Dec. 11 (Bloomberg) -- New Zealand will scrap a requirement that oil companies sell a share of products blended with biofuel and will instead offer tax breaks on fuels coming from proven sustainable sources, Energy Minister Gerry Brownlee said today.

The fuel sale directive, rising to 2.5 percent of annual sales by 2012, will be repealed under legislation to be voted on next week, Brownlee said in an e-mailed statement. Retailers can continue selling blended products and the government will prepare tax breaks on fuels cutting emissions the most, he said.

The former Labour government of New Zealand, a signatory to the Kyoto Protocol on climate change, set the biofuel requirement nine weeks before the election they lost in November to the National Party. While the target level was reduced to discourage use of fuels sourced from rainforest land or crops, critics said an uneven tax treatment favored imported ethanol over locally produced biodiesel.

“National went into the election promising a consistent tax incentive for sustainable biofuels,” Brownlee said today. “It will develop a process for approving sustainable biofuels to gain tax exemption once sustainability standards have been established that take into account net greenhouse emission reductions.”

Governments worldwide are tempering their drive for biofuel use after a surge in production increased land clearance in Latin America and Asia and reduced food production in some regions. In July, the Organization for Economic Cooperation and Development estimated wheat and corn prices may rise as much as 7 percent in the next decade because of greater U.S. and European production of alternative fuels.

Tax Treatment

In New Zealand, ethanol, usually made from grain or milk waste, is exempt from a 42.5 New Zealand cent (23 cent) a liter tax imposed on gasoline, about 30 percent of the pump price. Biodiesel, usually made from animal fat or natural oils, has no tax advantage over the conventional product.

Argent Energy Plc, operator of the largest biodiesel plant in the U.K., in August abandoned plans for a NZ$100 million ($73 million) project to make the fuel in New Zealand citing the government’s refusal to address the tax discrepancy. Government owned Biodiesel New Zealand Ltd. is building a 15-million liter a year plant at Rolleston, southwest of Christchurch.

National previously advocated a matching tax exemption for ethanol and biodiesel based on the percentage blended with conventional fuels, Brownlee said. It will also assess other alternative fuels and the role of electrically powered vehicles to ensure an even-handed treatment, he said.

To contact the reporter on this story: Gavin Evans in Wellington at gavinevans@bloomberg.net

Last Updated: December 10, 2008 21:13 EST