Transport secretary Ruth Kelly has commissioned a new study into the wider economic and environmental impacts of biofuels, to help guide future government policy.

The research will be carried out by the Renewable Fuels Agency, a newly formed body set up to administer the government’s Renewable Transport Fuel Obligation (RTFO).

It follows recent widespread criticism by environmental groups and some MPs that many biofuels could do more harm than good and that setting specific targets for incorporating them in transport fuels is misguided.

“Biofuels have the potential to help reduce the impact of transport on the environment, provided they are sustainable,” said Ms Kelly. “However, future biofuel targets must also take into account the latest scientific evidence about the environmental effects.”

The existing RTFO targets, which come into force in April, require a 2.5% inclusion rate for biofuels in transport fuel, rising to 5% by 2010. “We are not prepared to go beyond current UK target levels for biofuels until we are satisfied it can be done sustainably,” said Ms Kelly.

Environmental lobby group Greenpeace has called for the immediate suspension of all such targets. “The scientific evidence is mounting,” said director John Sauven. “Biofuels are often more damaging to the climate than the fossil fuels they are designed to replace.”

But the biofuels industry is adamant that there are many products that offer significant benefits and having minimum use targets is essential to kick start the industry.