While ethanol made from fermented corn grain can boost the octane and reduce the tailpipe emissions of gasoline, it’s expensive, costing about five cents a liter more than gas. A Canadian biotech company, however, says that next year it will begin building the world’s first facility to mass-produce ethanol, not just from grain, but from a far more abundant source: agricultural waste, such as cornstalks, cobs, and leaves. That could help bring ethanol’s price closer to that of gasoline.

Iogen of Ottawa, Ontario, uses enzymes made by a genetically engineered fungus to convert cellulose in the corn waste to sugars, which are then fermented to make ethanol. Three sites in the United States, Canada, and Germany have been proposed for the new plant, which will produce about 200 million liters a year – a capacity similar to that of the largest existing ethanol plants – and should be operational by 2007, says Jeff Passmore, executive vice president of Iogen. A $54 million investment by Shell and Petro-Canada is making it possible.

Whether Iogen can actually reduce the cost of ethanol won’t be clear until the factory is up and running, says Robert Anex, an agricultural engineer at Iowa State University. But what is clear is that using all of the waste from U.S. corn could theoretically increase the U.S. ethanol supply from about 11 billion liters a year to 95 billion liters, which is more than enough to blend with all U.S. gasoline at the current common proportion of up to 10 percent, says Charles Wyman, a chemical engineering professor at Dartmouth College.

If Iogen succeeds, the chemical that gives zip to beer could help a lot more cars run cleaner.