Yes, a sim can release a paper lantern if they have the “Child of the Village” trait. They sometimes do it autonomously but you can also direct them to do this via the sim’s personal pie menu - click on sim / release lantern.
There’s not much to this interaction in my opinion. The lantern goes straight up and disappears into the sky and unfortunately doesn’t float around for a while as one might expect.
It would also have been better if all sim were able to buy lanterns at the night market with an option to release them as a group.