CO2 emissions in the global supply chains of services: An analysis based on a multi-regional input–output model

Energy Policy 86 (2015) 93–103

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CO2 emissions in the global supply chains of services: An analysis based on a multi-regional input–output model Wencheng Zhang a, Shuijun Peng a,n, Chuanwang Sun b a b

Department of International Economics and Business, School of Economics, Xiamen University, Xiamen 361005, China Collaborative Innovation Center for Energy Economics and Energy Policy, School of Economics, Xiamen University, Xiamen 361005, China

H I G H L I G H T S







A consumption perspective for the assessment of the environmental impact of the service sector. International supply chain effect is analyzed using a global input–output model. Consumption-based emissions of the service sector are decomposed in two ways. Policy implications for emissions mitigation in the service-oriented economy.

art ic l e i nf o

a b s t r a c t

Article history: Received 22 April 2015 Received in revised form 15 June 2015 Accepted 16 June 2015

As the service sector dominates the economy in developed countries, its environmental impact has become an important issue. Based on a multi-regional input–output model, this paper estimates consumption-based emissions of service sectors of 41 countries and regions, and discusses the emission abatement policy of service sectors. The results indicate that consumption-based emissions of the service sector in most countries and regions are much greater than direct emissions generated by the service sector. Further decomposition by production sources demonstrates that final demand for services in certain countries causes substantial emissions in the other countries. In most countries, major parts of consumption-based emissions of the service sector come from upstream emissions in non-service sectors due to the intermediate consumption of non-service inputs in the service sector. For the US and China, the consumption-based emissions of their service sectors are traced back to different service consumption bundles and production sectors, which enable us to identify service categories and production sectors that play key roles in the impact of service sectors on CO2 emissions. Finally, policy implications of the results are discussed for the climate effect of the service-oriented economy, global mitigation of climate change, sustainability, and the decarbonization of the service sector. & 2015 Elsevier Ltd. All rights reserved.

Keywords: Service sector CO2 emissions Multi-regional input–output model

1. Introduction The service sector has become an essential part of economies both in developed countries and in certain developing countries. It accounts for about 70% of aggregate production and employment in OECD countries (Wölfl, 2005). Economy with high economic share of the service sector is usually called service economy or service-oriented economy (Moller and Rubin, 2008). While economic effects of the service-oriented economy are intensively discussed, very little attention has been given to its environmental implications (Grove et al., 1996; Oliver-Solà et al., 2007; Salzman, 1999). This is mainly due to the false perception that the service n

Corresponding author. Fax: þ 86 592 2180750. E-mail address: [email protected] (S. Peng).

http://dx.doi.org/10.1016/j.enpol.2015.06.029 0301-4215/& 2015 Elsevier Ltd. All rights reserved.

sector is an environmental friendly sector not involving large amounts of materials (Alcántara and Padilla, 2009; Grove et al., 1996; Perraton, 2006; Salzman, 1999). This false perception about the environmental implications of the service sector exists mainly because services are essentially processes lacking a physical presence and direct pollution generated in the service sector is generally minimal compared with industrial sectors (Alcántara and Padilla, 2009; Grove et al., 1996; Rosenblum et al., 2000; Suh, 2006). Considering their large economic scale, it is of great importance to analyze the environmental effects of service sectors. In fact, the environmental impact of some service sectors, such as transport and tourism, should not be neglected even if only direct repercussions are considered. Significant direct effects on the environment from transport and tourism have been reported by

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many studies (e.g., Liu et al., 2013; Perch-Nielsen et al., 2010; Timilsina and Shrestha, 2009). However, to understand fully the environmental implications of the service sector, one should go beyond its direct effects, that is, direct material/energy consumption or pollution in this sector. Instead, one should consider the full supply chain effect of service, which includes both direct and indirect environmental impacts of the service sector. As Stephen J. Grove and his co-workers put it, ‘while the processes that are reflected as services products may be intangible, perishable, and consumed as they occur, they often involve the support of a wide spectrum of physical components and reliance on natural resources’ (Grove et al., 1996, p. 3). In other words, the backward linkage of the service sector may indirectly cause substantial environmental pressure in upstream non-service sectors. This effect is also called the ‘pull effect of services’ (Alcántara and Padilla, 2009). Pull effects of service on some environmental problems including water pollution, air emissions, wastes, material and energy consumption have been found to be significant and much greater than the direct impact of the service sector (Rosenblum et al., 2000; Sánchez-Chóliz and Duarte, 2005). In recent years, there has been particular focus on implications of the service sector for climate change. Direct and indirect greenhouse gas (GHG) emissions of the entire service sector in some developed countries have been estimated and analyzed (Alcántara and Padilla, 2009; Butnar and Llop, 2011; Nansai et al., 2009; Rosenblum et al., 2000; Suh, 2006). Direct emissions of the service sector are found to be significantly different from their supply chain emissions. For example, Alcántara and Padilla (2009) found that CO2 emissions induced by service demand in Spain constituted more than one-third of the total emissions generated by all productive sectors in 2000, whereas direct emissions generated in the service sector only amount to 17.5% of total emissions. Suh (2006) showed that GHG emissions due to US household consumption of services excluding electric utilities and transportation services contribute 37.6% to US total industrial GHG emissions in 1998, although their direct emissions are only responsible for less than 5%. Nansai et al. (2009) found that domestic CO2 emissions associated with energy and material goods absorbed by services through the supply chain increased consistently in Japan during 1990–2000 and therefore constitute a key element in the rise of CO2 emissions induced by household consumption. In a study not assessing the entire service sector in a country, GHG emissions induced by local demand for municipal services in the city of Trondheim were assessed by Larsen and Hertwich (2009). These researchers determined that 93% of the carbon footprint of municipal services is composed of indirect emissions located in upstream paths. Previous studies reviewed above mainly focus on the impact of the service sector on national or regional GHG emissions. With the development of production fragmentation and trade, some pollution-intensive intermediate products used in the domestic service sector or final services may be imported from the other countries, which cause GHG emissions abroad. Therefore, it is also important to consider foreign emissions that are induced by the domestic service sector because the environmental effects of GHG emissions are beyond national borders. As Nansai et al. (2009) note, today’s supply chain has no national borders, and future work needs to investigate the materials and energy metabolism in service industries from a global perspective. Assessing GHG emissions of global supply chains of services is not only of great importance to more fully understand the climate effect of the service-oriented economy, but also has important implications for global GHG emissions mitigation and sustainability. The purpose of this paper is to assess CO2 emissions in the global supply chains of services by applying a multi-regional input–output (MRIO) analysis and try to fill partly the research gap

in recent academic discussions on the global environmental effects of the service sector. First, we estimate consumption-based emissions of the service sector (CBES) in 41 countries and regions in the period 1995–2009 and compare CBES with direct emissions of the service sector (DES) in each country or region. Second, CBES are decomposed by production sources and by supply chains in which we reveal how the domestic service sector affects emissions of the other countries and how many emissions occur in upstream non-service sectors. Third, consumption-based emissions of the service sector in the US and China are traced back to different service consumption bundles and production sectors, which allows us to identify service categories and production sectors that play key roles in shaping the impact of the service sector on CO2 emissions in these two countries. Finally, policy implications of the results are discussed for the climate effect of the service-oriented economy, global mitigation of climate change, sustainability, and the decarbonization of the service sector. The remaining content of this paper is organized as follows: Section 2 describes indicators, methodology and data used in this paper. Section 3 reports the main results of our empirical analysis. Section 4 discusses the policy implications of the results. Section 5 concludes this paper.

