october 29, 2026
“B. de Finetti Risk Seminars – Milano Lectures on the Mathematical Theory of Economics and Finance,”
Date and location: October 29, 2026, at 6:00 p.m., in Room C12, Via Mangiagalli 25, Milan.
Speaker: Prof. Rudiger Frey (WU, Vienna University)
Title: Focus or Diversification? Dynamic Allocation of Climate-Technology Investment under Budget Constraint
Abstract: Decarbonizing electricity production requires abatement technologies that are not yet available at scale. Two main routes are carbon capture and storage (CCS), which still depends on research breakthroughs, and renewable energy sources (RES), whose large-scale use requires sufficient infrastructure. Both need large upfront investment with uncertain returns, while public budgets are limited. This raises a basic question: should the budget be concentrated on one technology or spread across both?
We study this question in a dynamic stochastic control model. A social planner must meet a constant electricity demand and minimizes expected discounted production, investment- and installation costs plus climate damages from cumulative emissions. The CCS breakthrough occurs at a random time whose intensity increases with research spending. RES becomes usable once an infrastructure process, driven by investment and random shocks, reaches a threshold. The planner splits a capped investment flow between the two technologies and, after each breakthrough, chooses irreversible capacity.
We formulate the problem as a finite-stage Markov decision model, characterize the optimal policy through a coupled system of HJB equations, and prove existence of classical solutions and a verification result. For linear damages, the dimensionality of the problem reduces to one state dimension, and we compute the optimal feedback controls numerically.
The results show how the optimal allocation depends on time, on progress towards the RES threshold and on the social cost of carbon. Investment regions shrink as the horizon approaches, while a higher carbon price expands them for both technologies. Whether focus or diversification yields lower emissions depends on the calibration of model parameters. (Joint work with Alessio D’Amato and Katia Colaneri)