How Do Consumers Respond to Fuel Standard Regulation: Evidence from Gas Stations at City Boundaries

Fuel standards and gasoline content regulations are widely adopted by policymakers to reduce urban pollution and emission. An important but understudied question for policy design is measuring consumers’ private willingness to pay for higher gasoline standards. The empirical challenge is distinguishing consumers’ preferences over environmental standards from those over other product attributes e.g., price and brand. This paper provides a framework to uncover consumers’ preferences for higher fuel standards and estimates demand responses using high-frequency gas station-level panel data. We exploit unique characteristics of China’s retail gasoline market: government-controlled supply, homogeneous retailers, and highly regulated prices. Policy-induced differences in fuel standards generate spatial discontinuities at regional borders where consumers can freely choose from high or low standard gasoline. Combining difference-in-difference and geographic regression discontinuity, our identification strategy compares sales volume at gas stations on different sides of the border before and after one region experiences an exogenous fuel standard reform. Meanwhile, the reform induces a cost-driven price change that differs from daily price fluctuations. Controlling for this concurrent price change and other confounding factors, our data suggest that the enforcement of higher fuel standards increases sales at gas stations on the treated side of the border by 9.6-14%, which provides evidence that consumers respond strongly to fuel standard improvement. In the preferred specification, we estimate the consumer's WTP for higher fuel standard (III to IV) as 0.288 Yuan/liter, which accounts for about 3.9% of the gasoline price. We also find that consumers of premium gasoline have higher WTP for emission standard improvement than those of regular gasoline. Our findings highlight the importance of considering consumers’ private value from emission standards when designing environmental regulation.