The Government is working on a tax incentive regime to encourage the production of sustainable biofuels in New Zealand, Energy and Resources Minister Gerry Brownlee told Parliament yesterday.

He was speaking on the first reading of a bill that repeals the obligations placed on oil companies requiring them to put biofuels into petrol and diesel, reaching a level of 2.5 percent in 2012.

The obligation was introduced by the previous government and Mr Brownlee said the new government had a different approach.

"We think biofuels should be introduced through companies responding to commercial, environmental and marketing considerations, not because the Government tells them what to do," he said.

Mr Brownlee said there were problems with the previous government's regime because oil companies would have to import biofuels without any guarantee that they were produced sustainably.

He said forests were being cleared to grow biofuel and some sources, like soy and corn, were having the effect of forcing up the price of food.

The obligation would also increase the cost of fuel, estimated by oil companies at between 2c and 8c a litre, and the Government did not want that to happen during tough economic times.

Mr Brownlee said the Government supported the use of biofuels and knew it had a big role in the future.

But there was not enough of it being produced in New Zealand to help the oil companies meet the obligation.

Mr Brownlee said sustainability standards for biofuels were being developed, and that work would continue.

He said the Government was looking at applying a consistent tax incentive for sustainable biofuels, exempting ethanol and biodiesel from excise and road user charges in proportion to the blend.

Under the plan, a 10 percent blend would get a 10 percent exemption.

Labour MP Pete Hodgson said the Government was repealing the legislation for political reasons and had no rational explanation for what it was doing.

"This is an act of environmental vandalism, the minister has made a botch of it," he said.

"It is economically damaging. Companies will have to close...it doesn't allow New Zealand to take slow and early steps on biofuel -- that will be stopped by this legislation."

Mr Hodgson said Mr Brownlee had quoted price increase estimates work out by oil companies and had ignored official advice.

That advice was that the cost difference would be between minus 4c and 1.3c a litre.

"The Government's decision to wind back biofuels is simply wrong," Mr Hodgson said.

The bill passed its first reading on a 62-59 vote. National and ACT supported it but all the other parties in Parliament opposed it, including National's supporters United Future and the Maori Party.

The bill is being debated under urgency and will go through all its stages before Parliament adjourns on Thursday for the summer recess.