Well, what many predicted has come true, subsidies for ethanol aren’t actually going away:

Ethanol advocates Sens. John Thune (R-S.D.) and Amy Klobuchar (D-Minn.), meanwhile, won multi-year extensions of tax credits for producing “cellulosic” ethanol — which isn’t made from corn — and installing ethanol blender pumps at gas stations.

The deal will steer $1.33 billion — two-thirds of the savings from ending the blenders’ subsidy — into deficit reduction, while the balance of $668 million would support the other incentives, according to the lawmakers.

Any rational proposal for the future of ethanol should aggravate industry trade groups, and they’re predictably cheer-leading about how they’re being fiscally responsible, fueling our freedom, and all that other nonsense. It seems as if they saw the light at the end of the tunnel was fading fast, and they hopped on a train that would funnel a remaining 600 million into the industry.

Politicians seeking rational energy policy should not agree to this compromise. The ethanol industry is against the ropes: they are outnumbered in both the House and the Senate, and its not clear they can stick their policy hopes deep into any large bills later this year. The fuel has had decades to become cost competitive with petroleum, and despite enormously high oil prices the industry has been unable to meet this challenge.

While this legislation will technically reduce the deficit, allowing the legislation to expire at the end of the year is likely preferable. Every federal dollar poured into infrastructure for the industry creates yet another reason for them to demand increased federal funding less everything become useless once the subsidies go away. The current subsidies which, under the compromise, would expire in 2014/2015 will be fought tooth and nail at that time, much like the current battle has been fought. The extension of cellulosic ethanol to include ‘algae fuel’ will impose additional costs on the refining industry, and additional subsidies will be demanded/mandated if a large number of blender pumps for E15/E85 are installed at retail stations and go unused.