"If the tax exemption is ended for refined diesel at petrol pumps this market would collapse," said Arnd von Wissel, chairman of German biodiesel producers' association VDB.

Biofuel industry and farm associations are lobbying hard to retain some form of tax break and the actual scope of the coalition's plans are unclear. But Germany's Finance Ministry said this week biodiesel taxes would be raised in some form.

Surging oil prices meant German biodiesel consumption shot up this year to an estimated 1.8 million to two million tonnes from 1.1 million tonnes in 2004. About half of consumption is sold at petrol pumps and half is blended with conventional fuel by oil refineries.

Von Wissel warned compulsory blending could not replace the potential collapse in sales caused by higher retail taxes. German oil refineries will be compelled to blend a maximum five percent biodiesel content into conventional diesel fuels.

"We are already approaching a five percent blending level so this would only stablise sales in this sector," he said.

He said it was "absolutely essential" biodiesel retained a tax concession. Biodiesel was more costly to produce than conventional fuels and without a tax break would be more expensive than mineral diesel.

"This would devastate sales at the petrol pumps," he said. "Such a fall in sales would have a huge impact on an expanding industry, it would also affect rapeseed prices."

But if a tax concession could be retained on retail sales keeping biodiesel cheaper than conventional fuels, von Wissel said strong sales at the petrol pumps would continue.

"We are now hearing that coalition politicians do not want to wreck this market but that some tax exemption will be retained," he said.

Expanding German biodiesel use has strongly supported European rapeseed prices since the summer but fears of higher German taxes recently put the key Paris market under pressure.

GOVERNMENT IN FINANCE DILEMMA

Estimates are that booming biodiesel sales mean Germany's government is losing between 900 million euros ($1.06 billion) to one billion euros a year in tax revenues on conventional diesel, seen as too large to continue despite a desire to promote biofuels.

European oilseed and vegetable oil producers' federation Fediol said the German measure was not a surprise as the European Union was likely to embrace compulsory blending, while removing all tax exemptions for biofuels.

"The German government cannot fund the tax exemption forever and for an unlimited amount of biodiesel," Fediol director general Pascal Cogels said.