The British car industry's efforts to develop low carbon vehicles was given a boost today after the government announced it had teamed up with the sector to invest £100m each in a scheme to produce green demonstration vehicles.

The five-year Low Carbon Vehicle Integrated Delivery Programme will be co-ordinated by the Technology Strategy Board and guided by an industry-led advisory panel.

The initiative will help secure the uncertain future of the British car industry as rising fuel costs force drivers to find alternative modes of transport, according to skills secretary John Denham.

"The programme is a major step towards securing the long-term future of the British car industry – the people who work in it and the places whose wider economies hinge on attracting international R&D and proving their capacity to add value," he said.

A key goal of the programme is to integrate university and industry research and development activity in an attempt to avoid overlap between different research teams working on similar technologies.

There will also be funding for a strategic programme of university-based research targeted towards future technologies, for which there are good prospects of commercialisation.

Regional development agencies for the North East and West Midlands – which have a strong industrial heritage – have invested significantly in the scheme.

Alan Clarke, chief executive at development agency One NorthEast said the funding will bring clear benefits to the region. "Our investment will allow us to work with business and university partners on projects in the region, to pioneer research and development," he said.

Advantage West Midlands chief executive Mick Laverty similarly said that the initiative will help drive industrial renewal. "The West Midlands is embracing the opportunities of the new low carbon era and Advantage West Midlands takes a regional lead role on the national low carbon vehicle platform," he said.

The UK automotive sector will welcome the scheme, according to John Wood, managing director of engineering firm MIRA and chair of the scheme's advisory panel.

"The UK automotive sector fully recognises the importance of this exciting initiative," he said. "Co-ordination of the UK's low carbon vehicle activity, from initial research through to the production of full demonstration models, is vital if we are to speed up the introduction onto our roads of low carbon vehicles."

Iain Gray, chief executive of the Technology Strategy Board, argued that at a time of economic uncertainty R&D programmes were more important than ever to the long term health of UK Plc.

"We will come out of this downturn and when we do, it will be the businesses which held their nerve and continued to invest that will come out first," he said. "I believe it is those businesses that will emerge stronger and better equipped to face the challenges of the future."