Some of Europe’s heaviest polluters are in line for €160bn (£112bn) of free carbon permits under a planned restructuring of the Emissions Trading Scheme (ETS), a key weapon in the fight against climate change.

The European commission is proposing to reduce the number of free allowances and the companies eligible for them in a move condemned as too harsh by the British steel industry but too weak by green campaigners.

Miguel Arias Cañete, the European Union commissioner for climate action and energy, said the balanced initiative would clean up the planet while safeguarding the interests of businesses most at risk from foreign competition.

“Today we take a decisive step towards enshrining the EU’s target of at least 40% (CO2) emissions cut by 2030 into law ... With these proposals, Europe is once again showing the way and leading the global transition to a low-carbon society,” he added.

But Gareth Stace, director of UK Steel, said the commission had come up with “another flawed solution” to the competitiveness issues that the EU’s ETS causes for the energy-intensive steel sector.

“UK steel plants are trying to compete internationally against companies facing none of the same compliance costs. The ETS’s carbon leakage measures are meant to address this by ensuring the best-performing plants in the EU are given all the ETS allowances they need for free – but neither the current measures, nor the commission’s new proposals, live up to this promise.”

The WWF charity said the badly designed reforms were setting up the ETS for “another decade of failure”. Lies Craeynest, Oxfam’s EU policy advisor, said it did not do enough to help climate change adaptation in poor countries.

“By failing to make the sale of pollution permits pay for clean development and climate adaptation abroad, the European commission has lost an opportunity to restore its international climate leadership, and leaves the people most impacted by climate change without additional support,” Craeynest said.

Brussels is determined to revive the ETS which was established 10 years ago but has failed to perform. This is partly because too many permits were originally allocated which led to a collapse in the price of carbon.

The reforms, aimed at driving up carbon prices from their present level of €7 a tonne, must be endorsed by the European parliament and the council of ministers before they become law.

The ETS is the world’s biggest scheme for trading emission allowances with regulated industries and companies forced to hold one permit for each tonne of carbon released.

The permits can be traded in a market and under the new proposals will be reduced each year between 2021 and 2030 by 2.2%, compared with the current annual rate of 1.74%.

The scheme is meant to encourage companies to become more energy efficient but many European businesses argue it will lead to “carbon leakage” – the CO2 just being burned abroad by lower-cost rivals outside the ETS zone.