered fears over air pollution from the particulate matter released by burning diesel, which can cause respiratory problems.

Coal has become plentiful and cheap in part because of the effects of the extraordinary shale gas bonanza in the US. Gas prices there have fallen to as little as $2 a unit from a peak of around $10, and power generators have raced to build gas-fired power plants. That has led to large supplies of coal available for export, which has pushed down the price dramatically on the world market. According to the World Coal Association, coal's share of global energy consumption is at its highest since the late 1960s.

The International Energy Agency has estimated that on the current trend coal will overtake oil as a fuel. In the European Union, coal was supposed to be penalised as a fuel because of its high carbon content. But carbon prices within the EU emissions trading system, under which generators must have a permit for every tonne of carbon dioxide they emit, have fallen to record lows because of a glut of free permits issued by member states. Though moves are still afoot to prop up the trading system, carbon prices are unlikely to rise far and fast enough in the near term to swing the balance further against coal.

Another factor behind the increased burning of coal in Europe is a separate set of regulations governing pollutants such as sulphur, produced by burning coal, called the Large Combustion Plant Directive. Under these rules, coal-fired power stations must either comply with certain emissions limits or opt out – and are then allowed a certain number of hours of operation before they must be shut down. Companies with ageing power plants due to be taken out of service under these rules are rushing to use their remaining hours while their fuel is so cheap. However, research by Greenpeace recently suggested that some generators may try to prolong the life of their coal-fired power stations to take advantage of the cheap fuel. This would push the UK's emissions up even further.

Last year's rise in the UK's emissions made it the worst performing EU member state, according to data from Eurostat. It was one of only three where emissions rose - Germany, with a rise of less than 1%, and Lithuania, with a rise of 1.7%, were the others.

DECC's energy statistics also showed that consumption of diesel for road vehicles exceeded the consumption of petrol by more than 8m tonnes. Until 2005, petrol consumption was always higher than diesel, but higher petrol prices and the perception that diesel is more efficient have fuelled the switch. For the last decade, petrol consumption has fallen by 4.4% a year on average, but diesel use has risen by 2.4% a year over the same period.

This has alarmed air pollution campaigners, because burning diesel gives rise to far higher rates of particulate matter than petrol. This can trigger respiratory problems in vulnerable people, and worsens the UK's already poor record on air pollution control. The European Union has been urging member states to drop the favourable tax treatment for diesel that has encouraged drivers to switch, because even though switching can cut carbon dioxide emissions marginally, it is far outweighed by the adverse health effects.

Simon Birkett, founder and director of the pressure group Clean Air in London, said: "The government is stupidly continuing to favour diesel over petrol, and inaction instead of the abatement of tailpipe emissions, thinking it better perhaps to save 1% of carbon dioxide emissions [compared with petrol] than reduce carcinogenic exhaust emissions by 95%. Many lives could be saved if the government adopted technology neutral policies, as in the United States, which consider air pollution holistically [taking into account both] greenhouse gases and air pollution. It is time the government stopped hiding the facts and required CO2, PM2.5 [a measure of particulates in the air] and NO2 [nitrogen dioxide] emissions to be disclosed at the point of sale for new and used vehicles."

Doug Parr, chief scientific advisor at Greenpeace, said: "Old coal power plants are dominating the energy mix and far from helping us get off the coal hook, the government's energy bill could entrench the situation. Not only are old coal plants exempt from carbon pollution limits, but the government also proposes to use money from consumer bills to pay coal plants to stay open well into the next decade. The government needs to make good on its promises and reduce our reliance on this dirty fuel."

A spokesperson for the energy department said: "International coal prices relative to gas prices mean that coal-fired power generation in the UK is currently cheaper than gas-fired. We have introduced the Carbon Price Floor and the measures in the Energy Bill will reduce the role that coal generation plays in our electricity system. We are also bringing forward investment in lower carbon forms of generation consistent with our decarbonisation objectives."