OK, time for the “more than you wanted to know about reformulated/oxygenated gasoline and MtBE” hour! (well it shouldn’t take that long, I hope)
First, to answer the OP: Yes. Oxygenated gas (or Reformulated Gas or RFG) does indeed reduce air pollution.
Mostly it reduces the amount of semi-burned fuel coming out of the tailpipe (as Holden & Pluto said, by providing more oxygen for more complete combustion). These semi-burned hydrocarbons are typically not good stuff – they form ground level ozone (smog), and are often directly carcinogenic (think benzene and stuff like that). One study found RFG reduced cancer risk from gasoline by about 12 percent. Reformulated gasoline also reduces NOx pollution (which forms ozone/smog), but only by a very little bit – a percent or two.
It does reduce fuel economy, but only mildly. EPA studies show one to three percent loss in fuel economy. So yes, more CO2, but only a little bit.
Archer Daniels Midland (ADM) and all the corn farmers in Iowa definitely do have enough political pull to create all kinds of federal subsidies for ethanol (and in fact, did slightly influence the federal Clean Air Act requirements), but they didn’t create the reformulated gasoline program – it’s a real solution to the real problem of air pollution.
On to MtBE (methyl tertial-butyl ether), one of the two most common components of RFG (ethanol being the other).
The dope on that is, yes it was probably a mistake to use MtBE, but not as bad a mistake as many people think. MtBE is, in fact, not very toxic. It’s certainly far less carcinogenic than most of the other compounds in gasoline (benzene and all kinds of lovely relatives), so as far as inhaling vapors or drinking gasoline directly (if you’re into that kind of thing…), you’re actually better off with MtBE in the gas than without it. So at the time, it quite reasonably seemed like a good solution – remember it’s generally safer than the rest of gasoline (and reduced all kinds of other air pollution problems).
The problem with MtBE turned out to be that it’s very soluble in water, much more so than the rest of gasoline, so it moves through and into groundwater very well (much better than benzene and the really dangerous stuff). Combined with that is that you can smell and taste MtBE in very small concentrations (and it’s flavor is more than a little unpleasant). So even a small spill of gas with MtBE can contaminate wells in the area to the point where they’re unusable because of the taste. By the way, you taste MtBE at levels far below where it’s considered dangerous, so it’s unlikely anyone would drink enough water to be at much risk (which is not to say that losing the use of your well isn’t still a serious problem). Once the problem of it’s solubility was appreciated, regulators began acting to get it out of gasoline (by the way, regulations never required MtBE specifically, most refiners used it cause it was cheaper and easier than ethanol).
I’ve never heard of people failing blood alcohol test because of MtBE inhalation – do you have any more info or cites for that?
Oh, and if you want even more info, start with http://www.epa.gov/otaq/consumer/fuels/mtbe/mtbe.htm There are links to independent studies as well as EPA info.
(did I manage to sound as authoritative as Anthracite?)