Local councils could introduce a range of measures to speed up the reduction of carbon emissions, a report says.
The government is striving to cut CO2 by 26% by 2020
The study suggests the schemes would achieve the government's goal of 60% less carbon dioxide output 25 years earlier than its 2050 target.
The New Local Government Network report suggests rewards and penalties for councils based on how they perform. Proposals in the report include more congestion charging and converting landfill waste into electricity.
The government's draft climate change bill sets out plans to reduce carbon emissions by a minimum of 60%, from the 1990 base level, by 2050 - and sets an interim target of "at least 26% but not more than 32%" by 2020.
Scientists say carbon emissions, from fossil fuel-powered cars, factories and homes, are linked to global warming.
The report claims 320 million tonnes of CO2 emissions could be saved by 2025 if local authorities introduced a number of measures to reduce their area's carbon footprint.
These range from offering interest-free loans for people to invest in microgeneration technology, such as wind turbines and solar-powered heating panels, to allocating each resident a "carbon credit" to monitor and limit household CO2 emissions.
The report, supported by the international consultancy Serco and Kirklees Council, advocates a carbon trading framework between local authorities, which would reward those who reduce their emissions and penalise those who do not.
New Local Government Network (NLGN) director Chris Leslie said the performance grant scheme would be a "powerful driver" in reducing carbon emissions at the local level.
He said: "If government ministers chose today to give new financial incentives and penalties to each town or city depending on their carbon-saving performance, then the UK's climate change obligations could be met faster and with more."
The idea is based on a study of eight local authorities who participated in a carbon trading role play to reduce CO2 emissions in their locality.
In the study, council officers were obliged to introduce a number of green policies over a five-year period, with all authorities achieving a reduction in emissions.
The report's author James MacGregor added that tackling climate change at the local level can be a vote winner for political parties.
"Long-term actions tended to grow in popularity over time as the benefits were realised," he said.
"This suggests that strong and bold political leadership is key to realising local government's potential to tacking climate change."