Policy interactions and costs of decarbonizing aviation

• In Event: Toward the Energy Transition: Policy Design and Challenges in Energy Use and Infrastructure

Abstract

As federal climate policy faces uncertainty, state-level fuel standards are becoming central to aviation decarbonization. Yet when state instruments interact with federal mandates, they generate unintended cross-state spillovers that concentrate costs unevenly across jurisdictions. This paper asks which policy designs deliver 3 billion gallons of sustainable aviation fuel (SAF) by 2030 at least cost — and how state-level variation shapes who bears the burden.We construct a partial equilibrium model of U.S. road and aviation fuel markets incorporating the Renewable Fuel Standard (RFS), California's Low Carbon Fuel Standard (LCFS), the IRA Section 45Z production tax credit, and state SAF credits. The model endogenously solves for fuel quantities, feedstock prices, and credit market prices across five policy designs, explicitly separating California from the rest of the United States to capture heterogeneous state-level effects.Three findings stand out. First, most SAF-focused designs achieve comparable emissions outcomes at average abatement costs of $400–$500 per metric ton of CO₂ — well above the social cost of carbon. The carbon tax paired with a SAF credit is the only design achieving both greater emissions reduction and lower cost, at approximately $220 per metric ton. Second, state-level variation in compliance burden is striking. Under mandate-based designs, California drivers bear five to six times their demand share of total road fuel compliance costs — a direct consequence of LCFS placing obligations on fossil fuel providers when SAF draws shared feedstocks away from renewable diesel. Drivers in the rest of the United States face only $0.06–$0.20 per gallon increases. Critically, the carbon tax eliminates this disparity entirely by replacing LCFS compliance with a uniform carbon price. Third, aviation remains a structural free rider under most designs. When aviation is obligated under alternative designs, airlines pay only $0.09–$0.23 per gallon — a fraction of the burden borne by road users. SAF scale-up generates $10–13 billion in agricultural benefits, predominantly for soybean and corn producers, with the carbon tax delivering 59 cents per dollar of net policy cost compared to 42–44 cents under mandate designs.These findings carry direct implications for state-level climate policy. California's experience illustrates how ambitious state standards interact with federal instruments to concentrate costs locally. As states assume greater climate policy responsibility, understanding cross-state spillovers is essential for designing equitable and politically sustainable decarbonization strategies.

Author

• Mengying Wu, Harvard University
  Presenting Author