The announcement came in response to mounting pressure for more research into the potentially harmful displacement effects of large-scale biofuel production methods on the environment.
Kelly said: "The UK Government takes this issue very seriously. We are not prepared to go beyond current UK target levels for biofuels until we are satisfied it can be done sustainably.
"The review I am announcing today will ensure that the full economic and environmental impacts of biofuel production are taken into account in the formation of UK policy beyond 2010."
The report will draw on international and domestic research on biofuels, as well as scientific evidence from a survey on the environmental impacts of biofuels, soon to be published by the Department for the Environment, Food, and Rural Affairs (DEFRA).
There has been increasing international concern over methods of biofuel production recently. Studies have shown that emissions from changing the use of land for biofuel crop production can easily negate the benefits of biofuels without proper regulation. This also prompted the Environmental Audit Committee to call for a moratorium on further biofuel research.
The Renewable Transport Fuel Obligation (RTFO), to be introduced in April, will demand that companies already using biofuels for transport purposes submit their findings to the government for more detailed analysis.
It is hoped that in conjunction with the review’s findings, the data can be used to help determine the level of future government investment in biofuels, and ensure its suitability for use in meeting the UK’s target of 5% of all transport fuel being from renewable sources by 2010.
By 2011, minimum sustainability standards for sourcing and use of biofuels are expected to be imposed.