The Society of Motor Manufacturers and Traders has reacted with shock at the news, claiming it flies in the face of ministers' promises to boost the popularity of cleaner cars.
Since the ending of the Powershift scheme 15 months ago, no grants have been available to help buyers invest in the cleanest low carbon cars.
However, the industry had expected the Low Carbon Car Fund to be introduced as soon as the European Commission gave it the green light on state aid rules. That happened four weeks ago.
Transport minister Dr Stephen Ladyman revealed the decision in a written statement to the House of Commons. He said the schemes 'would not achieve market transformation or provide value for money'.
SMMT chief executive Christopher Macgowan said: "We are stunned by this decision. It sends completely the wrong message to consumers and the industry at a time when the Government claim to be taking a lead on lowering carbon dioxide emissions."
In a recent SMMT-commissioned survey of 1,200 motorists, 36% said that a Government grant would be the most important factor in encouraging them into a greener car.
The results clearly show that grants, as well as better consumer information and tax incentives, are fundamental to changing driver behaviour.
"The Government is committed to encouraging cleaner fuels and vehicles with policies that deliver for the environment and for the taxpayer.
I have reviewed how best to invest the £40 million earmarked in the Department for Transport's budget for environmental grants and advice over the next two years. The full budget will remain allocated for green transport initiatives and will be refocused. The detailed development of the initiatives will be taken forward as part of the Powering Future Vehicles Strategy review this year.
I will introduce a new communications campaign to promote consumer information on buying greener vehicles and on eco-safe driving. The campaign will also target businesses by promoting the benefits of workplace travel planning. The campaign will be developed in consultation with key stakeholders.
I will provide additional funding for the Freight Best Practice programme, including the Safe and Fuel Efficient Driving scheme for van drivers. This will train another 4000 drivers in fuel efficient driving techniques, provide for another 400 fuel efficiency reviews and increase dissemination of advice in the van sector similar to that for truckers. Analysis in the Climate Change Programme Review showed investment in this initiative is effective and offers value for money.
#AM_ART_SPLIT# I will refocus support for workplace travel planning, to work more effectively with business and encourage wider adoption of voluntary travel plans. These plans have the potential to reduce commuter car driving by 10-30%. As a first step I will re-launch and expand the Ground Floor Partners Network (of major private sector companies with an interest in travel plans) in the autumn to support and encourage more employers to develop travel plans and to promote them to business groups.
I will also provide funding to explore the feasibility and value for money of a range of programmes, including a bus fleet advice programme aimed at improving the environmental performance of the UK's bus fleets, and a green transport accreditation programme for UK companies that implement best practice and show improvements in the environmental performance of their transport operations.
I will continue with the three existing green transport programmes funded by the Department and managed by the Energy Saving Trust - the Low Carbon Research and Development grant programme, the Infrastructure grant programme and the Green Fleet Review programme, which provides advice to car fleet managers.
I have decided not to implement the Low Carbon Car, Low Carbon Bus, Air Quality Retrofit and Enhanced Environmental Vehicle grant programmes on the grounds that, if implemented, they would not achieve market transformation or provide value for money.
Regrettably, state aid rules limit the level of grant available to 30-40% of additional costs and it is clear that the level and number of grants available would not be sufficient to kick-start market transformation. The Low Carbon Car programme could only provide grants for 8500 low carbon cars a year - only 0.4% of the new car market - and sales of low carbon cars have been sustained despite the absence of grants for 18 months.
I am not persuaded that giving small grants for individual purchases will deliver significant emissions reductions or change the way we think about green transport. Not only do we need to promote the cleanest cars, we need to promote the cleanest in each class. Figures from the Society of Motor Manufacturers and Traders (SMMT) suggest that a reduction of up to 30% in average fleet CO2 emissions would be achievable if every consumer chose the most fuel efficient vehicle in its category.
"There are clearly significant savings to be made. Our priorities need to be working with industry to see increasingly efficient cars brought to market and supporting targeted, clear and helpful advice to inform the choices people make when purchasing and driving a car."