• Investment in green housing, power and transport at risk, says government committee • Millions of new electric cars plus rescue of carbon trading schemes among proposed measures

The recession is threatening the vast investment needed in green housing, power and transport and could seriously undermine Britain's efforts to meet its targets for tackling global warming, the government's climate change advisers warn today.

The UK already has the toughest climate change laws in the world but the Committee on Climate Change says that "radical" action is still needed. It highlights the need to rescue carbon trading schemes – a key weapon in the battle to reduce greenhouse gas emissions – from problems caused by the slump.

The committee demands "dramatic improvements" in the carbon efficiency of cars and measures to cut the growth in traffic, potentially including road pricing. It recommends that there should be 1.7m electric cars, with 3.9m drivers trained in fuel-efficient techniques, by 2020.

Europe is relying on carbon trading between polluters to make it cheaper to build wind turbines and develop technology to trap and store gases from power stations as part of a promised switch to a low-carbon economy.

The committee also warns that a "step change" is needed in the pace of UK emissions reductions if the government is to stick to tough new carbon budgets. Annual cuts must increase by at least four times, from the recent rate of 0.5% to 2-3%.The report also demands "more forceful" policy approaches.

Lord Turner, chair of the committee, said: "The government needs to build on its low-carbon transition plan and put in place a comprehensive delivery framework. What we have proposed is achievable and affordable, but action needs to be taken now if we are to make our contribution to combating climate change."

Andy Atkins, head of Friends of the Earth, said: "The Climate Change Act is a world-class piece of legislation, but the true test is the policies put in place to deliver its goals. Crucial strategies on fossil fuels, aviation and energy infrastructure, due out shortly, will demonstrate whether or not the government has heeded the committee's warnings."

With greater effort, the committee says, Britain could be transformed. It calls for a nationwide programme to boost energy efficiency in homes and offices, similar in scale to the installation of natural gas in every house from the late 1960s.It wants to see 10m lofts insulated by 2015 and 12m old boilers replaced by energy-efficient versions by 2022, as well as "significantly" increased numbers of energy-efficient washing machines and refrigerators. New laws may be needed to force private landlords to insulate and upgrade rented homes, the report says.

The CCC says Britain should slash emissions from the power sector by 50% before 2020 by building 8,000 new wind turbines, alongside four new coal power stations fitted with carbon capture technology and three new nuclear power plants. It also calls for an urgent overhaul of the national grid, to accommodate new windfarms. The report says: "In a world where carbon budgets are achieved, we will meet more of our energy needs from low carbon power, live in well insulated homes with energy efficient boilers and appliances. We will also work in energy efficient offices and drive more carbon efficient cars including hybrids and electric vehicles."

David Kennedy, chief executive of the committee, said the recession could demolish such plans. "It's a very big problem," he said.

The fall in economic activity has lowered CO2 emissions in Europe and left companies in the EU's emissions trading scheme with a surplus of carbon credits. The committee estimates this could result in a carbon price of just €20 a tonne in 2020, rather than the €50 a tonne used for its previous analysis.

Options to strengthen the carbon price, including the government underwriting a minimum price or intervening in the electricity market, should be "seriously considered", the committee says. On Friday, a report from Ofgem suggesting domestic energy bills could rise 14-60% by 2020 was seen by energy industry experts as an acceptance that the market-driven system has failed and the government needs to be more interventionist.

The analysis comes as a separate report from the Aldersgate group of companies says that a more radical approach to financing low carbon projects is needed to ensure carbon targets are met. It argues that a new strategic approach to reduce investor risks, mobilise capital and streamline institutional structures would accelerate the transition to a low carbon economy and reduce costs.

Emma Howard Boyd, head of socially responsible investment and governance at Jupiter Asset Management, said: "There remains a credibility gap between policy and delivery which has resulted in too much uncertainty and risk for investors to finance at the scale that is required."