Effect of structural economic transformation on the environment: Insights on transition from goods-based to service-based economies in OECD countries

Over the past century, the shift from a goods-based to a service-based economy has been profound, especially in developed nations. This paper examines the impact of this transition on CO2 emissions. Using panel data econometric models with fixed and random effects for 23 OECD countries from 1990 to 2022, this study estimates the impact of Cost Disease as an indicator of this transformation on CO2 emissions. The results indicate that Cost Disease has a positive and statistically significant impact on CO2 emissions in both fixed and random effects models. Notably, a 1% increase in Cost Disease in the service sector results in a 0.2% rise in CO2 emissions, suggesting that the technical effects of Cost Disease on the environment are more significant than the composition effects. Additionally, the findings reveal that 22 out of 23 OECD countries have experienced Baumol's Cost Disease, primarily driven by technical effects. The results for service subsectors show that the sectors most affected by Baumol's Cost Disease across OECD countries include communication and education services. Therefore, increasing R&D expenditure in the service sector, especially in Communication and Education services, is crucial to balance productivity growth between the service and goods sectors.