"We have been promised a market but it is not yet there," said Raffaello Garofalo, secretary general of industry association the European Biofuels Board (EBB). "It will come but in the short term we have to go through a desert."

Much of Europe's biodiesel industry is working under capacity, Garofalo said, although no precise figures are available.

Biodiesel sales in the biggest consuming country Germany have fallen dramatically this year after Berlin actually started taxing biofuels at a time when the EU wants to promote green fuel consumption.

Medium-term prospects were excellent following the decision by EU leaders on March 9 for a strategic cut in greenhouse gases by using more renewable energy.

But several key countries including Britain, Italy and Spain had not fully implemented past promises to raise biofuel use, Garofalo said. Germany's biofuel tax showed the country was putting financial considerations above the environment.

"Biodiesel is suffering from over-capacity because it is much easier to build production plants than it is to pass legislation," Garofalo said.

"Plants have been built because of promises by countries to increase biofuels use which they have not implemented and plants cannot run at capacity."

"If there is no legislative support on taxation or binding targets there is no real market for biodiesel."

Biodiesel is more expensive to produce than fossil diesel and needs tax breaks or a legal requirement to blend it with fossil fuels at oil refineries.

GERMAN BIODIESEL CRISIS

Germany's biodiesel industry is facing a crisis with sales at petrol pumps currently down by about 30 to 40 percent compared to December 2006, said Petra Sprick, CEO of biofuels industry association VDB.

"Sales in the petrol station market have collapsed this year," she said. "Our price attraction has gone."

Germany is the EU's largest biodiesel producer, with production capacity rising from two million tonnes in 2005 to 3.2 million in 2006 and just over four million tonnes now.

But Germany's government said it could not afford the loss of revenues as drivers switched from heavily taxed fossil diesel and started taxing biodiesel in August 2006. For a time high fossil fuel prices cushioned the impact of the new tax, but falling fossil fuel prices mean drivers now have no incentive to buy biodiesel.

As vehicles consume more biodiesel than fossil fuels and need more engine overhauls, biodiesel must be cheaper, she said.

"If the government further raises taxes on biodiesel in 2008 as it plans, the whole industry will close down," she said. "This would be a tragedy at a time we need biofuels to cut greenhouse gas."

High prices for rapeseed oil, the main component of biodiesel in Germany, meant biodiesel was being produced at a loss.

German investment in biofuels "has come to a stop", she said. But some projects have reached the point of no return and production capacity would rise to 4.8 million tonnes by the end of 2007.

Germany had introduced compulsory blending of biodiesel will fossil fuels from January 2007 but this would only generate demand for 1.5 million tonnes annually.

German production is being cut and the first biodiesel refinery, BioWerk Kleisthohe, has actually stopped production at it 6,500 tonne a year plant.

"We just cannot sell any biodiesel this year," said BioWerk CEO Thomas Vahle. "The new tax means it is just not competitive."

"I just do not understand the politicians. They say it is so important to stop global warming and then introduce a tax to stop me selling my biodiesel which protects the environment."

Shares in German biodiesel companies have fallen this year as problems became apparent. Producer Verbio issued a profit warning on Monday because of low sales and high costs, causing its share price to fall 40 percent at one point.

Verbio's share late on Thursday was at 7.04 euros, down from its issue price of 14.50 euros in October 2006.

EOP Biodiesel was at 9.80 euros, down from its year high of 22.05 euros in May 2006. Petrotec was at 6.90 euros, down from its year high of 18.60 euros on Nov 7.

UK OUTPUT DROPS

UK biodiesel producers also have problems. Britain's largest biodiesel producer Biofuels Corp plc announced earlier this month that due to unfavourable market conditions it had restricted production to 25 percent of capacity in January and February and output would remain low for the immediate future.

The company, which operates a 250,000-tonnes-a-year plant in north England, has seen its stock price fall to around 15 pence compared with over 200 pence in May last year.

Another key producer D1 Oils has also said it is operating below capacity due to difficult market conditions and many in the sector were disappointed that Britain's finance minister did not boost incentives in a budget on Wednesday.

"It seems to us profoundly odd that the industry should be turning off the biofuels production tap and delaying the installation of capacity just as the government is introducing the RTFO (Renewable Transport Fuel Obligation ) to bring in biofuel blends to reduce the growing levels of carbon emissions from transport," D1 Oils CEO Elliott Mannis said.