The government should replace VAT, a European Union-regulated tax on goods and services, with environmental taxes to encourage green products, an environmental lobby group said on Thursday.

The Green Alliance, an independent think-tank, said such a move to favour environmentally friendly products with differentiated taxes would encourage producers to make them and buyers to chose them.

"We are aiming high in order to get this on the political map. We feel we have got a political hook for it. If you are going to use taxation then probably the more productive way is to exempt the good and tax the bad," Julie Hill, Green Alliance policy expert, said.

The "political hook" she referred to was a rumour that Prime Minister Gordon Brown and French President Nicolas Sarkozy had been planning to lobby the European Commission to reduce VAT rates on green goods.

Hill said the aim of the report was to provoke discussion inside and outside government on the merits of product levies designed to promote environmentally-friendly behaviour.

"The market still brings forward products that conflict with the government's own environmental goals. Without the right price signals this pattern is set to continue," she said.