On December 31, 2011 Congress allowed a decades-old corn ethanol subsidy to sunset. It also sunsetted an import tariff on foreign cellulosic ethanol. The dissolution of these policies has prompted some concern about impacts on gasoline prices and the future of the U.S. ethanol industry.

Nearly all gasoline blended and sold in the U.S. contains at least 10% corn ethanol. USA Today is reporting that the end of the subsidy could raise gasoline prices by as much as $0.045/gallon as early as next week.

In an interview on NPR, Bruce Babcock, a professor of energy economics at Iowa State University, suggested that the corn ethanol industry will not see a large an impact in the short-run, arguing that current $100/barrel oil prices incentivize a search for low-cost substitutes, and that “corn ethanol really is the only lower-cost substitute we have right now in the short-to-intermediate run.”

The federal government continues to encourage the production of ethanol derived from biomass that is not used for food, such as switchgrass, camelina, algae, or cornstalk. However, according to a December 22, 2011 Congressional Quarterly article (subscription only), many farmers are reluctant to switch to these crops at scale due to a lack of existing infrastructure and an uncertain market for them.

Is allowing these ethanol policies to sunset the right move? What impacts do you expect this to have on the renewable fuels industry? On oil prices? What environmental, economic, and/or energy security implications might these decisions have?