Business could save money if they switch to greener company cars, a study by the Energy Saving Trust (EST) has revealed.

Currently only 7% of companies with fleets offer a financial reward to employees who choose a smaller, cheaper or lower carbon vehicle.

But with new government tax breaks now in force for greener fleets, the environmental organisation has found that if all UK companies chose cars with 120g/km or fewer carbon dioxide emissions there could be a collective saving of nearly £3bn a year.

This includes a saving of £1.2bn on the fuel bills of company cars driven privately, £780m for employers through reduced fuel consumption, £645m due to reduced benefit-in-kind income tax contributions and £250m from reduced national insurance contributions.

There would also be a reduction in transport emissions from UK company cars used on business of around 1.9m tonnes a year and from business cars driven privately of around 3m a year.

"The reasons are there for all to see: running vehicles costs a lot of money and with fuel prices over £1 a litre it's not going to get cheaper any time soon," said Nigel Underdown, head of transport advice at the EST.

"In addition, companies in the business-to-business sector won't get far when tendering for big contracts unless they can prove their environmental credentials.

He added that the new tax breaks for companies driving cars with 120g/km or fewer of carbon dioxide would see their tax bills cut in half. "2008 will see a tipping point where offering - and choosing - low-emitting cars is the only sensible business option," he said.

The research also found that 73% of organisations restrict the type of vehicle that employees can use for work, with managing directors responsible for company car policy in 46% of cases.

A third of companies (32%) offer a cash alternative to a company car, while 28% of those polled think it would cost money to cut carbon emissions.