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.

In announcing his intention to seek the GOP nomination in 2012, Tim Pawlenty visited Iowa yesterday to deliver so-called “hard truths” to the American people. Given that he was in Iowa, Pawlenty’s stance on ethanol is the perpetual elephant in the room. Most non-Iowan fiscal conservatives seemed happy with Pawlenty’s comments, though its not clear why. The WSJ, today, wrote a short op-ed praising the Pawlenty for his unprecedented, “amazing” steps in Iowa:

One of the immutable laws of modern American politics is that no candidate who wants to win the Iowa Presidential caucuses can afford to oppose subsidies for ethanol. So it’s notable—make that downright amazing—that former Minnesota Governor Tim Pawlenty launched his campaign for the Republican Presidential nomination Monday by including a challenge to King Corn.

I suppose its worth praising him for making a slight improvement to the Obama/Bush/Gingrich/*insert politician* doctrine, but it ends with slight. The “don’t pull the rug out from under them,” slowly-end the subsidy approach  isn’t a real stance, and its not an end to the subsidies.

What Pawlenty actually said:

The truth about federal energy subsidies, including federal subsidies for ethanol, is that they have to be phased out.  We need to do it gradually.  We need to do it fairly.  But we need to do it.

Now, I’m not some out-of-touch politician.  I served two terms as Governor of an ag state.  I fully understand and respect the critical role farming plays in our economy and our society.  I’ve strongly supported ethanol in various ways over the years, and I still believe in the promise of renewable fuels – both for our economy and our national security.

But even in Minnesota, when faced with fiscal challenges, we reduced ethanol subsidies.  That’s where we are now in Washington, but on a much, much larger scale.

It’s not only ethanol.  We need to change our approach to subsidies in all industries.

It can’t be done overnight.  The industry has made large investments, and it wouldn’t be fair to pull the rug out from under it immediately.

These are the same vague talking points that even Grassley is comfortable using these days. And indeed, the biggest ethanol jockey, the Renewable Fuels Association, is on board with the Pawlenty plan. Their support ($) is a good litmus test for confirming that the particular policy is horrible:

Governor Pawlenty’s remarks today appear to be in line with Senator Grassley’s approach for ethanol reform,” said Iowa Renewable Fuels Association President Walt Wendland in a statement after Pawlenty’s announcement speech. “The ethanol industry is united behind Senator Chuck Grassley’s legislation to phase down and reform the current ethanol incentive as part of the discussion on all energy programs.”

(The Environment & Energy Daily actually got it right, headlining their story: “Pawlenty echoes industry with call for gradual ethanol subsidy phaseout”)

When is ending a subsidy not ending a subsidy? When current preferential treatment is replaced with bigger, more damaging subsidies like infrastructure that sticks around for decades. When there is no talk of bringing the fuels market closer to an actual market by ending the mandates created by the Renewable Fuel Standard. Does anyone really think that 5 years from now the industry will go quietly into the night if the subsidies are once again “temporarily” extended? Of course not.

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.

From  The Center for Public Integrity:

According to IRS records, the ethanol group Growth Energy paid Gingrich’s consulting firm $312,500 in 2009.The former House Speaker was the organization’s top-paid consultant, according to the records. His pay was one of the group’s largest single expenditures, as it took in and spent about $11 million to promote ethanol and to lobby for federal incentives for its use.

In a Growth Energy publication, Gingrich was listed as a consultant who offered advice on “strategy and communication issues” and who “will speak positively on ethanol related topics to media.”

Chris Thorne, a Growth Energy spokesman, said Gingrich was not hired again in 2010. The group was organized by ethanol producers from the Midwest in late 2008, Thorne said. Its members sought Gingrich’s counsel when it started because “they were people who were never involved in DC politics before, and they were looking for someone who knew how to get things done.” The organization’s IRS report for 2010 is not yet available.

First, the idea that Growth Energy doesn’t have anyone who is familiar with DC politics is laughable. The CEO of Growth Energy is Tom Buis, formerly the President of the American National Farmer’s Union, and named one of D.C.’s top 50 lobbyists. They also employ (or have employed) General Wesley Clark and Jim Nussle.

Do recall Newt Gingrich’s scuffle with the WSJ earlier this year, where in a letter to the editor Gingrich wrote:

Second, I am not a lobbyist for ethanol, not for anyone. My support of increased domestic energy production of all forms, including biofuels and domestic drilling, is born out of our urgent national security and economic needs.

Turns out that wasn’t true. CEI has previously written about Gingrich’s shameless ethanol pandering here and here.