2. Methodology and data 2.1. Consumption-based emissions of the service sector and their decompositions Two perspectives can be used to assess the impact of the service sector on climate change. The traditional one is assessment based on direct emissions of the service sector, that is, emissions directly generated within the service sector. The second perspective is consumption-based perspective. Consumption-based emissions of the service sector are emissions occurring in domestic and international supply chains which are induced by final demand for services. Consumption-based perspective has been used in previous studies to analyze CO2 emissions of domestic service supply chains in a country (Alcántara and Padilla, 2009; Rosenblum et al., 2000; Suh, 2006). In this paper, we not only consider emissions of domestic service supply chains but also consider emissions of service supply chains beyond national borders. In other words, we shall assess the global supply chain effect of services on CO2 emissions. Input-output model accounting for direct and indirect requirements of intermediate inputs to produce the final demand in each economic sector is a useful tool for assessing the environmental effects of the service sector. Single-region input–output (SRIO) models have been widely used to analyze the environmental effects of the service sector (Alcántara and Padilla, 2009; Nansai et al., 2009; Rosenblum et al., 2000; Sánchez-Chóliz and Duarte, 2005; Suh, 2006). However, we shall use a MRIO model in this paper to consider the international supply chains of services. Although a SRIO model may do well in examining domestic environmental impacts of the service sector, the MRIO model is a more appropriate tool to examine its global impact on the environment because it models production technology of different countries, international trades of intermediate products and deliveries of final products among countries (Peters, 2008; Wiedmann et al., 2007; Wiedmann, 2009). For simplicity, we use a simplified MRIO model with 3 regions and 2 sectors (material and service) in each region to show the methodology in this study. It is straightforward to extend it to a general case with n regions and m sectors. Based on the MRIO model, production in three regions induced by final demand (including consumption of households,

W. Zhang et al. / Energy Policy 86 (2015) 93–103

government consumption, investments) of region 1 (or any other region) can be expressed as follows (superscripts identify regions)1:

⎛ x11⎞ ⎛ A11 A12 A13 ⎞ ⎛ x11⎞ ⎛ y 11⎞ ⎜ ⎟ ⎜ ⎟⎜ ⎟ ⎜ ⎟ ⎜ x21⎟ = ⎜ A21 A22 A23 ⎟ ⎜ x21⎟ + ⎜ y 21⎟ ⎜ ⎟ ⎜ ⎟⎜ ⎟ ⎜ ⎟ ⎝ x 31⎠ ⎝ A31 A32 A33⎠ ⎝ x 31⎠ ⎜⎝ y 31⎟⎠

(1)

where x11 is the vector of the domestic production of region 1 and x i1 (i ≠ 1) is the vector of production of region i induced by the final demand of region 1. Diagonal sub-matrix Aii in the block matrix on the right hand side is the domestic input requirement of region i, whereas the off-diagonal matrix A ji (i ≠ j ) is the imported input requirement of region i from region j. Altogether, off-diagonal matrices in the block matrix represent international trades of intermediate products across three regions. Finally, y11 is the vector of final demand in region 1 produced domestically, and y i1(i ≠ 1) is the final demand produced by foreign region i, that is, region 1’s import of final products from region i. Output x i1 can be solved as −1⎛ 11⎞ −A13 ⎞ y

⎛ x11⎞ ⎛I − A11 −A12 ⎜ ⎟ ⎜ ⎟ ⎜ x21⎟ = ⎜ −A21 I − A22 −A23 ⎟ ⎜ ⎟ ⎜ ⎟ ⎝ x 31⎠ ⎝ −A31 −A32 I − A33⎠

⎛ 11 12 ⎜ ⎟ ⎜B B ⎜ y 21⎟ = ⎜B21 B22 ⎜⎜ ⎟⎟ ⎜ 31 32 ⎝ y 31⎠ ⎝B B

⎛ 11⎞ B13 ⎞ ⎜ y ⎟ ⎟ B23 ⎟ ⎜ y 21⎟ ⎟ ⎜⎜ ⎟⎟ B33⎠ ⎝ y 31⎠

⎛ B11 B12 B13 ⎞ ⎜ ⎟ B* ≡ ⎜B21 B22 B23 ⎟, ⎜ ⎟ ⎝B31 B32 B33⎠

⎛ y 11 ⎞ ⎜ s ⎟ ⎟ y *s1 ≡ ⎜ y 21 ⎜ s ⎟ ⎜ y 31⎟ ⎝ s ⎠

Based on Eq. (6), CBES by categories of service can be readily obtained by equation * c1s, c = f *B*^ ys

1

(7)

⁎1 where ^ denotes ys 21 31 c1s, c = (c11 s, c , c s, c , c s, c ) is

the

diagonalization

a row vector. c11 s, c are domestic services, c is1, c (i

of

vector

y ⁎s1.

emissions induced by

final demand for = 2, 3) are emissions induced by final demand for imported services from country i. CBES by categories of service without considering the sources are ∑i c is1, c , which are reported in Section 3.3 for China and the US. With MRIO model, we can investigate the environmental effect of international trade induced by final demand for services. Using Eq. (4), we rewrite induced output of each region as r 2 21 r 3 31 x rs1 = Br1y 11 s + B y s + B y s , r = 1, 2, 3

(8)

Substituting Eq. (8) into Eq. (5) and reorganizing, we decompose CBES of region 1 into four components:

(2)

where the block matrix with sub-matrix Bij is the Leontief inverse matrix. Conventional production-based emissions account for emissions from production occurring within the political border of one country, whereas consumption-based emissions are defined as global emissions induced by final demand of one country (Davis and Caldeira, 2010; Muñoz and Steininger, 2010; Peters, 2008). Consumption-based emissions of region 1 can be formulated as

C 1 = f 1x11 + f 2x21 + f 3x 31

f * ≡ (f 1, f 2, f 3),

95

(3)

where f i is the row vector of emission intensity of each sector, with element f ki denoting CO2 emissions per unit of output in sector k.

C 1 yields total consumption-based emissions of region 1. To avoid confusion, we call C 1 national consumption-based emissions (NCBE). To assess global emissions induced by final demand for services in region 1, we define consumption-based emissions of the service sector (CBES) in a similar manner. In Eq. (1), if we set final demand for non-service products (sector 1) to zero, we obtain the vector of final demand for services of region 1, that is, y is1 = (0, y2i1)′. The subscript s represents service sector. Then, CBES of region 1 can be obtained using a deduction similar to that used above:

1 1i i1 Cs1 = f 1B11y 11 s + ∑i ≠ 1 f B y s   DEDS

DEFS   TDES

+

2 23 31 3 32 21 i ii i1 ∑i ≠ 1 f iBi1y11 s + ∑i ≠ 1 f B y s + f B y s + f B y s    FEFS FEDS    TFES

(9)

DEDS: Domestic emissions embodied in domestic supply of services for final demand purposes in country 1; DEFS: Domestic emissions embodied in foreign supply of services for final demand purposes in country 1; FEDS: Foreign emissions embodied in domestic supply of services for final demand purposes in country 1; FEFS: Foreign emissions embodied in foreign supply of services for final demand purposes in country 1; TDES: Total domestic emissions embodied in final demand for services of country 1; TFES: Total foreign emissions embodied in final demand for services of country 1.

