QPA Assessment of the Impacts of the Aggregates Levy. September 2003

Transcription

1 QPA Assessment of the Impacts of the Aggregates Levy September 2003

2 Introduction The Aggregates Levy was announced in the March 2000 Budget, legislation was included in the 2001 Finance Act, and the levy of 1.60 per tonne implemented in April The purpose of this paper is to assess the impact of the levy, notably in relation to the objectives of the levy set out by Government. Government is reviewing the levy, leading up to the 2003 Pre-Budget Report and 2004 Budget, and this paper is a contribution to that review process. The content of the paper is derived from a number of sources; from Government statements, official publications, levy guidance and literature from HM Customs and Excise, and information from QPA and other industry sources. Some information is hard and quantified, some is more anecdotal, and the aim is to use all such information to establish the impact of the levy. Following eighteen months of implementation there is now sufficient evidence and information on the impact of the levy to guide policy development for the future. The paper is split into six sections: Section One Section Two Section Three Section Four Section Five Section Six The Aggregates Market in Great Britain Environmental Impacts of the Aggregates Levy The Impacts of the Aggregates Levy in N. Ireland Operational and Administrative Impacts of the Aggregates Levy Cost and Revenue Issues Conclusion 1

3 Section One The Aggregates Market in Great Britain

4 The Primary Aggregates Market Demand for primary aggregates and the principal aggregates products have followed the following trends from 1980 to Crushed rock GB 200 Sand and gravel GB 200 mil tonnes p.a mil tonnes p.a Ready-mixed concrete GB 40 Asphalt GB 40 mil cu m p.a mil tonnes p.a In 2002 and the first half of 2003 demand has changed as follows: Table One Recent Aggregates Market Trends 2002 Jan - June 2003 (% change over 2001) (% change over same period of 2002) Crushed Rock -3-3 Sand & Gravel -4-5 Total Primary Aggregates Asphalt Ready-mixed concrete -2 NC 5

5 The Aggregates Market in Great Britain The introduction of the levy has led to an increase in prices, reflected in the following official price indices. March 2002 June 2003 % Change Aggregates % Source: Monthly Bulletin of indices July DTI/National Statistics The Levy Impact on Market Volumes The impact of the levy cost/price increase on demand is to some extent reflected in the movements in demand set out in table one. While the overall price elasticity of demand is relatively low, the price elasticity is - not surprisingly - greater at the low price end of the market. The changes in demand for asphalt and ready-mixed concrete are due to underlying movements in the market. Demand for asphalt, supported by Government funding for higher investment in transport infrastructure, has been relatively unaffected by the levy. Demand for ready-mixed concrete has been similarly unaffected, and significant changes in regional demand for the product have been driven by market factors such as the sharp decline in new commercial sector construction in Greater London. We also assess that the performance of the sand and gravel market has been largely driven by market factors other than the levy. The reduction in sand and gravel sales so far this year is primarily a consequence of a weakening aggregates market in South East England, both in terms of the phasing down of some major projects and the general decline in commercial sector activity. It is clear, however, that the levy has had an impact on sales of crushed rock. The 6

6 context here is that the production of premium rock is inevitably accompanied by the production of lower quality by-products such as rock/clay mixtures generally referred to as scalpings. In other words, due to factors such as variations in the geology of quarries, for every tonne of good quality rock quarried and processed the industry generates by-products of lower quality material. Such lower grade materials are a by-product of producing higher quality rock, and have traditionally been sold at low prices for fill and low quality uses. Quarry operators have worked hard to find markets for these lower quality materials because such materials, if not sold, will accumulate in quarries and prevent access to new rock - therefore sterilising reserves. This has also ensured that the industry makes the fullest use of the available resources and has minimised genuine waste - a key issue in operating sustainably. (To put this into perspective, the quarrying of slate, for example, has historically been highly inefficient in environmental and resource-use terms, with the production of around 100 tonnes of waste for every tonne of premium slate.) Recent demand for high quality rock has been largely linked to market trends other than the levy, but the impact of the levy in inhibiting sales of lower quality aggregates has been significant. Major QPA members have recorded declines in sales of lower quality crushed rock (processed and unprocessed fill materials) of between 10% and 20%, with one member reporting the annual accumulation of scalpings on site of 800,000 tonnes. A significant issue is the need to distinguish between extraction and sales. Sales of lower grade crushed rock have been reduced by the levy impact, but the impact on quarrying and extraction has been negligible as these lower grade materials are generally the by-products of extracting higher quality rock, and are produced as long as there is demand for higher quality rock. There is some anecdotal evidence that the growing accumulations of low grade 7

