As was widely reported, the Senate voted last week on a bill that would terminate the ethanol tax credit and corresponding tariff. While many were excited by the prospect of finally moving towards better energy policy, it seems likely that things will still get worse before they get better. The ethanol industry does not seem worried.

Consider the following: John McCain (R-AZ) offered additional legislation, while the Senate was voting down the tax credit, that would have ended federal subsidies for ethanol fuel pumps at gas stations. This was voted down 41-59:

“It lost because of the influence of the ethanol lobby,” McCain said on Fox News Thursday, alleging ethanol “is probably the greatest rip-off that I’ve seen since P.T. Barnum.

“It is one of the most outrageous examples of the influence of special interests,” McCain said.

He said that the rejection of his amendment thwarts the will of voters who handed Republicans major gains in last year’s midterm elections.

McCain said:

“The American people as of last November expected us to act. If we don’t, I think they will try to find somebody else that will. This example, the failure to address ethanol, at last to phase out these incredible subsidies to ethanol is really, I’m sorry to say, a signal to the American people we are not serious. And the special interests still govern here in Washington.”

He is right — though some Democrat’s have turned against ethanol, most haven’t, including the Obama Administration. And it seems, as some predicted all along, that though the tax credit might sunset, it will be replaced by some form of corporate welfare. The ethanol industry has suggested a number of different types:

• Require that all automobiles sold in the U.S. be flex-fuel vehicles — as many as 120 million — at no additional cost to the taxpayer.
• Eliminate artificial barriers to the transportation fuel market by building out the distribution infrastructure for ethanol, including 200,000 blender pumps and federal loan guarantees for ethanol pipelines. This infrastructure will provide consumers the access to choose ethanol in an open and free market.

Ignoring their abuse of language (free markets don’t involve federal subsidies and mandates), these subsidies will be much worse than the tax credit, as they will stick around forever and potentially be much more expensive. As more infrastructure and capital is invested into projects that cannot survive without federal support, the more money and fear mongering will be employed by the industry every time their federal support begins to dry up. Perhaps the relatively inexpensive $6 billion per year was a blessing in disguise compared to what they might get stuffed into a larger energy bill.