Much of the financial backing for Germany's Energy and Climate Fund -- set up to facilitate the phasing out of nuclear energy and the promotion of wind and solar alternatives -- comes from the emissions trading scheme, under which polluters buy the "right" to emit carbon dioxide and other greenhouse gases through an open market system.
The European Commission had been pushing to boost faltering prices for carbon allowances by reducing an oversupply caused by the economic downturn -- "backloading" them from the current 2013-15 period to 2018-20.
But the Parliament, meeting in a plenary session Tuesday, rejected the proposal, which was opposed by energy-intensive businesses.
After the vote, prices for allowances plunged to an all-time low of $2.20 per ton of carbon equivalent, bringing predictions the ETS had been dealt a possibly fatal blow.
Germany had assumed a carbon price of $13 per ton last year when it set the budget for its energy transition fund, predicting it would receive around $2.5 billion from the ETS. But the low carbon prices means only $1.16 billion will actually be available this year, the treasury estimated this week.
Another cut of $1.4 billion could be in store for 2014, it warned.
German Environment Minister Peter Altmaier, expressing disappointment over the European Parliament vote, said the blow would be softened somewhat with a $406 million contribution from the KfW Development Bank this year to support research and development into electric vehicles, building retrofitting and battery storage -- a major focus of the government's green energy plans.
Because of that one-time contribution, those areas would thus be fully funded this year, but other areas will see their funding slashed by half.
"The decision of the European Parliament to reject proposals to support the European emissions trading scheme and its impact on the revenue situation for the (climate fund), must be taken into account," he said.
Despite the vote, Altmaier remained optimistic the ETS can be saved, noting that rather than killing the backloading proposal, the EP vote referred it back to committees for more discussion, the daily Die Welt reported.
"I personally believe that we can effectively combat climate change with emissions trading," he said.
The issue has produced a political split in the German governing coalition. While Altmaier, a member of Chancellor Angela Merkel's Christian Democratic Union, pushed hard to boost the ETS, Economics Minister Philipp Rosler of the pro-business Free Democratic Party resolutely opposed the idea.
Merkel, meanwhile, remained on the sidelines, producing a government paralysis on whether to fix the ailing ETS, Der Spiegel reported.
The backloading proposal was rejected by the Parliament in a narrow vote, with 334 MEPs voting in favor of an amendment to reject the proposal, while 315 voted against and 63 abstained.
MEPs opposing backloading said propping up prices by manipulating the availability of allowances was the wrong way to bring about reforms and would only undermine confidence in the scheme.
Some also predicted higher carbon prices would hurt the competitiveness of European industry and would only be passed along to consumers in higher household energy bills.