7 The Aggregates Market in Great Britain crushed rock scalpings has led to industry action - where possible - to upgrade these materials into higher quality aggregates. However, other evidence indicates that the potential for such upgrading is limited. To quote one major operator: there is a physical limit to the amount of quarry engineering that is feasible to maximise the production of premium aggregates whilst minimising the by-products Recycled and Secondary Materials - Policy and Market One of the two principal Government justifications for the aggregates levy is to increase recycling in the sector. An aggregates levy will ensure that the environmental impacts of aggregates production not already addressed by regulation are more fully reflected in prices, encouraging a shift in demand away from virgin aggregates towards alternative materials such as recycled aggregate Source Budget 2000 Paragraph 6.91 The promotion of recycling was articulated by the Treasury in Select Committee evidence as follows: So what is the point of a tax? (Mr Timms) A tax would be a very direct incentive for increasing recycling. So you would see the object of a tax as improving recycling rather than reducing demand directly? (Mr Timms) I think both of these would be effects of a tax, but I suspect that 8

8 increasing the use of recycled and secondary materials would be the larger of them, given that there is only limited scope for varying the amount of aggregates used or equivalents. (Minutes of evidence to Environmental Audit Committee Tuesday 18 January witness Stephen Timms MP, Financial Secretary, Treasury) While identifying the encouragement of recycling as an aim of the levy, no estimates or targets for the impact of a levy on recycling in the aggregates market have been set out in any Pre-Budget Reports. However, speaking in a Westminster Hall debate on aggregates tax on 13 March 2002, Financial Secretary Paul Boateng MP said: The Department of Transport, Local Government and the Regions estimates that 10 million tonnes of construction waste could be recycled. This is the nearest the Treasury has come to identifying a recycling target for the levy. The Market for Recycled and Secondary Aggregates The use of recycled and secondary materials in aggregates markets has increased significantly over recent years. Research commissioned by Government identifies the growth on the table overleaf. 9

9 The Aggregates Market in Great Britain Table Two The Growth of Supply of Recycled and Secondary Aggregates Volume summaries million tonnes pa. (GB) Recycled/secondary source 1989/90* 2001** Construction/demolition waste Road planings 6 6 Slags Colliery spoil China clay waste Slate waste Other Total (*from The occurrence and utilisation of mineral and construction wastes ARUP Economics for the DoE 1991) (**Survey of Arisings and Use of Construction and Demolition Waste in England & Wales in 2001: ODPM/Nov 2002 Table 5.9) (**Survey of Arisings and Use of Secondary Materials as Aggregates in England and Wales in 2001: ODPM/Nov 2002 Page 11, with QPA estimate for Scotland to produce GB total) Based upon QPA estimates of the movement of the market in 2002, the table below summaries the shift in the market share of recycled and secondary aggregates in Great Britain. Table Three Market Shares of Primary & Recycled/Secondary Aggregates Comparison with Primary Aggregates Supply million tonnes pa. (GB) Aggregates Source % Change Primary % Recycled/Secondary % Total Recycled/Secondary 9.6% 21.3% 22.5% Market share 10

10 The Impacts of the Aggregates Levy The previous data suggests that the supply of recycled and secondary materials has been increasing by some 2.0 million tonnes per annum in recent years up to This growth has taken place without an aggregates levy. The supply of recycled and secondary materials into aggregates markets has been increasing for reasons including: 1 The increasing cost of landfill, including the impact of the landfill tax 2 The increasing willingness of clients to use such materials, implying greater technical awareness and confidence in these materials 3 More professional marketing of recycled and secondary materials As indicated in the following text, the underlying trend of increase of recycled and secondary materials of c.2 million pa. has increased following the levy, although the sources of a significant proportion of this additional tonnage raise a number of environmental concerns. These issues are best considered by source of supply. Construction and Demolition Waste, Road Planings, and Railway Ballast The supply of these recycled materials is mature and well established. The results of the ODPM research carried out in 2001, indicates that the potential additional supply from these sources is relatively restricted. The August 2002 ODPM consultation, (Consultation Paper - Draft National and Regional Guidelines for Aggregates Provision in England (Paragraph A15)) includes the following assessment overleaf: 11

