The Government’s £2.7 billion-a-year budget for winter fuel payments might be better spent on lagging, insulating, reglazing and modernising the homes of pensioners who cannot afford to heat them properly, suggested local government spending watchdog the Audit Commission.

The Commission pointed out that only 12% of people receiving the payments - worth up to £400 a year - are classed as being in fuel poverty. And it said that the payments do nothing to encourage energy efficiency and reduce the CO2 emissions blamed for global warming.

Audit Commission chairman Michael O’Higgins said: “A one-off improvement in energy efficiency would cut household bills, giving householders lasting independence. Good for the planet and for their pockets.

“Surely this would be much better than pensioners needing continual government support to keep draughty houses warm every winter.”

In a report entitled Lofty Ambitions, published today, the Audit Commission said that improvements in domestic energy efficiency can play a big part in meeting the government’s legally-binding target of 80% cuts in greenhouse gas emissions by 2050.

Homes account for a third of Britain’s carbon emissions, which could be cut more quickly and cheaply than those from industry or transport, said the report.

Cutting the power consumed by homes by one-third would cost around £50 billion, but the money would be repaid through cheaper fuel bills within eight years. The measures would improve the health and comfort of the 4 million people who cannot currently afford to heat their homes properly - half of whom are pensioners.

“Expenditure on winter fuel payments, as well as being poorly targeted, does not provide a sustainable solution to the problem it seeks to address, said the report.

“Winter fuel payments increase incomes but do not reduce energy consumption or bills. It would be more sustainable to improve energy efficiency in fuel-poor households, reducing energy bills and CO2 emissions.”

Today’s report said that local councils are well-placed to support the fight against climate change by obliging or subsidising social landlords and private sector homeowners to reduce domestic CO2 emissions.

It urged the Government to carry out a check on whether its voluntary approach to emissions cuts at the local level was working.

Mr O’Higgins added: “The global issue of climate change must now become a domestic one.

“There is a growing realisation that, unchecked, climate change will destroy the natural and built environments. Reducing emissions now will be far less costly than adapting our world to the consequences in the future.”

But Dot Gibson, general secretary of the National Pensioners’ Convention, said: “Every year over 20,000 pensioners die from cold-related illnesses and one in three older people are currently living in fuel poverty; paying more than 10% of their income on energy bills.

“Every time there is a 1% increase in energy bills, a further 40,000 older people fall into hardship.

“Suggestions that this scandal can be tackled by means-testing the winter fuel allowance is frankly stupid. The best way of getting money to those who need it most is to pay it universally and use the tax system to claw it back from those who are well off.”

Duleep Allirajah, policy manager at Macmillan Cancer Support, said: “Scrapping the winter fuel payment would be disastrous and a massive failing to those in fuel poverty who so desperately need it.

“For many vulnerable people over 60, including cancer patients, it provides immediate and vital financial help and getting rid of it would leave them cold and out of pocket.

“Improved energy efficiency measures will help in the long term but will do nothing to help vulnerable cancer patients struggling with fuel bills right now.

“With Government figures released today showing an increase in the number of households in fuel poverty, the UK faces an immediate crisis. And far from scrapping the winter fuel payment, we urge them to extend it to cancer patients under 60 who are in need.”

Andrew Harrop, head of public policy for Age Concern and Help the Aged, said: "While winter fuel payments don't provide a long-term solution to fuel poverty, in 2006 the payments were responsible for taking around 200,000 households out of fuel poverty in the UK.

"In an ideal world, the winter fuel payment wouldn't be necessary because people would have a sufficient pension to pay their heating bills, but the reality is more than two million pensioners live in fuel poverty and the winter fuel payment is still an effective way of getting additional help these people."