Impacts of Growth of a Service Economy on CO2 Emissions: Japan’s Case
© S. Okamoto; licensee Springer. 2013
Received: 30 April 2013
Accepted: 6 October 2013
Published: 17 October 2013
The structural transition to a service economy has clearly contributed to decreasing direct (or territorial) greenhouse gas emissions. Nevertheless, the role of this structural transition on direct greenhouse gas emissions is not well understood quantitatively. This study applied the additive decomposition method and decomposed the change in CO2 emissions from domestic industries into five components: changes in the overall scale of the economy, changes in the industrial composition of the various economic sectors, energy intensity changes, changes in import composition, and changes in the import scale. The decomposition results show that during the 15-year period from 1990 to 2005, structural change effects under the domestic technology assumption (which include industrial composition effects, import scale effects, and import composition effects) totaled −35 Mt CO2, or 3 % of total CO2 emissions in 1990. It is concluded that the CO2 reduction due to the transition to a service economy was not negligible during 1990–2005 and that the structural transition to a service economy was much more important than the material dependence of service industries.
JEL Classification: O14, O44, Q56.
Increased environmental loads can be understood as arising from a variety of economic factors. For example, the environmental Kuznets curve describes an inverted-U relationship between economic growth (including structural changes) and environmental pollution (Grossman and Krueger [1991, 1995, 1996]; Carson  for a literature overview). In particular, this article sheds light on the relationship between structural changes and environmental load in a specific country. As in Levinson (), I will focus on influences on CO2 emissions. In this study, I consider not only the economic scale, but also another factor that exhibits significant influence: changes in industrial composition. In Japan, the percentage of domestic Japanese production attributable to secondary industries (manufacturing), which exhibit high rates of CO2 emissions per unit production (i.e., large direct emissions coefficients), fell drastically, from 49 % in 1990 to just 39 % in 2005. In contrast, the percentage of domestic Japanese production attributable to tertiary industries (service industries), which exhibit low coefficients of direct CO2 emissions, rose significantly, from 48 % in 1990 to 60 % in 2005.1 This also implies that Japan’s transition toward a service-oriented economy has contributed in reducing CO2 emissions, but the extent to which this has slowed the pace of global warming remains unclear.
Important studies on the relationship between the transition to a service economy and CO2 emissions include those of Suh () and Nansai et al. (). Suh () demonstrated that household consumption of services, excluding electric utilities and transportation services, accounts for 37.6 % of total industrial GHG emissions in the United States. Nansai et al. () analyzed the factors governing life-cycle CO2 emissions in Japanese service industries between the years 1990 and 2000 and concluded that increased inputs of energy and resources (including materials and components) led to significantly increased CO2 emissions.
However, the studies of Suh () and Nansai et al. () did not quantify the transition to a service economy in terms of the increasing industrial composition attributable to service industries and also did not analyze the impact of the transition to a service economy on production-based CO2 emissions.2 In addition, their studies did not argue that the transition to a service economy spurs an increase in imports of CO2-intensive commodities and that consequently this structural change contributes to global warming. Therefore, in the present study, I apply the Shapley–Sun additive decomposition method (Shapley ; Sun ) and decompose the change in production-based CO2 emissions from domestic industries into five components: that due to changes in the overall scale of the economy, that due to changes in the industrial composition of the various economic sectors, that due to energy intensity (i.e., technical) changes, which measures CO2 emissions per unit of domestic production, that due to changes in the import composition of the various commodities, and that due to changes in the import scale. Using this index decomposition method, I will analyze the impact of Japan’s transition to a service economy on Japanese CO2 emissions between 1990 and 2005, and finally argue the environmental benefits of its structural transition.
The rest of this paper is organized as follows: Sect. 2 presents the decomposition method, Sect. 3 describes the data source, Sect. 4 presents a case study of Japan, and Sect. 5 concludes the paper.
2.1 Estimating CO2 Emissions Originating from Industrial Activities
Let denote the energy consumption (Gigajoules: GJ) of fuel type k () associated with 1 unit (¥1 million) of production in industry sector i () during year t. Here, N is the number of industry sectors and M is the number of types of fuel. Also, let denote the CO2 emissions (t CO2) generated directly from the consumption of 1 GJ worth of fuel type k in the specific industry sector. Then the quantity of CO2 emitted in conjunction with unit production in industry sector i in year t can be expressed in the form (t CO2/million yen).
