The decision by BP to scrap a revolutionary new hydrogen plant and carbon capture scheme in Scotland due to government delays was a "sad" blow to a nascent industry, officials from the sector said yesterday.

Britain's biggest company had planned to spend $1bn (£503m) on the scheme, based at Peterhead. It would have generated clean fuel by capturing and storing the carbon under the North Sea but BP said it was no longer proceeding with the plan. It said the government's timetable, revealed in Wednesday's energy white paper, for a competition to win financing for a prototype plant was too slow.

BP is expected to concentrate its efforts on similar schemes in the US and Australia, although it insisted it had not entirely given up on the UK. The company is looking at technology that would convert natural gas into hydrogen and carbon dioxide. It would use the hydrogen to run a power plant and store the carbon dioxide underwater in a used oilfield.

Around 1.8m tonnes of carbon a year would have been taken out of the atmosphere by the Scottish project, the first - and only British one - in a line of schemes planned by BP with partners including Scottish & Southern Energy and Rio Tinto.

Jeff Chapman, chief executive of the Carbon Capture & Storage Association, said: "It is sad but fortunately there are a lot of other schemes. We are always disappointed when the timetable is not as fast as we would like, but we accept that the government has a lot of work to do putting in place the appropriate regulations."

BP said it had been working closely with the Department of Trade and Industry but had put back its plans a number of times to try to meet the government's timetable. The decision to postpone the launch of a competition until November was a "delay too far", a BP spokesman said.

BP was planning to store carbon from Peterhead in the Miller field in the North Sea, but to meet the government's timetable BP would have had to keep the field mothballed, which would be "uneconomic".

It said the project had already cost it $50m. The financial viability of carbon capture is still unproven, but Mr Chapman argued it should be considered alongside renewables for investment help.