Holyrood's bottle-return scheme could be dead in the water after the UK Government signalled that it would block the "inflationary" project.
Lorna Slater, the Green minister leading the initiative, has admitted that an opt-out from Britain's Internal Market Act is needed for the scheme to proceed.
It is designed to boost recycling via a 20p deposit on single-use drinks bottles and cans.
But critics say the project will present significant costs and risks for businesses while putting more pressure on consumers.
A UK source told the Times: "The present scheme is in deep trouble, and that is before the UK Government has been asked to relax laws protecting cross-border trade."
Alister Jack, the secretary of state for Scotland, told the Commons last week that the bar for an exemption "is very high indeed".
Inflationary
He said: "Aldi will sell 12 bottles of Scottish water for £1.59. Under this scheme, that will become £3.99. If that is not inflationary, if that is not adding to people's cost of living, I do not know what is."
Mr Jack has urged the Scottish Government to pause the system and work with the UK on a method that could operate nationwide.
Scottish ministers have yet to approach London for an internal-market exemption, despite setting a deadline of tomorrow for businesses to sign up. The scheme is due to go live on August 16.
Kate Forbes, one of the front-runners to replace Sturgeon as SNP leader and first minister, said she would scrap the projec if elected.
She stated yesterday: "The wave of concern needs us to pause and look at this in the context of businesses who are at the moment overwhelmed...with Brexit, Covid, and the cost of living."
However, Ms Slater claimed that the project was "definitely going ahead" - but the Times understands a request for an internal-market exemption will be refused.
Disadvantage
In that event, UK suppliers outside Scotland could sell north of the border without signing up to the scheme, which would put Scottish suppliers at a huge disadvantage.
If an exemption was granted, suppliers from south of the border would also have to sign up, but many have said they will pull out of Scotland instead.
UK ministers believe the project would turn the Scottish border into a trade barrier.
Circularity Scotland, which is responsible for running the scheme, has announced £22million of support to remove upfront charges from some companies.
But Dougal Sharp, founder of Scottish brewer Innis and Gunn, told the BBC yesterday there were still lots of unanswered questions which meant firms were faced with a "devil's choice".
Asked what would happen if he didn't sign up to the initiative, he said the business would be crippled as they couldn't sell in Scotland.
Huge risks
He added: "If you take a step back from this and consider the huge risks that the whole scheme is placing on consumers through massive inflated costs, huge changes in behaviour and complexity, and then of course for businesses - the significant costs and risks associated with the scheme.
"We're urging an immediate pause and a rethink of this whole thing."