If denotes the industrial composition showing the fraction of output of industry sector i of total production across all industries, and denotes total industrial output summed over all industry sectors, the total amount of domestic production contributed by industry sector i in year t is then represented as (million yen).
2.2 Changes in CO2 Emissions: Factor Decomposition
We now use the Shapley–Sun decomposition method to analyze changes in the quantity of CO2 emissions originating from industrial activities (i.e., the quantity ) into three sources: technical effects, industrial composition effects, and economic scale effects (Levinson ). (For details on the decomposition method, see Ang ; Ang et al. ; Wood and Lenzen  and see e.g., Ma and Stern ; Kagawa et al.  for the energy decomposition analysis.)
Here, c is a row vector whose k th element, , is the emission coefficient of fuel type k; E is an matrix whose element, , is the energy consumption (i.e., energy intensity) for fuel type k used to produce one unit of output in industry sector i; and θ is an column vector whose i th element, , is the industrial composition of industry sector i. The superscripts t and indicate the year.
The first term on the right-hand side of Eq. (6) represents the influence on emissions of changes in the energy intensity in the industrial sector. The second and third terms represent the influence on emissions of changes in the industrial composition of the industrial sector and the total industrial output, respectively. The simplified additive decomposition method (e.g., Park ) ignores second-order interaction terms (such as the fourth, fifth, and sixth terms on the right-hand side of Eq. (6)) and third-order interaction terms (such as the seventh term). As a result, the sum of the contributions of the first three terms on the right-hand side will not be equal to total change in emissions . The important question is how to treat the influence of the interaction terms (Sun ).
We refer to the first, second, and third terms on the right-hand side of Eq. (7) respectively as the technical effect, the industrial composition effect, and the economic scale effect, which we denote by , , and . The effect expressed by Eq. (7) is the total effect, representing the sum of the effects across all industries; thus, for example, it is not possible to isolate from Eq. (7) the industrial composition effect in the service industry or the technical effect in the manufacturing industry. For this reason, we will further decompose Eq. (7) into the effect in each industry.
electricity, gas, and water supply industries, and
tertiary industries (service industries).
Here, , , and , where the subscripts m, g, and s, respectively, denote secondary industries, electricity, gas, and water supply industries, and tertiary industries, are diagonal matrices whose i th diagonal element is 1 for all i in the corresponding industry group and all other elements are zero.
I used CO2 emissions data obtained from industrial tables contained in the Embodied Energy and Emission Intensity Data for Japan Using Input–Output Tables: 3EID data book released by the Center for Global Environmental Research at the National Institute for Environmental Studies of Japan (2012). In addition, I used the 1990–1995–2000–2005 linked environmental input–output tables (396 industry sectors) (Nansai et al. [2007, 2009]).
The classification of fuel types
CO2 emission intensity
Steam coal, lignite and anthracite
Blast furnace coke
Coke oven gas (COG)
Fuel oil A
Fuel oils B and C
Petroleum-based hydrocarbon gas
Liquefied petroleum gas (LPG)
Natural gas, LNG
Recycled plastic of packages origins
Nuclear power generation
Hydro and other power generations
The categorization of industrial sectors
Wheat, barley and the like
Potatoes and sweet potatoes
Crops for beverages
Other edible crops
Crops for feed and forage
Seeds and seedlings
Flowers and plants
Other inedible crops
Dairy cattle farming
Fowl sand broilers
Agricultural services (except veterinary service)
Special forest products (inc. hunting)
Inland water fisheries and culture
Materials for ceramics
Gravel and quarrying
Other non-metal lie ores
Coal mining, crude petroleum and natural gas
Slaughtering and meat processing
Processed meat products
Bottled or canned meat products
Dairy farm products
Frozen fish and shellfish
Salted, dried or smoked seafood
Bottled or canned seafood
Other processed seafood
Flour and other grain milled products
Bottled or canned vegetables and fruits
Preserved agricultural foodstuffs (other than bottled or canned)
Dextrose, syrup and isomerized sugar
Vegetable oils and meal
Animal oils and fats
Condiments and seasonings
Prepared frozen foods
Dishes, sushi and lunch boxes
School lunch (public)∗∗
School lunch (private)∗
Whiskey and brandy
Tea and roasted coffee
Organic fertilizers, n.e.c.
