Turbulence Ahead: Economic Policies for Decarbonizing Aviation

We study the design of climate policy for hard-to-abate sectors, focusing on global aviation. We build a spatial equilibrium model that links ticket booking data, the global airline network, and climate-regulated airlines’ choices in imperfectly competitive air transport markets. We find that sustainable aviation fuel (SAF) quotas outperform carbon pricing, delivering equal emissions cuts at 46–66% of the welfare cost. Ignoring market structure understates the cost of price-based Pigouvian instruments when fuel-capital substitution is limited. SAF quotas are more robust to regulatory scope, cause less carbon leakage, and—when layered with existing carbon pricing—increase abatement while lowering welfare cost. Relying on carbon offsets risks locking in fossil jet fuel, whereas cost-effective in-sector abatement hinges on substantial SAF uptake. (JEL: Q58, H23, L93, R48, C63)

Rausch, Sebastian und Anna Straubinger (2025), Turbulence Ahead: Economic Policies for Decarbonizing Aviation, ZEW Discussion Paper Nr. 25-064, Mannheim.