A DYNAMIC OPTIMIZATION MODEL OF ENERGY RELATED ECONOMIC PLANNING AND DEVELOPMENT FOR THE NAVAJO NATION

The Navajo reservation located in portions of Arizona, New Mexico and Utah is rich in low sulfur coal deposits, ideal for strip mining operation. Presently, the Navajo Nation has been leasing the mineral resources to non-Indian enterprises for purposes of extraction. Since the early 1950s the Navajo Nation has entered into extensive coal leases with several large companies and utilities. Contracts have committed huge quantities of Navajo coal for mining.;A comparison of the shadow prices of coal deposits derived from the dynamic model with the royalty payments the tribe receives on the basis of the present long-term lease contracts indicates that in most cases the tribe is paid considerably less than the amount of royalty projected by the model. Part of these discrepancies may be explained in terms of the low coal demand condition at the time of leasing and due to greater uncertainties with respect to the geologic information and other risks associated with mining operations. However, changes in the demand for coal with rigidly fixed terms of royalty rates will lead to non-optimal extraction of coal.;A corrective tax scheme has been suggested on the basis of the results of this research. The proposed tax per unit of coal shipped from a site is the difference between the shadow price and the present royalty rate. The estimated tax rates over time are derived.;The present research has been directed to evaluate the shadow prices of Navajo coal and identify optimal coal extraction. An economic model of coal resource extraction over time has been structured within an optimal control theory framework. The control problem has been formulated as a discrete dynamic optimization problem.