The definition of a low carbon car is one that emits less than 100g/km of CO2, or the equivalent of about 70mpg. The present average among new cars sold in the UK is 178g/km and 40mpg.
The targets are included in a strategy document 'Powering Future Vehicles', launched this week.
Transport minister David Jamieson said: 'Road transport is responsible for 22% of the UK greenhouse gas emissions. We must tackle this.
'This strategy establishes the UK as a leader in the global shift to a low carbon transport economy, and in doing so builds competitive advantage for our automotive industries.
'It also delivers environmental benefits both in terms of reduced carbon dioxide emissions and improvements in local air quality in urban areas.'
John Healy, economic secretary to the Treasury, said: 'New vehicle technologies and fuels offer opportunities for radically reducing the impact of road transport on the environment. We must ensure that these opportunities are taken.
'In line with this thinking the Chancellor of the Exchequer has already announced significant tax changes to achieve environmental benefits and we will continue to use tax policy to deliver environmental benefits over the coming years.'
To help the strategy move forward, the Government is setting up a Low Carbon Vehicle Partnership by the end of the year, which will be made up of the car and fuel industries, consumer and environmental groups.
The UK has a legally binding commitment under the Kyoto protocol to reduce greenhouse gas emissions by 12.5% by 2008-2012, and a domestic goal of reducing CO2 emissions by 20% by 2010.