The government is expected to scrap a green policy that would have allowed individuals to take a stake in the low-carbon economy, in a move that could starve environmental projects of billions in potential investment, the Guardian has learned.

Green ISAs were a key Tory policy, to be introduced within two years as a way to help savers benefit from the growth of the green economy, as the billions raised from their sale would fund the state-backed green investment bank.

But objections from Treasury mandarins mean the savings accounts are to be dropped, choking off a funding stream that would have channelled an estimated £2bn a year into windfarms, electric vehicles and other low-carbon technologies.

The demise of green ISAs – widely regarded as the most potentially effective instruments the bank could use – is an embarrassment to George Osborne, chancellor of the exchequer, who came up with the idea three years ago and repeatedly championed the accounts. In February 2008, he said: "Green ISAs will engage the public in a new way in the issues around climate change and show them very clearly the economic benefits of green investment."

Bob Wigley, the ex-investment banker who drew up the blueprints for the bank at Osborne's request, estimated that sales of green ISAs would bring in £2bn a year. Savers would receive tax-free returns on the sums they invested in the accounts, and the bank could direct the investments towards buying shares in a portfolio of green projects, as well as reaping a commission to help fund its operations.

Treasury ideology was behind the scrapping of the policy, according to government insiders. As there are a small number of green ISA products already on the market, government-backed accounts could be regarded as competing with the private sector, a definite "no" as far as the Treasury is concerned. There was also a fear that it would be a risk to open up the bank to small individual investors.

The shutdown of green ISAs – one of the earliest policy measures mooted for the bank – may be part of a wider move within the Treasury to curtail the potential operations of the bank before it is set up. The Treasury said: "The final form of the bank still being subject to further design and testing work which the government hopes to complete by May."

The Department for Business Innovation and Skills said: "The government is continuing to consider the case of green ISAs as a source of funding for the green investment bank. However, retail deposits [such as ISAs] are not likely to be an initial source of funding for the bank because of the infrastructure needed."

But the loss of the savings accounts leaves a large funding hole.The government is committed to giving the bank an initial £1bn with up to £2bn more coming from asset sales. Under the Treasury's plans, the bank would not be able to take on loans or raise further money from the private sector.

Despite the Treasury's objections, the Guardian has found the UK's investment industry would welcome a government-backed green ISA rather than viewing it as unfair competition. Penny Shepherd, chief executive of the UK sustainable investment and finance association, which represents institutional investors, pointed out that the government already offers ISAs through National Savings and Investments, which could be used to offer green ISAs.

She said: "What's important here is the principle – if government chooses not to make these available to retail investors, they will have lost the opportunity to build wider support for the low-carbon transition."

Emma Howard Boyd, of Jupiter Asset Management, told the government during its consultation: "Institutional investors may provide the majority of funds for the bank, but retail investors could also prove an important source of funding. Indeed, the public's ability to participate in a green investment bank is in many ways as important as any funding they may bring ... Introducing a green ISA could be a cost-effective way to give everyone a chance to be an investor in our low-carbon future."

Research by the sustainable investment and finance association, UKSIF, found that half of investors in the UK said they would like to make money and "make a difference" through their savings and investments.

At present, individual savers have only limited opportunities to back clean technology. The small number of renewable energy companies listed on the stock market tend to be small in size and difficult to trade shares in. In the case of the bigger companies with an interest in clean technology, such as General Electric and Siemens, low-carbon products form only a small part of their overall portfolio, which means investors in them are also backing technologies they may find unpalatable, such as fossil fuel power generation and nuclear energy.

Forms of commercial green ISAs are offered by a handful of companies including Smile, Fair Investment Company and Virgin, which has a climate change ISA that invests in "businesses with a lighter carbon footprint".

The Treasury's move to scrap green ISAs may also mean that other financial instruments that could have been used to finance the bank will never make it past the drawing board. These include green bonds, which could be sold to investment houses to raise money for low-carbon projects.

The Treasury is set against allowing the bank to behave like a normal investment house, by raising money and loans, because these would show up on the government's balance sheet, potentially increasing the government's liabilities and the size of the deficit. Chris Huhne, climate change secretary, has fought to keep these options open, arguing that without such powers the bank is only a fund, and will have little real effect.

Green NGOs said they were disappointed with the move to abandon green ISAs. "The Treasury is putting ideology above any serious ambition to drive green jobs and growth," said Louise Hutchins, head of UK energy campaigns at Greenpeace.

"This is very short-sighted," said Matthew Spencer, of the Green Alliance. "[The government] has not engaged the public in the mission to rejuvenate the UK's infrastructure, and a green ISA would have been one way to raise enthusiasm as well as new funds."