The vote in the European Parliament's environment committee will be followed by a plenary vote, expected in September. It will also require endorsement by EU member states, which are deeply divided on the issue.
Environmental campaigners said Thursday's vote marked progress towards more sustainable biofuels.
But biofuel producers and their suppliers are furious at the policy U-turn. They said the proposed limit of 5.5% of total transport fuel use was far too low and would lead to plant closures and job losses.
Jean-Philippe Puig, chief executive of Sofiproteol, which owns the EU's largest biodiesel producer Diester Industrie, said the vote "was a very bad blow".
Earlier this month Sofiproteol said it would close two units of Diester Industrie because of overcapacity.
In 2008, an EU target was introduced to get 10% of transport fuel from renewable sources by 2020, most of which would come from so-called first generation biofuels made from sugar, cereals and oilseeds.
Since then, a series of studies has underlined the potential environmental damage caused by some biofuels, particularly biodiesel, which accounts for more than two-thirds of the estimated €13 billion EU biofuel sector.
Most recently, a study by the Joint Research Center (JRC) - the European Commission's in-house research body - confirmed earlier EU studies that biodiesel made from crops such as rapeseed does more harm to the climate than conventional diesel.
Other biofuels are less problematic, the research finds.
Fuels made from cereals and sugar crops have much lower carbon emissions than those from vegetable oils such as rapeseed oil, palm oil from Malaysia or soyoil from the Americas.
The reason some first-generation biofuels are considered a problem is that they increase demand for crops, displacing food production into new areas, forcing forest clearance and the draining of peat land. They can also add to food price inflation.
The displacement of land is known as ILUC (indirect land-use change) and can result in enough carbon emissions to cancel out any theoretical savings from biofuels.
The Commission proposal includes ILUC factors to estimate the indirect emissions of biofuels made from cereals, sugars and oilseeds, but they carry no legal weight.
Thursday's committee proposal makes them binding from 2020 for industry and in the case of governments with immediate effect.
"This vote will pave the way for truly sustainable transport fuels, which actually reduce emissions, as of 2020," said Nuša Urbančič, a manager at campaign group T&E.
Committee members also voted for extra incentives to promote advanced or second-generation biofuels. Made from waste or agricultural residues rather than food crops, these are seen as the most sustainable type of biofuel, but are still at an early stage of commercialisation.