Can ethanol survive a hostile political climate?

Ethanol used to be sacrosanct. Corn-based fuels have been subsidized by Congress for more than three decades, ever since the Energy Tax Act of 1978. And, given that corn-lovin’ Iowa always gets to go first in picking presidential nominees, ambitious politicians have long learned to gush over the virtues of the stuff.

(Seth Perlman/AP) But now that’s all changing. As Politico’s Alex Guillen reports, Republicans campaigning in Iowa are no longer averse to criticizing corn ethanol. Meanwhile, the ethanol tax credit, worth $6 billion per year, is set to expire this Sunday with nary a whimper from Congress. Ethanol’s defenders couldn’t surmount the combination of recent bad press for corn- and soy-based fuels — as it turns out, they can wreak havoc on the environment and cause food prices to spike — or the anti-subsidy mood in Washington. So what happens to ethanol now?

First off, the ethanol industry as a whole will likely survive just fine. Just ask the ethanol producers themselves. There’s a reason why they quietly relented on trying to extend the 45-cent-per-gallon volumetric excise credit this year. After 30 years of subsidies, the industry is thriving. Oil prices remain high, making ethanol more competitive. The EPA’s Renewable Fuel Standard is still in place, which mandates that transportation fuel blend in a certain amount of ethanol, a form of government that’s arguably even more valuable than the tax credit. And U.S. exports of ethanol hit a record high in 2011, with some one billion gallons shipped abroad.

Instead, the key question is whether better ethanol will come along. After all, various peer-reviewed studies have found that ethanol made from corn and soybeans, far from being “clean” fuels, can often be worse for the environment than regular gasoline by driving up food prices and creating incentives for deforestation. So the hope has always been that some new, cleaner ethanol could come along — made from cellulosic crop waste, say, or from algae. Something that could displace gasoline without so many nasty side effects.

So far, though, that hasn’t happened. The EPA has already had to lower its targets for cellulosic ethanol in 2012, because companies aren’t making enough. As Nathan Greene of the Natural Resources Defense Council points out, corn ethanol was supposed to be a stepping stone to better fuels, but producers haven’t yet taken that step, in part because corn ethanol was too lucrative to give up.

Now, it’s possible the expiration of the volumetric tax credit will prod producers to seek out newer, cleaner alternatives to corn and soy. But, Greene notes, creating incentives for these next-generation biofuels will probably require further policy changes — for instance, tightening the fuel standard to include stricter environmental rules, and making sure that corn- and soy-based ethanol don’t continue to crowd out other options. One agency that could drive some of these changes is the Navy, which just launched a three-year, $510 million plan to buy up advanced biofuels.

Overall, ethanol is likely here to stay. It’s just not yet clear what kind of ethanol will prevail.