We can also calculate conveniently total CBES using a block matrix operation below

The above decomposition helps us understand how a country’s final demand for services affects the environment of the other countries through global production networks and international trades. In addition, CBES include both direct emissions in service sectors and indirect emissions in material sectors of three regions. It is useful to decompose CBES as emissions within the service sector and emissions in non-service sectors, which can provide us a more detailed picture of the environmental load of service supply chains and facilitate design of environmental policies to mitigate their repercussions. In order to separate CBES into emissions within the service sector and emissions in non-service sectors, we diagonalize row vectors of emission intensity in Eq. (6) and obtain vector

Cs1 = f *B*y *s1

^* c1s, p = f B*y *s1

⎛ 11 ⎞ ⎛ x 11 ⎞ ⎛ ⎞ y ⎜ s ⎟ ⎜ B11 B12 B13 ⎟ ⎜ s ⎟ ⎜ x 21 ⎟ = ⎜B21 B22 B23 ⎟ ⎜ y 21 ⎟ ⎜ s ⎟ ⎜ s ⎟ ⎜ ⎜ 31⎟ ⎝B31 B32 B33⎟⎠ ⎜ 31⎟ ⎝x s ⎠ ⎝y s ⎠

(4)

2 21 3 31 Cs1 = f 1x 11 s + f xs + f xs

(5)

(6)

where 1 We use bold letters in upper case to denote matrices, bold letters in lower case to denote vectors and plain letters to denote scalars.

(10)

Elements of c1s, p (6 × 1, for a simplified world economy with 3 regions, 2 sectors) yield emissions in each sector of every region induced by final demand for services in region 1. Summarizing emissions in service sectors in all regions yields the direct

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component in CBES, whereas summarizing emissions in non-service sectors in all regions yields the indirect component in CBES. To distinguish DES from the direct component in CBES, we name the direct component in CBES on-spot emissions (OSE) because they occur within the service sector, and name the indirect component upstream emissions (USE) because they occur in non-service sectors. We can also separate total OSE into domestic on-spot emissions (DOSE) and foreign on-spot emissions (FOSE) based on Eq. (10). Similarly, USE can be separated into domestic upstream emissions (DUSE) and foreign upstream emissions (FUSE). Note that decomposition in Eqs. (9) and (10) link by relations: TDES ¼DOSEþ DUSE, and TFES¼FOSE þFUSE. 2.2. Data The major challenge to carry out MRIO analysis is limited availability of input–output tables and environmental datasets across nations. Thanks to the recent development of international input–output databases (Tukker and Dietzenbacher, 2013), MRIO models covering many regions have been used by many authors for consumption-based environmental accounting (e.g., Arto et al., 2014; Davis and Caldeira, 2010; Muñoz and Steininger, 2010; Peters et al., 2011; Xu and Dietzenbacher, 2014). In this paper, we carry out MRIO analysis based on the dataset from the World Input–Output Database (WIOD) (an introduction of this database, see Timmer et al. (2015)). World Input–Output Tables (WIOTs) in WIOD cover 41 economies. Each economy has 35 sectors (see Table A2 in Timmer et al. (2015)), 16 of which are service branches. CO2 emission data used in this paper are taken from environmental accounts of the WIOD. Although the most recent version of the WIOD supplies WIOT annual series from 1995 to 2011, environmental accounts are available only from 1995 to 2009. Therefore, the study period in this paper is 1995–2009.

3. Results 3.1. Consumption-based emissions versus direct emissions in a service sector Consumption-based emissions of the service sector (CBES) have been estimated for all 41 countries and regions in the WIOD from 1995 to 2009. However, we report here results for seven major developed countries (G7) and seven major emerging countries in 1995 and 2007 to save space without sacrificing major information.2 For selected countries, the share of value-added and final demand of the service sector, direct emissions of the service sector (DES), the share of DES in national production-based emissions (NPBE),3 CBES, the share of CBES in national consumption-based emissions (NCBE) and the share of foreign emissions in CBES have been reported for the years 1995 and 2007 (Table 1). The service sector plays an important role in both income creation and final demand in most of the seven developed countries and some developing countries in 1995. For most of the developed countries in Table 1, shares of value-added of the service sector are over 60%, and shares of final demand of the service sector are also greater than 50%. Shares of DES in NPBE range from 2 We estimate results for all years from 1995 to 2009. However, we choose results in 2007 for trend analysis to circumvent the influence of the economic crisis in 2008. In addition, the data for 2008 and 2009 are less reliable than for 2007 (Xu and Dietzenbacher, 2014). 3 National production-based emissions in this paper refer to emissions produced by all productive industries.

7% to 35%. Compared with their high economic shares, shares of DES are relatively low. For example, although the share of valuedadded of service sector in the US is 75%, the share of DES in NPBE is only 31%. For emerging countries, similar situations exist. For example, China’s service sector contributes 33% of total value-added in 1995 but only produces directly 7% of total emissions. However, when we assess emissions of the service sector from the perspective of consumption, its repercussions on climate change turn out to be much more prominent. As is shown in Table 1, CBES are significantly greater than DES for most countries. Shares of CBES in national consumption-based emissions (NCBE) are also much greater than DES shares for most countries. Differences between CBES and DES are especially large in the US, China and Russia. For instance, CBES in the US are 2149.6 Mt, 58% greater than DES (1357.4 Mt). The share of CBES in NCBE in the US reaches 47%, which indicates nearly half of NCBE of the US are due to final demand for services. One-fifth of NCBE in China also come from final demand for services. CBES includes emissions of the supply chains outside the consuming country (denoted as TFES). Shares of TFES in CBES for 7 developed countries range from 8% to 36% and from 2% to 20% for 7 emerging countries in 1995. Shares of TFES in Germany, the UK, Italy, and France are close to or more than 30%. Although, TFES share in the US is only 8%, its absolute level reaches as high as 174 Mt, much greater than DES in Germany or the UK. Therefore, to assess fully the climate impact of the service sector, it is important to consider both domestic emissions and foreign emissions induced by domestic final demand for services. During 1995–2007, shares of value-added or final demand in the service sector increase in many countries. CBES in most economies also increase significantly, particularly in Turkey (rising by 111%), China (103%), Indonesia (82%), Mexico (54%), the UK (45%) and Brazil (41%). The increase of CBES in China in terms of absolute volume is tremendous, that is, from 469.1 Mt to 951.2 Mt. This increment is twice as much as the CBES of Germany in 2007. Although DES in the US and Japan decrease by 3% and 7%, respectively, their CBES still increase 9% and 5%, respectively. Therefore, DES may occasionally convey a misleading image of the environmental effects of the service sector. In addition to increasing of the volume of CBES, shares of TFES in CBES also rise in all 14 countries, indicating more emissions in CBES occurred abroad in 2007. For example, the share of TFES in UK increases from 30% in 1995 to 45% in 2007. TFES shares in the US increase from 8% to 16%. Due to huge CBES of the US, the absolute volume of foreign emissions reaches 366 Mt in 2007, greater than DES in Japan or CBES in the UK. The rise of foreign emissions induced by the service sector further justifies the use of the MRIO analysis, which considers supply chain effects of services beyond national borders. The absolute level of CBES is influenced largely by the scale of final demand. To assess whether service consumption in one country is cleaner than that in another one, CBES per unit of final demand for services is a more proper indicator. CO2 emissions per 100 US dollars of final demand in China, Russia, and India are significantly higher than those in the other countries. (Fig. 1). Final demand for services in Japan, Germany, France and Brazil are cleaner than in the other countries. France and Japan have the lowest emission intensities (14 kg/100US$ and 15 kg/100US$, respectively). In addition, final demand for services in Russia has the highest emission intensity (308 kg/100US$) followed by China (237 kg/100US$). CBES in the US is much greater than those in other countries, as shown in Table 1. However, CBES per unit of consumption in the US is relatively lower, which indicates that high CBES in the US are mainly caused by a high volume of service consumption. In contrast, emission-intensive production technology in China, Russia and India plays an important role in causing

Note: DES stands for direct emissions of the service sector. NPBE stands for national production-based emissions. CBES stands for consumption-based emissions of the service sector. NCBE stands for national consumption-based emissions. TEFS stands for total foreign emissions embodied in final demand for services in each country and are computed using Eq. (9). Data of DES and NPBE is taken directly from the WIOD.

