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Dow Chemical and Algenol Biofuels, a start-up company, are set to announce Monday that they will build a demonstration plant that, if successful, would use algae to turn carbon dioxide into ethanol as a vehicle fuel or an ingredient in plastics.

Algenol grows algae in “bioreactors,” troughs covered with flexible plastic and filled with saltwater. The water is saturated with carbon dioxide, to encourage growth of the algae. “It looks like a long hot dog balloon,” Mr. Woods said.

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