Japan: Japan to Focus on Next Generation Biofuels

Due to limited agricultural resources and the debate of “food v. fuel,” Japan is to focus very determinedly on biofuels derived from cellulosic materials or other materials which do not compete with food supply. Ethanol production for fuel in 2009 is 200kl, biodiesel production was roughly 10,000 kl, and ETBE imports were roughly 57,000 kl. Japan reportedly starts importing ethanol for fuel from Brazil this year.

Executive Summary

Government and private sector research and investment in biofuels have been on the rise since Japan‟s first biomass plan, “Biomass Nippon Strategy,” was unveiled in December 2002. That Strategy was updated in 2008, and the Government of Japan‟s (GOJ‟s) current thinking, given the country‟s limited land resources, is to focus very determinedly on cellulosic biofuel as the future for Japan‟s biofuel production. During the past few years, in the wake of higher food prices, biofuel production has been under considerable criticism by Japanese lawmakers and media, often bearing the blame for driving up commodity prices. In fact, it was this supposed link between biofuels and higher commodity prices that inspired the GOJ to include food prices and food security in the G-8 Summit agenda held in July 2008 in Hokkaido, Japan. Despite the slight backlash, the GOJ and private sector continues to pursue biofuels production through conventional and cellulosic means with increasing focus on cellulosic sources. Indeed, since Japan‟s greenhouse gas emissions in fiscal year 2008 increased by 1.6% from the 1990 level, the GOJ is under greater pressure to turn that around in order to meet Kyoto Protocol commitments to reduce the greenhouse gas emissions by 6% from the 1990 level by 2012.

However, given Japan‟s limited agricultural production, it will be very difficult for Japan to produce enough biofuels to impact the domestic fuel market and thereby greenhouse gas emissions without a major technological breakthrough. For good or for bad, the media coverage of biofuels has decreased significantly in recent years, as oil prices have dropped from the historic high levels in 2008. Energy Consumption in Japan Japan‟s transportation sector is almost 100% dependent on imported oil. In the national energy strategy, released in May 2006, the GOJ articulated the goal of decreasing dependency on foreign oil to 80% by 2030. Biofuels are considered as an important renewable energy resource to achieve that goal. The GOJ aims to introduce 500,000 kl (oil basis) of biofuels by 2010 and to produce next generation biofuels domestically by 2015, aiming to sell at a price of Y100 per liter. Other means to achieve the goal are batteries, hydrogen and fuel cells, and clean diesel. The new Democratic Party of Japan government which took power in September 2009 has set a mid-term goal to reduce Japan‟s green house gas emissions by 25% from the 1990 level by 2020.

Policy and Programs

Ministries Involved in the Bio-fuels Policy Several ministries collaborate on Japan‟s biofuels policy: The Ministry of Economy, Trade and Industry (METI); the Ministry of Agriculture Forestry and Fisheries (MAFF); the Ministry of Environment (MOE); the Ministry of Education, Culture, Sports, Science and Technology (MEXT

MEXT);
the Ministry of Land, Infrastructure and Transport (MLIT); and the Ministry of Internal Affairs and Communications (MIC). Substantial discussions and coordination among the ministries are done in the Executive Committee on Biomass Nippon Strategy, which is formed by director-general level officials of the ministries concerned. MOE‟s main concern is meeting Kyoto Protocol commitments, preventing global warming, and expanding the conversion of waste products into energy. METI collaborates with industry and is interested in analyzing the cost-benefit of shifting to renewable fuels and their impact on automobiles and infrastructure, and thus is involved in feasibility studies. MAFF‟s goal is to produce biofuels domestically from existing sources (sugarcane, rice, rice straws and husks, and woody materials).

However, the focus has shifted to the use of sources that are not used for food, e.g., cellulosic materials. The New Energy and Industrial Technology Development Organization (NEDO) is overseen by METI and funds research and development, and conducts post-project technology evaluations. NEDO is managing several of the biomass studies ongoing in Japan.

