The ethanol compromise did not make it into any debt ceiling negotiations and its future is now looking bleaker than ever before. The Congressional ‘super-committee’ established by the debt ceiling negotiations will have to decide by November 23rd some manner to reduce the deficit by $1.5 trillion or face potentially unpopular automatic spending cuts to defense and discretionary spending (though USA Today writes that these “threats” have failed in the past). None of the rumored super-committee members seem to be from regions that would require their support of the ethanol industry

The ‘ethanol compromise’ had legs because it funneled money into the domestic ethanol industry while still maintaining a facade of deficit reduction. It would have collected $2 billion in revenue from the ending of the domestic tax credit as of July 21 and used a small amount less than that to spend on items near and dear to the ethanol industry (mainly ongoing support for cellulosic ethanol and money for the installation of blender pumps at fueling stations), hence their support.

The deficit reduction from the ethanol tax credit is no longer possible because the ethanol tax credit is again set to expire at the end of the year (as it was extended for one year at the end of 2010). This means that any potential deficit reduction is slowly being eroded as the tax credit continues on towards the end of the year, and renewal of support for the industry will add to the deficit rather than reduce it, making it much more difficult for conservative politicians to support it (though, obviously, they have been willing to forget their supposed free-market ideology when it suits them).

So it seems likely that the tax credit and tariff will expire at the end of 2011. It is possible (though it is harder to get subsidies back once they’ve been gone) that future support for the industry will get stuck into a larger energy bill, especially support for ‘next generation’ biofuels which remains popular among those who have given up on corn based ethanol. The Renewable Fuels Association has high hopes:

Bob Dinneen, president and CEO of the Renewable Fuels Association said that because the debt deal includes a call for a future budget framework, the opportunity to discuss comprehensive energy tax policy still exists. This could include infrastructure support, tax incentives for second-generation ethanol technologies and feedstocks and the repeal of petroleum subsidies. “With the debt ceiling crisis looking as though it has been averted for now, we hope Congress and the administration are now prepared to address the nation’s worsening energy crisis, as oil and gasoline prices continue to rise and the nation’s investment in homegrown renewable fuels languishes,” he stated.

The much bigger problem with ethanol is still the renewable fuel standard. This fight will manifest itself in future years as virtually every related industry outside of those who produce ethanol revolt against higher blends of ethanol entering the fuel supply (this assumes that ethanol does not become cost competitive with petroleum, if it does, the government would do best to get out of the way).

In an appearance on E&E TV, retired General Wesley Clark discusses the future of corn ethanol policy. Transcript here. Given that he is a member of Growth Energy, completely objectivity isn’t expected. However, he makes a number of incorrect statements and supports very poor economic analysis.

CLARK: And so we’re behind in cellulosic because we’ve been artificially constrained in the fuels market, first by the EPA blend wall at 10 percent, which meant there was no market for cellulosic. And then secondly then by the lack of infrastructure to be able to actually go out to the service agent and say, hey, I want to try 20 to 30 percent ethanol blend.

Cellulosic ethanol production is “behind” because its not economical, and investors are aware that the current market for cellulosic ethanol relies almost entirely on a government law that clearly isn’t guaranteed given how difficult it is to produce cellulosic ethanol at a price that is even close to something consumers would want.

Clark also complains about the 10% “blend wall” yet doesn’t acknowledge that the majority of ethanol sold is due to an “artificial” government mandate. I’d gladly end the EPA’s ability to determine what American’s can put in their gas tanks just as I’d gladly end the mandate requiring refiners to blend petroleum with ethanol.

Also, its obvious that a lack of infrastructure is due to a lack of demand for ethanol, not because of any artificial market constraints. E85 exists in almost all 50 states, yet sales are low because its still too expensive given the lower fuel economy. Why would anyone want to buy E20 or E30 if individuals with flex-fuel vehicles don’t purchase E85?

On fuel economy with higher blends:

CLARK: You know, our own personal research is that American cars that are flex-fuel cars, they work really great at 20 and 30 percent ethanol. And sometimes you get a falloff in mileage at 85 percent because the motor is not really tuned to use the ethanol. But at 20 and 30 percent, in some of these models, there’s no falloff and you’re saving.

I’m not sure what study he is referring to, perhaps an in-house, yet to be published, study. However, recent comprehensive studies show the exact opposite. As the percentage of ethanol increases as a percentage of the total fuel blend, fuel economy drops.

Here is a study by the National Renewable Energy Laboratory: “Effects of Intermediate Ethanol Blends on Legacy Vehicles and Small Non-Road Engines.” From the executive summary:

E.4.1 Fuel Economy
• All 16 vehicles exhibited a loss in fuel economy commensurate with the energy density of the
fuel.* With E20, the average reduction in fuel economy (i.e., the reduction in miles per
gallon) was 7.7% when compared to E0.
• Limited evaluations of fuel with as much as 30% ethanol were conducted, and the reduction
in miles per gallon continued as a linear trend with increasing ethanol content.

On importing foreign oil:

CLARK: They know, look, in the $14 to $15 trillion economy like the American economy, you cannot generate jobs if you are sending $400 billion a year, every year, abroad. It’s like a tax on the American people and that’s what our oil companies are — put a tiger in our tank and they look all-American, but they’re actually — they’re dollar extraction mechanisms. And the friendly service station operator there that some of them we’ve grown up with, they’re actually — it’s like a $1200 year tax on every man, woman, and child in America so we can import foreign oil.

The idea that importing goods from abroad is equivalent to a tax of $1200 is laughable, and I wish the host hadn’t been so easy on him. Perhaps Clark believes the world would be better off without any international trade.

Monica Trauzzi: Is corn ethanol being produced at the expense of other biofuels?

Wesley Clark: No, I don’t think it’s being produced at the expense of biofuels. This is market demand driven. Look, corn is a crop that people have learned to be increasingly innovative in growing. I mean the yield grows up — goes an average of maybe three, 4 percent per year, per annum. I mean year after year after year.

The demand for corn ethanol is not market driven. It’s government mandated.

2011 marks an important year for developments in ethanol policy. Building out infrastructure is just as big a waste of taxpayer dollars as is the current VEETC/mandate.