VAT should be cut for green purchases such as bicycles, energy efficient light bulbs and wind turbines as part of efforts to encourage people to cut their environmental impact David Cameron has suggested.

According to Telegraph reports, the Conservative leader told business leaders that he yesterday was keen to reward environmentally conscious consumers through a green tax incentives system.

"We need to make the environment something where people want to – and are encouraged to – lead greener lives and differential tax rates are a good example of that," he said.

Cameron's comments echo Gordon Brown's proposals to the EU summit last month that VAT on more energy efficiency electrical appliances and white goods should be cut to five per cent.

VAT negotiations are notoriously difficult as they require unanimous agreement of all member states, but the European Commission has agreed to investigate Brown's idea.

Cameron also called for a VAT loophole to be closed that currently means it can be more cost effective to build a new home than renovate an existing one to improve its energy efficiency. If you renovate your house and make green changes you are currently hit with 17.5 per cent tax, whereas building a house on a green field site incurs no VAT charges, he explained.

His comments follow calls earlier this week from the Communities and Local Government Select Committee for the loophole to be closed and step up efforts to curb emissions from existing housing.