Aviation e-fuel mandates: balancing average and minimum requirements for emission reduction

This paper examines a policy design to regulate the airline industry's use of e-fuel, a type of sustainable aviation fuel (SAF). We compare three policy approaches: an average policy that regulates only the average e-fuel usage; a minimum policy that mandates only the minimum e-fuel usage per sub-period; and a dual policy that enforces both average e-fuel usage over a period and minimum e-fuel usage in each sub-period. Using a two-period model, we evaluate these policies in terms of emission reduction and their impact on aviation outputs and e-fuel utilization. Our findings reveal that the average and minimum policies are equivalent in emission reduction efficiency (ERE), defined as the ratio of emission reduction under these policies to that under the dual policy. The ERE is influenced by market fluctuations, with larger fluctuations reducing the ERE to a minimum of 50%. We also explore the implications of incomplete information on policy design. When the government lacks information about future market growth, average e-fuel usage increases under low growth scenarios, though the minimum e-fuel requirement under the dual policy remains unaffected. Interestingly, under incomplete market information, the average or minimum policy may outperform the dual policy in emission reduction. Furthermore, even with incomplete information on e-fuel costs, the first-best outcomes achievable under complete information can still be realized, even when e-fuel costs are high. Our theoretical findings are validated through model calibrations, which provide actionable insights for policymakers aiming to optimize e-fuel mandates for emission reduction.