The higher cost of the new fuel will end up being passed down to drivers by the oil industry, and the rush to plant more biofuel crops could result in burning swathes of virgin forest cleared for cultivation, speeding up global warming.

Heightened political worries about climate change, energy security and soaring oil prices have triggered a race to produce the alternative fuel, made from sugars, cereals and vegetable oils, as rules are enforced stipulating the minimum amounts that must be blended with fossil fuels.

In the United States 46 ethanol plants are in the pipeline, 100-plus Brazilian ethanol sugar mills are expected by 2011, the EU sees cereals use for biofuels quadrupling by 2013, and Indonesia and Malaysia are to set aside two-fifths of their palm oil output for biodiesel.

But compared to conventional gasoline, biofuels are still uneconomic in developed countries and hefty tariffs and transport costs weigh on imports.

And as capacity explodes the expected forest clearance could release a surge of carbon dioxide into the atmosphere, environmental campaigners say.

A key threat of high biofuel costs is a pump price hike. In the United States this year law-changes requiring greater blending sparked an ethanol shortage and cost surge which refiners passed on at the pump.

"Otherwise they'd be selling gasoline at an eye-watering loss," said Phil New, global head of biofuels at BP, the biggest ethanol blender in the U.S. last year.

The European Union could be set for the same.

The bloc has set a minimum target of 7 percent biofuels by volume by 2010 compared to 1 percent currently, according to Darran Messem, head of biofuels at Royal Dutch Shell, the world's biggest biofuels distributor.

EU states are gradually shifting the onus for meeting the target on to refiners -- away from tax reliefs -- with the risk these will pass on higher costs to car drivers.

"You've clearly got inflationary pressure," said Messem.

"You could imagine that (the costs of an EU ethanol shortage) would be passed on to the consumer because retail markets are so tight," said BP's New.

FOREST BURN

Problems loom at the production end too.

Burning biofuels belches out fewer greenhouse gases than conventional fossil fuels because the plants they are derived from absorbed those same gases in the first place.

The hitch is that the explosion in capacity taps sources like Indonesia and Brazil, where new palm oil and sugar plantations could threaten rainforests. Burning them would more than wipe out any climate change advantage.

Malaysia is due to start selling a 5 percent palm oil-diesel blend at domestic pumps in October, while Indonesia -- which plans to open six million hectares to biofuel plantations -- has set a 10 percent biofuels target by 2010.

The difficulty for refiners is matching these targets without harming the environment through deforestation.

"Because we do have operations in markets that are interested in putting in place palm oil mandates we are taking a close look at implications," said Messem. Neither Shell nor BP currently blend palm oil.

The fear among green groups is that if they start, in wilder forest outbacks producers could hoodwink the refiners' checks.

"We've seen the rate of deforestation in the Amazon," said leading environmental campaigner George Monbiot. "Who's to stop them from clearing land for palm oil? Who's going to blow the whistle?"

It is a problem the oil industry says it is taking seriously.

"It's very difficult for us to police and enforce compliance with national law," Messen said. "We work closely with our suppliers to try and make sure those standards are adhered to."