IEEJ: October 2007

Japan’s Ethanol Introduction and Outstanding Issues
The Institute of Energy Economics, Japan<Summary>
1. Trends of motor-fuel ethanol and major producing-countries’ export potential
In pursuit of ① energy security, ② environmental preservation and ③
agricultural promotion, among others, ethanol introduction is under way as apolicy advocated by many governments worldwide. In 2005 the world fuelethanol output amounted to 33.60 million kiloliters (KL), which could reach an
estimated 100 million KL by 2015 according to some projections. On ethanol
made from food crops, we, at the IEEJ, have formed an outlook regarding the
supply-demand balance for each of four countries, including Brazil, the U.S.,
China and India, for the next several decades. Our outlook results show the U.S.
and China will fall short of supply in meeting their domestic ethanol needs for
producing blended gasoline (with 10% ethanol), because a greater portion of thefeedstock crops must be allocated for the food and feed uses in reflection of theirgrowing populations and economic development. India is projected to haveexport potential of an estimated million KL in 2010. Yet, given that Indians’
efforts to introduce 5%-ethanol-blended gasoline is just onset and that India is a
net oil importer comparable to Japan, the real size of the country’s surplus export
capacity needs to be examined closely.
2.

Brazil’s export potential and Japan’s response
Based on our outlook results, Brazil, having plenty of room for developing
arable lands and boosting harvests, is expected to have export potentials of around6.00 million KL in 2010, though ethanol supply and demand is feared to tighten
worldwide in the event of changing conditions in Brazil, notably an energy policychange and a poor harvest. Even if Brazil commits to ethanol exports to Japanalone, the risks associated with such uncertainties and the need for building
transport infrastructure (incl. shipping terminals and chartered tankers) to allow
shipments from Brazil require prudent examinations. For the time being, itappears pragmatic for Japan to consider introduction of Brazilian ethanol asconservative as covering exact needs for around 3% ethanol blending (some 1.80
million KL in absolute terms) as a maximum target.
3. Japan’s home-made ethanol supply potential

IEEJ: October 2007

In making ethanol domestically, Japan currently has few choices but todepend on food-derived energy crops (e.g. rice, sugar cane, sweet potato, beat).
Even if these crops are grown in currently mothballed farming land, the annual
ethanol output should remain at around a million KL at best, which barely covers
ethanol requirements for blending it with gasoline by 1~2%. The idea to use
cellulose-based ethanol as a feedstock must be dismissed for the present, as it still
remains at the R&D stage and how to cut its high production cost, among others,
involves stepped-up research efforts ahead. Such being the situation, it appears
appropriate for Japan to make ethanol from such farm products as off-specs foodcrops, with the resultant ethanol being consumed within the region it is produced(locally-produced-and-locally-consumed).
4. CO2 reductions by ethanol-blended gasoline and its cost/benefits
In case ethanol is imported from Brazil, ethanol-blended gasoline in either formof E-3 (ethanol directly blended with gasoline by 3%) or ETBE-7 (ETBE
synthesized from E-3 blended with gasoline by 7%) could curb CO2 emissions byaround 4.20 million tons on a LCA basis. However, with the crude oil priceassumed at $60/bbl, incremental costs incurred in ethanol imports amount to some¥90 billion, causing a higher E-3 price at service stations by ¥1.4/liter. This means
to slash a ton of CO2 in Japan costs some $190, several times dearer than the EU
carbon price level set for its emissions trading.
5.

Outstanding issues for ethanol introduction
The world population, now some 6.5 billion, is projected to reach about 9billion by 2050 (a UN forecast in 2004) and likely to be combined with rapidly
swelling food demand. Moreover, biomass introduction involves contentious
negative effects on the environment, typically water resource issues, shrinking
forests (lands) and genetic modification.
For these reasons, to makecellulose-based ethanol from any feedstock not conflicting with food and feedseems imperative, while considering a well-balanced introduction of a wide variety
of CO2-cutting options, like hybrids (incl. electric vehicles) and the diesel shift,with their cost/benefits taken into account.

