Fifteen months ago the then energy secretary, John Hutton, came within days of giving permission to build the first new coal-fired power station in Britain in more than 30 years, at Kingsnorth, Kent.

The move would have delivered a huge blow to the government's claims to be leading the world in tackling climate change and almost certainly triggered an intensification of the long-running conflict with activists, who had turned it into one of the green movement's totemic issues.

A last-ditch campaign by green cabinet members, including the then environment secretary, David Miliband, and his brother Ed, backed by Greenpeace and other environmentalists, first delayed the Kingsnorth decision and yesterday, having persuaded the Treasury, overturned the old energy department stance.

"This is a complete rewrite of UK energy policy. Instead of a laissez-faire system where companies told government what they wanted to build and where, government has decided that reducing climate change emissions cannot be left to the market and it must now tell industry what needs to be built to what pollution standards," one government source said yesterday.

No new coal-fired power station will now get government consent without it having equipment to capture and bury at least 25% of emissions now and 100% by 2025 when the technology is expected to be technically and commercially proven.

Details of how the four demonstration CCS projects, each costing around £1bn, will be paid for are still unclear, with both government and industry expecting the consumer to pay eventually with a 2% levy on electricity bills by 2020. But yesterday the industry signalled it was pressing for government subsidies. Paul Golby, chief executive of E.ON UK, said: "We are committed to fit capture technology to Kingsnorth in accordance with the government's proposed conditions, as long as it is properly funded."

The energy secretary, Ed Miliband, said he hoped Britain would lead an emerging world industry. "There is no alternative to CCS if we are serious about fighting climate change. We need new coal-fired power stations [for energy security] but only if they can be part of a low carbon future. With a solution to the problem of coal we greatly increase our chances of stopping dangerous climate change emissions. Without it we will not succeed," he said in a statement to the Commons.

Environment groups joined the CBI, unions, and energy companies in applauding the decision, but there was concern that the new coal plants would be allowed to operate for up to 10 years while still pumping three-quarters of their emissions into the atmosphere.

"Will existing coal plants like Drax, which are slated to continue operation into the 2020s, be allowed to continue operating unabated despite their massive emissions? How will the government ensure that, if CCS technology doesn't work, the UK won't be left with a legacy of new coal plants emitting huge amounts of CO2 at a time when we must be slashing emissions?" asked John Sauven, director of Greenpeace. His organisation's analysis suggested yesterday that the four CCS coal demonstration projects operating for 15 years before fitting 100% capture equipment may still emit up to 275m tonnes of CO2 - some 50% of current UK annual emissions.

Others suggested CCS would unleash a coal "rush" and add to pressure for damaging new open cast coal mines in the UK. "CCS will need 50% more coal for the same generation and it will add 70% to the costs," said independent energy analyst John Busby. "As we import 75% of our coal, the CCS stations would radically decrease our energy security and worsen the balance of payments."

But there was widespread approval for the announcement. "Carbon capture and storage could be a transformative technology," the CBI said. "We know it can work on a small scale but is not yet fully commercially viable for large plants, so we welcome this financial support for demonstration CCS projects."

"The government has now stepped up to the mark on coal. The ban on new unabated coal-fired power stations is the most important UK climate policy we have seen so far," said Matthew Lockwood, senior research fellow at Labour thinktank the Institute for Public Policy Research.

In response to criticisms, Miliband said that existing coal plants and new gas ones would be considered for CCS legislation. "We will have to think seriously how we deal with them. We will consult on how other plants get treated."

The most optimistic government analysis suggests the four new coal-fired power plants will lead to major reductions in emissions after 2025 because they will largely replace ageing coal stations. Of the four plants, at least two are expected to use pre-combustion technology which removes all emissions before burning the coal. One will collect emissions after they have been burned, which is less efficient but can be fitted to existing stations.

"If the four coal plants are 50% efficient by 2020, and we expect 34% of electricity to be generated by renewables and roughly 20% by nuclear, then that would lead to a decarbonisation of the electricity supply of 60%-66% by 2020," a government source said. "The rest would come by 2050."

Political pressure is expected to be placed on the Environment Agency, the government's pollution watchdog, which is to be given the role of independently assessing whether the technology works and decide when companies should move from 25% to 100% CCS.

"This is one of the most important environmental decisions the government has taken," said Lord Chris Smith, chairman of the agency. "We need to reduce dramatically the emissions from coal power stations and carbon capture technology offers real hope of a new era of 'clean coal'. It is an essential element of any sensible energy policy for the next 20 years.

"We will do all we can to ensure it is developed as soon as possible to help us meet the ambitious carbon emissions reduction target of 80% by 2050."

The shadow energy and climate change secretary, Greg Clark, welcomed the move. "But there are still gaps in today's announcement, including the refusal to make a clear commitment to an emissions performance standard, which would set a legal limit on the level of CO2 pollution that a power plant could emit. We also need to know who will pay the new consumer levy and how much will be added to fuel bills."

Lump sums: the new coal rush

Given that world reserves of coal amount to more than 500bn tonnes and every country with the resource plans to dig it up and use it at some point to drive its development, the introduction of carbon capture and storage is more urgent than ever. In a 2006 report BP found that the UK had coal reserves of 220m tonnes. At the current rate of consumption, around 19m tonnes per year, this would last just under 12 years. But undiscovered coal could push this further - according to the World Coal Institute as yet unknown deposits could push the UK's reserves up to 1bn tonnes. The UK's use of coal far outstrips its production, with the country importing around 23m tonnes a year from places such as Russia. The largest deposits of coal exist in the US, Russia, China and India with 122bn, 69bn, 59bn and 56bn tonnes respectively. Of these, the US and China mine the most every year, around 564m and 707m tonnes a year. India digs up around 167m tonnes a year but experts agree that this figure is set to increase rapidly in the coming decades.

Alok Jha