The introduction of MTBE to address air emissions problems has led to the discovery of MTBE in surface and ground water supplies in the state of California, due to leakage from storage tanks, vehicles and distribution systems. The air quality benefits associated with MTBE have now resulted in significant unexpected costs, which may far outweigh the intended benefits. This study has identified the major cost categories associated with use of MTBE at high levels in gasoline as an oxygenate, relative to the use of conventional gasoline. We have also identified the cost and benefit categories of the major alternative to MTBE, namely the use of ethanol as an oxygenate in an ethanol/gasoline blend popularly denominated gasohol. The following literature review discusses some of the sources of data for our cost categories. We are in the process of quantifying the costs and benefits of each gasoline alternative, first for the California economy as a whole, and subsequently evaluating the spatial and temporal implications of these costs and benefits. We have developed a series of policy options that can be implemented at a higher benefit/cost ratio than the current status quo. These policy options will be quantified in the coming months, within a reasonable range of uncertainty. Our final analysis will include data from the other MTBE Projects under SB 521 (managed under the UC Toxics Research and Teaching Program) that are being conducted by other UC researchers, as mentioned in the sections that follow.

COST CATEGORIES

MTBE as an oxygenate

• Public Health Costs

Preliminary review of scant studies shows no evidence of public and environmental effects associated with MTBE in the concentrations or doses that humans, flora and fauna would be exposed to. The available studies have been conducted with high doses applied to rats (e.g. Belpoggi et al., 1995, Miller et al, 1997, Johansen et al, 1995, Hong et al 1997, White et al, 1995, Daughtrey et al, 1997), in some cases using controversial experimental methods (Borak et al., 1998). A review of the existing literature and research underway at UCLA by John Froines, and at USC by John Peters will provide some additional information about possible health effects such as respiratory and reproductive effects associated with MTBE, which may require us to revisit the cost of treating MTBE-related illness.

The primary rationale for averting the risk of exposure to MTBE is the odor and taste issue. At this point both U.S. EPA and the Cal DHS have set the MTBE advisory level at 35 ppb. This level is currently under revision based on ongoing taste and odor studies.

Health benefits associated with lower carbon monoxide and aromatics in the atmosphere due to the addition of oxygenates are being evaluated, through a literature review and an analysis of actual reduction of ambient air concentrations in the South Coast Air Basin.

There is a potential for increased emission of aldehydes associated with MTBE combustion, that is being investigated by the UC Berkeley team. If the levels are of concern, we will evaluate the corresponding cost of illness that may occur.

• Ecological and Environmental health costs

Based on mortality studies conducted by Arco (Mancini, 1997) concentrations in the environment would have to be significantly higher to result in measurable costs. However, current research at UC Davis will provide information on reproductive and other functional effects that may be used to quantify ecological damages.

• Direct costs of fuel price increase and decline in fuel efficiency

The increase in the price of fuel due to the addition of MTBE at high levels has been estimated at 3-15 cents per gallon. This translates into an estimated annualized increased cost to the California economy of $390 million to $1.95 billion based on an average annual consumption of 13 billion gallons of gas for California (Lundberg, 1997).

The decline in fuel efficiency is due to the lower energy content of MTBE with respect to other gasoline constituents, and is estimated at 1.5% (NSTC, 1997). This translates into an estimated cost of $300 million per year, assuming an average cost of $1.50 per gallon of gasoline

• Cost of Water Treatment

Information from another study at UCSB indicates that the cost of treatment of MTBE-contaminated water ranges from $1.5/1000 gal ($0.40/m3) for low flowrate systems, in the range of 10-100 gpm (0.003 to 0.03 m3/min), to as low as $0.10/1000 gal ($0.026/m3) for high flowrate systems, in the range of 1000-5000 gpm (0.3 to 1.3 m3/min). Additional treatment costs for pretreatment of other influent water characteristics, as well as post-treatment to meet both effluent water and off-gas regulations are expected to increase total cost by about 10-15%.

In order to quantify the cost of water treatment for the California economy, the frequency and location of contaminated surface and groundwater supplies has to be determined. The UC Davis team is developing a database with relevant information. Currently we are using information available from the California DHS Monitoring Program to estimate the number of supplies requiring treatment.

• Monitoring costs

Estimates as high as $1300 per week for a particular water district�s monitoring of surface water and groundwater wells have been recorded. We are in the process of developing an estimate for all water utilities regulated by DHS.