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<Main Text>
1. Trends of motor-fuel ethanol(1) Ethanol production in 2005 (demand trends)
In 2005 ethanol output (for both fuel and industrial uses) amounted to 16.10
million KL in Brazil, 16.20 million KL in the U.S., 3.80 million KL in China, 2.20
million KL in the EU and 1.70 million KL in India. When combined, these five
regions are responsible for 90% of the world output. The world ethanol fuelproduction, which totaled 33.60 million tons in 2005, is on a sharp rise and someanalysts say it will reach 100 million KL by 2015.
(2) Ethanol production cost
Brazil is able to produce ethanol at the price of as low as ￠30/liter (usingsugar cane as a feedstock), followed by the U.S. at ￠60/liter (corn). In the EU, thecost is as high as over ￠80/liter (wheat, beat and others).
(3) Ethanol policies in major countries
Many governments across the world are unrolling the policy to put ethanol
introduction forward in their efforts on ① energy security, ② environmental
preservation, ③ agricultural promotion, and so on. However, because farm
products are firstly allocated to the higher-priced uses such as food and feed
preferred atop, those usable for ethanol production may be in short supply in thelong run. There are high expectations for commercialization of cellulose-based
ethanol by reducing its high production cost in order to avoid this situation.
2. Ethanol supply capacity outlook(1) Brazil, the U.S., China and India
For the four countries of Brazil, the U.S., China and India, which are likely
to produce even greater ethanol than now, ethanol supply-demand balances were
calculated. According to the calculation results, despite crop output increases
predicted for the U.S., China and India, ballooning needs for food and feed uses
are likely as well due to these countries’ growing populations and economic
development. As a result, the U.S. and China will find they are unable even to
fully cover their domestic needs for ethanol for making ethanol-blended gasoline(with 10% ethanol blended). India’s export potential, put at an estimated amillion KL for 2010, must be examined more carefully, seeing that it has juststarted introduction with 5% ethanol blended and is a net oil importer like Japan.

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Meanwhile, Brazil, having a lot of room for expanding arable land andharvests, is expected to maintain its ethanol export capacity. Brazil’s export
capacity is projected at: 6.00 million KL for 2010; 12.00 million KL for 2030; and11.00 million KL for 2050.
In theory, Brazil is predicted to have an export capacity of around 6.00
million KL in 2010. Yet, such uncertainties as Brazil’s energy policy change, poor
crop harvests worldwide, varying areas of farming land and inconstant yields, if
any come about, are feared to tighten ethanol supply and demand worldwide.
This risk of tightening demand and supply is pushing Japan to prepare effective
measures for securing supplies: long-term sales agreements with Brazil, ethanol
stockpiling, flexibility in varying the ratio of ethanol blends depending on
feedstock availability, and transport infrastructure (incl. shipping terminals,
chartered tankers) built in Brazil to allow shipments from the country.
(2) Japan
The Ministry of Agriculture, Forestry and Fisheries (MAFF) estimates
Japan’s ethanol production at some 6.50 million KL as a possibility. The problem
is that the MAFF assumes nearly 80% of the estimated output could be made from
cellulose-based feedstock, which is still at the R&D stage and requires a lower
production cost, among other problems. Thus, Japan has no alternatives tofood-derived energy crops (e.g. sugar cane, sweet potato, beat) for the time being
and its supply potential would be limited to around a million tons/year at best, or
no more than what’s needed for 1-2% ethanol blended.
In Japan, farming land is fractionalized into as small as an average of 2.4ha
per farming family, which results in a higher feedstock cost. Even with off-specs
wheat in use, Japan’s ethanol production cost exceeds ¥100/liter, several times
higher than abroad; in Brazil, about 80% of farming families possess farmland of
100 ha or larger each.
Thus, given the high production cost and feedstock supply restraints, Japanfor the present is recommended to make ethanol from such farm products as
off-specs food crops, and consume resultant ethanol in the region that they are
produced, a practice known as “locally-produced-and-locally-consumed.”
3. CO2 reductions by ethanol-blended gasoline and cost/benefits of theintroduction(1) LCA (life cycle assessment) of ethanol blended gasoline

