The Co-op and green groups claim coalition ministers are refusing to back other countries which want tar sands specifically named in a new fuel quality directive scheduled to come into force this autumn.
"It is extremely disappointing that the UK has caved in to pressure from Canada, which sees Europe as setting a dangerous precedent for the rest of the world to follow, potentially closing one market after another," said Paul Monaghan, head of social goals and sustainability at the Co-op.
"If it really does want to be the greenest government ever, it must lead by example and not be swayed by aggressive Canadian lobbying," he added.
Canada's tar sands are the world's largest oil reserves after Saudi Arabia but can require up to three times the amount of greenhouse gases to extract from the earth. They often need steam to be injected into the heavy bitumen before it can be broken up and brought out of the ground - unlike traditional oil extracted through drilling a well.
Campaigners, who also fear the "fracking" process will poison underground aquifers, have long claimed that fully exploiting Canada's tar sands alone would be sufficient to take the world to the brink of runaway climate change. But companies at the heart of these operations, such as Shell, insist the CO2 content is exaggerated and can be dealt with through the use of carbon capture and storage.
Tar sands were originally named in draft proposals from the European Commission which were drawn up to ensure that member states were able to meet the legally binding target of reducing greenhouse gas by 6% by 2020.
But by last year - following intense lobbying from the Canadian government - all references to tar sands were dropped, triggering a campaign by the Co-op, WWF and others for the words to be reinserted.
The European climate change commissioner, Connie Hedegaard, said in March that tar sands would be put back in the draft fuel proposals. If member states agree, implementation would cause the new standards to be introduced in the autumn of this year.
On Mondaythe Department for Transport said the government was totally committed to reducing greenhouse gas emissions from transport fuels, but questioned whether the European Union was going in the right direction with tar sands.
"Be in no doubt, we want to address the higher emissions of fuel derived from all heavy crudes, not just single out one particular source," said the department. "We are pushing the European Commission to agree a method for assessing the emissions of fossil fuels from different sources as part of the fuel quality directive as soon as possible. Such a methodology, based on sound science, could be a key means to reduce emissions."
But the Co-op and other campaigners see this as a "stalling tactic" pursued by the Canadian lobbyists and fear that British opposition could encourage other major countries to follow suit and capsize the wider directive.
Tar sands have become increasingly controversial, with green groups putting down motions at recent annual general meetings of Shell, BP and Statoil of Norway calling on them to halt their operations in Alberta, Canada.
"The ecological consequences of tar sands are now greater than those of the oil spill in the Gulf of Mexico. The difference is that they happen in slow motion," said Nina Jensen of WWF Norway during the Statoil's AGM last week.
"Statoil would never have been allowed to do this in Norway," she said, referring to the energy-intensive tar sands.
But Statoil management argued that tar sands are an essential energy resource that must be exploited to quench the world's thirst for energy, which is predicted to rise 40% in the next 20 to 30 years. Statoil's chief executive, Helge Lund, said: "These resources are an important part of future energy supplies."