EU agrees plan to cap use of food-based biofuels

* Deal fixes 7 percent limit for biofuels from food crops

* Still needs European Parliamentary approval

* New generation biofuels say they need more incentives (Adds reaction)

By Barbara Lewis

LUXEMBOURG, June 13 (Reuters) - EU energy ministers agreed on Friday to limit production of biofuels made from food crops, responding to criticism they stoke inflation and do more environmental harm than good.

The ministers' endorsement of a compromise deal overcomes a stalemate hit late last year, when European Union governments failed to agree on a proposed 5 percent cap on the use of biofuels based on crops such as maize or rapeseed.

Friday's agreement would set a 7 percent limit on food-based biofuels in transport fuel.

It still needs the approval of the newly-elected European Parliament, expected to begin considering it later this year.

"We think this proposal is much better than nothing," European Energy Commissioner Guenther Oettinger told the Luxembourg meeting of ministers.

"We need to support research and development in advanced biofuels so we can move forward from generation one into generation two and generation three," he added, referring to more sophisticated biofuels that do not compete with growing crops for food.

The proposed 7 percent limit is part of a goal to get 10 percent of transport fuel from renewable sources by 2020.

Initially, the European Union backed biofuels to contribute to efforts to curb greenhouse gas emissions and EU dependence on imported oil and gas.

Research has since shown that making fuel out of crops such as maize displaces other crops, forces the clearing of valuable habitats, and can inflate food prices.

The next generation of advanced biofuels, made from waste or algae for example, does not raise the same problems, but does require more investment.

The compromise supported by ministers on Friday includes a 0.5 percent non-binding target for next-generation biofuels, which environment campaigners say is nowhere near enough to make a difference.

The agreement could mean that the overall goal to get 10 percent of transport fuel from renewable sources by 2020 is missed, analysts say. Currently around 5 percent of EU transport fuel comes from renewable sources.

Food-based bio-refiners, which have invested on the basis of the original 10 percent, say a lower target threatens jobs.

And those trying to develop advanced biofuels say they are not been given sufficient incentive.

Manuel Sanchez Ortega, CEO of Spanish renewable and engineering firm Abengoa SA (NasdaqGS: ABGB - news) told Reuters by telephone the deal was positive in that it reduced uncertainty, but Europe was in danger of being left behind.

"In the United States there has been a revolution (in second-generation ethanol)," he said. "To us it seems that Europe is acting timidly."

Thomas Nagy, executive vice-president of Novozymes , which makes enzymes used in the production of advanced biofuels, said Friday's decision enabled "a reboot of the decision-making process".

However, he also said there was an "absence of incentives to allow the conventional biofuel industry to develop sustainably". He urged the European Parliament to propose amendments when it resumes debate of the draft law. (Additional reporting by Sybille de la Hamaide in Paris and Jose Elias Rodriguez in Madrid; editing by James Macharia and Jason Neely)