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Ethanol blended gasoline, if introduced, would be either E-3 or ETBE-7,
which is originated from Brazilian ethanol, and would allow Japan to reduce its
CO2 emissions by around 4.20 million tons on a LCA basis (from well to wheel).
(2) CO2 reductions and its cost and benefits
To introduce ethanol-blended gasoline would cost some ¥90 billion for E-3(about 1.80 million KL) and as much as about ¥120 billion for ETBE-7. Because
the ethanol price is closely linked to the crude oil and sugar prices, CO2 reduction
cost may vary greatly depending on the volatility of the prices. With major
parameters assumed at current levels, namely crude oil priced at $60/bbl, sugar
priced at ￠15/lb, tariffs set at 23.8% and gasoline tax set at ¥53.8, the price ofethanol-blended gasoline (E-3) posted at service stations will go up by ¥1.4/liter.
This puts the CO2 reduction cost at an estimated some $190/ton, several times
more expensive than the EU carbon price set for its emissions trading (around$20~30/ton).
In fuel quality terms, ETBE-7, blended at refineries, is believed to be lessproblematic. However, if the entire amount of domestic gasoline is put intoethanol-blended gasoline with ETBE-7 alone, its production requires massive
imports of butane as feedstock on top of the use of refinery’s byproducts.
4.

Outstanding issues for ethanol introduction
Introduction of ethanol-blended gasoline, which is very significant as a means
to help CO2 reductions, still faces many outstanding issues. Major ones aredescribed below:(1) Sustainable supplies
a. Domestic supply potential at present
The calculation results put the limit of Japan’s ethanol production at about amillion KL/year on the precondition that ethanol would be made from food crops
grown in idle farming lands at home. Moreover, in reflection of the highfeedstock cost in Japan, the cost of domestic ethanol production is found to behigher by several times or more than abroad.
From now on, to push the cost of energy crops down essentially requires
extensive-farming management with flat arable land. It means Japan could
hardly establish a domestic ethanol supply-chain as long as her agricultural systemremains unchanged.

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b. Ethanol supply capacity from Brazil
In Brazil, projects are now under way to expand shipping capacity, which
include construction of a new pipeline and shipping terminal.
These
infrastructure projects, if they make favorable progress, are believed to be helpful
in securing constant shipments to Japan. However, there is a problem not toreadily solvable. That is, since there are few tankers specifically designed forethanol transport right now, ethanol tankers have to be newly built, but given theworldwide tanker construction boom these days, it won’t be before 2010 that the
shipbuilding industry could initiate ethanol tanker construction.
Also, because Japan-bound exports are worried about being constrained bysuch factors as ① rivalry with EU/US-bound exports, ② poor harvests
attributable to unseasonable weather, and ③ ethanol production undermined byrising food prices like sugar, Japan is required to take some response measures,such as signing long-term sales contracts, expanding/upgrading stockpiling
facilities, and having flexibility in varying ethanol blends depending on feedstock
availability.
On these accounts, it is pragmatic for Japan to consider introduction of
ethanol of as much as about 1.80 million KL for around 3% blending as ayardstick.
c.

Conflicts with food requirements and commitments to biotechnology
The world population is projected to reach some 9 billion by 2050 (a U.N.
forecast in 2004), up from about 6.5 billion today, and likely to cause food demand
to surge. This, combined with mounting ethanol demand, may result in a
deficiency of arable land to grow crops, whereby tightening supply is feared.
As a result, it is essential to make ethanol not from food crops, but acellulose-based feedstock that does not conflict with food and/or feed uses.
(2)

Impacts on environment
Ethanol, positioned as carbon neutral, plays a key role in CO2 reductions.
Even so, there are problems peculiar to biomass production such as water
resources, disappearing forests (lands) and genetic modification, so this process too
has aspects not necessarily thought of as “environment-friendly.” Although someof them are not directly related to ethanol production or hardly verifiable inscientific or quantitative terms, these issues should be given full consideration.

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IEEJ:October 2007a.

