ROTTERDAM, Netherlands—At the tip of the 30-mile-long peninsula that hosts one of the busiest ports in the world, Finland's Neste Oil NES1V.HE +1.60% has just finished converting a plot of land reclaimed from the sea into the biggest biodiesel refinery in Europe.

The €670 million ($850 million) investment by the state-controlled company in the plant, which is already transforming vegetable oil and waste animal fat into diesel, aims at benefiting from European Union policies that seek to cut greenhouse-gas emissions from cars and trucks.

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But this plant, with a capacity of 800,000 metric tons a year, and others built by different companies around Europe face a new challenge: a possible shift in EU policy that could undermine their profitability.

"Europe. Europe is the key" in terms of markets, in important part because of EU regulation, said Matti Lievonen, Neste Oil's chief executive, in an interview on the day the company announced the start-up of production here in September.

However, less than three years after adopting a key law—which mandates that by 2020, 10% of the total energy used in transport will have to come from renewable sources such as biofuels—a tough debate has begun in the EU on whether biofuels really are better for the climate than conventional fuels.

On Thursday, the environmental organization Friends of the Earth Europe urged the EU to scrap its 2020 target, saying it would cost consumers as much as €126 billion without helping the climate.

"Europe's squeezed consumers and taxpayers are paying the price for a flawed green policy that delivers no environmental benefits," said Robbie Blake, a campaigner with the group.

If policy makers judge biofuels' touted benefits to the climate to be illusory, officials say changes in regulation could result. That would likely cause the demand for biofuels to drop, consequently calling into question many investments.

The majority of European cars run on diesel engines, and companies like Cargill, Sofiprotéol in France or Abengoa ABG.MC -1.51% in Spain have all together invested billions of euros in building up biodiesel production capacity. But current capacity would already almost be enough to cover the EU 2020 targets, while regulatory uncertainty is doing its part in lowering interest in new investments, experts say.

Biofuels are usually more expensive than regular gasoline or diesel. Europe diesel prices have been around $1,000 per ton, while biodiesel prices range from $1,200 to $1,400 per ton, said Matti Lehmus, responsible for oil products and renewable business at Neste Oil. The company's biofuel product, NExTBL, costs slightly more than that, he explained.

A liter of biofuel emits roughly the same carbon dioxide as a liter of fossil fuel when used in a car engine. But biofuels made from refining vegetable oils have been considered virtually carbon neutral because the plants from which the fuel is made has previously absorbed the carbon dioxide that is emitted by burning it.

By setting a target for 2020, the EU is effectively encouraging farmers to grow biofuel crops. But that potentially incentivizes farmers to cut down forests and move into peat lands, both of which absorb high levels of carbon dioxide in their natural states. Even if these lands aren't claimed directly to grow crops for biofuels, biofuel crops could displace food crops that would then be forced to move there. This process is called indirect land use change, or ILUC.

The debate has intensified since a panel of scientists from the European Environmental Agency, a body that provides scientific background to the EU for its policy decisions, began to question whether biofuels are really carbon neutral.

If you didn't grow a crop used to produce bioenergy on a given piece of land, they argue in a report published in September, some other crop would grow there, offsetting at least some of the carbon dioxide emitted by burning fossil fuels.

"If bioenergy production replaces forests, reduces forest stocks or reduces forest growth, which would otherwise sequester more carbon, it can increase the atmospheric carbon concentration. If bioenergy crops displace food crops, this may lead to more hunger if crops are not replaced and lead to emissions from land-use change if they are," the 19 scientists said in their report.

"The potential consequences of this bioenergy accounting error are immense," they said.

In 2008, EU governments and the European Parliament left for later the highly controversial issue of how to account for the full impact of higher demand for biofuels on the global use of land. The issue is so controversial that the European Commission, the EU's executive body, is already a year late in coming up with a way to account for ILUC in certifying biofuels.

Including an ILUC factor in certifying biofuels allowed in the EU would threaten Europe's ability to reach its 10% target, because it would reduce the amount of biofuels that could be used.

The commission itself is divided on the issue: Its energy department wants to stick with the target, but its climate branch is inclined to change it if it doesn't actually help the environment, officials said.

Neste Oil says it isn't worried about policy change. In Rotterdam, the company mainly produces NExTBL—a transparent, alcohol-like, odorless liquid, 40% of whose ingredients are waste products, like animal fat from the food industry. NExTBL has the potential to replace other biodiesels because it can be used in higher percentages when mixed with regular fuel, has a higher energy content and can stand lower temperatures, Mr. Lievonen said.

Write to Alessandro Torello at alessandro.torello@dowjones.com

A version of this article appeared February 3, 2012, on page A13 in some U.S. editions of The Wall Street Journal, with the headline: As EU Ramps Up Biofuels, Climate Debate Intensifies.