Investment in emissions technology and increasing use of hybrids and electric vehicles has led to average new car CO2 emissions falling by a quarter since 2000.
In 2011 emissions fell by 4.2 per cent year on year to 138.1g/km CO2 (equivalent to 52.5mpg), a reduction of more than 23 per cent since reporting began in 2000.
The SMMT's 11th annual New Car CO2 report shows that in 2011 almost half of new cars (46.8 per cent) had emissions below the 2015 European legislative target of 130g/km of CO2. In addition, more than 65,000 vehicles were exempt from Vehicle Excise Duty (VED) with sub-100g/km cars in Band A, almost doubling their market share to 3.4 per cent.
The biggest reductions in average emissions were made across all segments compared with 2010, with the biggest improvements in the Executive and Specialist Sports categories (falls of 9.5 and 7.0 per cent respectively).
Achieving record market shares, diesel and alternatively-fuelled vehicles (AFVs) continued their rise in popularity, taking 50.6 and 1.3 per cent of the 2011 market respectively.
Petrol-electric hybrids accounted for 92 per cent of all AFV volumes in 2011 with an average CO2 output of 104g/km, or 25 per cent below the UK average.
Registrations of electric vehicles (EVs) registrations rose by 557% in 2011 to 1,098 units, aided by the introduction of new models and the Plug-In Car Grant.
Paul Everitt, the SMMT's chief executive, said: "Industry can be proud of the progress it has made in reducing CO2 emissions and improving fuel efficiency by 23 per cent since 2000.
The UK motor industry recognises its responsibilities and the industrial opportunities from the transition to ultra-low carbon vehicles.
Future environmental and economic success will be determined by sustained investment in new technology, R&D, infrastructure and consumer incentives.
"We are seeing steady improvement in conventional technologies and the emergence of a range of alternative technologies, creating one of the most innovative periods for the global automotive industry."
European CO2 targets stipulate that the entire fleet must achieve a 130g/km CO2 average by 2015. In 2012, 65 per cent of the fleet must comply, with the proportion increasing towards total compliance in 2015.