Water resources and soil problems
To grow sugar cane in Brazil, most of its farming lands require no irrigation(with annual rainfalls outstripping 1,200mm). Growing energy crops in general,
however, involves agricultural irrigation that conflicts with living and industrial
water needs. From the global perspectives, 70% of the intake is destined toagriculture, 20% to industrial activity and 10% to living needs, with a gradually
increasing weight claimed by the last two these days.
What’s more, the world’s cultivated areas for cereals have kept shrinking in
the past 30 years. Food output increases are attributable to better production perunit area (yields). To increase the yields, on top of variety improvements andirrigation, fertilizers have been input in large quantities, which is warned to makesoil deteriorated and runoff-prone.
b. Disappearing forests
Due to such activities as food crop cultivation and mine development, thearea of forests (CO2 sinks) has been depleting worldwide. Given that forests arecleared to grow energy crops in some cases, the use of biomass involves an aspect
not necessarily counted as carbon neutral.
c.

Genetic modification
Plants of a high-yield type, if introduced by virtue of genetic modification,
could increase biofuel output. But, it is pointed out that their presence can causechanges to nutrients within soils, carbon circulation and nitrogen circulation.
Also, there is an argument that warns of adverse impacts on the ecosystem overall.
(3) Cost and benefits
Ethanol production cost
The cost of ethanol production, the cheapest in Brazil (sugar cane used as afeedstock) at about ￠30/liter, is much lower than the ¥100/liter in Japan where①

ethanol is made from confectionery-making rice and the like. A recently
commissioned demonstration plant, designed to make cellulose-based ethanol fromdemolition waste, reportedly marked a production cost of as high as a few hundred
yen per liter, which suggests a number of challenges to face before
commercialization.

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National consensus-building on the extra cost burden
The extra cost incurred in ethanol introduction (imports from Brazil) for
producing blended gasoline amounts to some ¥90 billion when E-3 is deployednationwide. Dividing the ¥90-billion extra cost by Japan’s total gasoline demand(60.00 million KL) results in a higher gasoline cost by about ¥1.4/liter. Given that
CO2 reductions total some 4.20 million tons on a LCA basis (about 5.00 million
tons on a national basis), the cost of CO2 turns to be $190/ton, several times higher
than the EU carbon price level.
②(4) Others① Clear-cut objectives of introduction
For Japan the objectives of having ethanol mixed with gasoline are twofold:① CO2 reductions and ② oil substitution (energy security). Ethanol will
surely prompt oil substitution and leads to diversification of Japan’s energy
procurement sources, but, in the sense that Japan remains fully dependent on
imports from overseas without any choices for the time being, there are few hopes
for ethanol introduction to help alleviate Japan’s reliance on overseas energy.
What is more, the likelihood is that ethanol won’t have enough potential to fully
replace petroleum fuel consumption of the current size even in the years ahead,that is, the role of ethanol will be limited to replacing part of the petroleum fuels.
For these reasons, while strengthening the ties with ethanol suppliers andattempting diversification of procurement sources, Japan is required to keep
steadily committing to various measures to ensure stable energy supplies andenergy security.
② Need for a well-balanced choice
From the standpoint of CO2 reductions, ethanol is counted as a pragmatic
option with such advantages as ① being a liquid energy at normal temperature,② usable with conventional infrastructure, and ③more convenient and safer
than other forms of new energy. Yet, there are a variety of CO2-cutting options,from hybrid (incl. electric) vehicles to the diesel shift, all expected to be
upgraded by technology advances ahead. Thus, Japan needs to consider awell-balanced introduction of ethanol by taking such factors as cost and benefits
into consideration.
③ Outstanding issues for increasing domestic supply potential

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Ethanol imports from overseas are advantageous in price competitivenessbut constrained by a limited number of supply sources, poorly-installed transport
infrastructure and, therefore, need to be complemented by increasing Japan’s
supply capacity at home.
From the viewpoint of CO2 reduction, among others, biofuels of theso-called “locally-produced-and-locally-consumed” type, characterized byproximity between producing and consuming areas and limited energy losses, arebelieved to offer a basic model for this sort of fuel. Namely, in hopes to ensure
adequate quantities and avoid conflicts with food uses, Japan is required tomaintain an adequate balance between ethanol imports and domestic supplies
through commitments to (i) reducing the cost to grow energy crops, and (ii)developing home-grown cellulose-based ethanol, or butanol (rather free fromtwo-phase separation when moisture gets mixed).

Contact: report@tky.ieej.or.jp

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