Japan's Approach on Bioethanol

1. Japan's Approach on Bioethanol July 2008 Ministry of Economy, Trade and Industry

2. Achievement of Kyoto Protocol Goal and Prospects for Introduction of Biofuels ○Japan has positioned bioethanol as one of the key renewable energies. ○Japan seeks to introduce 500,000 kiloliters oil equivalent in biofuels including bioethanol by FY 2010. ○Japan’s long-term energy supply/demand outlook as released in March this year projects biomass energy consumption in FY 2020 at between 2.9 million and 3.3 million kiloliters including biofuels. Projected biofuel introduction （Unit: 10,000 kiloliters oil equivalent) ※Biomass energy consumption covers wood fuel, biofuel and biogas. Source: Long-term Energy Supply/Demand Outlook, Energy Supply and Demand Subcommittee, Advisory Committee for Natural Resources and Energy

3. Reduction of Dependence on Oil under New National Energy Strategy ○Japan's transportation sector depends on oil for almost 100% of its fuel supply. ○Japan’s New National Energy Strategy (May 2006) aims at reducing the dependence to 80% by 2030. [Japanese Transportation Sector's Dependence on Oil and Target] Source: New National Energy Strategy (May 2006)

4. Next-Generation Vehicle and Fuel Initiative -- Simultaneous Achievement of Energy Security, Environmental Conservation and Competitiveness Enhancement -- ○In order to achieve (1) the transportation sector’s reduction of its dependence on oil to 80% and (2) the most eco-friendly motorized society by 2030, we have worked out the “Next-Generation Vehicle and Fuel Initiative” to develop next-generation batteries, fuel cells, clean diesel, biofuels and advanced IT technology by taking advantage of Japan’s strengths. ○Regarding biofuels, the strategy calls for innovating technology for second-generation biofuels that do not compete with food and for developing institutional infrastructure for smooth introduction of such biofuels. Battery -- Next-Generation Vehicle Battery Project Engine Innovation ○ Development of recharging stations, and safety-ensuring and other institutional systems ○ Japan will aim to introduce compact electric vehicles by 2010, plug-in EVs by 2015 and full-fledged EVs by 2030. Hydrogen/Fuel Cells -- Fuel Cell Technology and Infrastructure Development ○Demonstration tests will be implemented for future development of hydrogen infrastructure. ○ Japan will aim to make hydrogen/fuel cell vehicles as inexpensive as gasoline-powered automobiles by 2030. Clean Diesel -- Making Diesel Engines Highly Fuel-Efficient and Clean Fuel Innovation ○The industrial, academic and government sectors will cooperate in considering improvement of the image of diesel and incentives for introduction of clean diesel. ○ Aiming at full-scale introduction of clean diesel passenger cars in the Japanese market where emission control is the most rigorous in the world in and after 2009. Biofuels – Second-generation Biofuels and Institutional Infrastructure Development ○The industrial, academic and government sectors will cooperate in accelerating development of next-generation biofuel technology. ○Developing institutional infrastructure for smooth introduction of biofuels. Infrastructure Innovation Initiative for World's Most Eco-Friendly Motorized Society-- Creation of the World's Most Eco-Friendly Motorized Society Capitalizing on IT ○ Creating an industry-academia-government review program to consider specific measures for demonstration projects [from FY 2007] ○ Aiming at doubling the average urban traveling speed by 2030 (18 kilometers per hour in Tokyo and 26 kilometers per hour in Paris at present)

5. Biofuel Technology Innovation ○We have worked out the “Biofuel Technology Innovation Plan” to develop cellulose-based biofuels that do not compete with food. We will promote necessary R&D operations including development of resource crops for raising material production yields and enzymes featuring higher ethanol yields and lower costs. ● Major Technological Challenges Regarding Cellulose-based Biofuel Production Process (Pursuing commercialization by 2015) Fermentation Draining Enrichment/dehydration Preparation/glycation Material production Selection of high-yield plants growing in non-cultivatable land and development of technologies for growing such plants Development of enzymes featuring higher ethanol yields and lower costs Development of energy conservation technology for separation through membranes instead of distillation

6. Institutional Infrastructure Development for Smooth Introduction of Biofuels ○In order to promote smooth introduction of biofuels, Japan this year (1) took legislative action for securing appropriate quality of biofuel-containing gasoline and (2) created a tax incentive for diffusion of biofuel-containing gasoline. (1) Legal Revision ・Businesses mixing bioethanol with gasoline are now required to make advanced registrations and identify the quality of biofuel-containing gasoline. (2)Tax cuts for biofuel-containing gasoline ・As well as the system for ensuring quality of biofuels, a tax incentive has been created to exempt the biofuel content of gasoline from the gasoline tax for businesses that mix biofuels with gasoline (~March 31, 2013) The gasoline tax totals 53.8 yen per liter. If the biofuel content of gasoline is 3%, for example, the tax amount may be cut by 1.6 yen per liter.