Cotton and staple fiber fabrics (inc. fabrics of synthetic spun fibers)
Silk and artificial silk fabrics (inc. fabrics of synthetic filament fibers)
Woolen fabrics, hemp fabrics and other fabrics
Yarn and fabric dyeing and finishing (processing on commission only)
Ropes and nets
Carpets and floor mats
Fabricated textiles for medical use
Other fabricated textile products
Woven fabric apparel
Other wearing apparel and clothing accessories
Other ready-made textile products
Other wooden products
Wooden furniture and fixtures
Metallic furniture and fixture
Coated paper and building (construction) paper
Corrugated card board boxes
Other paper containers
Paper textile for medical use
Other pulp, paper and processed paper products
Printing, plate making and book binding
Industrial soda chemicals
Compressed gas and liquefied gas
Other industrial inorganic chemicals
Petrochemical basic products
Petrochemical aromatic products (except synthetic resin)
Oil and fat industrial chemicals
Other industrial organic chemicals
High function resins
Rayon and acetate
Soap, synthetic detergents and surface active agents
Cosmetics, toilet preparations and dentifrices
Paint and varnishes
Photographic sensitive materials
Gelatin and adhesives
Other final chemical products
Petroleum refinery products (inc. greases)
Tires and inner tubes
Other rubber products
Leather and fur skins
Miscellaneous leather products
Sheet glass and safety glass
Glass fiber and glass fiber products, n.e.c.
Other glass products
Ready mixed concrete
Pottery, china and earthenware
Other structural clay products
Carbon and graphite products
Miscellaneous ceramic, stone and clay products
Crude steel (converters)
Crude steel (electric furnaces)
Hot rolled steel
Steel pipes and tubes
Cast and forged steel
Cast iron pipes and tubes
Cast and forged materials (iron)
Iron and steel shearing and slitting
Other iron or steel products
Lead and zinc (inc. regenerated lead)
Aluminum (inc. regenerated aluminum)
Other non-ferrous metals
Non-ferrous metal scrap
Electric wires and cables
Optical fiber cables
Rolled and drawn copper and copper alloys
Rolled and drawn aluminum
Non-ferrous metal castings and forgings
Other non-ferrous metal products
Metal products for construction
Metal products for architecture
Gas and oil appliances and heating and cooking apparatus
Bolts, nuts, rivets and springs
Metal containers, fabricated plate and sheet metal
Plumber’s supplies, powder metallurgy products and tools
Other metal products
Refrigerators and air conditioning apparatus
Pumps and compressors
Machinists’ precision tools
Other general industrial machinery and equipment
Machinery and equipment for construction and mining
Metal machine tools
Metal processing machinery
Machinery for agricultural use
Food processing machinery and equipment
Semiconductor making equipment
Other special machinery for industrial use
Other general machines and parts
Other office machines
Machinery for service industry
Rotating electrical equipment
Transformers and reactors
Relay switches and switchboards
Wiring devices and supplies
Electrical equipment for internal combustion engines
Other electrical devices and parts
Applied electronic equipment
Electric measuring instruments
Electric lighting fixtures and apparatus
Other electrical devices and parts
Household electric appliances (except air-conditioners)
Video recording and playback equipment
Electric audio equipment
Radio and television sets
Wired communication equipment
Radio communication equipment (except cellular phones)
Other communication equipment
Electronic computing equipment (except personal computers)
Electronic computing equipment (accessory equipment)
Liquid crystal element
Magnetic tapes and disks
Other electronic components
Passenger motor cars
Trucks, buses and other cars
Two-wheel motor vehicles
Motor vehicle bodies
Internal combustion engines for motor vehicles and parts
Motor vehicle parts and accessories
Ships (except steel ships)
Internal combustion engines for vessels
Repair of ships
Repair of rolling stock
Repair of aircrafts
Other transport equipment
Other photographic and optical instruments
Watches and clocks
Professional and scientific instruments
Analytical instruments, testing machine, measuring instruments
Toys and games
Sporting and athletic goods
Audio and video records, other information recording media
Jewelry and adornments
“Tatami” (straw matting) and straw products
Miscellaneous manufacturing products
Residential construction (wooden)
Residential construction (non-wooden)
Non-residential construction (wooden)
Non-residential construction (non-wooden)
Repair of construction
Public construction of roads
