The report, compiled by the Society of Motor Manufacturers and Traders (SMMT) and launched at the British International Motor Show last week, shows that the average fuel consumption of new cars is decreasing along with their carbon dioxide emissions.
Last year, the average carbon dioxide emissions of new cars sold were 3.3g/km lower at 177.7g/km than in 2000, while their average fuel economy had increased from 38.94mpg to 40.35mpg.
The SMMT expects this trend to continue over the next few years as fleets buy ever more low emission diesel cars to shelter their drivers from higher tax bills under the new company car tax system.
But car makers want the Government to go further in spurring on the development of low and zero emission motoring by establishing a hydrogen task force to develop and manage an introduction strategy for the clean fuel over the next 10 years.
The Future Fuels Strategy Group, established by the SMMT, calls in the annual Sustainability Report for the Government to take action to help speed up the introduction of hydrogen technology.
It wants the task group to ensure hydrogen and zero emission vehicles are readily available within a decade.
The report says: 'The motor industry considers that hydrogen is the fuel that offers the greatest long-term potential for reducing motor vehicle CO2 emissions.
'The Government should engage constructively with the motor, fuel supply and other key industries affected to develop the optimum strategy to support a shared vision.
'Policy approaches need to consider the influence of product life cycle on technology introduction, including the time needed for product development and validation, a phased introduction to gain customer acceptance and a sufficient period of stability to achieve acceptable commercial viability.'
Hydrogen vehicles either burn the gas in combustion chambers or use it to power fuel cells, but either way generate water as their only tailpipe emission.
SMMT chief executive Christopher Macgowan said: 'With the wide range of alternative fuel concept cars and production models on display at this year's Motor Show, it is clear that green issues are top of the agenda. It is particularly encouraging that the latest sustainability report shows falling carbon dioxide emissions from new cars, a trend we expect to continue in the years to come.'