* Controversy in EU executive over fall-out from biofuel
* Leaked letter warns of threat to EU biofuel industry
* Draft document hints at green light to palm oil
By Pete Harrison
BRUSSELS, Feb 12 Fresh controversy is mounting within the European Union over biofuels and their unintended impact on tropical forests and wetlands, documents show.
One leaked document from the EU's executive, the European Commission, suggests biofuel from palm oil might get a boost from new environmental criteria under development.
But another contains a warning from a top official that taking full account of the carbon footprint of biofuels might "kill" an EU industry with annual revenues of around $5 billion.
The European Union aims to get a tenth of its road fuels from renewable sources by the end of this decade, but has met with criticism that biofuels can force up food prices and do more harm than good in the fight against climate change.
Most of the 10 percent goal will be met through biofuels, creating a market coveted by EU farming nations, which produce about 10 billion litres a year, as well as exporters such as Brazil, Malaysia and Indonesia.
Environmentalists say biofuels made from grains and oilseeds are forcing farmers to expand agricultural land by hacking into rainforests and draining wetlands -- known as "indirect land-use change" (ILUC).
Clearing and burning forests puts vast quantities of carbon emissions into the atmosphere, so the EU risks promoting damage to the climate by creating such a valuable market.
To counter that risk, strict environmental criteria have been put in place.
The European Commission has also been looking at introducing new rules to curb the impact of ILUC, but its progress had been complicated by conflicting opinions among specialists on trade, agriculture, energy and environment.
The stakes are high for European biofuel producers.
"An unguided use of ILUC would kill biofuels in the EU," a senior agriculture official in the Commission wrote to a top energy official in a letter seen by Reuters.
As part of its research, the Commission has received new scientific reports casting a new negative light on biofuels due to their indirect impact on land use, but has not made them public, says environmental group T&E.
The group has made a legal request to the Commission for the documents, but it has so far taken more than three-times the statutory 30 days to provide them.
"These reports need to be released so the public can see the full facts," said T&E campaigner Nusa Urbancic. "What is especially worrying is that we are seeing a pattern of manipulation of the science."
Commission officials said their research included hundreds of documents, making it difficult to meet T&E's request.
"The Commission is taking indirect land use change emissions from biofuels very seriously, and is conducting a large amount of work, including modelling work, in order to understand this issue with the best science available," said Marlene Holzner, spokeswoman for Energy Commissioner Guenther Oettinger.
"If the final results of this work show that indirect land use change emissions from biofuels are significant, then the Commission will need to consider what would be the appropriate policy response," she added.
A recent Commission document on biofuels appeared to wave through the palm oil industry, which stands accused of cutting down tropical forests in Malaysia and Indonesia to make way for plantations.
"A change from forest to oil palm plantation would not per se constitute a breach of the criterion," said the document seen by Reuters.
Holzner cautioned against drawing any conclusions from an unfinished draft.
"EU policy promotes only those biofuels which positively contribute towards our ambitions to decarbonise our energy systems," she added.
(Reporting by Pete Harrison)