The project by ScottishPower, Shell and the National Grid to build a carbon capture and storage (CCS) demonstrator at Longannet power station in Fife was tipped as the country's best chance to develop a world-leading technology that could curb the majority of emissions from coal and gas-fired plants around the world.
It had become the last entrant standing in the competition to win a £1 billion investment from the government to build the scheme after rivals E.ON, BP and Peel Power dropped out.
But after the ScottishPower consortium failed to bring down costs below a best-case-scenario £1.2bn, the Government decided to end negotiations.
A source very close to the project revealed last week that one of the main problems in the negotiations was the carbon price floor tax that became government policy after the Coalition came to power in May 2010.
Despite the importance of CCS to the worldwide drive to reduce carbon emissions, it had become apparent to ScottishPower that, when the carbon price floor came into effect on April 1 of this year, it would make it liable to pay around £250m for the right to keep creating high levels of emissions in order to keep the Longannet plant open for the sake of the CCS project. It asked the Government for a waiver in the event that the scheme went ahead, but was told that this would not be possible.
Although the scheme might have collapsed regardless of the carbon price floor, it is understood to have been a major obstacle nonetheless.
David Watt, executive director Scotland of the Institute of Directors, said it was "just mad" for the Government to insist on applying the tax to the station.
He said: "With the companies already investing their facilities, their staff, time and money, obviously alongside government money, my understanding has been for some time that they did not feel the support was there.
"If the Government was going to give £1bn and then take away £250m, that's not a partnership. Effectively, the Government would have been taxing itself."
The Government's handling of the affair bore most of the criticism in a subsequent report published last March by the National Audit Office (NAO). Among its findings, it said the Department of Energy and Climate Change "did not engage sufficiently early with the commercial risks involved and their consequences on cost".
The NAO did not mention the carbon price floor among its key findings, although it did acknowledge in the report that the Government's unwillingness to waive the tax at Longannet was one of three factors that led to the decision to withdraw. The other factors were that the project could not come in under £1bn and there was no prospect of the Government agreeing a contract with the consortium.
The failure of the project – dubbed by First Minister Alex Salmond at the time "an enormous lost opportunity" – almost certainly set back the progress of CCS as a viable technology.
This has been followed by the collapse last November of the Don Valley project in Yorkshire after the Government decided not to put it forward for a possible grant of up to £275m from the European Union's NER300 scheme. In the end, the EU decided not to make the money available to any European projects, on the basis that no member states had been able to confirm any of them as definitely going ahead.
The two frontrunners to develop a large CCS demonstrator are now the 110MW Boundary Dam retrofit project in central Canada and the 582MW new-build in Mississippi in the United States.
The Department of Energy and Climate Change last March started its CCS competition afresh with four new contestants including two based in Scotland: SSE/Shell at Peterhead power station and a proposal from US-based Summit Power to build a new plant at Grangemouth.
Peterhead was the subject of a previous joint venture with BP to pioneer CCS. It collapsed in 2007 after BP pulled out, blaming government delays.
A ScottishPower spokesperson said: "Following a detailed- study process we submitted projected costs to DECC based purely on developing a CCS solution. The Government decided not to proceed with the project."