Cost Benefit Analysis of MTBE and Alternative Gasoline Formulations

This paper presents a cost-benefit analysis of the 1990 Clean Air Act Amendments (CAAA) requiring the addition of oxygen content in gasoline, using California as a case study. The valuation and comparison of costs and benefits for several fuel blends (with and without oxygen content) provides a framework to investigate cross-media (air, water, soil) tradeoffs. We use known valuation methods such as the travel cost method to derive recreational value, the averting expenditures approach and cost of illness approach to derive public health costs, and market price method to quantify increases in fuel price and fuel efficiency costs in order to compare the alternatives. We use data from California to evaluate the current fuel blend with Methyl tert-Butyl Ether (MTBE), a fuel blend with ethanol (ethyl alcohol), and a fuel blend without oxygenated compounds. The most expensive option to meet the 1990 CAAA is the current reformulated gasoline blend with MTBE, which results in a net cost to California's economy of between $0.9 and 2.7 billion dollars annually. The cost of treating groundwater contaminated with MTBE is a major cost factor. Our assessment indicates that the non-oxygenated gasoline formulation is the most cost-effective, particularly in the long-term, once refiners are able to implement modifications to their installations or negotiate long-term supply contracts for these additives. Several strategies are identified to transition out of using the current gasoline blend with MTBE.