15.6 22.9 39.3 45.4 21.6 37.7 43.4 8.8 4.3 16.3 18.2 20.1 25.9 23.6 8.1 20.7 30.8 29.9 16.1 32.1 35.4 3.7 2.0 6.3 10.2 15.6 19.3 19.8 US Japan Germany UK Canada Italy France China Russia India Mexico Brazil Turkey Indonesia

75.4 64.4 65.1 66.1 65.4 64.5 70.5 32.7 55.1 44.5 59.9 64.6 49.2 40.0

78.0 69.5 66.4 75.1 66.8 68.3 75.1 41.5 57.5 50.9 59.7 64.1 62.1 39.3

70.7 60.0 58.5 63.6 63.1 58.5 63.3 27.9 49.3 35.2 51.7 60.6 41.6 35.2

72.0 66.1 60.8 70.1 62.6 60.7 65.6 38.2 51.1 37.3 51.2 61.2 53.4 42.0

1357.4 310.1 128.6 119.1 135.9 79.7 91.3 181.6 153.5 70.4 55.5 61.8 29.4 28.0

1316.4 289.2 128.3 136.1 153.4 87.7 93.2 387.6 190.9 54.4 80.6 82.4 45.4 33.6

31.3 30.3 17.7 26.4 34.1 22.1 32.2 6.7 10.9 9.8 21.4 35.3 21.1 16.2

28.0 26.8 18.2 29.6 32.2 22.6 33.5 7.0 12.5 4.2 22.1 32.2 18.2 10.2

2149.6 473.2 259.8 176.8 154.2 135.4 130.5 469.1 466.0 143.1 79.5 77.6 46.1 45.5

2345.2 498.4 239.2 257.1 201.9 173.0 152.8 951.2 448.5 169.8 122.2 109.1 97.2 82.8

46.5 36.5 27.7 35.4 44.5 31.2 34.0 21.1 45.1 21.8 31.7 37.8 28.5 26.3

42.2 40.0 27.4 39.7 41.4 32.9 32.7 23.0 40.5 13.7 29.0 37.0 31.9 27.9

2007 1995 2007 1995 1995 2007 1995 2007 1995 2007

2007 1995 1995

DES Mt Share of final demand % Share of value-added % Country

Table 1 Economic shares and CO2 emissions of the service sector in selected countries in 1995 and 2007.

Share of DES in NPBE %

CBES Mt

2007

Share of CBES in NCBE %

Share of TFES in CBES %

W. Zhang et al. / Energy Policy 86 (2015) 93–103

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high CBES in these countries. During 1995–2007, final demand for services generally shows a trend of decoupling from carbon emissions. Emission intensities of final demand in most countries have declined in 2007. Steep declines appear in China, Russia, and India. However, intensities in major emerging countries are still generally higher than those in major developed countries in 2007. Emission intensities in China and Russia are still much higher than are those in the other countries after their sharp decline after 1995. 3.2. Decompositions of CBES Table 2 reports the results of the decomposition of CBES by production sources for the years 1995 and 2007. The major components in CBES are domestic emissions embodied in domestic supply of services (DEDS) and foreign emissions embodied in domestic supply of services (FEDS). Domestic emissions embodied in foreign supply of services (DEFS) are negligible compared to total volume of CBES for all countries. Eq. (9) shows that DEFS in country 1 are emissions from producing the intermediate products which are exported first for services production and then are reexported to country 1. For example, China may export cartons to the US in order to import transportation services supplied by American shipping companies using those cartons for packaging. Therefore, DEFS is a feedback effect. For services, Table 2 shows the feedback effect seems very small, accounting for less than 0.1% of CBES in all selected countries. Foreign emissions embodied in foreign supply of services (FEFS) are also small compared with FEDS, particularly in developing countries. For instance, in 2007, the share of FEDS in the CBES of the US is 14.5%, whereas the share of FEFS is only 1.1%. The shares of FEFS in the UK and Germany are 10.3% and 7.2% respectively, much greater than the shares in the other countries. Eq. (9) shows that FEDS are emissions embodied in imports of intermediate products which are mainly non-service products, whereas FEFS are emissions embodied in imports of final services. Therefore, one major explanation for lower FEFS compared with FEDS may be that services are less tradable than non-service goods. In another word, Table 2 implies that, as regards its climate impact, it is more important that China imports intermediate products (e.g., vehicle for domestic transportation) than its direct importing of final services (e.g., transporting services). Therefore, international trade of intermediate products for service production is the key factor in how consumption of services in one country causes CO2 emissions in the other countries. Although domestic emissions in CBES are greater than foreign emissions in absolute volume, the latter rises much more rapidly than does the former in many countries. For example, TDES in the US’s CBES remain almost unchanged in 2007 compared with those in 1995, whereas TFES increase from 173.8 Mt to 366.4 Mt, or by 110.8%. FEDS and FEFS in the CBES of the US increase by 114.9% and 68.1%, respectively. A significant increase of FEDS and FEFS can also be observed in the other countries during 1995–2007. Rapid increase in FEDS and FEFS indicates that international trade plays an increasingly important role in shaping the environmental effect of the service sector. Foreign emissions in CBES are further decomposed into regional emissions in order to investigate their regional distribution ( Figs. 2 and 3). As is shown, the distribution of TFES is generally affected by the geographic distance between the consumer and the emitter. A lot of foreign emissions locate in countries adjacent to consuming country. For instance, 19.7% of TFES in the US’s CBES are produced by Canada and Mexico in 1995. Similarly, 42.9% of TFES in Canada’s CBES are produced in the US. Foreign emissions locating in Germany and the UK account for respectively 8.1% and 6.7% of the TFES in France’s CBES. A natural reason for this

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Comparing Figs. 2 and 3, it is easy to find that the proportion of TFES locating in developing countries in the CBES of developed countries significantly increases during 1995–2007,5 which indicates CO2 emissions in developing countries have been affected more seriously by the final demand for services in developed countries. A major explanation for this change is that more production processes in the supply chains of services in developed countries have been outsourced to developing countries in this period. Decomposition by production sources above has revealed the important role played by international trade. Moreover, decomposition by supply chains is able to show how the service sector causes emissions in non-service sectors. In Table 3, CBES are decomposed into on-spot emissions (OSE) and upstream emissions (USE), which indicates that massive emissions come from nonservice sectors in the supply chains of services. Results show that

350 1995

2007

Kg CO2 per 100 USD

300 250 200 150 100 50 0

Fig. 1. Emission intensities of final demand for services (in 1995 price). Note: The prices in 2007 have been deflated to 1995 price using price index re-computed using input–output tables in current prices and those in previous prices.

