Unless the Texas biofuels industry can convince state officials its vegetable-based diesel fuel won't foul the state's air, it risks being forced from the huge Texas diesel market.

Texas is the nation's largest producer of biodiesel, a mix of regular diesel and vegetable oil. A decision to allow or forbid the fuel is expected before year's end.

The state's chief environmental regulatory agency, the Texas Commission on Environmental Quality, has told the fledgling industry it must prove the fuel is clean enough for Texas.

That position puts Texas in a class all its own; other states are embracing the fuel.

Nationwide, experts agree, biodiesel is a "clean fuel" because it is nontoxic and biodegradable, and because it drastically reduces emissions of hydrocarbons, sulfur, carbon monoxide and particulate pollutants.

TCEQ is concerned, however, that biodiesel may increase tailpipe emissions of one pollutant in particular, smog-producing nitrogen oxide, or NOx. The state must reduce NOx in urban areas to meet federal Clean Air rules.

On Sept. 26, state senators on the Senate Natural Resources Committee will meet in Austin to hear testimony on biodiesel. Expected to testify is a noted expert in biodiesel/NOx research, Robert McCormick with the U.S. Department of Energy's National Renewable Energy Laboratory. McCormick has told the Environmental Protection Agency that preliminary test results show no net NOx increase from biodiesel and, in some cases, a decrease.

If TCEQ approves biodiesel, which has been on the market in Texas for a decade, the fuel can continue to be sold in 110 counties of eastern Texas suffering from polluted air, according to Mike Masi, general counsel to the nonprofit trade group Biodiesel Coalition of Texas.

"The 110 counties are a massive diesel market," said Masi, a partner with the Austin-based law firm Lloyd Gosselink Blevins Rochelle & Townsend P.C., noting that urban areas like Dallas-Fort Worth, Houston, Austin and San Antonio are included in the 110 counties, as well as the huge coal mining, quarrying, timber, marine and agriculture industries.

Texas is the nation's No. 1 consumer of diesel fuel, with biodiesel now making up a small, but increasing, slice. Besides reducing pollution, fans say biodiesel supports Texas farmers and keeps energy dollars in the state. Made worldwide from oils like soy and canola, biodiesel in Texas comes largely from crushing cottonseed.

"We have the potential to make a huge impact on the energy market," said Jeff Plowman, a founder of BCOT. "Texas is producing 96 million gallons this year."

Nationwide, biodiesel production has soared since 1999, when it was 500,000 gallons, says the Missouri-based National Biodiesel Board. The board predicts 150 million gallons this year.

Resolving the NOx issue is critical for the Texas industry, including 2-year-old Dallas-based Earth Biofuels Inc., said Linda Berndt, the company's director of public affairs.

The industry is confident it will convince state officials that biodiesel emits no more NOx than its petroleum counterpart. Newly formed BCOT has been meeting with TCEQ officials to present position papers and technical data to the agency in what Masi characterized as "a very cooperative dialogue."

While TCEQ struggles with technical aspects, Texas' political leaders are promoting the fuel. Lt. Gov. David Dewhurst in the fall issued a charge to the Senate to evaluate and look at eliminating economic and other barriers to biofuels. Similarly, Sen. Kay Bailey Hutchison, R-Texas, was keynote speaker in May at a Galveston Bay groundbreaking for what will be the nation's largest biodiesel plant. A partnership between Chevron and Texas A&M University, it will have an annual production capacity of up to 100 million gallons.

Biodiesel's NOx emissions came to the forefront Nov. 1, 2005, after TCEQ issued a rule for its Texas Low Emission Diesel program. The TxLED rule mandated, in part, reformulated diesel fuels that are less polluting. TCEQ in a subsequent clarification indicated biodiesel wasn't compliant with TxLED.

"When biodiesel fell into that niche last year, it sent a shock wave through the country," said Jake Stewart with BCOT, who also is vice president of development for Houston-based Organic Fuels.

The ruling drove consumers away. Demand dropped like a stone, Plowman said.

Scrambling quickly, the industry presented initial technical data and, in February, won a stay of execution from TCEQ until Dec. 31. Demand went back up.

BCOT believes biodiesel is compliant. Without approval under TxLED, the industry's manufacturers will either have to mix in additives, or else sell the fuel largely out of state, Stewart said. But the industry in recent months says it's seen hopeful progress.

"Political support is not a problem. Biodiesel kind of fits into motherhood and apple pie," Stewart said. "It gets bipartisan support because it really is a fuel that goes straight back to the farm."