(Fortune Magazine) -- Sandwiched between two nondescript commercial buildings in a vacant lot squats what looks like a long, plastic-shrouded greenhouse. Hanging nearby is a cluster of five-foot-long plastic sacks bulging with green slime that resemble intravenous drip bags for the Jolly Green Giant. It doesn't look like groundbreaking technology, but these scum bags in Cambridge, Mass., just might help save the planet.

That, at any rate, is what Isaac Berzin, founder and chief science advisor at GreenFuel Technologies, wants to do. The curious setup is an experimental bioreactor that takes the stuff of pond scum - algae - grows it like mad, and turns it into "biomass" that can be processed into fuel for cars and trucks. Even better, the GreenFuel system could help to clean up coal too.

The idea is that a coal plant's CO2 emissions, rich food for algae, could be piped into the GreenFuel system, inducing the algae to grow. Since the algae are essentially eating the coal emissions, there would be no need to capture and store the CO2. The process answers the "trillion-dollar question that led to the founding of GreenFuel," says acting CEO Robert Metcalfe. To wit: "Why expensively sequester CO2 when it can be profitably recycled?"

That's a leading question, of course, and it glosses over major challenges. Capturing all of a coal-fired power plant's CO2 emissions would require a series of GreenFuel bioreactors covering hundreds, or even thousands, of acres. In densely populated areas, that could be a killer. And the process hasn't yet been proven technically feasible on a large scale, much less profitable.

Still, Metcalfe's question captures why scum is getting love in energy circles these days. Unlike other biofuels, algae can grow in arid places using polluted or salty water - no need to use up scarce arable land and fresh water. A 2004 analysis at the University of New Hampshire concluded that all the transportation fuels in the United States could be supplied by algae grown on less than 30 million acres of desert - an area equal to about 3% of the U.S. land devoted to farming crops and grazing for animals.

Because algae can grow so fast, such farms are expected to yield much more energy per acre than other biofuels. "If algae are shown to be a cost-effective way" to reduce carbon footprints, notes Berzin, "the power industry will become a gorilla pushing algae forward." That's not likely: GreenFuel's main research collaborators so far are electric utilities.

Existing biofuels are primarily made from food crops, such as corn and soybeans. U.S. production of corn ethanol, buoyed by federal subsidies, has soared from 1.6 billion gallons in 2000 to 6.5 billion last year. Its explosive growth has demonstrated biofuels' gusher potential. Of course, given recent oil prices, they may well be the locus of the next bubble, and there is clearly a backlash brewing. But biofuels that are not derived from food crops, such as cellulosic ethanol made from switchgrass, could be a major new source of transportation fuel. Think, said a McKinsey analyst last year, of its reaching Saudi-oilfield proportions by 2020.

Algae-energy research

In a move that galvanized biofuels entrepreneurs, the federal Defense Advanced Research Projects Agency (DARPA) in November launched a major research program to enable the cost-competitive production of military jet fuel from both cellulosic and algal feedstocks. The director of the program, Douglas Kirkpatrick, says he thinks major questions about algal fuels' technical feasibility will be answered in "the next three to five years."

That sounds about right: Algae-energy research is bubbling with new ideas and talent and is beginning to get backing from venture capital. "In the past the money in this area went only to academics," says Matt Caspari, CEO of Aurora BioFuels in Alameda, Calif. "Now it's reaching entrepreneurs who are applying technologies that didn't exist ten or 15 years ago."

Two-year-old Aurora is developing biodiesel from oil-rich algae cultivated in labs at the University of California at Berkeley. Solazyme, a South San Francisco biotech, is working to develop algae that produce more gallons of biodiesel per acre. And several players, including Kent SeaTech (San Diego), A2BE Carbon Capture (Boulder), and LiveFuels (Menlo Park, Calif.), plan to combine aquaculture with algae farms.