U.S. President George Bush’s anticipated State of the Union comments tomorrow on alternative energy may renew interest in corn, sugar cane and saw-grass futures.

But don’t expect ethanol to play any notable role in achieving energy independence, according to the libertarian right-wing Cato Institute think tank.

Jerry Taylor and Peter Van Doren, both senior fellows at Cato, argue in the new issue of The Milken Institute Review that corn-based ethanol is a non-starter as a serious effort to wean Americans off their dependence on oil because of its heavy subsidies and higher cost of production than conventional gasoline.

"The dizzying array of federal, state and local subsidies, preferences and mandates for ethanol fuel are a sad reflection of how a mix of cynical politics and we-can-do-anything American naiveté can cloud minds and distort markets," state the authors.

They claim the heavy subsidies the ethanol industry receives are not actually intended to level the playing field, move the country closer to energy independence or reduce greenhouse gases.

"These are flimsy rationales for the real purpose of the program – to convince urban voters and their representatives to willingly hand over their money to corn farmers and the rapidly growing ranks of investors in ethanol plants."

The authors cite a study recently published by the nonpartisan International Institute for Sustainable Development estimating that federal and state subsidies for ethanol in 2006 were somewhere between $5.1 billion and $6.8 billion, and that they will soon increase to as much as $8.7 billion annually. Without subsidy, the authors claim the production cost of ethanol would be $2.53 a gallon on average, blending in capital costs.

By contrast, they quote a U.S. Department of Energy (DoE) study in 1999 that they say found the oil industry only received a "mere $567 million per year" in subsidies, which increased by a few hundred million more a year upon passage of the 2005 Energy Policy Act. (Greenpeace estimates the American oil industry receives $15-35 billion a year - see Cleantech.com's Oil industry subsidies for dummies.)

Politicians' calls for dramatic increases in ethanol production are unfulfillable, say the authors. They quote another DoE study arguing that 700,000 barrels per day by 2030 is the practical limit for U.S. ethanol production.

Nor do they believe that cellulosic ethanol holds the answer. They cite higher production costs - estimated by the DoE at $3.35 a gallon, according to the authors. And, they claim, because cellulosic energy yields are lower than conventional ethanol, which itself is lower than gasoline, it will never become a major source of fuel.

"Even if production costs come down, cellulosic ethanol is unlikely to ever contribute more than a trivial amount to the transportation fuels market," they write.

Not surprisingly, the Renewable Fuels Association, the ethanol industry association, takes exception with the article's assertions. In an interview with Cleantech.com, Matt Hartwig, director of communications, said the 700,000-barrels-a-day-by-2030 DoE limit the authors quote is misleading.

"We talked with the DoE about this number. They're relying solely on corn as the feedstock. It's not that they don't believe cellulosic ethanol will come. It's just that because we're not producing it today, they can't include it in their projections."

And in terms of cellulosic ethanol, Hartwig said not only does cellulosic ethanol have the same energy value as conventional, but the cost is dropping rapidly.

"Cellulosic ethanol is on its way, and the cost is constantly coming down. New technology is being developed, the process is being refined, and that cost is constantly on a downward trend," he said.

The Milken Institute Review is sent quarterly to the world’s leading business and financial executives, senior policy makers and journalists. Its editor is Peter Passell, former economics columnist for The New York Times.