The Social Costs of an MTBE Ban in California

December 14, 2004

In the early 1990s, oxygenated gasoline was widely hailed as a solution to many of the nation’s air quality problems. Even though the anticipated air quality benefits of oxygenated gasoline were in fact realized, the large-scale use of MTBE (methyl tertiary butyl ether) as a gasoline oxygenate resulted in adverse impacts to water quality. The use of MTBE exposed in dramatic fashion the fundamental problem of leaking underground storage tanks. As MTBE was detected in water supplies in the late 1990s, public concern intensified and proposals to ban the use of MTBE in gasoline surfaced in several states, most notably in California, which has moved to ban the use of MTBE in gasoline by 2003.

While the widespread use of MTBE has had adverse impacts on water quality, removal of MTBE from gasoline will impose significant costs on society — both in terms of gasoline production costs and prices, as well as possible impacts on air and water quality by fuel blending components that replace MTBE in gasoline. In moving to protect groundwater resources from MTBE, California may force the adoption of gasoline formulations that are, in fact, less beneficial to society. The total social cost of banning MTBE has not been properly evaluated by the studies that have been conducted to date. Many of these studies evaluate only separable components, and those that propose to perform a comprehensive assessment of the costs and benefits are incomplete and internally inconsistent.

In this paper we provide a comprehensive and internally consistent cost-benefit analysis of the gasoline formulation alternatives for California. Our analysis includes several categories of cost that have largely been neglected in the past analyses of MTBE use. These include: (i) the cost to taxpayers of increased ethanol consumption, due to the ethanol tax subsidy; (ii) the increases in the cost of oil imports caused by replacing MTBE volumes with blending components made from other substitutes; (iii) the effects of changes in gasoline prices on gasoline consumption and thus on automobile emissions; and (iv) the potential effect of MTBE substitutes, such as ethanol, on water quality.

Overall, our analysis indicates that the continued use of MTBE in California gasoline has clear and significant benefits relative to either the use of ethanol or the use of non-oxygenated reformulated gasoline (RFG). The increased annual cost resulting from a ban of MTBE in California when ethanol replaces MTBE ranges from $0.92 billion to $1.32 billion, with an expected value of $1.24 billion. When non-oxygenated RFG replaces MTBE, the annual increased costs range from $0.59 billion to $1.02 billion, with an expected value of $0.92 billion. The model results are robust to reasonable ranges of uncertainty; even under the worst case for MTBE and the best case for the other substitutes, it still follows that banning MTBE will lead to an increase in the total cost associated with gasoline use in the state of California.

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