I don't think that ethanol will ever be a major source of fuel. As a way to make use of vegetable matter that would otherwise just go to waste, fine. But it's certainly not a very efficient way to generate energy.
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Neither increases in government subsidies to corn-based ethanol fuel nor hikes in the price of petroleum can overcome what one Cornell University agricultural scientist calls a fundamental input-yield problem: It takes more energy to make ethanol from grain than the combustion of ethanol produces.
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Adding up the energy costs of corn production and its conversion to ethanol, 131,000 BTUs are needed to make 1 gallon of ethanol. One gallon of ethanol has an energy value of only 77,000 BTU.
On the other side, here's an organization which promotes using a mixture of 15% gasoline and 85% ethanol for fuel:
LinkThis stuff does seem to have some genuine advantages:
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E85 has the highest oxygen content of any transportation fuel available today, making it burn cleaner than gasoline. Fewer exhaust emissions result in reduced production of smog and a decline in respiratory illness associated with poor air quality. E85 also reduces greenhouse gas emissions such as carbon dioxide, the main contributor to global warming, as much as 39 to 46 percent compared to gasoline.
To answer your questions:
1. As I said, it's a good way to use up plant matter that would otherwise just go to waste. However, I don't think growing crops that have other important uses in order to produce ethanol makes a lot of sense, due to the energy consumed to produce it. If ethanol production became a lot more efficient, maybe I'd have to change my mind on that point.
2. I wouldn't go so far as to pick either choice. There's nothing wrong with ethanol as a fuel, but it shouldn't be a major part of national energy policy.
3. There is certainly an economic benefit to getting government money for producing ethanol. No doubt some of this is pure pork. I wouldn't mind giving a tax break to companies that make use of plant waste to produce ethanol, but the biggest motivation for such companies should be profit.