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The plan was unveiled by Premier Frank Hsieh during a visit to the southern town of Hsuehchia, one of three sites picked by the Council of Agriculture to experiment on the trial project.
The "biomass fuel" could be produced by crops such as beans and sunflowers, and the island's emission of oxygen dioxide could be reduced by up to 900,000 metric tonnes a year, the council estimated.
Taiwan imports nearly all of its energy needs and with the historically high crude prices the government has ordered agencies to generate electricity from renewable sources.
This includes hydraulic, wind, solar power, and biomass.