7. Challenges (1) Stability of Supply 2400 2200 2000 1800 1600 1400 1200 1000 800 600 400 200 0 ○ If Japan were to import ethanol as energy or fuel, stability of ethanol supply would be a major challenge. [Ethanol] Production and Exports 各主要国の生産・輸入・輸出の状況 万KL 万ｋｌ Ethanol Supply and Demand Conditions in Major Countries (Domestic consumption, imports and exports) Global production: about 51 million kiloliters Ethanol supply/demand conditions in major countries (Domestic consumption, imports, exports) Global output: about 51 million kiloliters U.S. Brazil China EU India Republic of Korea Japan Production (domestic consumption) Production (exports) Imports Source: F. O. Licht, World Ethanol & Biofuels Report, 2007 FFVs (Flex Fuel Vehicles) can run on both gasoline and ethanol.

8. Challenges (2) Economic efficiency ○(1) Maintenance of economic efficiency and (2) stability of prices over a long term are important for gasoline, bioethanol and other fuels. ・ Japan’s average ethanol import price over the past five years is almost the same as the average gasoline price on a per-liter basis. On a calorific value basis, however, the import price for ethanol, which features less calorific value, is some 50% higher than the gasoline import price. (Average prices between 2003 and 2008: Gasoline at 55.3 yen per liter,ethanol at 49.9 yen per liter on a CIF basis. The price for ethanol having the same calorific value as gasoline is estimated at 83.5 yen.) ・ Gasoline and ethanol prices are linked to each other and volatile (in the Japanese market). Trends of Japan’s Ethanol Import (CIF) Price and Gasoline Wholesale Price (before tax) in the Japanese market Sources: Trade Statistics for ethanol; the Oil Information Center’s Petroleum Products Wholesale Price Survey for gasoline

9. Challenges (3) Competition with Food ○Grain and other food prices have risen fast over recent years as overseas demand for biofuels has increased rapidly. Biofuels are feared to compete with food. ○There is a view that the impact of biofuel’s competition with food regarding sugar cane is smaller because sugar has no direct relationship with staple food. While sugar cane is used for ethanol production, sugar price hikes have not been as clear as grain price increases. ○In order to promote sustainable introduction of biofuels in the future, however, we will have to prevent biofuels’ competition with food. [Changes in Wheat, Corn and Other Grain Prices] [Sugar Price Changes] In dollars per bushel Soybean Front-month contract price Wheat Corn Year/month (Note) Front-month futures contract prices at the last weekend of every month until October 2007 on the Chicago Board of Trade Source: Food Supply Forecast, Website for Ministry of Agriculture, Forestry and Fisheries Source: "Food Outlook," FAO Website

10. Challenges (4) Impacts on Ecosystems ○ Massive biofuel production is feared to cause forest destruction and other impacts on the ecosystem in some regions. In regionsthat massively produce palm oil used for biodiesel as well, for example, deforestation for palm oil plantations has reportedly caused various problems including massive forest ecosystem lossesand soil erosion. ○ It is important to give full consideration to biofuel production’s impacts on ecosystems. Plantations developed through logging of tropical forests in Southeast Asia Source: Website for World Wide Fund for Nature Japan

11. Conclusion ○ Although biofuels are one of the promising means to reduce CO2 emissions over a medium to long term, there are relevant challenges including (1) stability of supply, (2) economic efficiency, (3) competition with food, and (4) deforestation and other impacts on ecosystems. ○We will strive to innovate technologies for next-generation biofuels to overcome these challenges. ○ In order to (1) reduce the transportation sector’s dependence on oil to 80% and (2) realize the world’s most eco-friendly motorized society by 2030, Japan plans to tackle technological innovations regarding next-generation batteries and fuel cells by taking advantage of its strengths. Based on progress in such technological innovations and overcoming challenges regarding biofuels, Japan will gradually introduce biofuels. ○We hope that your country will tackle sustainable production and consumption of bioethanol while overcoming relevant challenges such as bioethanol’s competition with food and impacts on ecosystems. ○To this end, Japan and Brazil should further deepen their cooperation. They should cooperate in developing technologies for cellulose-based or next-generation biofuels that do not compete with food and in introducing biofuels with consideration given to impacts on ecosystems.