* Ten percent biofuel target still possible
* Signal that industry must advance to non-food fuels
* Campaigners say proposals 'half-baked' (Adds biofuel industry reaction)
By Charlie Dunmore and Barbara Lewis
BRUSSELS, Oct 17 (Reuters) - New EU rules to limit how much food can be made into biofuels are "not perfect" and make it harder to achieve overall goals on switching to low carbon energy, European Commissioners said on Wednesday.
But they insisted the proposals sent out the right signal to the biofuel industry, which would have to move on to new-generation fuels that do not compete with demand for food.
The Commission announced a major policy shift in September, saying it planned to limit crop-based biofuels to 5 percent of consumption, as part of a goal to draw 10 percent of transport fuel from renewable sources, mainly biodiesel and bioethanol.
On Wednesday, it formally published the proposal, which biofuel producers have said could devastate their business and green campaigners say fails to address the problem.
"Our analysis in the Commission is that it's still possible to achieve the 10 percent target, but if you were to ask me whether this proposal will make it easier, I would answer 'no'," Climate Commissioner Connie Hedegaard told Reuters in an interview.
Hedegaard and Energy Commissioner Guenther Oettinger earlier told a news conference that the proposal was "not perfect".
Science had moved on from when the Commission agreed the 10 percent biofuel target in 2008 and as knowledge increased, further changes could be necessary, the Commissioners said.
The reason some first-generation biofuels are considered problematic is that they can displace food production into new areas, forcing forest clearance and draining of peatland. The displacement is referred to as ILUC (indirect land-use change).
In some cases, first-generation biofuels can be worse for the environment than fossil fuels. Another human cost is the possibility of adding to food price inflation.
"Everybody accepted that the day would come when we would have more knowledge about these ILUC factors and then they should also be factored in somehow," Hedegaard said in her interview with Reuters.
"I believe that we taking a very, very important step and sending a very, very important signal."
Wednesday's proposal includes ILUC factors to measure the indirect emissions of biofuels made from cereals, sugars and oilseeds, but they carry no legal weight in a watering-down of an earlier draft proposal.
Both Hedegaard and Oettinger said they were not closing down biofuel plants overnight but giving the industry fair warning that only second generation fuels made from waste or algae, for instance, could merit subsidies in future.
"We create more incentives to research and development in promoting the second generation," Oettinger told reporters.
The biodiesel industry was relieved the proposals had lost some of their force.
"The ILUC factor, the way it had been envisaged initially was sounding the immediate death knell for the sector," Jean-Philippe Puig, CEO of Sofiproteol, which owns the EU's largest biodiesel producer Diester Industrie, told Reuters.
"I think we came back to a compromise that is not acceptable but that does not directly and immediately threatens all jobs."
But for producers of bioethanol, which had expected to increase their share of the biofuel market, the proposals could lock in biodiesel's dominance.
"If you know the fuels market, we in Europe are hugely short on diesel, and oil companies want to fill the gap with biodiesel as much as possible," Rob Vierhout, secretary general of EU bioethanol lobby ePURE, said.
"So there is a real chance that this 5 percent will be filled with biodiesel only, which is good for my colleagues in the biodiesel sector, but is bad for us."
Environmental campaign groups were extremely disappointed years of debate on ILUC had produced what BirdLife Europe said was a "half-baked" result and blamed lobbying from industry.
"The only thing farmers and the bio-industry achieved today was to protect their past with no regard for tomorrow," BirdLife Europe policy officer Trees Robijns said in a statement.
Campaign group Transport & Environment said the Commission had missed the opportunity to get biofuel policy right.
"While the European Commission proposal limits today's bad practices, it does not fundamentally steer future bioenergy in a sustainable direction, because it still does not account for ILUC emissions from biofuels," said Nusa Urbancic, T&E programme manager for fuels.
Now the proposals have been published, they must be agreed by EU governments and lawmakers in a process that can take up to two years. (Additional reporting by Sybille de la Hamaide in Paris; Editing by Rex Merrifield and Anthony Barker)