Table 2 Decomposition of CBES by production sources for the years 1995 and 2007. Country

1995

2007

DEDS (1)

DEFS (2)

TDES (1) þ (2)

FEDS (3)

FEFS (4)

TFES (3) þ(4)

DEDS (1)

DEFS (2)

TDES (1)þ (2)

FEDS (3)

FEFS (4)

TFES (3)þ (4)

US Japan Germany UK Canada Italy France

1975.4 375.0 179.7 123.9 129.4 91.9 84.3

0.4 0.0 0.1 0.1 0.0 0.0 0.0

1975.8 375.0 179.8 124.0 129.5 91.9 84.4

158.6 84.5 64.7 44.8 18.3 39.0 39.7

15.3 13.6 15.3 8.0 6.5 4.4 6.4

173.8 98.1 80.0 52.8 24.8 43.4 46.2

1978.2 384.3 145.0 140.2 158.3 107.8 86.5

0.6 0.1 0.2 0.2 0.0 0.0 0.0

1978.8 384.5 145.2 140.4 158.3 107.8 86.5

340.7 102.2 76.8 90.2 37.2 58.7 58.3

25.7 11.7 17.3 26.5 6.4 6.5 8.1

366.4 113.9 94.1 116.7 43.6 65.2 66.3

China Russia India Mexico Brazil Turkey Indonesia

451.6 456.6 134.2 71.3 65.5 37.2 36.4

0.0 0.1 0.0 0.0 0.0 0.0 0.0

451.6 456.7 134.2 71.3 65.5 37.2 36.4

16.1 8.1 8.0 7.4 11.1 8.5 6.8

1.3 1.2 1.0 0.8 1.0 0.4 2.2

17.5 9.3 8.9 8.1 12.1 8.9 9.0

867.0 429.1 142.1 100.0 87.1 72.0 63.3

0.2 0.1 0.0 0.0 0.0 0.0 0.0

867.2 429.1 142.1 100.0 87.1 72.0 63.3

79.4 17.7 26.3 21.0 20.5 24.2 16.6

4.6 1.7 1.5 1.2 1.4 1.0 3.0

84.0 19.4 27.7 22.2 21.9 25.2 19.5

Note: The decomposition is carried out using Eq. (9).

phenomenon is that geographic proximity reduces the trade cost among these countries and therefore facilitates the construction of international supply chains of services. In addition, for all selected countries, great deals of their TFES locate in China. And the proportions of TFES locating in China for all countries increase significantly during 1995–2007. For example, 12.4% of TFES in the US’s CBES are located in China in 1995 and the share increases to 24.4% in 2007. The first important reason for the high shares of TFES locating in China is that firms in China have more deeply embedded in the world production network and become a key production base since China’s reform and opening policy in 1978, particularly after its entry into World Trade Organization in 2001. In fact, studies have shown that export of China contributes substantial CO2 emissions and their rapid growth in China recently (Minx et al. 2011; Weber et al., 2008). The second important reason for the high share TFES locating in China relates to the high emission intensity of Chinese electricity sector, which we will show in the following section. China is the world’s largest exporter of emissions in 2008, that is, it produces the largest emissions for satisfying the final demand in the other countries (Arto et al., 2014). We found this is still true when only the consumption of services is considered. 4 4 According to our estimation, the emission exports of China induced by final demand for services in the other countries (total TFES locating in China) reach 532.5 Mt CO2 in 2008 which are the largest in the world.

USE is much greater than OSE in most selected countries. For instance, USE account for 1231.7 Mt or 52.5% of the CBES in the US in 2007. The proportion of USE in China reaches 82.6%, the highest in the selected countries. A high share of USE also exists in India (80.3%) and Russia (78.9%). However, Canada and France have USE shares lower than 50% (39.4% and 47.8%, respectively), that is, OSE are greater than USE in the CBES of the two countries. During 1995–2007, both OSE and USE increased for selected countries except for the US, Japan, Germany, and Russia. In the CBES of the US, while the OSE decrease by 2.1%, the USE increased by 21.7% in this period. Similar change can be observed in the CBES of Japan. Therefore, the climate impact of the service sectors in the US and Japan can be more fully understood only when their supply chain effects are considered. For Germany and Russia, their OSE increase whereas their USE decreased. Note that TFES are the sum of FOSE and FUSE. Table 3 also shows that most TFES in CBES are upstream emissions, namely emissions occurring in non-service sectors abroad. For example, 81% of the US’s TFES are foreign upstream emissions, namely FUSE. In fact, shares of FUSE in TFES are over 70% in all selected countries. As regards domestic emissions (DOSE plus DUSE), shares of upstream emissions (DUSE) are much lower than are those in foreign emissions. DUSE shares in domestic emissions in Canada, 5 The aggregated region ROW in the world input–output table mainly includes developing countries.

W. Zhang et al. / Energy Policy 86 (2015) 93–103

100.0 90.0

ROW Other developing countries

80.0 70.0

Indonesia Turkey

Regional shares %

Brazil 60.0

Mexico India

50.0

Russia China

40.0 30.0

Other developed countries France Italy

20.0

Canada UK

10.0

Germany Japan

0.0

US

Fig. 2. The regional distribution of TFES in the CBES of selected countries in 1995. Note: Countries in the horizontal axis are countries in which the consumption of services located. ‘Other developed countries’ include developed countries except for the G7 in the world input–output table. ‘Other developing countries’ include developing countries except for the 7 major developing countries listed in the figure. The grouping of countries here refers to the grouping list of International Monetary Fund. 100.0 90.0

ROW Other developing countries

80.0 70.0

Indonesia Turkey

Regional shares %

Brazil 60.0

Mexico India

50.0

Russia China

40.0 30.0

Other developed countries France Italy

20.0

Canada UK

10.0

Germany Japan

0.0

US

Fig. 3. The regional distribution of TFES in the CBES of selected countries in 2007.

Brazil and France are only 30.0%, 29.6% and 27.9%, respectively. Alcántara and Padilla (2009) revealed that more than one-half of emissions induced by final demand for services in Spain are emissions occurring in upstream non-service sectors, a fact also found in this paper (65.5% of domestic emissions and 75.8% of foreign emissions belong to upstream emissions in Spain’s CBES). However, this feature is not universal for the service sector in all countries because we find that on-spot emissions within the service sector in some countries, particularly in such countries as Canada, Brazil and France, can be greater than upstream emissions of non-service sectors. 3.3. Sectoral analysis for CBES in the US and China In this section, we report sectoral results for 2007 in the cases of the US and China, the two largest CO2 emitters. A similar analysis can be done for all the other countries and regions. Table 4 reports emissions induced by final demand for each service category, namely CBES, by service categories, which are further decomposed into on-spot emissions and upstream emissions. As for the US, the service category that induced the largest emissions is service from ‘public administration and defense; compulsory social security’. CBES induced by final demand for services from this branch amount to 31.7% of total CBES of the US. The second most important service category is ‘Health and Social