Policy Overview Japan‟s first biofuel plan, “Biomass Nippon Strategy,” was unveiled in December 2002 with four pillars

1) Preventing global warming;

2) Formulating a recycling society;

3) Nurturing strategic industry; and

4) Revitalizing rural communities.

When the Kyoto protocol was ratified in February of 2005, Japan felt compelled to move rapidly towards the promotion of biofuels to meet its commitment to reduce CO2 emissions by 6 percent from the 1990 level by 2010 (In fiscal 2008, Japan‟s CO2 emission level was 1.6% higher than the 1990 level). Accordingly, in March 2006, Japan revised the Biomass Nippon Strategy to emphasize the use of biofuels for transportation. It set a goal of replacing fossil fuels with 500,000 kl (oil basis) of biofuels for the transportation sector by 2010. In February 2007, the Executive Committee on Biomass Nippon Strategy released a report titled “Boosting the Production of Biofuels in Japan.” The report presented to the Prime Minister claims that Japan will be able to produce 6 million kl of biofuels domestically by around 2030 if appropriate technological advancement is realized. It sets a target of producing 50,000 kl of biofuels from molasses and off-spec rice, and 10,000 kl of biofuels from construction waste by 2011. In addition, the report sets a goal of producing 6 million kl (estimation by MAFF) of biofuels per year, 10% of domestic fuel consumption, from cellulosic materials such as rice straw, tinned wood and resource crops such as sugar cane, sugar beet by around 2030. This ambitious target is based on the estimation that Japan has unused biomass resources (non-edible portions of farm crops and forestry residues) equivalent to 14 million kl of oil, and that it could produce resource crops equivalent to 6.2 million kl of oil by fully utilizing the abandoned arable land, which is estimated at 386,000 ha. MAFF‟s goals are not shared by all Ministries, but MAFF officials are optimistic that by putting all their efforts and considerable financial backing into cellulosic research and development they can meet this goal. Move toward Biofuels Sustainability Standards The food crisis in 2008 brought a change to the biofuel policy in the EU and the U.S. The new direction is to limit the types of biofuels to be used only to those meeting the sustainability standards, which concern greenhouse gas emission reductions, environmental impacts, and impact on competition with food. Those are estimated by an approach called the Life Cycle Assessment (LCA) of biofuels. In line with the global trends, the GOJ began to consider establishing its own sustainability standards of biofuels. METI, in cooperation with MAFF and MOE, set up a Study Panel to Discuss the Introduction of Sustainable Biofuels.

The panel released an interim report in March 2010. The report recommends that:

1) Japan set the LCA‟s CO2 reduction level at 50%

2) Japan increase domestic production of biofuels, which is currently 3% of the total supply, to more than 50% (this would include biofuels produced in other Asian countries, partially supported by GOJ funding);

3) Japan emphasize cellulosic or other non-food materials to produce biofuels in order not to compete with the food supply. Based on the discussion by the panel, METI decided to treat biofuels as a source of greenhouse gasses and require oil companies to cut emissions.

Though biofuels are treated as zero-emission fuels under the Kyoto protocol, the approach of sustainable biofuels estimated by LCA accounts for CO2 emissions of biofuels from cultivation of raw materials to transportation of the final products. METI is planning to set its requirement on oil firms this year. The companies who do not comply will be penalized in some way Government Incentives and Import Regimes In 2008 the GOJ introduced tax incentives to encourage the use of bioethanol. The Act on the Quality Control of Gasoline and Other Fuels, which is supervised by METI, was amended and a tax system to promote fuels derived from biomass was created. The gas tax is usually Y53.8 per liter (approximately USD .60). Under the new tax system, if a fuel contains 3 percent bioethanol, the gas tax is lowered by ¥1.6 per liter (approximately USD .02). This tax measure is effective until March 31, 2013. In order to guarantee bio-gasoline quality, a registration system for bio-gasoline blenders was implemented. On May 21, 2008 the Diet approved a bill to promote using biomass resources to produce biofuels.

