Now with new technology, the Dow Chemical Company (NYSE:DOW) and Algenol Biofuels are constructing a demonstration plant that will convert CO2 into biofuels via algae.

Algenol grows algae in “bioreactors,” which are troughs covered with flexible plastic and filled with saltwater. The water is saturated with carbon dioxide to encourage growth of algae. The algae, through photosynthesis, then converts the carbon dioxide and water into biofuels.

Dow will provide the material required to make these long, sausage-like balloons.

Algenol already has 40 similar bioreactors in Florida, but this new demonstration project is looking to build 3,100 of them, on a 24-acre site, owned by Dow, in Freeport, Texas. Several well-funded technology institutes will be working together on improving the separation of water and oxygen from ethanol, a necessary study since harvesting hydrocarbons has proven to be difficult.

The demonstration plant could produce up to 100,000 gallons of biofuel a year. Algenol and its partners are spending more than $50 million, said Paul Woods, chief executive of the Florida-based company, but not all of the funding is going into the pilot plant. The company has applied to the Department of Energy for financing under the stimulus bill, but will go ahead with the project with or without such a grant.

“The project will create 300 jobs,” Woods explains, adding that the combination of an innovative start-up company (Algenol), a major company with extensive experience in industrial processes (Dow), a university (Georgia Institute of Technology) and a national laboratory (Membrane Technology and Research) show the high-level of dedication of their endeavor.