During his State of the Union address last week, President Obama joked about the absurdity of an Environmental Protection Agency (EPA) regulation that could have forced dairy farmers to pay $10,000 for spilled milk. Equally absurd is the same agency fining companies $6.8 million in 2011 for failing to use a fuel that does not exist. Even more absurd is raising the fine in 2012 — but that is exactly what the EPA is doing.

The spilled milk line refers to an EPA regulation that would have required dairy farmers to file emergency plans to show how they would deal with large amounts of spilled milk, including how they would train “first responders” and build “containment facilities” to store the milk. This was a terrible interpretation of a law that attempts to prevent oil spills. After being the brunt of Capitol Hill jokes, the EPA sensibly determined that milk should not be classified as oil.

It’s time for Congress and the EPA to make the same determination for cellulosic ethanol — a fuel that Washington laws require but the energy industry can’t provide.

The 2007 Energy Independence and Security Act (EISA), the same law that bans the traditional Edison light bulb, requires oil companies to blend motor fuels with cellulose, which is made primarily from organic plant materials. When properly blended, the fuel becomes cellulosic ethanol. A major problem with this requirement is that there is no cellulosic ethanol commercially available.

Originally, EISA required companies to produce a combined 250 million gallons of cellulose by 2011 and 500 million gallons by 2012. Because no company has been able to produce the fuel commercially, the EPA decided to reduce the quotas to 6.6 and 8.65 million gallons. Though the new, much lower quotas are certainly an improvement, oil companies were still fined $6.8 million for not meeting their 2011 target.

Oil companies are not disregarding the law. There are more than 20 companies currently attempting to make commercially viable cellulosic ethanol worldwide. But so far those efforts have gone nowhere, despite massive government subsidies. Even after receiving more than $150 million in government grants, for example, Range Fuels was forced to close its Soperton, Georgia cellulosic ethanol factory last year.

The question is: Why is the government pouring billions of dollars into the production of nonexistent fuels for “energy independence and security” when the private sector — through projects like the Keystone XL pipeline — has the ability to make America energy secure without government handouts?

Cellulosic ethanol companies are nowhere near a point where they can provide the fuel commercially, let alone without government handouts. This flawed policy puts Americans on the hook twice — when their tax dollars are spent financing these projects and when the oil companies have to pass the fines on to the consumer when they inevitably miss another quota.

During his January 24 address, the president noted that “we need smart regulations to prevent irresponsible behavior.” The cellulosic ethanol mandate is an example of where we need smart energy policies to prevent irresponsible government behavior.

Adam Peshek is a research associate at the Reason Foundation.