Business Secretary Vince Cable has announced a £75m fund to speed up the development of green engine technologies.
To apply for a share of the Advanced Propulsion Centre (APC) pilot project budget, bidding groups must include a vehicle manufacturer, an SME and a supply chain company.
One beneficiary is a £1.5m scheme to test driverless cars in a pedestrianised area for the first time.
The 'pods' will carry two people and run on designated pathways in Milton Keynes city centre.
The plan is for an initial batch of 20 driver-operated pods to be running by 2015. By 2017, there will be 100 fully autonomous pods.
Early collaborators on the project are engineering consultancy firm Arup, Transport Systems Catapult, The Automotive Council, and Cambridge and Oxford Universities.
Vince Cable commented: “By 2050, very few - if any - new cars will be powered solely by internal combustion engines, so it is important that the UK car industry is at the cutting edge of low carbon technologies.”