German parliament rejects cut in biofuel blending

* Upper house vetoes plan to cut biofuel content in fuel

* Hard-hit biofuel industry warmly welcomes the decision

HAMBURG, June 12 (Reuters) - Germany's upper house of parliament on Friday vetoed government proposals to cut its biofuels blending target this year and further raise taxes on biofuels.

The upper house, which represents state governments, refused to accept a plan to cut the 2009 blending target to 5.25 percent biofuel content in fossil fuel in 2009 from 6.25 percent originally intended.

The proposals would damage investment in German biofuels, reduce Germany's capability to cut carbon dioxide emissions and damage a valuable market for agricultural products, said the eastern state of Brandenburg, a location of many biofuel plants.

Germany, along with other European Union countries, compels oil companies to blend biofuels with fossil fuels at oil refineries as part of efforts to combat global warming.

But Germany and several other European countries scaled back biofuel blending plans last year partly on concern that increased biofuel output was causing rising food prices.

"We greatly welcome the decision as the blending market is critical for the future of the industry," said Frank Bruehning, spokesman for the German Biofuels Industry Association.

Germany's biodiesel industry is suffering a huge drop in sales, partly because government taxes on biofuels have removed their price advantage against fossil fuels and cut sales at petrol stations. A series of plant closures and insolvencies have been announced in the past year.

Germany's once-booming biodiesel industry is only working at about 60 percent of its 4.8 million tonne annual capacity, Bruehning said.

Higher taxes mean the association forecasts only 200,000 tonnes of German biodiesel will be sold at petrol stations in 2009, down from 1.1 million tonnes in 2008 and 1.8 million tonnes in 2007 because taxes have made biodiesel more expensive than fossil diesel, he said.

The 5.25 blending level would create a German requirement of about 2 million tonnes of biodiesel this year, the 6.25 percent 2.6 million tonnes, he said.

"With the death of petrol station sales blending is the critical market for us," Bruehning said.

"We are no longer very concerned about government plans to further raise taxes on biodiesel sales at petrol stations as there are almost no sales to tax any more."

The upper house of parliament has already rejected the proposal once and on Thursday vetoed a decision by the inter-parliamentary conciliation committee which had approved the government's proposals.

The proposals now return to the lower house of parliament. They would become law if the lower house approves them again. (Reporting by Michael Hogan; Editing by James Jukwey)