• Costs of Alternate Water Supply

Some utilities are faced with using an alternate water supply, at least in the short term (e.g. the city of Santa Monica). We can identify this cost as an averting expenditure that represents a form of valuing public willingness to pay to avert heath risks. In this particular instance, the cost increase has been from $25 per acre-foot from the city�s pumping wells to $440 per acre-foot for water from the Metropolitan Water District (Rodriguez, 1998). Given the wide range indicated, it will be necessary to investigate the water pricing differences to find a viable range for the state of California. This can then be compared to the cost of treatment to make decisions at a local or regional level. It is clear that if a large number of water utilities opt for this strategy, the increase demand will affect the price of the available clean water.

• Recreational Costs

Due to the discovery of MTBE in water supplies where there exists some boating activities, steps have been taken to control the use of motor vehicles, from restrictions to outright banning. This represents a recreational cost that needs to be accounted for. Information is being gathered by the Recreational Boaters of California association related to the value of boating to the state and local municipalities. We will use this information to measure the dollar value of boating restrictions.

Ethanol as an oxygenate

• Public health costs

Preliminary review of toxicological data indicates no evidence of health issues associated with low levels of ethanol in groundwater or surface water supplies. However, there is a concern that use of ethanol as an oxygenate will result in increased aldehydes and PAN, as products of incomplete combustion or secondary by-products, that may pose ambient air quality problems (NSTC, 1997). We are in the process of translating this into human health issues and then performing an economic valuation.

• Direct costs of fuel price increase and decline in fuel efficiency

The California Energy Commission will release a study in the next few weeks evaluating the costs associated with using ethanol as an alternative oxygenate. This should provide us with information on the projected direct fuel price increase associated with ethanol. Communications with oil industry representatives indicate that there will be additional costs due to blending of ethanol into gasoline at regional distribution centers to avoid phase separation in pipelines and other components of the distribution system. If ethanol is chosen as the mandated oxygenate for California, this will increase the marginal cost curve for all suppliers. This increase would translate into a price increase to the consumer. We are looking at experiences in other states (Oregon, Arizona, Midwestern states) that have adopted gasohol as their main oxygenated gasoline alternative, to determine the marginal cost increase, and thus perform a forecast for California.

There are estimates of a 3% reduction in fuel efficiency associated with using ethanol as an oxygenate (NSTC, 1997). This would double the current additional cost to the consumer of using MTBE-oxygenated gasoline.

Policy Options

The preceding literature review contains the cost categories and preliminary estimates of costs, where warranted. In this section we discuss the policy options. In addition to the major choices in the types of oxygenates (i.e. MTBE, ethanol) which can either be implemented through regulation or through relaxation of gasoline performance requirements (e.g. Reid Vapor Pressure), there are many policies that can be implemented to reduce the costs while maximizing the benefits of adding oxygenates to gasoline. For example:

1. Continue use of MTBE but with management of the surface water reservoirs, both temporally and spatially, to reduce the levels of contamination. Some water utilities have the option of managing multiple reservoirs which allows them flexibility to reduce the risk of MTBE exposure. The Santa Clara Water District, for example, has implemented different restrictions on boating in their various water reservoirs, through fees and a reservations system. This option takes on more relevance in light of recent studies regarding the rate of volatilization of MTBE from surface waters (Malcolm-Pirnie, 1998).
2. Limit use of MTBE or ethanol to air quality non-attainment areas and require the oxygenated gasoline only during time periods of non-attainment (e.g. June-October). Other areas may revert to conventional gasoline or gasohol, depending on their regional air quality. This requires an evaluation of the spatial distribution of air and water quality issues, to perform a regionalized cost benefit analysis.
3. Internalize the cost of MTBE-contaminated water treatment through a surcharge on gasoline used to increase the existing State Revolving Fund for groundwater cleanup. Gasohol would not have a surcharge. This would allow for a market-based decision-making process.
4. Increase the use of ethanol as an oxygenate, by developing market incentives for promoting ethanol production in California from agricultural wastes. Market incentives could include tax breaks on capital investments associated with ethanol production and ethanol/gasoline blending facilities.
5. Eliminate the use of MTBE after reevaluating the need for oxygenated gasoline, given the significant reduction in overall emissions from the newer fleet of vehicles. Implement additional incentives to remove older vehicles from circulation.
6. Evaluate the possibility of allowing for natural attenuation of MTBE plumes in those cases where there is a low risk of exposure to humans or sensitive ecosystems. Stipulate that cleanup standards be based on risk analysis and not mandated cleanup goals.