Carbon tax or sustainable aviation fuel quota

In this paper, we build a simple model to compare two policies, i.e., carbon tax and sustainable aviation fuel (SAF) quota, in curbing the greenhouse gas emission from the aviation industry. We consider two policy objectives, which are emission oriented, i.e., controlling the expected total emission under a certain level; and social welfare oriented, i.e., maximizing the expected social welfare level. With emission-oriented policies, we find that the more ambitious the emission target is, the more likely that SAF quota outperforms carbon tax in emission control if the realized price of the traditional aviation fuel (TAF) is lower than the expected value. Besides, it is more likely that SAF quota can lead to higher social welfare level than carbon tax if the price of SAF decreases. With welfare-oriented policies, the emission level is higher under carbon tax than under SAF quota when the SAF price is sufficiently low. However, carbon tax can lead to higher social welfare level than SAF quota when there is no uncertainty in the TAF price.