Unfortunately, the ethanol produced in the U.S. comes from a less-than-ideal source: corn. Corn ethanol’s “net energy balance”—the amount of energy it yields in proportion to how much energy goes into its production—is significantly lower than that of other alternatives, and modern corn farming isn’t easy on the land. By contrast, ethanol distilled from sugarcane is much cheaper to produce and generates far more energy per unit of input—eight times more, by most estimates—than corn does.
...The favors granted to the sugar industry keep the price of domestic sugar so high that it’s not cost-effective to use it for ethanol. And the tariffs and quotas for imported sugar mean that no one can afford to import foreign sugar and turn it into ethanol, the way that oil refiners import crude from the Middle East to make gasoline. Americans now import eighty per cent less sugar than they did thirty years ago.
Theoretically, there is such a thing as market failure. In practice, political failure is much, much larger. See Clifford Winston's book.
UPDATE: A commenter asks why we don't wind up just importing sugar-based ethanol. My guess is that it's harder to transport ethanol than sugar. But still, you would think that a tariff on raw sugar could be evaded by importing sugar-based products instead.