Public construction of rivers, drainages and others
Agricultural public construction
Electric power facilities construction
Telecommunication facilities construction
Other civil engineering and construction
On-site power generation
Steam and hot water supply
Industrial water supply
Waste management services (public)∗∗
Waste management services (private)
Real estate agencies and managers
Real estate rental service
Railway transport (passengers)
Railway transport (freight)
Bus transport service
Hired car and taxi transport
Road freight transport (except Self-transport by private cars)
Coastal and inland water transport
Harbor transport service
Consigned freight forwarding
Storage facility service
Facility service for road transport
Port and water traffic control∗∗
Services relating to water transport
Airport and air traffic control (public)∗∗
Airport and air traffic control (industrial)
Services relating to air transport
Travel agency and other services relating to transport
Other services relating to communication
Internet based services
Image information production and distribution industry
News syndicates and private detective agencies
Public administration (central)∗∗
Public administration (local)∗∗
School education (public)∗∗
School education (private)∗
Social education (public)∗∗
Social education (private, non-profit)∗
Other educational and training institutions (public)∗∗
Other educational and training institutions (profit-making)
Research institutes for natural science (pubic)∗∗
Research institutes for cultural and social science (public)∗∗
Research institutes for natural sciences (private, non-profit)∗
Research institutes for cultural and social science (private, non-profit)∗
Research institutes for natural sciences (profit-making)
Research institutes for cultural and social science (profit-making)
Research and development (intra-enterprise)
Medical service (public)
Medical service (non-profit foundations, etc.)
Medical service (medical corporations, etc.)
Health and hygiene (public)∗∗
Health and hygiene (profit-making)
Social insurance (public)∗∗
Social insurance (private, non-profit)∗
Social welfare (public)∗∗
Social welfare (private, non-profit)∗
Social welfare (profit-making)
Nursing care (In-home)
Nursing care (In-facility)
Private non-profit institutions serving enterprises
Private non-profit institutions serving households, n.e.c.∗
Goods rental and leasing (except car rental)
Car rental and leasing
Repair of motor vehicles
Repair of machine
Building maintenance services
Judicial, financial and accounting services
Civil engineering and construction services
Worker dispatching services
Other business services
Performances (except otherwise classified), theatrical companies
Amusement and recreation facilities
Stadiums and companies of bicycle, horse, motorcar and motorboat races
Sport facility service, public gardens and amusement parks
Other amusement and recreation services
General eating and drinking places (except coffee shops)
Eating and drinking places for pleasures
Other cleaning, barber shops, beauty shops and public baths
Miscellaneous repairs, n.e.c.
Supplementary tutorial schools, instruction services for arts, culture and technical skills
Other personal services
4.1 Macro-level Decomposition Results
According to the 1990–1995–2000–2005 linked input–output tables, Japan’s total industrial output was ¥841 trillion in 1990, ¥886 trillion in 1995, ¥922 trillion in 2000, and ¥962 trillion in 2005. Meanwhile, CO2 emissions originating from industrial activity were 1.04 billion t CO2 in 1990, 1.10 billion t CO2 in 1995, 1.13 billion t CO2 in 2000, and 1.17 billion t CO2 in 2005. The increase in CO2 emissions can be attributed to the growth in total industrial output. However, the CO2 intensity, which can be defined by dividing CO2 emissions originating from each year’s industrial activity by total industrial output, was 1.24 t CO2/million yen in 1990, 1.25 t CO2/million yen in 1995, 1.22 t CO2/million yen in 2000, and 1.22 t CO2/million yen in 2005. Thus, Japan’s CO2 intensity has been gradually improving, indicating that factors such as technological progress and the transition to cleaner fuels have contributed to reducing CO2 emissions.
Thus, we see that, during the 10-year period from 1990 to 2000, economic scale effects and industrial composition effects both contributed to increasing CO2 emissions, while technical effects contributed to reducing CO2 emissions. However, this trend reversed itself in the years between 2000 and 2005, during which technical effects contributed significantly to increasing CO2 emissions, whereas industrial composition effects contributed significantly to reducing CO2 emissions.