99

work’ services, which causes 12.4% of total CBES. In addition to these two service categories, CBES caused by final demand for ‘retail trade, except of motor vehicles and motorcycles; repair of household goods’, ‘hotels and restaurants’, ‘air transportation’, and ‘real estate activities’ amount to 8.4%, 8.0%, 6.5%, 6.0% of total CBES, respectively. Consumption-based emissions of the other service categories are much less than those of the six service categories above. Further decomposition shows that most CBES induced by final demand for services from four transportation branches are on-spot emissions, based on their higher direct emission intensities compared with the other service subsectors. In contrast, CBES induced by the other service categories mainly come from upstream non-service sectors. With regard to China, CBES induced by final demand for ‘public administration and defense; compulsory social security’ and ‘health and social work’ are also the most important, amounting to 18.4% and 20.5% of the total CBES of China, respectively. CBES of ‘education’ services also come to 15.5% of total CBES in China, much higher than that in the US. The other important service categories include ‘other community, social and personal services’ (7.6%), ‘wholesale trade and commission trade’ (7.4%) and ‘hotels and restaurants’ (6.7%). Decomposition shows CBES of all service categories except for transport services are made up of upstream emissions just as in the US. Over 60% of CBES induced by final demand for services from ‘air transportation’ and ‘water transportation’ are on-spot emissions, which is also similar to the case in the US. However, only 39.2% of CBES induced by ‘inland transport’ in China are on-spot emissions, whereas the corresponding number in the US is 76.5%. Although the results in Table 4 are helpful for designing abatement polices in the consumption end, it is also important to analyze how much emissions actually occur in each industry to construct a production-based scheme for emission abatement. Such information can be obtained by further dividing OSE and USE into production branches in the service sector and non-service sector. In Table 5, on-spot emissions induced by final demand for all service categories are reallocated to each service branch based on actual, direct emissions from production of final services. For example, subsector ‘air transport’ in the US directly produces 173.8 Mt CO2 due to final demand for all types of services. Considering their higher direct emission intensities, it would not be surprising to learn that four transport sectors in the US contribute a substantial part (387 Mt or 34.8%) of total OSE in the US’s CBES. Additionally, 77.6% of foreign OSE come from transport sectors. It should be noted that OSE from ‘air transport’ and ‘inland transport’ are much higher than are those from ‘water transport’. Emissions from subsector ‘public administration and defense; compulsory social security’ also reach 22.6% of total OSE, most of which occur domestically. A similar case exists in China, where 48.3% of total OSE come from the transports sector and 10.1% from ‘public administration and defense; compulsory social security’. Similarly, we trace back upstream emissions in the CBES to individual non-service sectors from production perspective (Table 6). The distribution of upstream emissions in non-service subsectors in the US and China are very similar. Most of the USE in the two countries originate from energy-intensive sectors, particularly from the utility sector ‘electricity, gas and water supply’. In the US, the USE in this utility sector account for 788.7 Mt (64%) of total USE. The proportion of USE in this sector in China reaches up to 69.6%. USE in manufacturing as a whole account for 29.4% of total USE in the US and 24.8% of total USE in China. In addition, most USE in manufacturing come from several energy-intensive subsectors including ‘coke, refined petroleum and nuclear fuel’, ‘basic metals and fabricated metal’, ‘chemicals and chemical products’, ‘other non-metallic mineral’, and ‘pulp, paper, printing and

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Table 3 Decomposition of CBES by supply chains for the years 1995 and 2007. Country

1995

2007

DOSE (1)

FOSE (2)

OSE (1) þ(2)

DUSE (3)

FUSE (4)

USE (3)þ (4)

DOSE (1)

FOSE (2)

OSE (1) þ (2)

DUSE (3)

FUSE (4)

USE (3)þ (4)

US Japan Germany UK Canada Italy France

1096.5 202.7 89.2 72.7 96.4 49.0 59.5

40.6 31.0 19.2 15.1 7.7 8.6 13.5

1137.1 233.7 108.4 87.8 104.1 57.7 73.0

879.3 172.4 90.6 51.2 33.1 42.9 24.9

133.2 67.1 60.8 37.7 17.1 34.8 32.6

1012.5 239.5 151.4 88.9 50.2 77.7 57.5

1043.8 168.9 76.8 82.9 110.9 53.4 62.4

69.7 30.6 23.6 34.7 11.5 14.6 17.5

1113.5 199.5 100.4 117.6 122.4 68.0 79.8

935.0 215.5 68.3 57.5 47.4 54.4 24.1

296.7 83.3 70.4 81.9 32.1 50.6 48.9

1231.7 298.8 138.8 139.4 79.5 105.0 73.0

China Russia India Mexico Brazil Turkey Indonesia

98.5 85.3 46.4 40.9 48.0 23.9 17.6

3.3 1.9 1.4 1.5 2.2 1.4 3.1

101.7 87.2 47.8 42.5 50.2 25.4 20.6

353.1 371.5 87.7 30.4 17.5 13.3 18.9

14.2 7.4 7.6 6.6 9.9 7.5 6.0

367.3 378.9 95.3 37.0 27.4 20.7 24.8

149.0 91.2 30.1 61.1 61.4 34.3 22.9

16.9 3.5 3.3 2.8 3.4 3.9 5.4

165.9 94.7 33.4 63.9 64.7 38.3 28.3

718.2 337.9 111.9 39.0 25.8 37.7 40.4

67.1 15.9 24.4 19.3 18.6 21.3 14.1

785.3 353.8 136.4 58.3 44.3 59.0 54.6

Table 4 CBES induced by final demand for each final service category in 2007. Service sector

USA CBES Mt

Wholesale trade and commission 66.7 trade Retail trade, repair of household 198.0 goods Hotels and restaurants 188.2 Inland transport 100.0 Water transport 26.5 Air transport 152.5 Financial intermediation 89.1 Real estate activities 140.9 Renting of M&Eq and other business 85.7 activities Public admin and defense; compul743.5 sory social security Education 71.1 Health and social work 289.9 Other community, social and personal 106.9 services All other service branches 86.2 Total service sector 2345.2

China OSE %

USE %

CBES Mt

46.3 53.7

70.6

51.8 48.2

16.2 26.0

37.2 76.5 83.8 84.5 45.4 24.1 47.4

63.7 13.0 87.0 41.0 39.2 60.8 11.8 64.0 36.0 5.9 67.6 32.4 18.5 14.6 85.4 37.6 13.9 86.1 44.7 14.0 86.0

62.8 23.5 16.2 15.5 54.6 75.9 52.6

45.5 54.5 175.3

OSE %

USE %

18.0 82.0 74.0

18.7 81.3

26.2 73.8 147.5 14.1 85.9 43.3 56.7 194.6 9.2 90.8 47.2 52.8 72.4 22.7 77.3 40.7 59.3 51.4 21.4 78.6 47.5 52.5 951.2 17.4 82.6

Note: OSE by service categories in this table are on-spot emissions caused by consumption of each service category. Total OSE here are reattributed to each service category based on the consumption-based perspective and are different from OSE in each service branch reported in Table 5, where OSE are allocated by the production-based perspective, that is, they are actual emissions emitted by each service branch.

publishing’. The distributions of domestic USE and foreign USE in non-service sectors are generally similar to total USE. Secondary energy, particularly electricity, is a primary input of service supply chains (Rosenblum et al., 2000). Moreover, a large proportion of electric power both in the US and China is generated by coal, one of the most carbon-intensive fossil energy sources.6 CO2 emission intensity of this sector in China was much higher than in many developed countries and in some developing countries in 2007 (Fig. 4). Therefore, it is not surprising that a large

6 Approximately 49% of the US’s electricity was produced by coal-fired power plants in 2007 (EIA, 2014). This number may reach 80% in China (Financial Times, 2008).

proportion of USE occur in sector ‘electricity, gas and water supply’ in China. In fact, emissions from this sector in China are so significant that it also has important influence on the CBES of the other countries. As shown in Fig. 5, a considerable proportion of foreign emissions (TFES) in CBES for selected countries locate in China. For instance, emissions emitted in China account for approximately one-quarter of foreign emissions in the CBES of the US or Japan. Moreover, for all selected countries, nearly or over one half of emissions emitted in China induced by their final demand for services can be traced back to the power sector (‘electricity, gas and water supply’). Therefore, decreasing the emission intensity of the power sector in China would be not only of great importance for reducing China’s CBES but also would be very helpful for reducing the CBES of the other countries.

