Iogen says its ethanol reduces greenhouse gases emissions by 90 percent compared to gasoline, and is a good way to reduce dependence on imported oil.

"The message we're trying to send is that cellulose ethanol is really ready to go," Iogen CEO Brian Foody told Reuters.

"This is an excellent illustration of changes that can be made that don't have to change peoples' lifestyles, don't change the kinds of cars they drive, but can yet make significant improvements."

A test of its fuel, and a chance for publicity, comes at next week's meeting of the Group of Eight in Scotland, where climate change is on the official agenda.

The leaders' cars will be powered by a mixture of 95 percent gasoline and five percent cellulose ethanol -- the maximum that European engines can handle.

Regular vehicles in the United States can run on a 10 percent ethanol blend.

But Foody says even 5 percent of cellulose ethanol cuts carbon dioxide emissions by five grams per kilometer (0.6 miles) driven, from a European average of 163 g/km. The European Union wants to cut the average to 140 g/km by 2008

He says widespread use of the five percent ethanol mixture would deliver the same benefits as a 20 to 30 percent market penetration of relatively costly hybrid cars, which are powered by both gasoline and batteries.

The idea is attracting interest from major oil companies. Royal Dutch/Shell has invested C$60 million ($49 million) in privately owned Iogen, and Petro-Canada put in another C$25 million.

The International Energy Agency says biofuels would be increasingly competitive with crude oil prices above $60 a barrel, and Iogen cites US government studies which say fuel from grasses and agricultural residues could one day replace between 30 and 50 percent of US gasoline.

But it will be some time before regular drivers can go the cellulose ethanol route.

Iogen has a test facility up and running in Ottawa, but it is now looking for C$400 million ($325 million) to build its first full-scale production plant.

The plant would need 700,000 tonnes of straw and other agricultural waste a year, and would produce 220 million liters of ethanol.

A liter of the biofuel currently costs around 40 Canadian cents, but Iogen wants to bring that down to 32 Canadian cents eventually.

Recent US figures show it costs around US$1.10 to produce a US gallon of gasoline from crude oil, the equivalent of 36 Canadian cents per liter.