11 The Aggregates Market in Great Britain The available evidence suggests that there has been a rapid increase in the use of C and D waste (construction and demolition waste) since This means that most of the C and D waste that is easy to recycle is now being recycled and therefore it is likely to become progressively more difficult to increase the use of C and D waste further. While there is potential for increased supply from some mineral wastes, a number of other sources of alternatives to primary aggregates are decreasing as a result of industrial changes. Anecdotal evidence from QPA members has indicated an increase in the activities of unregulated or less regulated suppliers of C and D waste, notably in urban areas. (In contrast to the activities of the established and regulated suppliers of aggregates produced from C and D waste.) Secondary Materials As with C and D waste, some secondary materials such as iron and steel slags are well-established elements of aggregates market supply. In such cases the aggregates levy has had little impact on supply from domestic sources. The most significant noted change in the pattern of supply has been the expansion of untaxed quarrying, encompassing both legal and illegal activities. Illegal activities refer to the supply of untaxed rock and sand and gravel into aggregates markets by suppliers who have not registered for aggregates levy or falsified returns to Customs and Excise. While such illegal activities account for a low proportion of the aggregates market, and evidence of such activities in Great Britain has been limited, it has proved a very significant problem in N. Ireland (see section 3). 12

12 More significant than these illegal activities is the expansion in supply of extracted minerals outside the scope of the aggregates levy. The growing significance of these non-taxed minerals is due to the structure and detail of the levy, which includes a wide range of materials which are not subject to the levy or exempt from the levy. Such exceptions include: Anything consisting entirely of the following substances: China clay waste Ball clay waste Spoil from the processing after extraction of industrial minerals Aggregates necessarily arising from the laying of foundations or of pipes and cables on building sites Aggregates necessarily arising from navigation dredging Aggregates necessarily arising from highway construction Any material, more than half of which consists of the following substances: Clay, soil, vegetable or other organic matter Coal Lignite Slate Shale Processing waste resulting from the separation of coal, lignite, slate or shale from other aggregates after extraction Drill cutting from oil exploration in UK waters or from land drilling Materials arising from utility works Any overburden arising from the extraction of these materials or from the extraction 13

13 The Aggregates Market in Great Britain of any industrial minerals is taxable unless it is a specifically exempt material. Interburden from china clay and ball clay extraction is not taxable. Source: Notice AGL1 March 2003, HM Customs and Excise The fact that the legislation allows materials comprising of more than 50% of the listed minerals and other materials, and under 50% of (otherwise tax liable) rock and/or sand and gravel, to be sold without tax has stimulated new mineral workings of these mixed materials, and other re-activation of old workings of poor quality materials. While we do not have quantified evidence, we believe it likely that in general the environmental impacts of such opportunistic extraction and workings would be greater than equivalent supply from an established and fully regulated crushed rock or sand and gravel quarry, wharf, or depot. Market Conclusions The previous sections describe how the levy impact on primary aggregates has been most marked in reducing sales of low quality crushed rock, with the major substitution effect levy the increased supply of other non-taxed minerals into aggregates markets. Table four opposite lists GB aggregates sales in 2001 by use. This is the latest official industry data. 14

14 Table Four 2001 Primary Aggregates Sales by Use Type of aggregates and use 2001 sales/million tonnes Sand For asphalt For mortar For concrete Gravel For asphalt For concrete Other screened/graded aggregates For fill/hoggin Total sand and gravel Crushed rock For asphalt For roadstone/uncoated For concrete For fill/ballast Total crushed rock Total sand and gravel and crushed rock This table demonstrates the relatively higher volume of crushed rock classified for fill use. Taking account of volumes of (rail) ballast and other higher quality rock which may be included within the fill/ballast statistical category, it can be assumed that lower quality fill materials account for c.40 million tonnes, 30% of total crushed rock sales. QPA members have estimated that sales of low quality fill-type rock has declined by between 10% and 20% since the implementation of the aggregates levy. Using a 15% drop in sales of these materials as a reasonable average equates to an impact of 6 million tonnes of crushed rock. 40MT x 15% = 6MT 15