Because the results presented in Fig. 1 are aggregate totals over all industry sectors, they do not allow us to identify the particular industry sectors in which technical effects and industrial composition effects influenced CO2 emissions. To investigate these questions, we use Eqs. (8) through (15) to analyze technical effects and industrial composition effects in each of our four industry groups: primary industries, secondary industries, electricity, gas, and water supply industries, and tertiary industries.
4.2 Technical Effects for the Four Industry Groups
Thus, we see that, in the past 15 years, the technical effects in electricity, gas, and water supply industries have varied widely. In particular, one factor contributing to the increase in emissions during the 5-year period from 2000 to 2005 was the high technical effect of +62 Mt CO2 observed for the commercial electric power sector. The primary cause of this phenomenon in the commercial electric power sector is the fact that, although the energy intensity for crude oil decreased during this period, the energy intensity for coal, lignite, and anthracite increased, and an energy shift to these fuels, which exhibit relatively higher concentrations of CO2 emissions, has occurred.
Figure 2 also reveals that technical effects in tertiary industries led to a significant decrease in CO2 emissions between the years 2000 and 2005. Considering the technical effects in specific sectors, we see that the technical effect in the ocean cargo transport industry was −8 Mt CO2 and that in the road cargo transport industry was −7 Mt CO2. Improved fuel efficiency in both these sectors significantly reduced the quantity of heavy oil needed to power ships and the quantity of light oil needed to power trucks, accounting for 88 % of the technical effects observed in tertiary industries.
4.3 Industrial Composition Effects for the Four Industry Groups
The total industrial composition effect for primary, secondary, and tertiary industries was −18.8 Mt CO2 between 1990 and 1995, −15.8 Mt CO2 between 1995 and 2000, and −30.4 Mt CO2 between 2000 and 2005. These observations indicate that, throughout this 15-year period, the market for primary and secondary industries contracted, whereas the market for tertiary industries expanded (indicating the transition to a service economy); these changes consequently reduced CO2 emissions by 65 Mt CO2.
4.4 Role of the Service Economy and International Trade on CO2 Emissions
The 1990–1995 overall effect of +880 kt CO2 corresponds to 0.1 % of total emissions in 1990, which is the base year of the Kyoto Protocol. Whereas the industrial composition effect during this period was a large negative effect due to the transition to a service economy, the technical effect contributed significantly to increased CO2 emissions. Between 1995 and 2000, the overall effect was −50.7 Mt CO2, corresponding to 4.6 % of total emissions in 1995; between 2000 and 2005, the overall effect was −34.2 Mt CO2, or a 3 % decrease compared to total emissions in 2000. Nansai et al. () analyzed the domestic CO2 emissions associated with the energy and material goods absorbed by services through the supply chain during the decade 1990–2000. They found that the CO2 emissions contributed by way of the material goods absorbed by service industries rose from 68 Mt CO2 in 1990 to 87 Mt CO2 in 2000. As a result, the material dependence of service industries increased by 19 Mt CO2 during 1990–2000. On the other hand, this study found that the CO2 reduction due to the transition of a service economy was 35 Mt CO2.4 This reveals that the structural transition to a service economy was much more important than the material dependence of service industries.
In this study, we have employed the domestic technology assumption to estimate import-based CO2 emissions by multiplying Japanese import volumes by Japanese CO2 emission coefficients for each of 396 industries. For this reason, we might have underestimated CO2 emissions due to imports from developing countries with relatively high emission coefficients. As the Japanese economy transitions from agricultural and manufacturing industries to service-based industries, it depends increasingly on imports of agricultural products and manufactured goods; on the basis of the domestic technology assumption, these imports changes (especially, the increase in the import scale of manufacturing products) and the previous industrial composition changes (i.e., the transition to a service economy) have consequently brought about a reduction in production-based CO2 emissions of 35 Mt CO2, or approximately 3 % of total emissions in 1990.
However, this reduction effect may be considerably overestimated due to differences in CO2 emission intensities between Japan and other countries. Based on the World Input–Output Database (40 countries and 35 industrial sectors),6 the Japanese industrial CO2 intensities are approximately half those of China (one of the more CO2-intensive countries) on average. Although the Chinese CO2 emission intensities from the World Input–Output Database cannot be easily used for our study due to the highly aggregated sectoral classifications, it is clear that if we simply assume all the Japanese CO2 intensities for a particular year (1990, 1995, 2000, and 2005) to be double their actual values, both the import scale effect and the import composition effect would be also double, accounting for 76 Mt CO2 and −16 Mt CO2, respectively. As a result, this assumption leads to the findings that the imports change effect, including their scale and composition effects, is 60 Mt CO2 and the reduction effect due to the industrial composition changes over the entire 15-year period was offset by the imports change effect (see Sect. 4.3 for the industrial composition effects). Thus, the CO2 emission leakage of Japan might not be negligible.
