* Vattenfall blames lack of political will

* UK scrapped a leading CCS programme in October

"We must unfortunately accept that there is currently insufficient will in German federal politics to implement the European directive so that a CCS demonstration project in Germany could be possible", said Tuomo Hatakka, head of the company's Business Division Production and its country manager for Germany.

"This is a harsh setback for innovation, climate change and the German economy," he added.

CCS is a new technology to make fossil-fueled power plants, on which Germany relies heavily, less harmful to the environment by capturing their CO2 emissions for storage underground, but it has struggled to win political and public acceptance.

Local citizens' groups from around the planned project in Jaenschwalde in the eastern state of Brandenburg protested against the project, which was targeted for completion in 2016, citing fears that leaks could be uncontrollable and that the CO2, which is noxious in high dosages, could impair the quality of drinking water.

Hatakka also said Vattenfall would close test installations for possible storage sites in Brandenburg.

CCS draft legislation is currently with the mediation committee of Germany's lower and upper houses of parliament. The draft law was approved by the Bundestag or lower house but rejected by the upper house. The mediation committee has adjourned twice without result, Vattenfall said in its statement.

"Vattenfall has emphasised that a clear legal framework is needed and that the existing draft for the CCS law is, without substantial improvement, insufficient for multi-billion investments in further development of this technology," the company said.

In October, a row between the UK government and Scottish Power, owned by Spain's Iberdrola, led to a cancellation of a 1 billion pound CCS demonstration plant at Longannet in Scotland after the British government withdrew funding.

Analysts said the withdrawal signalled that the technology remains too costly and that it undermined Britain's ambition to become a clean technology leader.

As a result, Britain is unlikely to see commercial CCS projects by 2020, and the government should devise a plan to reach climate targets by the end of the decade without CCS, a UK parliamentary committee stated in a report.

Source: http://www.reuters.com/article/2011/12/05/vattenfall-carbon-idUSL5E7N53PG20111205