Purchasers of the most polluting vehicles will have to pay a tax of almost £1,000 from 2010 under a major overhaul of vehicle excise duty (VED) announced by the chancellor yesterday in his budget speech.

The move to clampdown on the most polluting vehicles will see six new road tax bands introduced from 2009 based on car's emissions, including a new top band M for vehicles such as SUVs and sports cars that emit more than 225g CO2 per km.

All cars in the new band F and below, emitting 150g CO2 per km or less, will see road tax cut with band F cars paying £120 and band B cars, such as the Toyota Prius, paying just £20. Meanwhile, the most polluting cars will see their rate of VED increase with band M cars paying £425 a year.

From 2010 further changes will see all new band A to D cars that emit less than 130g CO2 per km exempt from road tax in the first year after purchase. Band E to G cars emitting between 131 and 160g CO2 per km will pay the standard rate during the first year, while the most polluting cars will face a first year rate of £950.

Similar changes to taxes on business travel will make it more expensive for firms to run high emission vehicles as company cars.

Under the reforms, from April next year business expenditure on cars with CO2 emissions above 160g per km will attract a 10 per cent Writing Down Allowance (WDA) against corporation tax while spending on cars with CO2 emissions of 160g per km or below will attract a more generous 20 per cent WDA.

Company car tax rates will also be increased on all but the cleanest cars emitting less than 135g CO2 per km or less in 2010.

Chancellor Alistair Darling said the changes would "provide a real incentive to manufacturers and motorists" to invest in low carbon cars and argued that it was right that people choosing to buy a more polluting car "should pay more in the first year to reflect the environmental cost".

There are signs the government's adoption of emissions-based road tax bands, coupled with growing public opposition to so-called gas guzzlers, is already proving successful. According to sales figures from the Society of Motor Manufacturers and Traders sales of band G cars fell 15 per cent last year, while sales of band A and B cars climbed 17 per cent and are projected to overtake band G cars this year.

Attempts to reduce emissions from road transport formed the green centrepiece of a budget speech that left environmentalists otherwise disappointed.

In addition to the tax changes, Darling also announced fresh funding for road pricing trials and endorsed the recommendations of the King Review on low carbon cars, announcing plans for a new £40m research programme into greener vehicle concepts and pledging to lobby Brussels for more stringent tail pipe standards.

Environmentalists welcomed the moves to penalise the most polluting vehicles, but roundly criticised the chancellor for deferring until October a two pence increase in fuel duty that had been planned for next month.

John Sauven of Greenpeace said that the decision to suspend the increase had "fatally undermined" attempts to present a "green budget", adding that changes to road tax designed to get people into cleaner cars were similarly contradicted by the government's road building policy.

The announcement that the government is to press ahead with plans to set mandatory targets for biofuel use was also condemned by green groups who have been calling for a moratorium on biofuels until there is satisfactory evidence that they can be produced in an environmentally sustainable manner.

The Department for Transport has launched a review into the environmental impact of biofuel use, but it is not expected to report until later this year and in the meantime the goal of ensuring five per cent of fuel at the pump comes from biofuel by 2010 is still being pursued.

Greenpeace chief policy advisor Benet Northcote warned that in continuing to support biofuels Darling was also ignoring the recommendations of the King Review. "At the same time that Alistair Darling was telling the house he was pressing ahead with the government's biofuels plans, Julia King's report was published warning ministers that increasing the efficiency of our cars is a far better way of reducing transport emissions than encouraging biofuels," he observed. "Government policy means that in a month's time motorists will be forced to pump biofuels into their tanks, with no way of ensuring they're sustainable."