The legislation includes tax breaks and financial assistance for biofuel manufacturers and farmers producing feedstock, such as agricultural cooperatives and private businesses. The government encourages collaboration of those two groups, and their plans will be monitored by MAFF in order to qualify for the benefits. Under the scheme, the fixed property tax for newly built biofuel facilities will be reduced in half for three years. Interest-free loans for a redemption period of ten years will be provided to farmers producing feedstock.. In June 2009, the Promotion of Non-Fossil Fuel Energy Usage and Effective Utilization of Fossil Fuel Act was enacted. This law requires energy suppliers, particularly oil distributors and gas suppliers, to use biofuels or biogas. In addition, the import tariff on Ethyl Tert-Butyl Ether (ETBE) derived from biomass (3.1%) will continue to be removed this year (April 1, 2010 to March 31, 2011) under the Act on Temporary Measures concerning Customs. For clean diesel vehicles, the automobile weight tax and the automobile acquisition tax are exempted for the vehicles weighing less than 3.5 metric tons. These tax breaks are effective until March 31, 2012. For used clean diesel vehicles, the automobile acquisition tax is reduced by 0.5% until August 31, 2010.

Bioethanol and Biodiesel

Japan’s Motor Vehicles Petroleum Based Energy Market According to the Japan Automobile Manufactures Association (JAMA), there are 74 million automobiles in Japan (gas and diesel) and domestic fuel consumption is around 60 million kl per year for gasoline and 36 million kl per year for diesel. If a three percent ethanol blend gasoline (E3) were nationalized, it is estimated that demand for ethanol would be around 1.8 million kl. In the case of 10 percent ethanol blend gasoline (E10), demand would be 6 million kl per year. Japan’s Gasoline Market The Japanese gasoline market is made up of large companies. There are almost no independent dealers, and only a handful of companies import oil and/or gasoline. These roughly ten companies are organized into five groups, and they sell to their own contacts through a formalized distribution system. The companies form the Petroleum Association of Japan (PAJ).

In January 2007, several member companies of the PAJ jointly established Japan Biofuels Supply LLP (JBSL), a company to import bio-ETBE. In April 2007, PAJ imported through JBSL 7,500 kl of bio-ETBE from France and mixed it with gasoline at a refinery in Yokohama to make a 7 percent ETBE blend. From April 27, 2007 PAJ started to sell bio-gasoline as an alternative to regular fuel for the first time on a commercial basis at 50 gasoline stations in the greater Tokyo area. In April 2008, PAJ imported approximately 6,500 kl of ETBE from Brazil; where the price is reportedly 20-30% lower than its competitor in Europe. In October 2008, PAJ announced that it has entered into a long-term contract with Copersucar, the Brazilian supplier of bioethanol, to purchase 200 thousand kl per year. The ethanol is shipped to the U.S. to produce ETBE, which then is exported to Japan. In late 2009, the first shipment of 22 thousand kl of ETBE produced in the Channelview plant of LyondellBasell in Texas arrived in Japan. PAJ aims at expanding the sales of bio-gasoline nationwide to 210 thousand kl by 2010. For that purpose, it plans to import 840 thousand kl of ETBE (360 thousand kl on bioethanol basis). To date, the bio-gasoline is available at 1,490 gasoline stations nationwide. Bio-gasoline is currently sold at the same price as that of regular gasoline though the production cost is higher by Y7~8 per liter (approximately USD .07~08).

