Dave Juday, a commodity analyst writing in The Weekly Standard, has a long essay covering the largely negative consequences of our nation’s ethanol policy. He covers many of the familiar arguments, such as rising food costs and the ongoing nonexistence of cellulosic ethanol, but also many topics less often covered by the media, such as the clever ability of corporations to take advantage of these subsidies in ways that were not intended:

For a time, the $1 tax credit provided a huge incentive to import soy oil from South America, blend it with a small amount of petroleum diesel to claim the U.S. tax credit​—​the blending often occurred while the tanker ship was still in port​—​and then re-export the blended fuel to Europe to further capture EU subsidies. That little scheme was known as “splash and dash,” and it was a $300 million subsidy to promote domestic biofuel use that did not in fact subsidize biodiesel use in the United States.

Consider the absurdity of splash and dash at its height: According to the Department of Energy, in 2008 the United States produced 678 million gallons of biodiesel and exported 677 million gallons. We imported 315 million gallons, and domestic U.S. consumption was 316 million gallons. That particular stratagem ended in 2009, but exports haven’t. Despite not meeting the mandated minimum for domestic biodiesel use last year, more than a third of the biodiesel produced in this country was exported in 2010.

This shouldn’t surprise anyone, but it is frustrating nonetheless. These companies would appear to have collected over $300 million in U.S. tax credits (and these tax credits are often defined a “refundable tax credits” which mean the IRS can actually write you a check if the tax credits exceed corporate tax liability, which they often do) at the expense of the U.S. taxpayer while not making any actual progress on the (still misguided) attempt at shutting the U.S. economy off from foreign sources of energy.

The author also covers the complex world of RINs — renewable identification numbers — that are bought and traded with each gallon of renewable fuel:

On top of all the complexity of the tax credits, tariffs, and the import quotas, the federal mandate by feedstock category creates an intricate compliance system. Energy companies who comply with blending regulations to meet the mandate are issued a “renewable identification number,” known as a RIN. These are 38-character numeric codes to trace the transfer of biofuels. Even the National Biodiesel Board itself confesses that “a RIN may look, at first glance, like a wicked advanced algebra problem,” but “in reality, it is the basic currency for .  .  . credits, trading, and use by obligated parties and renewable fuel exporters to demonstrate compliance, as well as track the volumes of renewable fuels.”

There is a sophisticated secondary market for RINs among “obligated parties”​—​i.e., energy companies who must blend biofuels into petroleum-based fuels to meet the standards. Companies who earn RINs may sell them to companies who don’t. It is a miniature cap and trade regime.

Energy companies who cannot procure advanced biofuels on the market because supplies are not available are forced to buy RINs. Given the production situation​—​overproduction of corn ethanol combined with severe underproduction of advanced bio-fuels—it came as no surprise to industry observers when a Maryland biodiesel producer was indicted for fraudulently selling counterfeit RINs.

Yet, to effectively maintain the overall biofuels mandate imposed in 2007, the Obama EPA recently proposed to increase the 2013 biodiesel mandate above the statutory level of 1 billion gallons to 1.28 billion gallons. There can only be one outcome: U.S. diesel users will pay more for fuel in order to offset the cost of imported sugar ethanol from Brazil and the lack of viable commercial cellulosic production technology.

With every government regulation comes an army of lawyers and a large complex program that those affected have to comply with. The author didn’t include another recent RIN scam put on by our own government, which is the EPA requiring that fuel producers continue to purchase cellulosic ethanol RINs despite the lack of cellulosic ethanol on the market, to the tune of roughly $6 million in 2011.

Read the entire essay here. The ethanol tax credit and corresponding tariff on ethanol imports is scheduled to expire at the end of the year and it seems very unlikely that either will be renewed. However, as one subsidy dies a new one might take its place. The ethanol industry is now promoting an ‘open fuel standard’ (among other ideas) which would give consumers the choice require that gasoline stations sell larger blends of ethanol (e15 and higher) while also mandating that automobile manufacturer’s begin building out their vehicle fleet to be flex fuel compatible, or able to run on higher blends of ethanol. I criticized that idea here.

The largest subsidy for the ethanol industry is still the renewable fuel standard. It seems very unlikely that ending this fuel standard would be politically feasible, though it might be possible to change the legislation such that current blend levels are frozen in place while not requiring that they continue to increase until 2022.