Projects designed to halt deforestation and peatland destruction represent a far more cost effective means of cutting carbon emissions than biofuel subsidies and should play a greater role in the government's climate change strategy.

That is the central finding of a new report on biofuels and deforestation from think tank the Policy Exchange, which urges the government to abandon its subsidies and targets for biofuels and instead step up investment in forest protection initiatives.

The think tank, which works closely with the Conservative Party, argued that while the biofuel subsidies that support the government's target of ensuring five per cent of transport fuel comes from biofuels by 2010 will cost the Treasury £550m they will result in carbon emissions reductions of just 2.6 to three million tonnes of CO2 a year, equivalent to one tenth of the output of one coal-fired power station.

The report argues that investing the same sum in preventing deforestation and peatland destruction would cut emissions by up to 200 million tonnes a year, resulting in potentially 50 times more avoided emissions.

Speaking to BusinessGreen.com, report editor Ben Caldecott said that the government should be investing in the most cost effective means of avoiding emissions as a matter of best practice. "The debate over cost keeps getting forgotten, but government should remember that the goal is to prevent climate change and we need to ask what is the cheapest way of doing that," he said. "In that light, it is clear first generation biofuels are far too expensive."

He also endorsed concerns amongst green groups that biofuel subisidies are leading to increased deforestation that undermines their supposed environmental benefits. "We can't tackle climate change in a world where tropical deforestation continues, and there is now plenty of evidence that demand for energy crops is exacerbating that problem," he added.

A spokeswoman for the Department for Transport said that the government realised it had to "proceed with caution" in its drive for greater use of biofuels, adding that it is "pushing for effective sustainability standards for biofuels, and… for EU policy to be reviewed in light of any emerging evidence".

She also argued that the government was investing in forestry projects as well as biofuels, having recently pledged £50 to the Congo Basin Forest Fund, and another £15m via the World Bank Forest Carbon Partnership Facility, to help test and pilot innovative ways to reduce emissions from deforestation.

But Caldecott countered that while such measures are welcome, the fact remains that forestry protection projects represent a far more cost effective means of cutting total global emissions than current biofuel policies. "I would rather pay £5 to a forestry project in Borneo than around £200 to a farmer in the US producing biofuels," he said. "We are paying lots of different groups to change the way they behave and the products they produce so we might as well target the most cost effective."

New mechanisms for helping to fund forestry reduction projects are under discussion at the latest round of UN climate talks in Ghana with experts reportedly divided on how best to increase investment levels. Delegates are discussing proposals to include forestry projects in the global carbon market by allowing them to sell carbon credits, but some critics have argued that such an approach would flood the global market with credits forcing down the price of carbon.

Caldecott insisted that forestry could be integrated into the carbon market without leading to a fall in prices, as long as carbon caps for those companies within cap-and-trade schemes were cut to ensure demand for credits climbs to match the rising supply of forestry credits.