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

1 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 Japans 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. 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 Japans 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. Achievement of Kyoto Protocol Goal and Prospects for Introduction of 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

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

3 In order to achieve (1) the transportation sectors 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 Japans 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. The industrial, academic and government sectors will cooperate in accelerating development of next-generation biofuel technology. Developing institutional infrastructure for smooth introduction of biofuels. Biofuels – Second-generation Biofuels and Institutional 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 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 Engine Innovation Fuel Innovation Infrastructure Innovation Next-Generation Vehicle and Fuel Initiative -- Simultaneous Achievement of Energy Security, Environmental Conservation and Competitiveness Enhancement -- Battery -- Next-Generation Vehicle Battery Project 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 Hydrogen/Fuel Cells -- Fuel Cell Technology and Infrastructure Development Clean Diesel -- Making Diesel Engines Highly Fuel-Efficient and Clean 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) Initiative for World's Most Eco-Friendly Motorized Society -- Creation of the World's Most Eco-Friendly Motorized Society Capitalizing on IT

4 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. Preparation/glycation Fermentation Enrichment/dehydration Draining Material production Development of energy conservation technology for separation through membranes instead of distillation 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 Major Technological Challenges Regarding Cellulose-based Biofuel Production Process (Pursuing commercialization by 2015)

5 Institutional Infrastructure Development for Smooth Introduction of Biofuels (1) Legal Revision Businesses mixing bioethanol with gasoline are now required to make advanced registrations and identify the quality of 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. (2)Tax cuts for biofuel-containing gasoline 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.

6 Challenges (1) Stability of Supply KL If Japan were to import ethanol as energy or fuel, stability of ethanol supply would be a major challenge. Ethanol supply/demand conditions in major countries (Domestic consumption, imports, exports) Global output: about 51 million kiloliters Ethanol supply/demand conditions in major countries (Domestic consumption, imports, exports) Global output: about 51 million kiloliters [Ethanol] Production and Exports U.S.BrazilChinaEUIndiaRepublic of KoreaJapan 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. Ethanol Supply and Demand Conditions in Major Countries (Domestic consumption, imports and exports) Global production: about 51 million kiloliters Ethanol Supply and Demand Conditions in Major Countries (Domestic consumption, imports and exports) Global production: about 51 million kiloliters

7 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. Japans 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). Sources: Trade Statistics for ethanol; the Oil Information Centers Petroleum Products Wholesale Price Survey for gasoline Trends of Japans Ethanol Import (CIF) Price and Gasoline Wholesale Price (before tax) in the Japanese market

8 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 biofuels 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. 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 biofuels 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. Challenges (3) Competition with Food [Changes in Wheat, Corn and Other Grain Prices] In dollars per bushel Front-month contract price Soybean 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 [Sugar Price Changes]

9 Massive biofuel production is feared to cause forest destruction and other impacts on the ecosystem in some regions. In regions that 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 losses and soil erosion. It is important to give full consideration to biofuel productions impacts on ecosystems. Massive biofuel production is feared to cause forest destruction and other impacts on the ecosystem in some regions. In regions that 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 losses and soil erosion. It is important to give full consideration to biofuel productions impacts on ecosystems. Challenges (4) Impacts on Ecosystems Source: Website for World Wide Fund for Nature Japan Plantations developed through logging of tropical forests in Southeast Asia

10 Conclusion In order to (1) reduce the transportation sectors dependence on oil to 80% and (2) realize the worlds 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. 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. 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. We hope that your country will tackle sustainable production and consumption of bioethanol while overcoming relevant challenges such as bioethanols 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. We hope that your country will tackle sustainable production and consumption of bioethanol while overcoming relevant challenges such as bioethanols 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.