The Government was today urged to step up efforts to improve energy efficiency, as a report found it would not only cut Britain's production of global warming gases but also improve economic growth and employment and reduce inflation.

By contrast, attempts to bring down CO2 emissions by increasing the price of fuel to consumers and businesses risk damaging the UK's economy by driving up inflation and reducing growth, warned the report.

It had been feared any energy savings won by efficiency measures like house insulation and low-MPG cars might be lost, as consumers choose to have warmer homes or drive further rather than pocketing the savings.

But the report from the Cambridge Centre for Climate Change Mitigation Research suggests the impact of this so-called "rebound effect" will amount to no more than 21 per cent to 29 per cent of the energy savings.

Instead, lower inflation and lower prices can be expected, as the production system requires less energy to produce the same output, and growth will be boosted as consumers spend the money they have saved.

The report, commissioned by the Department for the Environment, Food and Rural Affairs, covers the effects of energy efficiency policies on UK macroeconomic performance over the period 2000 to 2010.

It shows a 0.3 percentage point reduction in the annual growth rate of prices for 2005-10 and a 0.1 percentage point increase in the annual GDP growth rate for 2005-10 as a result of energy efficiency measures.

Centre director Dr Terry Barker said: "This is one of the first studies to look at the macroeconomic implications of the Government's energy efficiency drive. We found that if the policies work out as planned then they will yield surprisingly large benefits for inflation and growth.

"These policies could well be considerably strengthened at even greater benefit to households and business, so saving energy, reducing damaging emissions and improving the overall performance of the economy."

Climate change, Pages 6 & 7