The difference is currently borne by the industry alone as the government support ceased at the end of fiscal 2008. Bio-diesel Policy With respect to bio-diesel, the GOJ decided that the blending ratio of Fatty Acid Methyl Ester (FAME) into light oil should be less than 5 percent, in order to ensure that the fuel meets safety and gas emissions standards for existing vehicles. This new requirement was added to the Light Oil Standard under the Quality Control Law and became effective in March 2007. In Japan, because 100 percent bio-diesel fuel (B100) is not subject to the light oil transaction tax, many regional governments have initiated measures to use competitive B100 for their official vehicles, such as garbage trucks. However some have pointed out that problems may occur because automobiles distributed in Japan are not designed to use B100. Indeed, media reports state that a number of problems with engines that use B100 have been reported. According to the reports, the problem is caused when the fuel filter is clogged with impurities in the fuel made from used edible oil. In the transportation sector, the GOJ hopes to promote clean diesel vehicles, as diesel fuel is more energy efficient than gasoline fuel and CO2 emissions are lower. The GOJ introduced tax breaks for clean diesel vehicles in 2009.

Sulfur free diesel oil was introduced in the market in 2005 and currently is available throughout the nation. Production Ethanol Production The initial thrust of Japan‟s biofuels movement focused on traditional production techniques, analogous to those used in the United States and other producing countries. MAFF has joint partnerships with local agricultural cooperatives, as well as alcohol and trading companies, to operate several model plants. MOE, METI and others also have a number of projects in the works. The following is a description of a select few of the model plants and facilities in Japan.

Utilizing MAFF‟s subsidies, which pay for up to 50 percent of the cost of building plants, two major major facilities were built in Hokkaido, Japan‟s agricultural heartland, for launch in April 2009: One run by Oenon Holdings, a holding company of several sake breweries, is in Tomakomai and is using rice; the other is in Shimizucho and intends to use off-spec wheat and sugar beets. The project in Shimuzucho is a public-private partnership between Mitsubishi Corp. and Hokuren, the federation of agricultural cooperatives in Hokkaido. Oenon Holdings and Hokuren are the first commercially viable ethanol plants in Japan with an annual production of 15,000 KL each. That ethanol is used to produce ETBE. In order to produce 15,000 KL of ethanol, approximately 33,000 MT of rice, 35,000 MT of wheat or 150,000 MT of sugar beets are needed. A third facility in Obihiro City, Hokkaido is run by the Tokachi Foundation and is supported by prefectural and national funds. The Foundation runs a very small still that converts Hokkaido-grown wheat into ethanol to fuel a single test vehicle.

The equipment is all state of the art, expensive, and on a miniature scale. The Foundation says that this is a „proof of concept‟ project intended simply to see whether they could produce ethanol from wheat to fuel the vehicle. There is one model plant in Niigata that is operated by JA Zen-noh, a federation of agricultural cooperative with MAFF‟s support. It uses high yield rice grown specifically for biofuel production (800 kg/1000 m2 vs 500 kg/m2 for food use rice). The project began in 2006 using fallow land set aside in MAFF‟s acreage reduction plan. In 2009 the facility began to produce 1000 kl of bioethanol requiring about 2,250 tons of rice. The ethanol is used as part of an E3 blend and the sales began in March 2009 at 20 affiliated gas stations around Niigata prefecture. In addition, there are ten more ethanol facilities nationwide including one in Okinawa using sugar cane as the fuel stock. All those are small-scale built for bioethanol verification projects supported by the GOJ. In order for these plants to make commercial sense, these commodities must be purchased at a significantly lower-than-market price. In the case of rice, it would have to be cheaper than feed-quality rice, which is already one-fifth the price of table rice. Like rice, the government also very tightly manages prices of wheat and sugar beets.

