Dow Chemical and Algenol Biofuels, a start-up company, are set to announce Monday that they will build a demonstration plant that, if successful, would use algae to turn carbon dioxide into ethanol as a vehicle fuel or an ingredient in plastics.

Because algae does not require any farmland or much space, many energy companies are trying to use it to make commercial quantities of hydrocarbons for fuel and chemicals. But harvesting the hydrocarbons has proved difficult so far.

The ethanol would be sold as fuel, the companies said, but Dow’s long-term interest is in using it as an ingredient for plastics, replacing natural gas. The process also produces oxygen, which could be used to burn coal in a power plant cleanly, said Paul Woods, chief executive of Algenol, which is based in Bonita Springs, Fla. The exhaust from such a plant would be mostly carbon dioxide, which could be reused to make more algae.

“We give them the oxygen, we get very pure carbon dioxide, and the output is very cheap ethanol,” said Mr. Woods, who said the target price was $1 a gallon.