The European Union's flagship program to fight global warming—a regional carbon-emissions trading system—suffered a major blow Tuesday when legislators rejected a proposal aimed at saving the market from collapse.

After the European Parliament's rejection, spooked investors drove the already depressed price of carbon emission permits down by nearly half. Benchmark electricity prices also fell.

The legislature derailed—at least temporarily—a plan to revive prices by postponing the issuance of any new permits for between five and seven years. Electricity generators and some other industries must buy the permits to cover their carbon dioxide emissions.

Europe's Emissions Trading System, launched in 2008, was intended to protect the environment by raising the cost of polluting and encouraging businesses to invest in cleaner technologies.

But lately, as the region struggles to recover from recession, politicians have focused more on economics—generating jobs and sparking growth—relegating green concerns to second.