Ethanol has emerged as a promising alternative to fossil fuels, but its use can lead to significant dilution in lubricants, particularly during cold start or heavy traffic. This dilution can affect the performance of additives, including friction modifiers like molybdenum dithiocarbamate (MoDTC), which are designed to reduce friction under extreme contact conditions. Prior research suggests that ethanol may impact the performance of MoDTC, prompting this study’s goal to investigate the effects of ethanol on MoDTC tribofilms and their friction response under boundary lubrication conditions. Therefore, reciprocating tribological tests were performed with fully formulated lubricants containing MoDTC with varying ethanol concentrations. The results indicate that a critical ethanol dilution level inhibits friction reduction by MoDTC activation, resulting in friction coefficients (COFs) similar to the base oil. Surfaces tested with simple mixtures of polyalphaolefin (PAO) + MoDTC showed increased COFs with added ethanol. Analysis of tested surfaces using Raman spectroscopy, X-ray photoelectron spectroscopy (XPS), and X-ray absorption spectroscopy near the edge structure (XANES) revealed the presence of sulfates, MoO3, MoS2, and MoSxOy compounds in the tribofilms formed on the surfaces, with and without ethanol diluted in the lubricant. However, the addition of ethanol increased the sulfates and MoO3 content of the tribofilms at the expense of friction-reducing compounds such as MoS2 and MoSxOy. These findings suggest that ethanol dilution in lubricants containing MoDTC creates an oxygen-rich interfacial medium that favors the formation of compounds with insufficient friction-reducing capabilities.