The announcement adds to a series of initiatives to clean up smog-choked Chinese cities and control surging demand for imported oil. The government is spending heavily to develop an electric car industry and has raised sales taxes on vehicles with larger engines.
Plans call for China to develop a demonstration facility by 2020 that can make 50,000 tons of ethanol a year from cellulose, according to the Cabinet's National Energy Administration. It said that would expand to commercial scale by 2025.
'It is an ideal alternative to fossil fuel,' said an unidentified NEA official quoted by the official Xinhua News Agency.
China is the world's biggest energy consumer and auto market. It started producing ethanol from corn in 2004 but banned use of food crops in 2007, prompting suppliers to switch to straw stalks and other materials. About one-fifth of gasoline produced in China has added ethanol, according to Xinhua.
Regulators later eased the ban on use of food crops in some areas. Xinhua said the latest plan is intended in part to use up aging stockpiles of corn.
Other governments including Brazil and the United States require gasoline to contain from 10 percent to as much as 85 percent ethanol to curb emissions and reduce petroleum demand.
The NEA gave no indication what level of ethanol would be required, but Xinhua said it would be 10 percent.
On Saturday, a deputy industry minister said Beijing is developing a timetable to phase out production and sales of traditional fuel cars. France and Britain announced similar plans in July.