LONDON (Dow Jones)- The U.K. government Wednesday said it will extend a form of tax relief to hedge funds and other investment managers trading carbon emissions credits and similar instruments, relieving concerns within the industry that U.K.-based managers active in this area would choose to relocate.

In the Treasury's 2007 Budget, it said carbon trading from mid-April will become a part of an existing system that lets non-U.K. funds with U.K.-based investment managers avoid tax on their income and profits. It hadn't been clear how carbon credits would be treated, since physical assets such as commodities aren't covered under the scheme.

While there are still relatively few funds trading carbon-related instruments, the move highlights how hedge funds' influence in all corners of the financial markets is prompting governments and regulators to re-work their policies.

The results of a wider review of the investment manager exemption framework had been expected as part of Wednesday's Budget, but will now come by the end of the month.

In a draft version, the government proposed tougher tests for managers to prove their independence from the offshore funds they advise, and new guidance on managers' remuneration from the funds. Lawyers and industry groups say any material changes to the exemption system could lead U.K. hedge-fund groups to migrate to other parts of the world.

In the Budget, the government said it "will continue to engage with the industry and its representatives to ensure the IME continues to attract investment management business to London."