Excluding smaller retailers from a 5p plastic bag charge in England risks watering down moves to cut the use of single-use carrier bags, MPs said.
The parliamentary Environmental Audit Committee said the Government had ignored calls to change the levy scheme so that it included all retailers, in the same way a successful scheme in Wales had.
But the Government has admitted its proposed exemption for "biodegradable" plastic bags will not be included when the scheme is introduced in October 2015 - as no such bag currently exists.
In its report on bringing in a 5p charge on single-use bags in England, the EAC labelled the planned exemption for biodegradable bags as "risky and unnecessary", warning that it could lead to contamination of plastic recycling, undermine the reductions in bag use and send confused messages to shoppers.
In its response to the EAC report published today, the Government said there would always be a need for carrier bags, for example for impulse buys.
It said the proposed exemption for biodegradable bags represented a challenge to industry to develop a bag with fewer environmental impacts across its life-cycle and which could be identified and separated in waste and recycling systems.
But the Government has stuck to plans to exclude smaller shops from having to implement the charge to "reduce the burden on start-up and growing businesses in England at a time when the Government is supporting new growth in our economy".
And it confirmed the scheme would not apply to paper bags, but only apply to plastic bags, which take a long time to break down in the environment, can harm wildlife, and litter towns and countryside.
Environmental Audit Committee chairwoman Joan Walley said: "The 5p bag charge is the right solution - it will reduce litter, cut carbon emissions and reduce waste.
"Despite our committee's recommendations, the Government has decided not to apply the charge across the board, but to go ahead with its proposed exemptions. That risks diluting the benefits of the charge.
"The decision to only include large retailers is particularly short-sighted and ignores calls from all of the main small retailer organisations to be included in the scheme.
"I am pleased, however, that the Government has conceded that the proposed exemption for biodegradable plastic bags could cause problems for the UK's recycling industry and will now not be included when the charge is introduced next year."
She added: "The Government should think again about an exemption for small businesses. The Government says simply that some trade bodies are opposed.
"The Government should tell us which trade bodies are against, so that we can see exactly what the evidence says for ourselves."
Shadow environment secretary Maria Eagle said: "For months the Tories' Environment Secretary Owen Paterson delayed the introduction of a plastic bag levy because he wanted an exemption for biodegradable bags, even though scientists said this was a flawed policy that would damage the environment and the recycling industry.
"He was forced into an embarrassing U-turn on his fantasy biodegradable bags and now he has undermined the scheme by exempting some retailers. This is an unscientific mess from a Government that is allergic to science."
The Break the Bag Habit campaign, backed by organisations including Keep Britain Tidy, the Marine Conservation Society, the Campaign to Protect Rural England and Surfers against Sewage, criticised the failure to include paper bags.
Campaigners said the move ignored evidence that fast food retailers used paper bags for their products and it was one of the most commonly littered items. They have a negative impact on the environment due to the carbon emissions in the distribution.
Samantha Harding, on behalf of the Break the Bag Habit campaign, said: "The Government's commitment to blundering on with a scheme at odds to all professional advice is mystifying and frustrating.
"How is it possible to ignore the advice it's been given, including from within Parliament itself? The result is it's making a hash out of something very simple.
"It's not too late for the Government to get this right. It just needs to leave politics aside and do what it's supposed to do - create a workable policy that delivers the best social, economic and environmental benefits.
"We urgently want to see paper bags and small retailers included in the scheme."