15 The Aggregates Market in Great Britain However, in the earlier comments on the market for recycled and secondary aggregates it was noted that the pre-levy trend in the supply of recycled and secondary materials was an increase of 2MT pa. Most of this historic increase in supply has involved the substitution of crushed rock, and so some of the post levy reduction in sales of lower quality crushed rock would have happened even without the levy. We therefore estimate a levy impact of 4.5MT of crushed rock as follows: Reported post-levy reduction in sales of low quality crushed rock - 6MT Trend (pre-levy) substitution of crushed rock by recycled/secondary materials (2MT x 75%) - 1.5MT = - 4.5MT The conclusion that the levy has reduced sales of lower quality crushed rock by c.4.5 million tonnes raises two questions. Is this a levy effect, or just a general market effect? We have assessed previously that post-levy changes in sand and gravel and value added product sales have not been significantly reduced by the levy (in GB). The broader analysis of the discrepancy between construction product sales and construction output in 2003 by the Construction Products Association (CPA) (Appendix One) illustrates the general trend of relatively low heavy materials sales in QPA data indicates that crushed rock sales fell by 3% in 2002 and the trend to date in 2003 is also minus 3%. In total this represents a cumulative decline in crushed rock sales in 2002 and 2003 of 6%, equivalent to 8 million tonnes. In this context, the assumption of a specific levy impact of c.4.5 million tonnes does not appear unreasonable. 16

16 Has the whole of the specific estimated levy impact of reducing crushed rock sales by c.4.5 million resulted in substitution of other materials? In estimating the 4.5 million tonnes reduction, the trend substitution of other recycled and secondary materials for crushed rock (1.50MT pa) has already been discounted. We are also aware of anecdotal comments that techniques such as lime stabilisation (where a smaller volume of lime - or cement - is used to stabilise a structure instead of a larger volume of lower quality aggregate or other fill material) are being used or considered more by designers - although there is no statistical evidence of this yet. However, the overwhelming evidence from the market indicates that most of the levy-generated decline in low quality crushed rock sales has been substituted by other non-taxed extracted minerals. These additional non taxed minerals include both sources of aggregates supply which are acting illegally in avoiding liability for aggregates levy, and - more significantly - supplies of extracted minerals such as shale and additional slate which are not liable to the levy. As a result the increase in supply of extracted materials not liable to the levy, due to the impact of the levy, can therefore be estimated at 3-4 million tonnes in Great Britain. Of this 3-4 million tonnes, around 1 million tonnes comprises the additional levy - generated volumes from china clay and slate sources (estimate from market sources and ODPM publication Monthly Statistics of Building Materials and Components ). It is likely that much of this additional china clay and slate extraction would have taken place without the levy, as the by-product of premium china clay and slate production, and as such it is not new extraction. 17

17 The Aggregates Market in Great Britain Therefore it can be estimated that, by discounting this 1 million tonnes of additional china clay and slate waste in aggregates markets, new extraction of materials generated by the aggregates levy, for use in aggregates markets, is in the range of 2-3 million tonnes in Great Britain. This is likely to be a conservative assumption because it is based upon the fundamental assumption that aggregates and crushed rock demand would have shown a modest decline in 2002/03 even without the levy, due to general market conditions. There remains outstanding concerns that sales of aggregates and aggregates products, and other heavy construction materials, were apparently so much lower than the 8% recorded increase in construction output in There is clearly a possibility that the underlying growth rate for the total aggregates market was in fact higher than the (negative) growth recorded for primary aggregates sales, and more closely related to construction output growth than indicated by recorded data. If so, this would imply that the increase in supply of untaxed materials and minerals into aggregates markets was substantially higher than 3-4 million tonnes. Statistical Summary Construction output growth in 2002 = +8% Sales of crushed rock aggregates in 2001 = 134MT Total reduction in sales of crushed rock 2002/03 = -6%/8MT Estimated reduction in sales of lower quality crushed rock post levy = 40MT x 15% = 6MT Trend increase in crushed rock substitution by recycled and secondary materials = 1.5MT Specific levy effect in reducing sales of crushed rock = 4.5MT 18

18 Substitution of crushed rock by additional supplies of non taxed extracted minerals = 3-4MT Discount 1MT of additional china clay and slate waste supply generated by the levy, which would have been extracted with or without the levy Therefore the levy has generated new extraction of 2-3 million tonnes, taking account of all sources of supply into aggregates markets 19