Under the terms of the Kyoto Protocol, Japan’s target was to reduce domestic emissions by 6 % of total emissions in 1990; thus, if we consider only the domestic industrial composition effect (−65 Mt CO2) discussed in Sect. 4.3, then we must conclude that this structural transition has contributed significantly to Japan’s attainment of its emissions-reduction goals under the Kyoto Protocol. Moreover, the CO2 emissions tax under consideration by Japan’s Ministry of the Environment is 289 yen/t CO2, and, based on this tax rate, the environmental benefit of the transition to a service economy will amount to ¥18.7 billion (). Thus, we cannot ignore these structural change effects when considering the mitigation of domestic greenhouse gas emissions. Industrial policies that accelerate Japan’s transition to a service economy are an effective means of reducing Japanese domestic CO2 emissions. However, such policies may result in increased emissions overall, by steering the production of manufactured industrial goods to foreign producers exhibiting high concentrations of CO2 emissions. The important point is to strive for the dematerialization of society as a whole, thereby reducing CO2 emissions from manufacturing sectors both in Japan and abroad.
In this study, I considered the Japanese economy during three time periods, from 1990 to 1995, from 1995 to 2000, and from 2000 to 2005, and I decomposed changes in CO2 emissions originating from detailed industrial activities into five contributing factors, technical effects, industrial composition effects, economic scale effects, import scale effects, and import composition effects.
During the 15-year period from 1990 to 2005, technical effects in the ocean and road cargo transport sectors (including, among other factors, increased fuel efficiency for ships and trucks) helped to ensure an overall technical effect of −29 Mt CO2 for tertiary industries as a whole, thus contributing significantly to a reduction in CO2 emissions.
The industrial composition changes during the period from 2000 to 2005 contributed to a decrease in CO2 emissions, while those changes during the 10-year period from 1990 to 2000 led to an increase in CO2 emissions. The main reason is that the Japanese economy experienced a significant decarbonization due to structural changes toward a service economy during 2000 to 2005.
During the 15-year period from 1990 to 2005, structural change effects under the domestic technology assumption (which include industrial composition effects, import scale effects, and import composition effects) totaled −35 Mt CO2, or 3 % of total CO2 emissions in 1990. These effects were instrumental in allowing Japan to attain its emissions-reduction target under the Kyoto Protocol, which was a 6 % reduction from 1990 emissions levels.
I demonstrated that the domestic environmental benefit arising from the transition to a service economy would amount to ¥18.7 billion.
where π is an column vector whose i th element, , is the import composition of imported commodity i, and is the total amount of imports to Japan.
SO proposed the SDA method, conducted data analysis, and provided policy implications.
I estimated the industrial composition rates using the linked input–output tables during 1990–2005 (see Ministry of Internal Affairs and Communication of Japan, 2010, for the linked input–output tables).
Production-based CO2 emissions represent CO2 emissions from the production activities of domestic industries.
Figures 2 and 3 show that the technical effects and industrial composition effects of electricity, gas, and water supply industries were large during the study period. In this section, I would like to discuss how the structural changes affected the CO2 emissions when excluding these effects of electricity, gas, and water supply industries.
The CO2 reduction effect due to the transition to a service economy during 1990–2000 was estimated by summing total industrial composition effects during 1990–1995 and 1995–2000 (see Fig. 4).
The import-based CO2 emissions represent CO2 emitted by producing imported goods and services overseas.
An early version of this paper was prepared for The International Input–Output Association: The 20th International Input–Output Conference, Bratislava, Slovakia, 25–29 June 2012. I wish to express my gratitude for discussions with Shigemi Kagawa (Kyushu University) and Keisuke Nansai (Center for Material Cycles and Waste Management Research, National Institute for Environmental Studies in Japan). I also appreciate several helpful comments from Manfred Lenzen (the University of Sydney).
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