Dow Chemical and Algenol Biofuels, a start-up company, are set to announce Monday that they will build a demonstration plant that, if successful, would use algae to turn carbon dioxide into ethanol as a vehicle fuel or an ingredient in plastics.

Because algae does not require any farmland or much space, many energy companies are trying to use it to make commercial quantities of hydrocarbons for fuel and chemicals. But harvesting the hydrocarbons has proved difficult so far.

The ethanol would be sold as fuel, the companies said, but Dow’s long-term interest is in using it as an ingredient for plastics, replacing natural gas. The process also produces oxygen, which could be used to burn coal in a power plant cleanly, said Paul Woods, chief executive of Algenol, which is based in Bonita Springs, Fla. The exhaust from such a plant would be mostly carbon dioxide, which could be reused to make more algae.

“We give them the oxygen, we get very pure carbon dioxide, and the output is very cheap ethanol,” said Mr. Woods, who said the target price was $1 a gallon.

Algenol grows algae in “bioreactors,” troughs covered with flexible plastic and filled with saltwater. The water is saturated with carbon dioxide, to encourage growth of the algae. “It looks like a long hot dog balloon,” Mr. Woods said.

Dow, a maker of specialty plastics, will provide the “balloon” material.

The algae, through photosynthesis, convert the carbon dioxide and water into ethanol, which is a hydrocarbon, oxygen and fresh water.

The company has 40 bioreactors in Florida, and as part of the demonstration project plans 3,100 of them on a 24-acre site at Dow’s Freeport, Tex., site. Among the steps still being improved is the separation of the oxygen and water from the ethanol. The Georgia Institute of Technology will work on that process, as will Membrane Technology and Research, a company in Menlo Park, Calif. The National Renewable Energy Laboratory, an Energy Department lab, will study carbon dioxide sources and their impact on the algae samples.

Algenol and its partners are planning a demonstration plant that could produce 100,000 gallons a year. The company and its partners were spending more than $50 million, said Mr. Woods, but not all of that was going into the pilot plant. The company had applied to the Energy Department for financing under the stimulus bill, but would build a pilot plant with or without a grant, he said.   

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