4. Discussion 4.1. Are services better for climate change? People are inclined to view the service sector as a green industry not involving large amounts of materials and pollutions because environmental repercussions directly generated by the service sector are small compared with non-service sectors. However, more and more empirical studies have queried this traditional view, in which the environmental impacts of the service sector are assessed from consumption-based perspective focusing on domestic supply chains of services (Alcántara and Padilla, 2009; Nansai et al., 2009; Rosenblum et al., 2000; Suh, 2006). In the current work, we extend these researches by considering service supply chains beyond national borders using a global input–output model. Our results support the major conclusion of previous studies but further reveal that the impact of the service sector on climate change is even more prominent when international supply chain effects are considered. In the period of 1995–2007, the economic shares of the service sector in most countries had risen. Owing to its relatively high value-added, the relative growth of the service sector may ‘dilute’ the overall emission intensity in a country and help achieve a relative decarbonization of the economy (Suh, 2006). However, massive upstream emissions may still occur to satisfy the mounting final demand for services, and therefore the absolute volume of emissions that determine the climate effect does not necessarily decrease in the process of relative decarbonization. In

W. Zhang et al. / Energy Policy 86 (2015) 93–103

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Table 5 On-spot emissions produced by each service branch in 2007 (Mt CO2). Service branches

US

China

Total

Domestic

Foreign

Total

Domestic

Foreign

Transport Air transport Inland transport Water transport Other supporting and auxiliary transport activities; activities of travel agencies Renting of M&Eq and other business activities Retail trade, repair of household goods Hotels and restaurants Health and social work Public admin and defense; compulsory social security All other service branches Total OSE in CBES

387.0 173.8 137.8 35.1 40.3 87.7 82.0 61.4 86.2 252.0 157.2 1113.5

332.9 141.5 127.0 25.4 39.0 81.2 80.3 60.7 86.1 251.7 150.9 1043.8

54.0 32.4 10.7 9.7 1.3 6.5 1.7 0.7 0.1 0.3 6.3 69.7

80.2 19.0 32.7 19.8 8.6 7.1 2.9 8.6 10.1 16.8 40.2 165.9

66.4 11.8 29.3 17.2 8.2 6.3 2.6 8.3 10.1 16.7 38.7 149.0

13.7 7.2 3.4 2.6 0.5 0.8 0.3 0.4 0.0 0.2 1.5 16.9

reality, as shown in this paper, national emissions and consumption-based emissions of the service sector in most countries increased in the study period. For instance, the GDP share of the service sector in China increased from 32.7% in 1995 to 41.5% in 2007. Meanwhile, the national emission intensity (CO2 emissions per 100 USD) in China decreased from 144.2 kg to 68.3 kg. However, the total emissions from production in China doubled in the same period. While the relative development of service sector contributes to the decoupling of economic activities from climate change, it does not solve the problem. Instead, the impact on climate change of the service sector increases during 1995–2007 assessed from consumption-based perspective. Therefore, instead of presupposing the service sector as a green, environmentfriendly industry, more attention should be paid to the decarbonization of service supply chains as the development of service-oriented economy.

14.0

Kg CO2 per USD

12.0 10.0 8.0 6.0

4.0 2.0 0.0

Fig. 4. Emission intensity of the sector 17 (electricity, gas and water supply) in selected countries in 2007.

35.0

4.2. Carbon leakage in the service sector and its countermeasures Percentage %

The current work shows that most consumption-based emissions of the service sector are domestic upstream emissions occurring in material and energy production sectors, which would lead to the problem of responsibility attribution among domestic industries (Gallego and Lenzen, 2005; Lenzen et al., 2007). The emission responsibilities of the service sector under consumer principle or sharing principle would be greater than those under producer principle (Zhang, 2013). However, this paper further shows that a considerable proportion of consumption-based emissions of the service sector in developed countries are emissions outside these countries resulting from the consumption of

30.0

25.0 20.0 15.0 10.0 5.0 0.0

Shares of emissions emitted in China's sector 17 in the TFES of selected countries Shares of emissions emitted in China in the TFES of selected countries

Fig. 5. Shares of emissions emitted in China and in China’s sector 17 (‘electricity, gas and water supply’) in the TFES of selected countries in 2007.

Table 6 Upstream emissions produced by each non-service branch in 2007 (Mt CO2). Non-service sector

Agriculture, hunting, forestry and fishing Mining and quarrying Manufacturing Coke, refined petroleum and nuclear fuel Basic metals and fabricated metal Chemicals and chemical products Other non-metallic mineral Pulp, paper, printing and publishing Food, beverages and tobacco All other manufacturing sectors Construction Electricity, gas and water supply Total USE in CBES

