1. Development environments are running on Kubernetes, and VS Code is remoting into them. You don't have to pay a monthly subscription for that. VS Code remoting is free-as-in-beer and Kubernetes is free-as-in-speech.
https://code.visualstudio.com/docs/azure/kubernetes
2. The actual Kubernetes hosting is the product "GitHub Codespaces" running on Azure. GitHub certainly isn't paying a monthly fee to themselves for this; they are, technically, self-hosting it. I agree that you probably do want to have the option to run it yourself, but I think you do, given 1.
I don’t see why that would be a problem though? If I can pay a company to provide improved GC for my infra, where the cost savings made it beneficial, I would do it…
(not entirely serious, but it has a very expensive monthly fee for what is in essence a better GC algorithm)
This will be coming to a cloud service near you
In some cities you do, and they're often controlled by organized crime.
(Whether this comment is a metaphor for SaaS is left as an exercise for the reader.)