The argument for government being involved with the development of alternatives to petroleum based energy seems novel but it turns out the government has been mucking around with energy policy for quite some time.
Early in the development of the automobile, gasoline engines competed with engines that burned alcohol and even electric cars. The alcohol-burning engines were actually more efficient than the gas burning engines (in the early 1900s) and alcohol was a lot cheaper than gasoline. However, pre-income tax the U.S. government was funded on excise taxes and tariff revenue, and one of the excise taxes was on alcohol.
The distillers and the fledgling auto industry lobbied the government to reduce the tax on denatured alcohol to make it affordable as an alternative to gasoline. However, the government chose not to reduce the taxes on denatured alcohol, which, in turn, made gasoline cheaper (by about 15 cents per gallon or $3.32 in 2006 dollars) and the automobile industry went with gasoline rather than the "renewable" fuel. What is only slightly ironic is that one hundred years later the U.S. government and activisits proclaim that consumers, who do not understand negative externalities of gasoline, make it so that the government (which one?) should, once again, decide the winner in a new new-energy game.
The December 24, 1907 NYT reports another twist in the early battle between gasoline and alcohol:
Representative Cary has introduced a bill awarding a bounty [subsidy], extending over five years, of 15 cents upon each gallon of proof alcohol produced by farm distilleries with a daily capacity of not over 100 gallons...only ten stills, the Commissioner of Internal Revenue reports, have been set up to produce denatured alcohol from farm waste at a cost, thus far, far greater than was promised.">>>MORE
