The great green con

Arnold Schwarzenegger, the Governor of California, uses it in one of his Hummers. Sir Richard Branson, the Virgin boss, wants to fuel his planes with it. American President George Bush (pictured below) hopes it can wean his country off oil imports from the Middle East. And next year, if tough new targets are met, it will be in every other litre of petrol sold at the pumps in this country.

Biofuel is the latest green craze. It is made from crops such as wheat, rapeseed, corn and sugar, and less commonly, waste products such as used cooking oil and tallow (animal fat). According to biofuel's many fans, blending conventional petrol and diesel with these crops or waste reduces the amount of crude oil needed and the overall amount of carbon released into the atmosphere.

Everyone is jumping on the biofuel bandwagon. In his State of the Union address in January, Mr Bush announced a 15 per cent target for the replacement of petrol by biofuels in US vehicles. Over the next 18 months, American biofuel production capacity will double to some 7 per cent of the petrol that the country consumes.

The EU has set a less ambitious target of just under 6 per cent by the end of the decade; this could rise to 10 per cent.

But questions are starting to be raised about just how green biofuels really are. They encourage deforestation - responsible for around a quarter of the world's carbon emissions - as land is cleared to grow the crops. Biofuels have also driven up food prices, hitting the world's poor the hardest. According to the International Grain Council, at the end of this financial year the world's grain stocks (corn, wheat and barley) will be the lowest since the 1970s, mainly because of soaring demand from biofuels. Some of these "green" energy sources also use up more energy during the manufacturing and refining process than they save.

Politics - particularly the interests of big agricultural businesses - is starting to dictate the biofuel market. The US has imposed punitive import tariffs on Brazilian-made ethanol - one of the world's most efficient bio-fuels - and subsidises the export of its domestically made corn-based ethanol, which is one of the least efficient. This subsidy could lead to a trade war between the EU and the US.

The biggest drawback with biofuels is the deforestation that it directly and indirectly causes. How much deforestation takes place is hard to measure, but if new demand emerges - such as from biofuels - more land has to be found from somewhere.

Biofuel crops thrive best in tropical climates. For example, Brazil can make 6,000 litres of ethanol from a hectare of sugar cane (the staple crop for Brazilian biofuels), which is five times the output of a hectare of rape seed in the UK. It is also cheaper to produce biofuels in countries such as Brazil. According to Department of Transport figures, to grow and process ethanol in Brazil costs less than half what it does in the UK.

Sugar cane production in Brazil rose by half between 1993 and 2003, from 2.8 million hectares to 4.2 million hectares, mainly to feed domestic demand. It is expected to increase by half again by the end of the decade to meet global demand.

It does not necessarily follow that sugar cane grown in Brazil to make biofuels will be planted on cleared rainforest or tropical savanna. According to a study commissioned by the Dutch government, sugar cane plantations usually replace land used for grazing cattle or other forms of food production. But the effect of sugar's advance is to displace other food production into the cerrado - tropical savanna covering a quarter of Brazil which, according to the World Wide Fund for Nature, is biologically the richest grassland in the world. According to scientific body the Brazilian Agricultural Research Corporation, around a 10th is already being used for cattle grazing, but this will grow.

Because of the growth in sugar-cane farming, the Dutch report says, "livestock production is moving - particularly to the central part of Brazil, and particularly at the borders of the present agricultural land, into cerrados".

Deforestation caused by growing palm oil - another cheap bio- fuel staple - in Asia, principally Indonesia and Malaysia, is also causing concern. The Friends of the Earth environmental group estimates that 87 per cent of deforestation in Malaysia between 1985 and 2000 was to make way for palm oil plantations.

The British Government has admitted that a "significant proportion" of UK biofuel demand will be met by imports. Indeed, analysts at Goldman Sachs believe that to meet the 2010 target wholly from domestically grown plants would take over a quarter of all available crop land in the country. This means buying biofuel crops from places such as Brazil and Indonesia, with all the environmental consequences - direct and indirect - of deforestation which follow.

Chris Brodie,a partner at the Krom River commodity fund, argues that agricultural prices will keep headinghigher as more land is devoted to biofuel-crop production. Global grain stocks are already at historical lows because of biofuel replacement levels in the US, he says. When American biofuel demand doubles - and when the EU targets kickin -grain prices will increase even further. "You really need toapply common sense. The further we impact grain inventories, the impact on grain prices will be multiplied."