Therefore, there is little incentive for farmers to sell these commodities at a price these ethanol plants can afford unless the GOJ provides an additional incentive to support the price gap. The above-mentioned pilot projects and small-scale production facilities will not be enough to meet the goal to domestically produce of 50,000 kl of bioethanol by 2011 and the target to replace fossil fuels with 500,000 kl (oil basis) by 2010. Thus, the emphasis has shifted to research and development of cellulosic technology using readily available inputs that will not compete with the food supply, e.g. rice straw. The budget request that MAFF submitted for fiscal 2008 was Y3.2 billion (approximately USD 34 million) – the Minister himself requested the money – for soft-cellulosic research. For fiscal 2009, METI requested a budget for research and development of an integrated system of production of bio-ethanol from cellulosic sources and to study the sustainability and the Life Cycle Assessment of the biofuel. The total budget amount for research and development of cellulosic technology has remained the same level as the previous year and 24% or Y776 million (approximately USD 8.2 million) of the budget was allocated to METI. In the past two years, under the MAFF scheme, four projects were selected through a Request For Proposal process to produce ethanol from rice straw and husk and wheat straw. MAFF contributes 50 percent of the project costs.

Bio-diesel Production Municipal governments and regional Non Profit Organizations conducting a small-scale bio-diesel feasibility project called the “Rapeseed Project” has increased to 120 locations in 2008. The project is to grow rapeseed to produce cooking oil and collect the used oil to recycle as bio-diesel fuel. A couple of major restaurant chain operators are participating in the projects to collect used vegetable oil. The oil is processed into bio-diesel fuel for use in government vehicles or municipal buses. The current annual production of bio-diesel fuel is estimated to be 10,000 kl per annum. In June 2010, MAFF started a joint research project with private firms and universities to produce biofuel from algae. The research will attempt to extract oil produced by the Pseudochoricystis algae, with the goal of developing mass production technology, hoping to commercialize the fuel as substitute for gasoline and diesel by 2020.

It is estimated that algae-based biofuel could meet 10 to 20% of domestic demand for diesel if the effort is successful. Impact of Use of Agricultural Feedstock in Biofuel Production on Existing Markets Previously, biofuels policy was aimed at nurturing agriculture and revitalizing rural communities, and one of the ways of doing so was to increase agricultural production. The use of existing feedstock such as rice straw and off-spec wheat was also included in the initial plan, and is now receiving the most focus. This is in part a reaction to the “food v. fuel” debate that has received media attention in Japan. It also reflects a strategic refocus on how Japan can best achieve its goals in the biofuels sector. Thus, taking used vegetable oil, rice straw or even certain rice stocks off the market does not take away from existing markets for feed, etc.

Even if ethanol production facilities operated in Japan absorb traditional commodities like rice or sugar beets, their impact on the existing food and feed markets would be negligible because the amounts are very small portions of the total supply of these commodities: rice about 0.4 percent; wheat, 0.6 percent; and sugar beets, 3.5 percent. Consumption Direct Blending and ETBE There are two methods for blending bio-ethanol with gasoline, “direct blending” and “ETBE.” I Japan, MOE promotes direct blending while METI supports the ETBE method. The reason for the latter is that it is more costly for oil distributors to renovate the facilities for direct blending. One report estimates the cost to replace or upgrade existing infrastructure would be Y300-500 billion ($3-5 billion). MAFF has favored promoting direct blending. However, it is yielding to support the ETBE method in order to secure the distribution channel for domestically produced bio-ethanol. In 2009, two MAFF supported bio-refineries, Hokuren, the federation of agricultural cooperatives in Hokkaido, and Oenon Holding started to sell the bio-ethanol they produce to PAJ for blending with ETBE. The total production capacity of those two refineries is 30 thousand kl per year.

