Fuel regulation in a developing country: An interventional perspective

Given that the regulation system in most developing countries is immature, this paper investigates how to reduce firm's fossil fuel consumption for energy transition in a developing country. From an institutional perspective, we argue that the government can purposely intervene to regulate for firm-level fuel saving. With evidence from China, we construct the intensity of the intervention for fuel-saving regulation (FRI) by the interaction between two sources of variation: the jack-knifed average of government intervention and the ambient air quality at the city level. It confirms the constraint effect of the fuel-regulation intervention on a firm's fuel consumption with robustness to the endogenous bias. We further confirm that the constraint effect is larger for firms with government connections. Finally, we show that the fuel-regulation intervention improves firm's profitability through constraining its fuel consumption. Ultimately, we reveal that the fuel-saving regulation relies on government intervention with incentive compatibility. Considering that our analysis does not require any particular regulatory regime, approach or design, this paper offers general insights to show that a government in a developing country can intervene by its connections to stimulate fuel-saving incentive for energy transition.