ethanol.jpgTo fight soaring air pollution, China plans to encourage the wider use of ethanol, according to the Financial Times ($).

Beijing could soon set a target for the amount of ethanol in China's energy mix, according to one western energy trader.

Clearly, the FT's source is hardly disinterested but if the Chinese government does mandate greater use of ethanol it could have big implications for western carmakers and energy companies in China.

The proposal seems well advanced and the government has apparently taken on board the lessons learned by other countries that have sought to promote renewable energy.

Worldwatch Institute's excellent ChinaWatch service says the government is considering a risk-sharing mechanism to allow biomass energy companies to reserve funds during oil price hikes.

Those funds would be used to compensate losses and sustain companies' operations if oil prices plummet, so hopefully avoiding the sort of problems that hit Brasil's ethanol industry in the 1990s.

Ethanol-powered cars are hardly new. The original 1908 Ford Model T could run on ethanol and Brasil popularised the fuel in the 1980s. But it is only with today's sky-high oil price that western governments and oil companies have begun to take the fuel seriously.

In the US, a clutch of ethanol pure-play companies are preparing IPOs to exploit interest in the newly-fashionable fuel while BP recently committed $500m to biofuels research.

China is already the third largest ethanol producer in the world behind the US and Brasil. Currently, eight of its provinces have made E10, a 10 per cent ethanol and petroleum blend, mandatory at local petrol pumps.

Today, China produces roughly 1m tons of ethanol from corn each year. However, the greater use of corn and grain to produce ethanol is being discouraged because it could jeopardise the nation's food security.

The focus has thus shifted to alternative feedstocks. Today, just under 100,000 tons of biodiesel comes from waste vegetable oil and oil plants such as Jatropha curcas, Pistacia chinensis and rape seed.

China's long-term target is to produce 12m tons of biofuels, including ethanol and biodiesel, annually by 2020, accounting for 15% of the fuel used for transportation.

The use of biomass for electricity generation in China also growing. Several pilot projects set up in recent years are using the stalks of agricultural crops as feedstock, and offering a cleaner alternative to coal-fired power plants, which generate around 86% of China's electricity needs.

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