A supply-use approach to capital endogenization in input–output analysis

Abstract

Input–output analysis currently treats capital investment as exogenous to the inter-industry system despite capital goods being used further in production processes. Previous studies have applied the Leontief calculus to include impacts of capital in footprint calculations. Here, we adopt a supply-use approach to incorporating capital into footprint calculations, by constructing capital supply-use tables (KSUTs) that enable differentiating capital goods. As the new KSUT formalism is compliant with the Supply-Use formalism in the UN's System of National Accounts, we can keep full transparency throughout the process of calculating impact multipliers. We demonstrate the usefulness of the KSUT framework in a case study of the Australian economy, with environmental extensions from the EXIOBASE3 database. If consumption-based emissions were considered for the UN's Framework Convention on Climate Change, the KSUT framework would provide a consistent and transparent foundation for working out countries’ responsibility for carbon emissions from both current use and capital investment.