19 Section Two Environmental Impacts of the Aggregates Levy

20 Since the aggregates levy was first raised as a policy option in the July 1997 Budget, a key rationale for taxation has been that a tax/levy would reduce identified environmental impacts. For example: The July 1997 Budget, in raising the possibility of an aggregates tax, identified environmental costs associated with the extraction of aggregates and other quarrying as impacts on landscape, on local residents and effects of noise and dust (1997 Financial Statement and Budget Report para 2.22) These impacts were again listed and extended in the November 1998 Pre-Budget Report, which described the environmental impacts of the potential aggregates tax as possible reduction in noise, dust, visual intrusion, damage to wildlife habitats and other environmental impacts (November 1998 Pre Budget Report Table 5.1) The 2003 Budget specifically identifies the environmental impact of the aggregates levy as: Reductions in noise and vibration, dust and other emissions to air, visual intrusion, loss of amenity and damage to wildlife habitats Source: 2003 Budget Table 7.2 Page 171 The environmental case for the levy rests on the degree to which the levy succeeds in minimising the adverse impacts listed in the Budget. 23

21 Environmental Impacts of the Aggregates Levy The Government s claim that the levy will generate reduction in the impacts listed above rests upon a simple theoretical proposition - that the levy will reduce demand for taxed aggregates (with the demand reduction generating associated reductions in environmental impacts) and will incentivise operators to reduce environmental impacts. As a policy basis for assuming reducing environmental impacts, this proposition is very weak - both in theory and practice. Before the introduction of the levy, the QPA commissioned two independent assessments of the environmental impact of an aggregates tax/levy. The two reports concluded: In conclusion, the positive environmental effects associated with an aggregates tax seem to be rather limited. The tax would offer no incentive to producers to reduce the environmental impact of their operations. The only impact of the tax would be to reduce demand (which seems relatively price inelastic), and yet the linkage between output and the external costs associated with aggregates supply may be rather weak. Furthermore, the environmental impact of a change in demand depends both on the way in which the (more or less) marginal reduction in output occurs, and on the way in which these changes are reflected in changes in external costs. In terms of its potential for encouraging recycling of construction wastes, the effect is unlikely to be strong unless the differential between a tax on primary sources and recycled materials is set at a very high level. It would be better to address (though administratively difficult since this would require valuable Parliamentary time) the 24

22 primary legislation which allows those handling construction wastes to employ them for somewhat superfluous purposes which are exempt from waste management licensing. There would appear to be alternative ways of addressing, within the planning system, both the issue of demand and the environmental impacts of aggregates supply. As mentioned above, there are also better ways of encouraging re-use of construction wastes. The case for an aggregates tax is therefore highly questionable. Source: Environmental Effectiveness of a tax on the supply of aggregates - Ecotec Research and Consulting Ltd 1998 We conclude that an aggregates tax is an extremely inefficient way to try and secure an environmental target: a because the demand is inelastic and b because the tax is a products tax rather than an externality tax. This suggests that a package of measures directly targeted at the environmental impacts will be more effective than an aggregates tax. Source: The Economic Benefits of Environmental Awareness and Training Programmes in the Aggregates Industry - Professor David Pearce/EFTEC Ltd 1999 The key point that the levy is inherently inefficient because it is a crude volume tax is highlighted by EFTEC/Pearce: But the fact that the product is taxed rather than the externality, has formidable implications for the effectiveness of the tax. For it means that the industry has no incentive to reduce the environmental impact of each tonne of aggregates. Were it to do so, it would reduce the environmental impact, but it would not reduce its tax burdens. The only way a product tax helps is by reducing the quantity of the 25

23 Environmental Impacts of the Aggregates Levy product and, as we have seen above, this will not happen on any significant scale because of the inelasticity of demand for aggregates. This feature of product taxes for environmental control is well known. Environmental taxes should, as far as possible, always be targeted at the externality itself, not the product embodying the externality. The lack of any specific environmental benchmarks and/or targets for the aggregates levy, in spite of the long gestation period of the levy, does not allow transparent assessment of the environmental impact of the levy. However, even without such official targets it is possible to draw conclusions. Firstly, if we take the Government s logic at face value - that reduced demand for primary aggregates is a good proxy for reduced environmental impacts - has the levy succeeded? The earlier assessments of the post-levy aggregates markets reach a number of related conclusions: 1 Primary aggregates demand has generally declined over the past 18 months, due to both the impact of the levy and other market factors 2 The key levy impact in the primary aggregates market has been reduced demand for low quality crushed rock, a by-product of the production of premium rock 3 Stockpiling of low grade rock in quarries has increased significantly 4 So while overall rock sales across the weighbridge have declined due to the levy, 26

