Consumption Definition: Understanding the Term "Consumption"

Understanding the term "consumption"

It is important to understand what is meant by the term “consumption” and how this relates to materials use. The term “consumption” is typically defined to be consistent with what economists call “final demand”. It represents purchases of goods and services (including energy) by households. In some models (such as those used by Oregon and King County) it also includes purchases by governments as well as business purchases that are classified as investment or capital – typically, goods that are kept in inventory for more than one year, and not quickly passed on to another business. In other models (notably the UC Berkeley Cool Climate approach) consumption includes household purchases, but not government; business investment purchases are treated like other business purchases (non durable goods) and embedded in emissions intensities. In all approaches, non-capital/inventory business expenditures are not part of “consumption”, in order to avoid double-counting, as will be shown below. This definition of “consumption”, or “final demand”, is consistent with the system of national economic accounting used by the US and throughout the world.

When a consumer engages in “consumption”, it triggers a series of events. For example, when an individual purchases a washing machine, money flows from the consumer to the retailer. Some of that money then flows to the manufacturer of the washing machine, and from there, some passes up through a series of inter-linked supply chains (manufacturers of labels, buttons, casings, gaskets, drums, lights, electrical cords, cardboard boxes, paper for instruction manuals, etc.). Economic input/output analysis is used to trace this flow of money from one economic sector to another, and an analytical method in linear algebra called the “Leontief inverse” captures the seemingly infinite nature of the supply chains (the industry that makes the steel used to make the equipment used to mine the coal used to make the steel used to make the equipment used to mine coal, etc.). The result is an estimate of the economic activity in each of many different economic sectors associated with each act of final consumption (a household purchasing a washing machine, for example).

This economic information is then combined with estimates of the greenhouse gas emissions associated with each economic sector. For example, if consumer demand for $1,000 of washing machines results in $100 of economic activity by steel manufacturers, and it is estimated that for every $100 in economic output, steel manufacturers (on average) emit X pounds of GHGs, then the emissions associated with the steel used to make $1,000 of washing machines will result in X pounds of GHG emissions by the steel industry.

What does this mean for the treatment of materials in a consumption-based emissions inventory? For materials “consumed” in the community, the upstream (supply chain) life-cycle emissions are included. Similarly, when waste disposal “services” are consumed, these emissions are included as well. However, not all materials that are part of the community’s “waste stream” are included in the definition of “consumption”. This includes materials gifted from outside of the community, but more significantly, many materials that are purchased by area businesses. If these materials are not consumed directly by in-region consumers (households, governments, investment expenditures), or part of the supply chain of goods and services consumed by in-region consumers, the supply chain emissions of these materials will not be included, even if the materials are made, used, and/or disposed of (by businesses) within the community. For example, a local manufacturer may produce widgets that are sold to consumers in other cities or states. This local manufacturer may use significant materials and produce large quantities of wastes. To the extent these materials or wastes are associated with satisfying economic demand from elsewhere, they will not be included in the community’s consumption-based emissions.

For another example, consider the office paper that is purchased by a local law office. Imagine that the law office has three (and only three) clients:

  • A local resident, “consuming” legal services.
  • A non-local business, which produces semiconductors used by computer manufacturers in another state.
  • A local business, which produces component parts used to make military submarines 

The law office is serving local “consumption” in two of these three cases:

  • The local resident is “consuming” legal services from the law office. Put differently, the local resident is directly consuming from the law office.
  • To the extent that local residents or government agencies also purchase computers containing the semiconductors in question, the law firm is also part of the supply chain serving that local consumption (consumers purchase computers; computer-makers purchase semiconductors; the semiconductor maker purchases legal services, and the law office purchases office paper). In this case, the local residents (or government agencies) are indirectly consuming from the local law office.

All of the emissions associated with the local resident’s purchase of law services would be assigned to the local community; a fraction of the emissions associated with the law office serving the semiconductor manufacturer would be assigned to the local community (presuming that the semiconductors go into products that are sold in multiple communities).

However, in the case of the local submarine part manufacturer, presuming that local residents and governments are not purchasing military submarines (direct consumption), or anything made with military submarines (indirect consumption), the last client is not serving local consumption. This is true even though the law office’s customer is local, and the office paper is purchased, and recycled (or disposed of) locally.

As a consequence, only some fraction of the greenhouse gas emissions associated with the law firm’s purchase of paper, and purchase of waste services, would be allocated to local consumers. The inclusion or exlcusion of emissions associated with making and disposing of the paper are completely independent of where the paper making, use, and disposal activities occur. This example illustrates that an emissions-generating activity (making paper) is included if and only if it is part of a supply chain that ultimately serves local consumption, using the economists’ definition of consumption.

Complicating matters, the allocation of these emissions would be based on dollars (billings), which might or might not correlate with actual paper use. And complicating matters further, unless actual data were available on all of the law offices and their clients in the community, the allocation would be based on industry averages (not individual firms), probably drawn from statewide or nationwide industry surveys.