The minority Conservative government wants to regulate that 5 percent of gasoline sold in the country by 2010 contain biofuels such as ethanol made from corn or wheat, and that 2 percent of diesel sold by 2012 be biodiesel.

"What we're doing today ... before looking at things like incentives and subsidies, is to set the ground rules," Environment Minister Rona Ambrose said.

"Frankly, I turn it over to the opposition now: we need the passage of the Clean Air Act to move forward with our regulations, and looking forward to other market incentives," she said at a news conference in Saskatoon, Saskatchewan.

The government has a minority in Canada's Parliament, and would need opposition parties to vote in favor of legislation that would include the targets.

The regulations could take at least two years to develop, and the government plans consultations and studies through 2007.

Agriculture Minister Chuck Strahl said other incentive programs to spur Canadian biofuel production would have to be part of a future budget, which would also require support from opposition parties to pass.

Renewable fuels are made from crops, plant material and animal fats, and reduce greenhouse gas emissions from vehicles when added to gasoline and diesel fuels.

Canada would require 2.1 billion liters of renewable fuels and 600 million liters of biodiesel to meet the targets.

Currently, Canada produces only about 400 million liters of ethanol and 100 million liters of biodiesel, said Bruce McEwen, chief of Environment Canada's fuel section.

"The regulations would not require Canadian content," McEwen told reporters.

Strahl announced C$200 million (US$174 million) to encourage farmers to invest in new plants, and C$145 million on research and development in the sector.

The government will help farmers with up to 25 percent of project costs, or a maximum of C$25 million per project.

Canadian biofuel producers have long said they need tax incentives to compete with the booming US biofuel sector.

Canada will be the first country to regulate the use of biodiesel, Ambrose said.

The canola industry wants to supply the domestic biodiesel industry, but needs more help, the president of the Canola Council of Canada said.

"Without government investments that put Canada on par with the US, there is no biodiesel industry in Canada," said Barb Isman, president of the Canola Council of Canada.

Canada is the world's largest producer and exporter of canola, a rapeseed variant that traditionally has been used to make cooking oil.

In 2006, Canada exported more than 100,000 tonnes of canola oil to the European Union for use in biodiesel, as well as several hundred thousand tonnes of canola seed to crushers in Dubai, Turkey and Pakistan for use in the EU biodiesel industry.