24 the volume of total extraction has been less affected - the balancing item being increased stockpiling of low grade aggregates 5 Sales of recycled materials such as construction and demolition waste have continued to increase, but the trend growth remains similar to the pre-tax growth rate (in practice, new waste definitions now being implemented by Government are in danger of reducing the existing level of sales from recycled sector - See Appendix Two) 6 The key tax impact has been the substitution of low grade (now stockpiled) primary aggregates by other non-taxed extracted materials. These include the use of tax exempt minerals such as shales and clay in low quality aggregates markets 7 The market has seen no significant change in the overall level of quarrying of crushed rock and sand and gravel aggregates and china clay and slate (although some substitution of china clay waste and slate waste for crushed rock waste), but an increase in the quarrying of other non taxed minerals such as shale for use in aggregates markets 8 The net impact of this market substitution of lower quality crushed rock is likely to have been an overall increase in the total volume of quarrying and extraction of minerals for the supply of aggregates markets. (Conversely, it is difficult to see how this changing supply pattern could have led to any net reduction in total extraction) 9 Anecdotal evidence would suggest that the marginal transfer of supply of lower quality materials from crushed rock quarries to some other, less well regulated, sources of supply is likely to have generated overall environmental disbenefits 10 The overall conclusion is that, while the levy has reduced demand for low quality crushed rock, the levy has generated a less efficient use of total mineral 27

25 Environmental Impacts of the Aggregates Levy resources, an overall increase in mineral extraction, hence the use of total production as a proxy for reducing environmental impacts has failed. Specific Environmental Impacts The 2003 Budget (and earlier Budgets and Pre-Budget Reports) claimed the aggregates levy would reduce the following environmental impacts: Noise and vibration Dust and other emissions to air Visual intrusion Loss of amenity Damage to wildlife habitats No evidence nor information has been provided by Government to identify or estimate the extent of these impacts in the primary aggregates sector, nor any aims or objectives for the reduction of such impacts provided. To establish the extent of public concerns about such issues related to the supply of primary aggregates, it is worth referring back to the research into The Environmental Costs and Benefits of the Supply of Aggregates, commissioned from London Economics by the DETR prior to the levy introduction. We have major concerns about the conduct of this work and the use made of the results (see Appendix Three), but the very small number of local residents quoting potential reasons for local quarry closure is striking. 28

26 The Environmental Costs of Quarrying Research % of local residents quoting an environmental cost Issue Sample No. Quoting Cost % On site noise % Blasting % Dust % Adverse nature impact % Eyesore % Specific Environmental Impact of Aggregates Supply a Noise and vibrations Dust and other emissions to air The official assumption that these impacts of primary aggregates supply will be reduced by the levy is based entirely on the presumption that any reduction in demand would be an accurate proxy for reducing environmental impacts. We have already indicated that this assumption is fundamentally flawed because: The levy has reduced demand for lower quality crushed rock aggregates, but has had a minimal impact on aggregates extraction The levy has led to the need to stockpile higher volumes of low quality rock on site and/or the need to move such materials off-site for disposal The levy has increased the supply of other minerals into aggregates markets, and new extraction and supply of non-taxed minerals The substitution of supply of lower quality materials from crushed rock quarries to other extracted minerals and minerals waste has not only led to a likely net increase in total extraction, it is likely to have transferred some supply at the 29

27 Environmental Impacts of the Aggregates Levy margin from well regulated aggregates quarry operations to less regulated and environmentally responsible mineral operations In the real world, and away from the flawed environmental assumptions of the levy, the process of minimising impacts such as noise and dust is a continuous one. Later in 2003, for example, the ODPM will publish consultation on new mineral planning guidance (MPS 1) specifically related to the environmental impacts of quarrying and surface mineral working. b Emissions and operational environmental performance For the reasons just described, there is no evidence that the levy has led to an overall improvement in environmental performance - in reality the environmental impact appears to have been perverse. The fundamental environmental inefficiency of the aggregates levy is clearly described in the work of EFTEC/Pearce. EFTEC/Pearce summarise: Thus there are no incentives for industry to reduce the tax burden by becoming more environmentally efficient and reducing the environmental intensity of aggregates production. Moreover, reductions in output will occur where the financial costs of production are highest, irrelevant of the environmental costs In practice, while the levy is at best an irrelevance, or at worst a perverse factor with regard to the environmental impacts of aggregates supply, other evidence indicates that the environmental performance of the sector is improving, and is relatively low compared with other industries. 30

