By Roger Harrabin
BBC environment analyst
The German government is about to trigger a new crisis in Europe's flagship climate policy, the Emissions Trading Scheme (ETS).
An unbalanced ETS could disadvantage some industries
BBC News understands the German cabinet is likely to agree a deal that will reduce carbon emissions from industry by only 0.6% between 2004 and 2012.
The decision is likely to influence other EU countries, including the UK, which still have to set their own caps.
Environmental groups describe the target as "pathetic and shameful".
"These figures are unbelievably unambitious," said Regina Gunther from WWF Germany. "It is shameful that our environment minister has agreed to this."
Climate analysts now fear a meltdown of EU climate leadership.
"I have been a big supporter of the EU ETS, but hearing the German news I feel more depressed than I ever have done about our ability to tackle climate change," said Professor Michael Grubb of the UK Carbon Trust, set up by the British government to help create a low-carbon economy.
"I really believed that Europe would lead the way through the EU ETS but now I wonder whether this will ever happen."
The news will offer comfort to US climate sceptics who predicted that Europe would talk big on climate change but fail to impose large carbon cuts on its own industries.
The decision represents a major success for the German business lobby.
Last year, German industries were so successful in lobbying that their government handed them 21 million tones of carbon permits more than they actually needed.
This pushed down the value of carbon in the EU ETS carbon market and made emissions savings less attractive to businesses across the EU.
The carbon price bounced back when carbon traders found that some nations such as the UK had forced unexpectedly large CO2 cuts on their power sectors.
A German environment ministry spokesman, Michael Schroeren, argued that his nation's carbon targets up to 2012 were stricter than they appeared.
He said last year's carbon emissions total of 474 million tonnes from big industry might have been anomalously low, so Germany had to allow for that.
Mr Schroeren said Germany was still committed to its Kyoto targets, but would achieve carbon cuts through other measures.
One plan is to cut three million tonnes of carbon by training motorists to drive more economically.
The normally temperate Professor Grubb poured scorn on the suggestion of an anomaly.
"The German position is ridiculous - their emissions had been coming down over a long period of time. Last year's figures are definitely not a blip and this agreement is certainly nothing to do with protecting the climate."
Environmentalists are also angry that the German government has decided to hand companies all their emissions permits free of charge.
The EU encourages member states to auction up to 10% of permits in order to create a more genuine market in which firms have to reveal their true intentions. But this has been rejected.
The UK says it will auction between 2% and 10% of permits. The UK will cut CO2 between three and eight million tonnes.
At least the Germans will be announcing their EU ETS plans on deadline on Friday. Most other EU nations do not have their plans ready.
The UK government is waiting on the German decision because in the last phase of the EU ETS, British firms complained that the Germans had been given too many carbon permits, conferring a competitive advantage.
The Swedish government has agreed a lax cap on CO2 and is expected to stick to that unless Germany and the UK impose much stricter caps. This now looks most unlikely, and will badly undercut the EU's position in international negotiations on climate.
The German news comes as the European Environment Agency released figures showing that the EU is badly under-achieving on its Kyoto targets.
EU emissions rose by 0.4% in 2004 relative to the previous year. UK emissions rose 0.2 %. In 2004, the combined EU-15 emissions were only 0.9% below 1990.
Under the Kyoto Protocol, Germany has pledged to cut greenhouse gas emissions by 21% from 1990 levels by the period 2008-2012.