While ethanol is typically produced from the starch contained in grains such as corn and grain sorghum, it can also be produced from cellulose. Cellulose is the main component of plant cell walls and is the most common organic compound on earth. It is more difficult to break down cellulose to convert it into usable sugars for ethanol production. Yet, making ethanol from cellulose dramatically expands the types and amount of available material for ethanol production. This includes many materials now regarded as wastes requiring disposal, as well as corn stalks, rice straw and wood chips or "energy crops" of fast-growing trees and grasses.

Producing ethanol from cellulose promises to greatly increase the volume of fuel ethanol that can be produced in the U.S. and abroad. A recent report found the land resources in the U.S. are capable of producing a sustainable supply of 1.3 billion tons per year of biomass, and that 1 billion tons of biomass would be sufficient to displace 30 percent or more of the country's present petroleum consumption.

Importantly, it offers tremendous opportunities for new jobs and economic growth outside the traditional "grain belt," with production across the country from locally available resources. Cellulose ethanol production will also provide additional greenhouse gas emissions reductions.

The Energy Policy Act of 2005 (H.R. 6), signed into law in August 2005, contains a number of incentives designed to spur cellulosic ethanol production:

- Creates a credit-trading program where 1 gallon of cellulosic biomass ethanol or waste derived ethanol is equal to 2.5 gallons of renewable fuel
- Creates a cellulosic biomass program of 250 million gallons in 2013
- Creates a Loan Guarantee Program of $250 million per facility
- Creates a $650 million Grant Program for cellulosic ethanol
- Creates an Advanced Biofuels Technologies Program of $550 million.
- Targets Biomass Research and Development
- Establishes program of production incentives to deliver the first billion gallons of annual cellulosic ethanol production

World production of ethanol in 2006 was 51 gigalitres (1.3×10 US gal), with 69% of the world supply coming from Brazil and the United States^. More than 20% of Brazilian cars are able to use 100% ethanol as fuel, which includes ethanol-only engines and flex-fuel engines. Flex-fuel engines in Brazil are able to work with all ethanol, all gasoline or any mixture of both. In the US flex-fuel vehicles can run on 0% to 85% ethanol (15% gasoline) since higher ethanol blends are not yet allowed

or efficient. Brazil supports this population of ethanol-burning automobiles with large national infrastructure that produces ethanol from domestically grown sugar cane. Sugar cane not only has a greater concentration of sucrose than corn (by about 30%), but is also much easier to extract. The bagasse generated by the process is not wasted, but is used in power plants as a surprisingly efficient fuel to produce electricity.