Average CO2 emissions in new cars have fallen by a record 5.4 per cent in 2009 compared to the previous year, the SMMT report says.
For the first time ever, average emissions from new cars sold in the UK is just under 150g/km, compared to 158g/km in 2008 and nearly 190g/km in 1997.
New EU regulations mean all manufacturer ranges must emit less than 130g/km on average, and although Fiat remains the only auto maker so far to achieve this, the SMMT believes the industry is on course to meet the targets.
Currently 27.6 per cent of new cars registered in 2009 emitted less than 130g/km, and this figure is expected to rise when the Government subsidy for electric, hybrid and alternative fuel vehicles begins in 2011.
Low CO2 and electric cars such as the Fiat 500, Ford Focus Electric and Alfa MiToMultiAir are popular choices for customers buying a greener car, and over the next 12 months, Vauxhall (Ampera), Citroen (C-Zero) and Peugeot (iOn) will enhance their line-ups with more efficient models.
The SMMT attributes much of the success to the Government scrappage scheme. Vehicle manufacturers have invested heavily in new technology to boost sales during the global recession and the scrappage scheme has encouraged buyers to trade in less efficient vehicles.
Average emissions from cars bought as part of the scrappage scheme was just 133.3g/km, 26.8 per cent less than the average emissions from scrapped cars.
However, the SMMT urged the Government to continue to offer environmental incentives to the car industry as the scrappage scheme comes to an end.
Paul Everitt, SMMT chief executive said; "Vehicle manufacturers have invested heavily in both improving conventional technologies and bringing advanced systems to market that reduce the environmental impact of new vehicles.
"Developing a long-term and consistent approach to vehicle taxation and environmental incentives will be important in maintaining the current rate of improvement."