US

China

Total

Domestic

Foreign

Total

Domestic

Foreign

13.8 61.0 362.5 93.4 66.7 66.4 50.1 30.7 15.6 39.7 5.7 788.7 1231.7

9.7 25.5 227.7 67.3 29.5 39.4 33.8 26.9 14.5 16.3 5.4 666.7 935.0

4.1 35.6 134.8 26.1 37.2 27.0 16.3 3.7 1.1 23.4 0.3 122.0 296.7

15.4 27.7 194.6 22.5 41.4 59.7 31.5 13.4 8.0 17.9 1.2 546.5 785.3

14.1 20.3 159.8 17.3 33.8 47.3 29.0 12.6 7.7 12.0 1.1 522.8 718.2

1.2 7.3 34.8 5.2 7.6 12.4 2.5 0.8 0.3 5.9 0.1 23.7 67.1

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imported intermediate products in domestic service industries. For instance, there were 89.3 Mt CO2 in China induced by the consumption of services in the US in 2007. Furthermore, increasing foreign emissions of the service sectors in developed countries have been shifted to developing countries, particularly to China. Carbon leakage occurs when the consumption of services in developed countries induces emissions in developing countries without emission caps since these emissions are not attributed to responsibilities of developed countries under the traditional territory-based (or production-based) accounting (Muñoz and Steininger, 2010; Peters and Hertwich, 2008). Carbon leakage would weaken the efficiency of climate policies implemented in developed countries and may even increase global emissions as a result of the dirtier production technologies used in developing countries. Carbon accounting approaches based on consumer responsibility or responsibility sharing principles are alternatives to the territory-based accounting for reducing the carbon leakage (Ferng, 2003; Peters, 2008; Peters and Hertwich, 2008). Consumption-based or sharing-based environmental accounting is particularly relevant for the service sector of which the major environmental effects locate outside the sector, that is, domestic and foreign non-service sectors. The carbon leakage problem also queries the sustainability of socalled service-oriented economy. While the service-oriented economy may be seen as a ‘weightless’, dematerialized economy (Chichilnisky, 1998; Quah, 1997), this paper shows evidence that the decarbonization of the service-oriented economy in developed countries is achieved partly at the expense of carbonization in some developing countries. For instance, according to the computation in this paper, CO2 emissions in Brazil, Russia, India, Indonesia, China (BRIIC) induced by the consumption of services in G7 (Canada, France, Germany, Italy, Japan, the UK, and the US) are 138.4 Mt in 1995 and increase to 300.9 Mt in 2009. In a global economy, while the service-oriented economy in developed countries may be sustainable with regard to their domestic ecological capital and environmental quality, it is not necessarily so when assessed from global perspective since productions in developing countries as supplier of intermediate products may seriously damage the local or global environment. This is particularly true for carbon emissions whose environmental effects are almost the same no matter where they are emitted. Therefore, it is necessary to construct indicators with global perspective for the assessment of sustainability of economy in developed countries (Proops et al., 1999). 4.3. Decarbonization of the service sector and its challenges The results of this paper show that a substantial part of CO2 emissions are induced by final demand for services in many developed and developing countries. Therefore, the decarbonization of the service sector is of great importance for the reduction of national and global emissions. Since the service sector affects climate change mainly through indirect, upstream emissions, decarbonizing the service sector has to decarbonize the entire supply chain of services by optimizing the input structure and improving efficiency for reducing the consumption of materials and energy in supplying services. For instance, to reduce the climate impact of the retail trade sector, we should not only reduce their direct emissions from fuel use and freight transport, but also reduce their resources (e.g., paper, plastic products for wrapping, electricity for lighting and air conditioning) used in their operation to reduce their upstream emissions in the supply chains. A natural challenge for the decarbonization of the service sector is the difficulty for service suppliers and final consumers to recognize the climate impact of the upstream productions out of their sight (Miller et al., 2010). This is particularly true when environmental effects occur outside the consuming country. Two measures are helpful for dealing with this challenge. Firstly,

information on indirect environmental impact from service consumption can be conveyed to consumers through education, which is helpful for consumers to recognize the environmental effect of their consumption activities and change their behavior. In order to educate consumers, the assessment of environmental impact of supply chain of services is indispensable. Secondly, environmental responsibility from service production and consumption can be shared among producers and consumers. If producers in the service sector and service consumers bear some responsibility for carbon emissions in non-service sector, they would have strong motivation to shift to low carbon technology and consumption pattern. Some indicators for sharing responsibility can help to reattribute environmental responsibility among producers and consumers (e.g., Lenzen et al., 2007). Another major difficulty exists for the decarbonization of some service branches, such as hotels, restaurants, or so called cumulative services (Salzman, 1999). Cumulative services generally consist of a large number of small, heterogeneous establishments. Material and energy directly or indirectly use at a single establishment might be negligible. However, as a whole, they may absorb substantial quantities of material goods and energy. Formal environmental management standards (EMS) can be established to deal with this challenge. For instance, the International Organization for Standardization (ISO) certificate can be very helpful to the decarbonization of the hotel industry (Chan, 2008). In sum, policies and measures for decarbonizing the service sector would be much more complicated than those for reducing emissions from industrial sectors. In spite of the above challenges, decarbonizing the service sector may be indispensable for most developed countries to meet their reduction targets in consideration of their high and rising economic shares. In developing countries, shares of the service sector are relatively low comparing developed countries. However, CO2 emissions induced by the service sector in some emerging countries are also rather considerable. For instance, domestic CO2 emissions induced by final demand for services in China increase from 451.6 Mt in 1995 to 867.2 Mt in 2007, which are much greater than those in the other countries except the US and account for 15.7% of total production emissions in China. As the biggest CO2 emitter in the world, China is facing mounting pressure from international community to mitigate its emissions (Wang and Watson, 2008). Although most of the emissions in China still come from the production of nonservice goods, decarbonization of the service sector would be very helpful for its emission mitigation. The sectoral analysis for the case of China in Section 3.3 shows reducing the use of coal-dominated electricity in the service sector by adopting new business models and management strategies would be of great importance to decarbonizing supply chains of services in China. In a global perspective, shifting from the coal-dominated power system to a low carbon power system would be not only critical for the decarbonization of domestic service supply chains in China, but also very helpful for decarbonizing international supply chains of services.

5. Conclusions Conventional indicators based on direct repercussions such as direct pollution or direct energy consumption by the service sector may be misleading because they do not reveal indirect impacts induced by service consumption in upstream non-service sectors. In this paper, we propose a consumption-based perspective to assess the global environmental effects of the service sector. The consumption-based CO2 emissions of the service sector in major countries are assessed using a MRIO model. The MRIO model allows us to analyze the environmental impact of domestic and international supply chain of services. The decompositions of consumption-based emissions of the service in the MRIO

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framework help to reveal how the consumption of services in a country causes emissions in domestic upstream non-service sector and in foreign countries. The results show that consumption-based emissions of the service sector are significantly greater than direct emissions generated by the service sector. Although direct emissions of the service sector in some countries decrease, consumption-based emissions of the service sector still increase substantially during 1995–2007. A considerable proportion of consumption-based emissions of the service sector in many developed countries occur in foreign countries. Foreign emissions mainly result from intermediate consumption of imported products in the domestic service sector. For many countries, foreign emissions in consumption-based emissions of the service sector increase much more significantly than do domestic emissions during 1995–2007. Therefore, considering the environmental effect of international supply chains of service is important, particularly when we assess a global environmental issue such as climate change. Moreover, decomposition by supply chains shows that most emissions generated by the supply chains of services in many countries are upstream emissions, which further supports the conclusion of previous studies (e.g., Alcántara and Padilla, 2009; Rosenblum et al., 2000; Suh, 2006). We have discussed the policy implications of the results for the mitigation of climate change, sustainability of service-oriented economy and the decarbonization of the service sector (see Section 4). Although many countries have shifted from the industrialized economy to the service-oriented economy, little attention is paid to the environmental implications of the service sector. We hope the results of the current work may call more attention to the problem. Although we have identified key service categories and production sectors that have great influence on consumptionbased emissions of the service sector in our work, a more detailed picture of the environmental effect of the supply chain of services can be obtained using more complicated MRIO technique, such as the structural path analysis (SPA), in future work. As the share of the service sector in many countries may continue to rise in the future, scenario analyses considering this structural change will be helpful in revealing environmental implications of further development of the service sector. In addition, possible policy mix for decarbonizing the supply chain of services should be specifically discussed and assessed in future work.

Acknowledgments This paper is supported by the Major Program of the National Social Science Fund of China (Grant 13&ZD167), the Major Program of the Ministry of Education Foundation of China (Grant 13JZD010), and the National Natural Science Foundation of China (Grants 71373218, 71073131 and 71303199), Social Science Planning Fund Program of Fujian Province (Grant 2014C045), and Principal Foundation of Xiamen University (Grants 20720151026 and 20720151039). We would like to express our gratitude to three anonymous reviewers for their constructive comments, which have greatly helped improve the paper.

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