EU leaders promise to act against China and US in carbon crusade

European leaders have pledged to lead a world crusade for a "low-carbon" economy but promised that energy-hungry industries would not be sacrificed on the altar of climate change.

A European Union summit promised to push through legislation within 12 months to impose ambitious targets to reduce the 1990 level of carbon emissions by one fifth by 2020. The European leaders also pledged, however, to take action, if necessary, to counter unfair competition from less eco-friendly countries, such as China or the United States.

The French President, Nicolas Sarkozy, suggested that this could mean "carbon" taxes on manufactured goods from nations which refused to take radical action against global warming. Other EU officials suggested that it was more likely to mean some kind of compensation – such as "free" carbon-generating permits – for heavy industries facing unequal competition from abroad.

Haggling over the final text yesterday morning was said to have produced a sharp but polite confrontation between Gordon Brown and the German Chancellor, Angela Merkel. Mr Brown was worried about a possible drift towards protectionism; Ms Merkel – and several other leaders – were determined to defend EU heavy industry if other countries refused to take tough action to reduce carbon emissions at a global conference on climate change in Copenhagen next year.

The Prime Minister later gave way and helped to broker a compromise statement. In return, he won backing from Ms Merkel and other EU leaders for his plan for lower, or "green", rates of VAT on environmentally friendly consumer goods, from fridges to washing machines. The European Commission had attempted to place his plan in the institutional deep-freeze. Mr Brown secured a promise that the idea would be "studied". He said: "I think people have been persuaded by the argument that we should look at this very carefully."

At his press conference at the end of the summit, Mr Brown warned that the worsening crisis on financial markets meant there could be "hard times" ahead. He said he was confident, however, that the economic policies adopted in Britain and Europe – including a renewed commitment yesterday to the removal of remaining EU trade barriers – would allow Europeans to weather the storm.

At his own press conference, President Sarkozy was cock-a-hoop at winning a summit statement expressing concern at "rapid" shifts in currency exchange rates. He has been fighting a lone battle to persuade the European Central Bank to take action to prop up the euro, which is now at an all-time record level against the dollar of €0.63. The summit noted its "concern" at "undesirable volatility and disorderly movements of exchange rates".