Britain has signed up to an EU directive which insists suppliers dilute petrol with environmentally-friendly alternatives.
The new petrol is called E10 and is due to be launched in the UK later this year, alongside standard petrol and other green fuels.
However, a study released by Chatham House today warned the petrol gives fewer miles to the gallon, adding around £80 a year extra to the average family’s fuel bill.
"The increased use of ethanol in petrol to meet EU sustainability targets is resulting in drivers paying extra at the pump," the study warns.
Additionally, The Department for Transport estimate that up to 8.6million vehicles may not be compatible with the new fuel.
The increased use of ethanol in petrol to meet EU sustainability targets is resulting in drivers paying extra at the pump
Author Rob Bailey, a senior research fellow at Chatham House, warned E10 petrol is not compatible with older vehicles.
"Based on case studies in other countries that have introduced E10, field trials and laboratory tests, the research found issues of material incompatibility, corrosion and drivability problems for vehicles of ten years or older," he said.
The move to E10 is part of a wider policy to cut the use of fossil fuels and so reduce their contribution to the creation of greenhouse gases and global warming.
The EU’s Renewable Fuel Transport Obligation requires 5 per cent of the fuel supply of member states to be renewable by 2014.
Oil companies are using ethanol as the renewable source which, when diluted with petrol ethanol, generally cuts a vehicle’s fuel efficiency.
The green petrol was introduced in Germany two years ago and many drivers decided not to use it in case it damages their engines and because they are uncertain about the wider “environmental and social impacts of ethanol,” said Mr Bailey.
The news comes as new research suggests a third of Brits admit to driving on next to no fuel each month as they only top up with just "as much as they can afford."
The study was funded by Olleco, a business which collects and converts used cooking oil to be used as biodiesel, an alternative to ethanol which the report found to be more environmentally friendly and cheaper for drivers.