The radical shift would also drastically affect cash-for-car employees who fund their own vehicles and insurance, but continue to drive high mileages on business.
The Institute of Public Policy Research (IPPR), which has called for the change, is one of the most influential think-tanks in the UK, with strong networks in Government, and aims to be 'a force for change'.
Tony Grayling, associate director of the IPPR, said: 'Insurance companies would still alter the cost per mile based on location, age and risk factors, but it would also provide an incentive for people to drive less.
'Company car drivers could have satellite tracking systems installed in their vehicles that would provide monthly summaries of business and private mileage.
'If it is the case that company car drivers have more accidents because they drive further, this would be a fairer system of insurance.
'If they had fewer accidents, then they would pay a lower rate to their insurance company.
'A mileage based insurance premium could also reduce insurance costs for low-income motorists who drive fewer miles and provide an incentive for all motorists to drive less.
'This change would both tackle social exclusion and help the Government to cut congestion and pollution.'
The call for a scheme followed a presentation in London by Todd Litman, director of the Victoria Transport Policy Institute in Canada.
He said a network of vehicle mileage auditing stations could be set up throughout the UK for vehicles not fitted with tracking devices, although the IPPR said these would need Government support.
Litman said: 'Current insurance pricing is comparable to an all-you-can-eat restaurant.
'The incentive is to maximise consumption in order to get your money's worth. This tends to result in waste and gluttony.
'Pay as You Drive (PAYD) is comparable to an al a carte restaurant, where you pay for just what you eat, and so have an incentive to limit your consumption to just what you really want. As a result, PAYD insurance makes driving more affordable and efficient.'
Insurance giant Norwich Union recently announced the first-mileage based insurance policy trial in the UK. Its scheme relies on satellite tracking and only works on new cars with tracking devices.
The IPPR also said it would support other forms of mileage-based taxation, including Vehicle Excise Duty, although it had not produced a definite opinion on company car taxation.