Japan‟s Ethanol Blend Limit Japan‟s ethanol blend limit remains low by U.S. standards at 3 percent. A number of potential hazards have been raised, including automobile part corrosion. However, there are feasibility studies looking at the potential for introducing a 10 percent blend in the future. MOE, at present, aims to introduce E10 to the market in 2012. Japanese automakers have started to introduce some new models that can run on E10. Reportedly, in 2008 Toyota Motor Corp. supplied two vehicles to the Ministry of Transportation for use in road testing an E10 ethanol blend in Osaka prefecture. Nissan Motor Co. received approval from the GOJ for an E10 version of its Murano. The GOJ has a rigorous testing and monitoring scheme to measure the effects of E3 on vehicles and the environment and how best to introduce ethanol to the market. In 2004 and 2005, METI commissioned the Japan Petroleum Energy Center to conduct experimental studies on the prospects for buying or producing, distributing and using ethanol-blended fuel. The ethanol is refined in Yokohama and distributed to service stations in Akita, Chiba, Toyama, Mie, Osaka and Fukuoka Prefectures. E3 usage is still quite limited in Japan. For example, in Osaka one can easily count the number of cars that are registered to use E3 gasoline: 576. Only six gasoline stations in the Osaka and nearby Hyogo prefectures sell E3 gasoline. This is a project supported by MOE, which promotes the direct blending method. Meanwhile, PAJ started selling bio-gasoline (regular gasoline blended with bio-ETBE) in those areas.

 The two different types of biofuels are actually competing in the market, and the competition has expanded as Mitsui Oil Co., an oil wholesaler, began selling E3 gasoline at affiliate gas stations in Ibaraki prefecture this year. The E3 gasoline was made and supplied by Brazil-Japan Ethanol Co., an affiliate of Petrobras, the Brazilian state-run oil supplier. Brazil-Japan Ethanol Co. itself started to supply E3 gasoline to gas stations in Chiba prefecture affiliated with agricultural cooperatives. Both Ibaraki and Chiba prefectures are located in the greater Tokyo metropolitan area. Though the production cost is higher than that of regular gasoline, the E3 gasoline is sold at the same price thanks to subsidies from MOE. Trade Imports of ethanol and biodiesel for transportation are negligible. However, because of joint ventures established between Japanese and Brazilian firms starting in 2010, imports will likely increase. MOE aims to supply 1.9 million kl of ethanol by 2020.

Of the total, 0.9 million kl will be imports. Prior to 2007 no imports were recorded but, as noted in the prior section -Japan‟s Gasoline Market, 7,500 kl of ETBE were imported from France in 2007 and 6,694 kl from Brazil in 2008. In 2009, 56,293 kl were imported from Brazil and the U.S. As of March 2010, 185 thousand kl of ETBE, were imported from the U.S. Investment Japan is engaged in a mixture of public and private investment and development projects in other countries. In terms of development, in order to help reduce green house gas emissions, Japan will provide technical assistance to Southeast Asian nations, in particular, to Thailand and Vietnam from 2010. Several Japanese trading companies have started to invest in Malaysia and Indonesia for producing biodiesel from palm oil and bioethanol from sugar cane and jatropha. Some Japanese trading companies have shown interest in Brazilian ethanol investments. This includes sugar cane farms as well as the associated ethanol production facilities. For example, in July 2008 Mitsui and Petrobras announced a joint venture in the cerrado region of the Brazilian state of Goias. One of the main goals is to export the sugar-based ethanol overseas, including to Japan. In 2009, the firm started the operation of its ethanol facility of which production capacity is 200 thousand kl per annum. Sojitz Corporation has expanded investment on its Brazilian joint venture firm to increase exports to Japan and Europe by tripling the output capacity to 3 million kl by 2012.

Advanced Biofuels

Japan’s scientific community, including universities, and public and private research institutions, has been expending significant effort toward basic and applied research related to biofuels. The focus of research has shifted to cellulosic sources and technologies in light of recent discussion on the sustainability of biofuels. MAFF recently started a research project with some private firms and universities to produce fuel from algae. It aims to commercialize the product as a substitute for gasoline and diesel by 2020. On June 12, 2010, USG and the GOJ agreed to start joint research on new production methods of biofuels to contribute to the reduction of greenhouse gas emission. The two nations will invest a total of yen 1 billion (approximately USD 11 million) over three years for the program which includes a study on effective methods to produce fuel from algae.