An integral cost-benefit analysis of gasoline formulations meeting California Phase II Reformulated Gasoline requirements (1998)

We conduct a Cost Benefit Analysis (CBA) for three gasoline formulations that meet CaliforniaOs Phase II Reformulated Gasoline (CaRFG2) requirements: CaRFG2 with MTBE, CaRFG2 with ethanol, and non-oxygenated CaRFG2. Cost and benefits for each formulation are compared against conventional gasoline as defined by the 1990 Federal Clean Air Act Amendments. Air quality benefits for all three formulations are essentially the same; the highest economic benefit is the reduction in benzene concentrations due to CaRFG2 specifications, which translate into reduced cancer risk for millions of people. However, CaRFG2 with MTBE and CaRFG2 with ethanol have been shown to increase emissions of aldehydes, which are also classified as potential carcinogens. Therefore, these formulations have some air quality costs associated with them. A preliminary evaluation of the most likely composition of non-oxygenated gasoline indicates that there is no additional air quality cost associated with the use of this formulation relative to conventional gasoline. In addition, oxygenated gasolines (with either MTBE or ethanol) are more expensive than non-oxygenated gasoline, which translates into hundreds of millions of dollars paid by CaliforniaOs consumers at the pump for these formulations. Gasolines with MTBE have several other significant costs, associated with the release of uncombusted gasoline with MTBE to the environment and subsequent contamination of surface and groundwater reservoirs. To estimate the annual cost of treating water supplies, we consider three elements: treatment of contamination from leaking underground storage tanks, treatment of contaminated groundwater at the drinking water well, and treatment at the surface reservoir outflow. These costs are on the order of $340 million to $1.4 billion per year for California. Other significant costs include the potential loss of recreational value of CaliforniaOs dual-use surface water reservoirs, and the costs associated with monitoring water supplies for MTBE contamination. Based on the results of this CBA, non-oxygenated CaRFG2 is the best option for achieving the air quality objectives, from an integral economic perspective. The value of air quality benefits is larger than the costs for non-oxygenated CaRFG2. For CaRFG2 with ethanol and CaRFG2 with MTBE, the value of costs is larger than the value of air quality benefits. The water treatment costs associated with CaRFG2 with MTBE far outweigh the value of air quality benefits, resulting in an inefficient fuel alternative, from an economic perspective. Cost-Benefit Analysis of Gasoline Formulations 2 We evaluate several policy options available to reduce the costs of the continued use of MTBE, while transitioning to non-oxygenated gasoline: (1) Restrict the use of CaRFG2 with MTBE to air quality non-attainment areas during non-attainment periods, promoting the use of non-oxygenated gasoline in all other regions, by providing refiners with flexibility in the compliance with CaRFG2 specifications, while still meeting air quality objectives; (2) Internalize the cost of MTBE-contaminated water treatment through an additional surcharge on underground storage tanks and gasoline; (3) Increase the use of ethanol as an oxygenate, by developing market incentives for promoting ethanol production in California from agricultural wastes, after a full environmental assessment of gasoline with ethanol is conducted; (4) Accelerate vehicle retirement programs to achieve air emissions reductions; and (5) Manage surface water reservoirs to reduce the levels of contamination.