By 2010, universities and further education colleges that do not meet defined levels of sustainable development in management and curriculum could have their funding council grants withheld.
The proposal appears in the first annual report of the Sustainable Development Education Panel, a government advisory body reporting to David Blunkett and John Prescott.
Published this week, it proposes that further and higher education funding councils make sustainable development performance a condition of grant.
The panel is chaired by Exeter University vice-chancellor Sir Geoffrey Holland and includes Peter Toyne, vice-chancellor of Liverpool John Moores University, who in 1993 wrote a report on greening universities. It follows a wide-ranging statement on sustainability in universities signed by vice-chancellors, principals and students earlier this month.