Do green subsidies always reduce emissions? Strategic pricing and abatement leakage in the air–rail market

Sustainable aviation fuel (SAF) is a pathway for aviation decarbonization, but its green premium makes deployment dependent on government support. This study develops a two-stage Stackelberg game to examine how a limited public decarbonization budget should be allocated between SAF subsidies and high-speed rail (HSR) support. The model endogenizes the subsidy-induced reduction in aviation emissions intensity and its effect on air–rail price competition. Results show cleaner aviation reduces the environmental benefit of keeping HSR fares low to attract passengers. The HSR operator therefore raises its fare, causing passengers to shift back to aviation and potentially reducing emissions savings relative to a fixed-fare benchmark. This feedback is stronger when air and HSR are closer substitutes and the HSR operator places more weight on social welfare. When market feedback is sufficiently strong and SAF technological efficiency is low, it may offset the subsidy’s marginal emissions benefit. The marginal welfare effect of an initial reallocation towards SAF changes sign at a boundary marginal welfare threshold. When welfare is non-concave, however, this boundary condition does not determine the global optimum, which requires welfare comparisons over the full allocation range. These findings highlight the need to consider government budget allocation, HSR pricing, and modal shifts.