European Union plans to level diesel fuel taxes across the continent have been rejected by senior peers.

The European Commission's proposal to harmonise tax on commercial diesel would cause more environmental damage, members of the Lords EU committee warned on Wednesday.

They forecast that if the move went ahead it would cost the UK Treasury £2 billion per year and increase traffic levels on an already gridlocked road network.

"The proposal should be withdrawn. In the future, the Commission needs to coordinate its work better, in order to ensure coherence between its policies on taxation, transport and the environment," said committee chairman Lord Geddes.

To meet the Commission's proposal deadline of levelling duties by 2010, the UK would have to cut duties by 50 per cent.

Harmonising duties would also harm Britain's rail freight industry, the committee said.

Currently member states set their own duty levels which vary considerably and often leads to hauliers crossing borders to take advantage of lower prices.

The issue of fuel duties is massively contentious and led to the infamous protests by lorry drivers that brought the country to a near-standstill in September 2000.

The Committee accepted there was a need for a minimum fuel duty rate across the EU but believed provisions had already been made in existing legislation.

Lord Geddes claimed the Commission's arguments were confused.

"While cuts in tax on diesel might delight lorry drivers, the potential economic and environmental consequences of this proposal make it unacceptable," he said.

"The proposal goes against the EU's 'polluter pays' principle and does nothing to make transport users face up to the real costs of transport - for the EU as a whole, it would move taxation in the opposite direction because it would reduce the average level of fuel duty."