Bridging the green divide: Optimal airport subsidy mechanisms for sustainable aviation fuel adoption in airports

Abstract

Sustainable Aviation Fuel (SAF) has emerged as a critical lever for decarbonizing air transport, yet its high production cost keeps uptake stubbornly low. Airports, which can bridge the price gap through targeted subsidies, have piloted both per-unit fixed payments and cost differential schemes to support SAF adoption. This paper develops a unified two-stage sequential-game model, incorporating emission constraints, stochastic SAF costs, and oligopolistic airline competition to compare these mechanisms. We evaluate the performance of each subsidy strategy in promoting SAF adoption, airport profit, airline profit, subsidy burdens, and social welfare. Fixed payments provide stability and drive uptake in nascent, volatile, or highly competitive markets. Cost differential support, by aligning subsidies with actual cost spreads and sharing risk, maximizes welfare in mature, stable, high-demand environments. Building on these insights, policymakers can start with per-unit fixed subsidies to catalyze initial adoption, then transition to cost differential schemes, backed by a transparent and data-driven monitoring system that aligns subsidy parameters with the evolving market to ensure optimal decarbonization outcomes.