Designing Cost‐Effective Carbon Payments to Induce Cellulosic Feedstock Production for Sustainable Aviation Fuel

ABSTRACT Perennial bioenergy crops, such as miscanthus and switchgrass, and crop residues have the potential to scale up sustainable aviation fuel (SAF) production and mitigate carbon emissions. However, high establishment costs, delayed returns, and risk–return profiles that diverge from those of conventional crops can hinder incentives to adopt bioenergy crops. We develop an economic model that incorporates spatially varying joint yield and price distributions for the multiple crop choices a farmer faces and apply it to examine the incentives for risk‐averse, present‐biased, and credit‐constrained farmers to produce cellulosic feedstocks under various biomass prices. We link this model to a biogeochemical model to quantify the spatially varying carbon mitigation benefits from these feedstocks in the rainfed region of the United States. We also analyze the cost‐effectiveness of two carbon payment policies: annual and upfront. We find that risk‐averse, present‐biased, or credit‐constrained farmers prefer to grow the lower‐yielding but less risky switchgrass and harvest corn stover instead of the lower carbon, higher‐yielding but riskier feedstock miscanthus, resulting in lower SAF production. Upfront carbon payments incentivize higher quantities of less carbon‐intensive SAF production by risk‐averse, credit‐constrained, and present‐biased farmers because they offset a part of the establishment costs of miscanthus. We also find that when farmers are credit‐constrained, upfront payments are more cost‐effective in terms of carbon mitigation per dollar spent. In contrast, annual payments are more cost‐effective when farmers can access credit.