Over at NRO, Dave Freddoso has a great primer on the ethanol debate, including this history of the subsidy:
Corn ethanol would not exist at all without Uncle Sam. The handouts began with ethanol tax credits in the Energy Tax Act of 1978. It was an attempt to solve two problems at once: our vulnerability to oil shortages and corn prices that had been depressed by our agricultural subsidies. In 1980, a punitive tariff of 50 cents per gallon was laid against ethanol imports (the rate today is 2.5 percent plus 54 cents). This and government sugar-price supports and tariffs guaranteed that American corn would be the only cost-effective feedstock for ethanol. Ethanol producers also became eligible in 1980 for government-guaranteed loans for up to 90 percent of their construction costs. (By 1988, the government had lost $352 million in defaults.) The government provided other assistance as well – R&D funding, for example.
Government help was a windfall for ethanol: Production shot upward from 20 million gallons in 1979 to 750 million gallons by 1986. In 1990, a tax credit of ten cents per gallon was created for small-capacity ethanol producers. In the same year, Congress mandated the use of oxygenated gasoline. The subsequent downfall of MTBE boosted demand for ethanol, a rival but less cost-effective oxygenate, so that production surged to 3.6 billion gallons by 2004.
Our ethanol policy always made food slightly more expensive by increasing demand and reducing supply. But 2005 was the year that Congress went all-in. Just before the oxygenate mandate disappeared in 2006, Congress guaranteed that ethanol use would expand dramatically no matter what. The Energy Policy Act of 2005 mandated the use of 4 billion gallons of ethanol in 2006, increasing each year toward an annual consumption of 7.5 billion gallons of ethanol by 2012. This immediately brought about increased ethanol investment and production – and much higher demand for corn, leading to higher prices. By 2007, when ethanol production had already reached 6.5 billion gallons, the new energy bill upped the mandate to 15 billion gallons of corn ethanol by 2015.