In the early 1990s, oxygenated gasoline was hailed as a partial solution to the nation’s air quality problems. Although the large-scale use of methyl tertiary butyl ether (MTBE) as a gasoline oxygenate successfully improved air quality, it adversely impacted water quality and dramatically exposed leaking underground storage tanks. However, removing MTBE from gasoline could impose significant societal costs—in terms of both gasoline production costs and prices and possible air and water quality impacts. The analysis conducted for this report is based on a comprehensive and internally consistent cost-benefit framework and includes several cost categories largely neglected in prior MTBE analyses, including: (1) the cost to taxpayers of increased ethanol consumption; (2) increases in the cost of oil imports; (3) the effects of changes in gasoline prices on gasoline consumption and thus on automobile emissions; and (4) the potential effect of MTBE substitutes on water quality.

A careful analysis of the costs and benefits of using MTBE as a fuel oxygenate, as compared to use of its most reasonable substitutes, finds that the net private and social costs of MTBE' s alternatives are substantially higher than those of MTBE. The expected costs of future MTBE use have been revised downwards as a result of the state of California's successful program to replace and monitor underground fuel storage tanks, as well as more complete estimates of the incremental clean up costs from MTBE contamination. Moreover, as California has begun to seriously consider the logistics and costs of removing MTBE from gasoline, it has become clear that the cost of MTBE alternatives is higher than previously anticipated. In light of the information that has come to light since California's 1999 decision to phase out MTBE use by 2003, that decision may merit revisiting.