"Environmental measures in this budget will improve the air we all breathe," Finance Minister Jim Flaherty said in introducing his annual federal budget on Monday.

The provision allowing accelerated write-off of oil sands investments will be phased out gradually so projects that had counted on them can proceed. Existing developments will get the allowance; for new projects the provision will be phased out between 2011 and 2015.

"I'm not surprised but I am disappointed," said Will Roach, chief executive of UTS Energy Corp., which holds a 30 percent stake in Petro-Canada's planned Fort Hills oil sands project, one of numerous multibillion-dollar projects on the drawing board.

Alberta's oil sands, which rival Saudi Arabia's conventional oil reserves in size, are the target of an unprecedented development rush as companies look to cash in on North America's thirst for secure energy supplies.

Such projects are also a major source of greenhouse gas emissions, however.

Roach said it was too soon to say if the changes will affect the Fort Hills partners' plans.

The government will extend by eight years, to 2020, an accelerated write-off of investment in equipment that generates energy more efficiently or uses renewable energy sources. It will be expanded to include wave and tidal energy and additional solar and waste-to-energy technologies.

The Conservatives, elected in January 2006, have changed tack and made the environment a top priority in response to a sudden surge in concern on the part of Canadians.

Flaherty announced a rebate of C$1,000-C$2,000 (US$850-$1,700) for purchases of new fuel-efficient vehicles. Examples of those eligible for the full rebate include the Toyota Prius, the Honda Civic Hybrid and a hybrid model of the Ford Escape SUV.

Most major car makers have at least one on the list, including the Saturn Vue Hybrid, the Jeep Patriot and flexible-fuel versions of the Chevrolet Impala and Chrysler Sebring.

The government is also slapping on a new "Green Levy", or gas-guzzler tax, of C$1,000-C$4,000 on the sale of new passenger vehicles that are not fuel-efficient.

The budget allocated C$2 billion for renewable fuels. This includes C$1.5 billion as incentives for ethanol and biodiesel; and C$500 million to help build plants for next-generation renewable fuels, produced from agricultural and wood waste products like straw and wood residue.

The Canadian Renewable Fuels Association lauded the measures. When combined with regulations requiring renewable fuel content of 5 percent in gasoline and 2 percent in diesel by 2010, the move will cut greenhouse gas emissions by more than 4.2 megatonnes, it said.

That is the equivalent of taking more than one million cars off the road each year, the association said.

(Additional reporting by Scott Haggett)