TORONTO (CP) - A fund to help Ontario ethanol plants boost production of the cleaner-burning gasoline additive will help the province's farmers and improve air quality without raising pump prices, Premier Dalton McGuinty promised Friday.

The government plans to spend $520 million over the next 12 years on the construction of local plants in order to make sure all gasoline sold in the province contains an average of five per cent ethanol by 2007, McGuinty told a news conference.

The province will cancel a tax exemption for ethanol producers that was originally set up to encourage the use of alcohol in gasoline - an incentive the premier said is no longer necessary now that the province is making it mandatory.

"What we need to incent today is not the use, it's the production facilities," McGuinty said.

"They need just a bit of help from our government to get out of the starting blocks and get into the race and we're just convinced that this is the best way to use that money."

Ethanol is a high-octane fuel additive made from crops, usually corn, that helps cut emissions from conventional fuel. Ontario currently imports about a third of its ethanol supply from Brazilian and American plants. The fund would redirect revenue to local production projects.

He said there are five proposals to build new plants in Ontario, and the fund would help those companies cover capital and operating costs and research and development.

McGuinty called the plan "a revenue-neutral measure" and insisted that consumers would not see increased costs.

The Canadian Taxpayers Federation, however, predicted the cost of blended gas would go up by a cent per litre.

Spokeswoman Tasha Kheiriddin called the plan an attempt to curry favour with the agricultural sector and derided the Liberals for "giving direct subsidy to business."

"You should source that ethanol in the cheapest way possible," Kheiriddin said. "If it is cheaper to import it, then it should be imported and producers here should be more competitive to produce it at a lower cost."

McGuinty later participated in a groundbreaking ceremony in Mooretown, Ont., near Sarnia, where Suncor Energy Products (TSX:SU) is building a new $120-million ethanol refinery that's slated for completion some time next year.

In Saskatchewan, where ethanol is also going to be a required additive, Husky Energy Inc. (TSX:HSE) is building a major plant near its heavy oil upgrader at Lloydminster, while another company, NorAmera Bioenergy, is turning an old whiskey distillery near Weyburn into an ethanol facility.

Ontario's farmers will need help meeting the expected demand for corn that the province's ethanol measures are expected to create, but they aren't getting any from the Liberals, complained Conservative Leader John Tory.

"Farmers will be lucky to see a penny of benefits in this for years to come when in fact many of them are struggling now, especially the corn producers," he said.

"What they should have done was made sure there's capacity to produce ethanol domestically first and then brought the limits in after that time."

Tory said the province will boost imports from Brazil and other places to meet its January 2007 deadline and that local farmers will lose out.

Agriculture Minister Steve Peters called the plan good news for farmers, industry and the air, and said Ontario farmers will win in the end.

"The whole goal is to add value to that commodity that the farmer is producing," Peters said.

"To transport corn long distance is extremely costly. By strategically locating these plants in different parts of Ontario that's going to encourage and help the local producer to get access to those operations."

McGuinty said the province won't require ethanol producers to use Ontario corn because that would invite trade sanctions.