Sustainable Management of Fossil Fuels: A Dynamic Stochastic Optimization Approach with Jump-Diffusion

This paper deals with a relevant aspect of energy modeling, i.e. fossil fuels management. The issue is faced by using purely operational research techniques, which are suitable in this context. In particular, a dynamic stochastic optimization model is developed to optimally determine use and stock of resources to be employed in consumption and investments, in a wide economic sense: human and physical capital, R&D, etc. It is assumed that a sustainability criterion drives the optimality rules, i.e. decisions are also grounded on the well-being of future generations. The policymaker maximizes an aggregated intergen- erational expected utility under the dilemma of present consumption/conservation of natural resources for the future. In reference to standard environmental economic theory, jump-diffusion dynamics for the stock of natural resources and infinite time horizon are assumed. Extensive numerical experiments com- plete the analysis and contribute to determine fossil fuels management policies, showing that long-term investments make the difference for the well-being of present and future generations.