Environmental constraints and a dynamic model for energy development

Abstract This paper employs a dynamic optimization model to evaluate the shadow prices of Navajo coal; and estimates the optimal rate of extraction of coal over time using conventional welfare economics criteria. The results indicate that the actual royalty payment received by the tribe on the basis of the present long-term lease contracts is usually less than the amount estimated in the optimizing model. Furthermore, an environmental constraint is placed on the model to test the impact of this constraint in estimating the optimal time profile of production and its impact on shadow prices. Based on these estimations policy recommendations are made.