Oil produced from algae could replace fossil fuel-based oil by 2020 if a funding initiative is successful.
The Carbon Trust has launched the Algae Biofuels Challenge to promote research into commercialising the use of algae as the raw material for oil.
Up to £6 million could be made available by the Carbon Trust and the Department for Transport has announced that it could contribute as well.
According to the trust, algae-based biofuels could replace over 70 billion litres of fossil derived fuels by 2030, leading to a cut in carbon dioxide emissions of over 160 million tonnes of CO2.
Transport minister Andrew Adonis said: "Everyone agrees that to tackle climate change we must develop new and cleaner fuels. But we are clear that biofuels will only have a role to play in this if they are sustainably produced."
The project aims to develop second generation biofuels, which do not use food crops as a raw material.
In the first phase funding will be provided to bidders to research which microalgae to use, maximising algae oil content and solar conversion efficiency and cultivation methods.
The second stage will be the construction of an open pond test and demonstration plant.
Algae-based biofuels are considered to be an alternative to controversial raw materials for biofuel.
The EU slowed down its biofuel adoption schedule following rapid food price hikes, which the World Bank attributed to the use of food crops and arable land to produce biofuel.
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