"Our working group is studying whether it is feasible to introduce such ETBE-blended gasoline on the retail market in 2008," said an official at the agency, a unit of the Trade Ministry.

Kyoto-protocol leader Japan consumes more than 1 million barrels of gasoline a day and is the world's second-biggest gasoline market after the United States.

In the United States, Europe and Brazil, gasoline blended with up to 10 percent bioethanol is already in use.

The official said the government tentatively aimed to replace about 10 percent of gasoline sold in the retail market with auto fuel containing 7 percent ETBE.

Japan's Environment Ministry had aimed to start selling gasoline containing 3 percent ethanol (E3) in April 2005 and to replace all retail gasoline with ethanol-blended auto fuel by 2012.

However, E3 remains unavailable at the pump, partly because of strong industry opposition due to costs and concerns about human health.

"If you inject raw ethanol directly into gasoline, the fuel produces more NOX (nitrogen oxide)," despite cutting carbon dioxide emissions, a spokesman at the Petroleum Association of Japan industry group said.

NOX is a greenhouse gas harmful to human health.

"The direct injection would cost refiners lots in capital investment as you'd have to blend it at gas stations," he said, meaning refiners would incur extra costs for delivering gasoline and ethanol to retail outlets separately.

However, gasoline blended with bio-ETBE would require less investment. Refiners could convert idle facilities once used to produce methyl tertiary butyl ether (MTBE) into plants for making ETBE-blended gasoline.

They would also blend gasoline with ETBE at their refineries and deliver it to retail outlets via tanker lorry.

Japanese refiners stopped making MTBE, a gasoline additive, between 2000 and 2001 due to health and environmental concerns.

CONSUMERS WOULD PAY IMPORT COSTS

ETBE is a gasoline additive made by compounding ethanol and isobutane. Therefore, gasoline blended with 7 percent ETBE would still need to contain 3 percent ethanol made from grains, the same level as the failed E3.

Domestically produced bioethanol is scarce, so Japan would have to rely on imports mainly from top producer Brazil, analysts said.

That could bump up retail prices.

"ETBE-blended gasoline is less price-competitive because, for example, ethanol prices would jump if sugar cane production was hit by a (natural) disaster," an analyst said. "High freight costs will be passed on to consumer prices."