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Air pollution from industry costs Britain €4-11bn a year in health and environmental damage according to the European environment agency. When CO2 costs are included, the figure rises to between €11-18bn – more than what the government spends each year on the arts, environment, transport and security and intelligence combined.

Air pollution from industry in the EU costs the UK up to €18bn a year, says the European environment agency. Photograph: John Giles/PA

In a first attempt to link financial costs to emissions from large power stations, refineries, waste plants and factories, the Copenhagen-based agency calculates that air pollution cost Europe €100-169bn in 2009. It has used government figures and has arrived at the costs by factoring in population densities, health costs, building damage and crop losses from pollutants such as low-level ozione. By far the biggest single pollutant is CO2, one of the main climate change gases. Costs have been calculated by using the British government’s “marginal abatement costs” – an estimate of what it expects it will cost to cut CO2 emissions in 2020.

Emissions from power plants made up the largest share of the damage costs at €66–112bn. Production processes cost €23–28bn and manufacturing combustion €8–21bn. Sectors excluded from the EEA analysis include transport, households and most farming activities. If these were included the cost of pollution would almost certainly be more than doubled. Half of the total damage cost (between €51bn and €85bn) was caused by just 191 facilities.

Britain emerges as Europe’s third greatest industrial polluter, behind Germany and Poland, which depends almost entirely on coal for power. Britain’s largest, and most costly polluter is Drax power station which, says the EEA, emits 20.5m tonnes of CO2 a year and costs the economy over 1 billion Euros a year. Drax emerges as Europe’s fifth most polluting plant.

Britain has 16 of Europe’s top 100 polluting plants, second only to Germany with 17. Longannet, Cottam, Ratcliffe on Soar and West Burton power stations together emit more than over 30m tonnes of CO2 and other pollutants and cost the economy up to €2.7bn a year.

While there are stringent laws on air pollution, European governments have found it difficult to cut emissions in areas such as transport, and are mostly in breach of EU laws.

The report is published following a plan announced in March by EU environment commissioner Janez Potočnik to make 2013 the “year of air”. Potočnik says he wants stronger air quality laws across the European Union but many member states are already failing to enforce current rules. The European commission has begun a comprehensive review of existing laws that could lead within a year to changes in the 2008 air quality directive.

“It’s very clear we’ve been able to reduce emissions but that those emissions have not translated into ambient air quality,” said Jacqueline McGlade, who heads the Copenhagen-based EEA.

The EEA’s 2011 report on air quality, released this month, shows broad historical improvements, levels of nitrogen oxide (NO2), ozone and particulate matter have risen, fuelling concerns about overall air quality especially in urban “hot spots”.

Poor air quality has been shown in some studies to lead to nearly 500,000 deaths a year in the EU, while the EEA’s upper estimates show that anti-pollution measures could cut prematuyre deaths to 230,000 in 2020.

Germany, with its large industrial facilities and large power plants, is the biggest polluter Europe-wide – resulting in a cost of €21.5bn – €33.8bn of the overall €100-€169bn bill. Five of the top 10 emitters are German.

The two biggest polluters, which are in Poland and Bulgaria, are followed by the largest German brown coal power plant, a 3,000 megawatt power plant in Jaenschwalde, in the federal state of Brandenburg, which is owned by Vattenfall Europe. It was taken into operation in the 1980s, and modernised in the 1990s, but has been a target of environmentalists for years. This month activists from Greenpeace and Oxfam protested in front of the plant, claiming that brown coal is a “climate killer” and its mining should be stopped.

Vattenfall plans to open five new mines and to build a carbon capture and storage demonstration plant in Jaenschwalde. The other four big Geman polluters are power plants owned by the German energy company RWE.

The greatest refurbishment of Britain’s homes since world war two will be revealed on Wednesday by Chris Huhne. The “green deal” aims to retrofit 14m homes to increase their energy efficiency by the early 2020s, according to ministers.

The programme is at the heart of the coalition government’s plan to meet the UK’s legally binding carbon emission cuts, and focuses on an area seen by many as the cheapest and easiest way to tackle climate change. Of the UK’s carbon emissions, 29% come from homes. Improving the warmth of people’s homes will also help tackle rising fuel poverty – there are over 25,000 excess winter deaths a year – and the politically toxic issue of soaring home energy bills, driven upwards by rising wholesale gas prices. Fuel poverty campaigners protested on Monday outside EDF Energy’s headquarters in London.

The green deal will offer homeowners a loan for insulation and other measures that will meet the so-called golden rule: that the energy savings delivered by the measures will be bigger than the loan repayments.

But there has been widespread concern from businesses, consumer groups, environmental campaigners and opposition politicians that the policy, due to be revealed in a consultation by Chris Huhne today, will be unable to meet ministers’ high ambitions.

Getting homeowners to install energy saving measures is notoriously hard, even when provided for free. A cashback incentive of £150 has been discussed but some fear this will be insufficient. The rate of interest charged on the loan is also key: the higher the rate, the less can be done while still meeting the golden rule. A green deal finance company has been proposed to group together loans, and therefore reduce interest rate, but it lacks start-up finance. Ministers had initially talked about household names such as B&Q and Tesco being involved as providers, but as yet none have pledged to take part.

The UK’s ageing homes are far less energy efficient than European counterparts, with, for example, energy bills for Norwegian homes being lower than those in the UK. In Britain, 10m (43%) of all lofts remain unlagged or very poorly lagged, and 8m houses with cavity walls (42%) have yet to be insulated.