The European Commission - the EU body responsible for implementing Europe-wide legislation - has proposed an emissions limit of 95g/km for passenger vehicles by 2020.
Under the strict targets, drivers are likely to save an estimated £3,300 over the lifetime of their cars, according to a joint report from consultancies Cambridge Econometrics and Ricardo-AEA.
The recommendations have come in a bid to sustain the competitiveness of European car makers in the wake of President Barack Obama's demand that US manufacturers hit 93g/km by 2025.
The report suggests that drivers could save around £3,300 over the lifetime of their cars.
Vehicle innovations required to meet the emissions targets would add around £1,000 to the list price of a car but drivers would save an estimated £350 a year in fuel costs.
It is also estimated that between 350,000-450,000 new jobs will be created due to increased expenditure on vehicle technology.
Improvements, such as stop-start and light-weight body panels are already available, with the latest Ford Focus ECOnetic already meeting the proposed emissions standard.
The European car makers' association ACEA has also warned of harm to manufacturers. Speaking to the BBC, a spokesman said: "Price is the number-one factor motivating a customer's purchasing decision. In a sector where margins are narrow and consumers have a wide range of choice, even a slight relative price rise can make a manufacturer's range uncompetitive."
However, some manufacturers have already committed to the proposed limit. Volkswagen has already announced its aims to reduce fleet CO2 emissions to 95g/km by 2020 in a bid to be the world's most environmentally sustainable car maker.