ISSUE BACKGROUNDER Why Davis moved to ban MTBE: While MTBE has been enormously successful in fighting smog, state officials became concerned that MTBE might pose an unacceptable contamination threat to drinking water supplies after MTBE was discovered in wells in Santa Monica and South Lake Tahoe in 1996 and 1997. In an effort to assess risk, the Legislature commissioned a study of the issue by the University of California. The study concluded that the risks of contamination and the costs of groundwater clean-up were too great to justify continued use of MTBE in California. Citing the study’s conclusion, Davis decided to ban MTBE by executive order by the end of 2002. The Ethanol Factor: In concert with his decision to ban MTBE, Davis petitioned the U.S. Environmental Protection Agency (EPA) for an exemption from the Clean Air Act’s requirement that gasoline in smog-prone regions be mixed with an oxygenate (either MTBE or ethanol) to make gasoline burn more cleanly. Davis argued that, due to California's planned phase-out of MTBE, the Clean Air Act's oxygenate requirement amounted to an ethanol mandate in California that would impose significant additional costs on consumers. Davis also argued that California could achieve acceptable pollution control results without the use of an oxygenate in its gasoline, whether that oxygenate be ethanol or MTBE. In June 2001 the EPA denied Davis's petition. As a result, California will have to blend its gasoline with ethanol if it proceeds with the MTBE ban. Switching from MTBE to ethanol, however, poses several major problems that could lead to severe gasoline shortages and price spikes. Insufficient ethanol supply. The California Energy Commission has predicted that, due to insufficient ethanol supply, California will face a 6%-10% gasoline shortfall by 2003. This lack of supply, coupled with high transportation costs associated with shipping ethanol from the Midwest where it is produced primarily, will result in significant gasoline price spikes. Gov. Davis's office and the California Environmental Protection Agency have predicted price spikes as high as $.50 per gallon if ethanol replaces MTBE in reformulated gasoline statewide. Ethanol market concentration. Another factor that could contribute to price spikes is the fact that a single company, Archer Daniels Midland (ADM), controls 40% of all ethanol production in this country. This market concentration will only increase if California switches to ethanol because ADM is better able than are other producers to ramp up production. As a result, this one company would control approximately half of all the supply of an essential component of California’s gasoline supply. Reduction of gasoline supplies. Using ethanol instead of MTBE would result in a 10% decrease in gasoline production because less ethanol than MTBE can be blended into gasoline. Furthermore, with domestic refinery capacity taxed to its limit, gasoline supplies are already subject to occasional shortages that lead to gasoline price spikes, such as those we experienced this Spring. Permanently decreasing gasoline production by 10%--the effect of blending gasoline with ethanol instead of MTBE—could easily lead to severe shortages given existing supply constraints. MTBE and Ground Water: In the two years since Davis decided to ban MTBE, it has become clear that the threat of water contamination posed by MTBE is not what it was feared to be when the Governor signed his Executive Order. Water contamination. While there was great fear in 1999 that contamination of drinking water supplies would become pervasive, the reality has been otherwise. California’s Department of Health Services has detected MTBE in only 0.8% of all water sources tested in the state. Furthermore, the agency has found that MTBE exceeds the state's acceptable health standard in only 0.2% of tested water sources. For the sake of comparison, there are two dozen other contaminants, many of which are known carcinogens, that exceed the acceptable health standard in a greater number of water sources. Health effects. MTBE is commonly referred to in media accounts as a serious health threat. A multitude of studies, however, indicate that this is not so. The World Health Organization's International Agency for Research on Cancer, California’s own Office of Health Hazard Assessment (Proposition 65 Committee), the National Toxicology Program (US Dept. of Heath and Human Services) and the Health Effects Institute indicate that MTBE is not a human carcinogen. The Bottom Line: California must now choose between MTBE and ethanol. Does it make sense to switch to ethanol given the gasoline supply and price problems it poses and what we now know about the actual water contamination threat posed by MTBE? We think the answer is clearly no. By switching, California would gain uncertain environmental benefits at great economic cost.