Backward- and Forward-looking Shadow Prices in Inclusive Wealth Accounting: An Example of Renewable Energy Capital

Abstract

Attaching weights to the list of capital assets is crucial in inclusive wealth accounting and sustainability assessments. These weights, or shadow prices, can be constructed in theory by looking prospectively at future social profits that the capital in question is expected to yield. In practice, however, both backward- and forward-looking shadow prices are used. This study confirms that these two approaches are theoretically equivalent under strong assumptions and reviews how and why the two approaches are taken. The two approaches are then applied to renewable energy capital (REC), which has rarely been done in either produced or natural capital accounting and sustainability assessments. Renewable energy capital provides an ideal example with which to compare the two approaches, as it is a class of produced capital that substitutes both produced and natural capital. The numerical results of both approaches demonstrate that renewable energy capital starts to account for as large a share as natural capital does, if not produced capital or inclusive wealth, in those countries where natural capital is poorly endowed and investment in renewable energy capital has been witnessed.