* Investors say ethanol production in Amazon economically viable
* Environmentalists fear pressure on land use
By Reese Ewing
SAO PAULO, June 4 (Reuters) - Brazil plans to vote on a bill in the coming weeks to reopen large areas of the Amazon to sugar cane mills, rekindling fears that ethanol production could accelerate deforestation and create a major marketing challenge for the country's biofuels industry.
Environmentalists are concerned Congress' vote could overturn a ban on cane expansion in the region that went into place in 2009 and increase pressure on land use in areas that amount to nearly a third of the broader Amazon region in Brazil.
Meanwhile, the expansion into the environmentally sensitive areas could hurt ethanol producers' plans to open new export markets, economists say.
Investors say the high cost of transporting fuels into Brazil's isolated north makes local production of ethanol a compelling economic investment, while senators from the region supporting the bill believe more cane mills would actually help curb illegal deforestation and create jobs.
"It's not like there will be a flood of new mills suddenly," said Roraima state Senator Acir Gurgacz, who is sponsor of the bill. "Mills still have to follow environmental laws ... and soy and cattle are allowed, so why not cane?"
If the bill, which cleared the Senate Environmental Committee in May, passes the full Senate and lower house in the coming weeks, it will overturn the ban at a delicate moment.
Brazil's main cane ethanol lobby is trying to convince the European Commission to recognize its ethanol as sustainable, which would earn it special access to an important new market.
Renewed cane planting in the Amazon, which spans 58 percent of Brazil's territory, may make it harder to win that recognition in the coveted European market.
The bill proposes to limit cane to areas that could add up to roughly the size of South Africa - 1.25 million square kilometers (775,000 square miles) - in the broader Amazon. The areas were cleared of trees and brush decades ago and are more savannah-like and thus more suitable for cane than rainforest.
Although six sugar cane mills currently operate in Brazil's Amazon region, new projects have been unable to get licensing from environmental agency Ibama or access to farm credit at subsidized rates from the country's main state banks since 2009, when the ban went into effect.
The broader Amazon is not just rainforest. It includes areas of savannah and pasture deforested in past decades, scattered across the states of Amazonia, Par?, Roraima, Rondonia, Acre, Amap?, Rondonia, Maranh?o, Tocantins and Mato Grosso.
Only a little more than two-thirds of the nearly 5 million square kilometer broader Amazon region is actual rainforest, which would likely remain inviable area for mills to plant cane.
The areas that could support cane in the Amazon could be six to ten times the size of Brazil's main cane belt in the center-south region, where there are 8 million hectares (20 million acres) of cane under cultivation.
However, a massive increase in cane planting in the Amazon appears unlikely, since ethanol produced there would be mainly for the local market and would struggle to compete with cheaper, more efficient biofuels from the center-south.
IMAGE CHALLENGE
Although Brazil's main sugar and ethanol industry association Unica said it has not seen the final form of the bill and as of yet has not officially supported or opposed renewed planting in the Amazon, it has preferred the region remain closed to cane in the past.
The vast distance between the center-south cane belt and the areas of greatest deforestation in the Amazon has been the cornerstone of its argument that its ethanol is sustainable.
If cane mills start popping up in the Amazon, even in a limited way, the visceral power of that image could be enough to raise doubts in Europe or the United States, which could impose barriers against Brazilian ethanol exports.
"Allowing cane ... creates some challenging optics on indirect land use ... and more generally on whether sugar cane production causes deforestation," said Avery Cohen, an economist who is studying the impact of global land use at the National Center for Atmospheric Research in Boulder, Colorado.
Environmentalists are alarmed at the medium-term risks of the bill. Edigar Oliveira Rosa, a specialist in conservation at the World Wildlife Fund in Brazil, said the biggest threat was displacement of existing land owners, should cane expand.
"Land prices could rise and displace existing ranching or farming," Rosa said. "Even if the mill doesn't cut down the trees, it might push others to."
VENTURE CAPITAL SUPPORT
Brazil's VPB venture capital fund, which has investment interests in farming in the region, says the introduction of sugar cane mills to the Amazon could actually reduce illegal deforestation as well as misery.
"You can't hide cane. All of it has to be within 30-40 kilometers (20-25 miles) of the mill, so it's easy to police," said VPB Director Eduardo de Lima Giuliani. "It would create jobs, generate taxes and reduce greenhouse gasses."
Giuliani said that local ethanol production in the Amazon would also spare the region of having to import fuel from thousands of miles away by truck or boat.
Motorists in Sao Paulo state - where 60 percent of Brazil's ethanol is produced - paid an average of 1.91 reais a liter ($3.53 per gallon) in May, while drivers in Para state paid 2.57 reais per liter because of the cost of freight to bring in the fuel.
"Studies show that the mills actually protect forest and minimize advances in deforestation," said Para state Senator Flexa Ribeiro, author of the bill. "But the center-south cane industry will oppose expansion of cane in the north because it would take local demand away from them." (Editing by Todd Benson and Marguerita Choy)
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