The government should consider introducing financial incentives for businesses to move freight by water rather than road or rail, a committee of MPs urges today.

Just 1% of domestic freight is transported on canals and rivers, despite the fact that carbon dioxide emissions from coastal and inland shipping are 80% lower than those from road haulage, a report from the environment, food and rural affairs select committee says.

It notes that in 2000 British Waterways promised to double the amount carried by water by 2010. But by 2005 the amount had actually fallen, from 4.3m tonnes to 3.4m tonnes. The agency argued it was uneconomic to transport goods by water and warned it would create extra costs.

The report into British Waterways calls on the government to review the opportunities for increasing freight by water and suggests a carbon credit scheme to help.

It warns that the government was asking the agency to generate more income, yet expecting it to promote a generally unprofitable activity. "If the government is serious about transferring more freight on to the waterways, companies themselves require further financial incentives to make this move," the MPs add.

They also warn they are "extremely concerned" about British Waterways forecasts that its grant would be cut by 5% in real terms over the next three years. The agency said that would be "a disaster".

But ministers insist the agency's income over a decade is higher than its estimates because of strong commercial earnings and grants paid up to 2007. The committee calls for the National Audit Office to review the conflicting claims.