The planned Green Investment Bank must be a "real bank" and not just another fund for distributing Government money, MPs have urged.
The Environmental Audit Committee (EAC) said the bank must be able to raise private finance to plug the multibillion-pound gap in investment needed to drive the shift towards green technology such as renewable energy.
The setting up of the Green Investment Bank has been dogged by disagreement within Government about whether or not it should be a bank which is able to raise its own capital.
There are concerns that if it is classified as a "public sector" institution, its borrowing will show up on the Government's balance sheet, undermining efforts to reduce the deficit.
But a report by the committee of MPs said that between £200 billion and £1 trillion will be needed over the next couple of decades to move the UK to a low carbon economy.
According to the report, traditional sources of capital for investment in green technology would provide only £50 billion to £80 billion, leaving a massive shortfall in funding.
In last October's comprehensive spending review, Chancellor George Osborne confirmed the bank would go ahead, with £1 billion in capital, with potentially more raised by private sector funding and the future sale of Government assets.
It is hoped the bank will fund clean energy and low-carbon projects, leveraging billions of pounds in private finance.
The report said the Green Investment Bank would only be able to lever the levels of private investment required to cut emissions and boost renewable energy if it is able to operate as a bank which can raise its own finance on the markets.
EAC chairwoman Joan Walley said if the “Government is serious about being 'the greenest ever', the Chancellor must ensure the Green Investment Bank can do what it says on the tin and raise extra capital like a real bank”.
"The UK desperately needs a game-changing injection of private sector investment if we are going to meet our climate change targets and move to a green economy.
"Setting up a Green Investment Bank without the power to borrow would be a bit like trying to buy a house without first getting a mortgage offer.
"George Osborne has got the deposit, but if he doesn't allow the bank to raise extra capital, the sums are going to fall far short of what is needed," Walley said.
The report said the bank should offer green bonds and also green Isas, which could raise up to £2 billion a year and help people feel they are doing their bit to help move the country to a low-carbon economy while putting money into savings.
The MPs also urged the Government not to rule out using the Green Investment Bank to provide money to support the Green Deal, a Government scheme to improve energy efficiency in millions of homes.
But the bank should not invest in new nuclear power plants, which are a proven technology, instead putting its money into "fledgling green technologies that are struggling to get off the ground", Walley said.
Business Secretary Vince Cable said he wanted the Green Investment Bank to grow into a "significant institution", which with other key policies would help meet environmental objectives and promote economic growth.
"We agree with the committee that the Green Investment Bank should be an enduring bank, which takes investment decisions at arm's length from ministers and be able to reinvest the proceeds from its investments," he said.
The Aldersgate Group, an alliance of business, politics and society leaders, said the committee had sent a strong signal that the Government must not dilute or under-fund plans for the bank.
Ed Matthew, director of Transform UK, who co-ordinates the national alliance for a Green Investment Bank, said this is “the shot in the arm the UK economy needs”.
“The only cost the Treasury should consider is the cost of failure to unleash this institution's massive potential to re-power our economy.”
Greenpeace executive director John Sauven said the EAC report “couldn't be clearer - only a proper Green Investment Bank with at least £4 billion capitalisation and powers to issue Government-backed bonds will deliver”.
"A clear announcement is needed at the Budget so investment can start to flow into Britain's clean energy industries, which would drive the sustainable growth and jobs that are so badly needed in our country."