Japan Ethanol Gasoline Blending Policy for Gasoline
Japan announced its Seventh Basic Strategic Energy Plan this year following extensive prior discussions, which includes guidelines for E10/E20 ethanol blending in gasoline. In response to this policy initiative, an action plan was promptly launched through public-private collaboration, aiming for the introduction of E10 by 2030.
Given that the transportation sector accounts for approximately 20% of domestic emissions, and gasoline demand exceeds 40 million kiloliters in Japan, prioritizing gasoline for decarbonization, reflecting both its impact and practical feasibility, should be justified. Japan has already blended 500,000 kiloliters of ethanol, and increasing this ratio is considered rather realistic.
Ethanol benefits from tax incentives, such as a reduction of around ¥50(=＄0.3) per liter in gasoline taxes, which constitutes about one third of retail price. Despite its lower calorific value compared to gasoline, it remains competitive as of today. Moreover, the international distribution market, particularly in Brazil and the United States, is likely to be well-developed, with sufficient production capacity.
While the government is also promoting synthetic fuels as part of its net-zero strategy in the long term, these face significant challenges. Currently estimated at around ¥700(=＄5) per liter, synthetic fuels are undergoing demonstrations both domestically and internationally. However, issues such as feedstock procurement costs, conversion efficiency, and scalability remain unresolved. Although commercialization is expected in the early 2030s, the scale of deployment remains uncertain. Thus, ethanol is likely to retain its role as a baseload decarbonization solution.
Biofuel Facing Challenges
On the other hand, biofuels also face several challenges. When it comes to domestic supply side, the introduction of E10 blending in Japan is estimated to require ¥900 billion(=＄6 billon) if it covers all domestic market, in new capital expenditure (CAPEX) according to the industry. While attention must be paid to its impact on retail prices if the distribution scale gets larger, with gasoline demand expected to decline due to the expansion of EVs and aging refineries requiring more maintenance costs, gaining consensus among oil industry stakeholders for additional investment may prove difficult.
Since Japan lacks domestic ethanol production, any significant demand in the future would rely on imports, and the influence of additional demand and limited liquidity on international biofuel pricing, compared to the ample cross-border market of oil and gas, must also be considered. Biofuels are typically locally produced and consumed, with demand concentrated in producing countries. Their supply-demand dynamics are influenced by agricultural policies and crop yields sometimes. Thus, high-level coordination with producer countries might be important to secure both interests. Additionally, public understanding of the environmental value and associated costs is crucial in the case where retail prices rise.
Further efforts must be also addressed to aviation, maritime, and diesel sectors. Ethanol may be in demand for aviation and possibly maritime fuels, diesel use, there is a lack of feedstock, policy incentives, and production facilities. These sectors are considered “hard to abate” due to the difficulty of electrification, making decarbonization pathways unclear, if they need more ethanol, moreover, the demand and supply balance from the comprehensive demand of view, would be paid more attention.
Domestic Supply Response to Changing Demand
The shift toward non-fossil fuels will change demand across fuel types, reducing the optimality of refineries that were designed primarily for gasoline production for today.
This could lead to higher costs and reduced supply capacity, especially in relation to co-products. If demand for conventional fuels changes uniformly and the stable supply of non-fossil fuels is integrated coherently, supply-side adjustments will be more manageable. However, this outlook remains uncertain.
In the short term, imbalances between fuel types will be addressed through imports and exports. For middle distillates, which are expected to maintain stronger demand, refinery capacity expansion within Asia is anticipated, making imports a viable solution.
The petroleum industry must maintain a stable supply of petroleum products, ensure disaster preparedness, and simultaneously transition to supplying new types of fuels utilizing existing infrastructure as next-generation fuel hubs. These challenges are directly linked to Japan’s energy security, and a robust supply system for both petroleum and alternative non-fossil fuels must be ensured through public-private cooperation during this transitional period.