28 In its latest report on the environmental performance of business (Spotlight on Business Environmental Performance 2002), the Environment Agency s sectoral analysis of serious pollution incidents affecting all media (air, land and water) indicates: Table Five Sector analysis of serious pollution incidents affecting all media (air, land and water) Sector % change Chemicals Construction and demolition Farming Metal industry Mining and quarrying Power generation (not fuel) Waste management facilities Water industry Other Total The 7 incidents in the total Mining and Quarrying sector account for less than 0.5% of total incidents. Of the 7 sectoral incidents, 2 were related to primary aggregates extraction, accounting for 0.13% of the total. The EA sectoral analysis states: While it is not a major polluter at national levels, sites can have significant local impacts The minerals sector is relatively well managed... 31

29 Environmental Impacts of the Aggregates Levy The sector is not the major contributor of any of the main pollutants In the past five years the sector has shown an overall improvement in releases of all the major substances c Visual intrusion Loss of amenity Damage to wildlife habitats In relation to the levy, the Government has produced no evidence of these impacts, no targets for improvement and no means of measuring or assessing changes in impacts. As with the previous impacts, it is difficult to see how the operation of the levy can have improved such impacts due to the lack of any levy incentive for operators to improve environmental performance, and the perverse effect of the levy in reducing the resource efficiency of particularly crushed rock quarries, and the likely overall increase in extraction. Once again, the levy is an irrelevance in the context of the higher standards of operation, restoration and aftercare evident in the aggregates sector. There is no evidence that a whole life analysis of crushed rock and sand and gravel supply has a damaging net impact on wildlife habitats and biodiversity. In contrast, there is evidence suggesting that the net impact is already likely to be positive. English Nature, for example, has estimated that over 700 Sites of Special Scientific Interest have their origin in quarry and mineral workings. 32

30 There are numerous examples of how the quarry cycle has produced sites of significant amenity, conservation and biodiversity value. Appendix Four illustrates examples of such restoration benefits and quality. d Additional issues related to the supply of recycled and secondary materials One issue which would benefit from further investigation is the extent to which the additional levy-generated supply of recycled and secondary material has impacted in specific environmental respects, including: Landscape and amenity impacts Some sources of untaxed minerals being increasingly sold into aggregates markets are from designated landscapes such as national parks. For example, the substitution of slate waste for low grade crushed rock in N. Wales is a well recognised impact of the levy which has generated no net local environmental benefit. Less well known is the (levy generated) supply of newly quarried slate waste from the Lake District National Park into aggregates markets in N. West England, replacing supply of aggregates from local market sources. Transport impacts The slate reference above highlights that the levy has enabled supplies of non-taxed materials to travel further to find aggregates markets. Logic would suggest that the 1.60 per tonne levy advantage awarded to suppliers of non-taxed materials would have enabled the wider distribution of these materials, and therefore an overall net increase in the road transport mileage of supplying such materials to the market. 33

31 Environmental Impacts of the Aggregates Levy Aggregates Levy Sustainability Fund (ALSF) An assessment of the ALSF in England is underway by DEFRA, to which the QPA and member companies have contributed. Our assessment of the ALSF can be summarised as follows: The QPA has strongly supported the use of levy revenue to support environmental improvements and benefits to local quarrying communities In its regulatory/voluntary alternative to aggregates taxation - rejected by Government in the March 2002 Budget - the QPA submitted proposals for a Sustainability Foundation. This Foundation would have been financed by a voluntary industry levy equivalent to c. 30 million pa., and managed through an independent management board. Thus the existence of a Sustainability Foundation/Fund was not dependent on the introduction of the levy The list of projects supported by the ALSF in England, Wales and Scotland includes many projects which should generate benefits for communities in quarrying areas There are, however, a number of problems which are inhibiting the optimum use of the ALSF. These include: 1 The initial funding was for two years only, ending in March This lack of a longer-term commitment has meant that the funding bodies have not been able to commit to potentially valuable longer-term projects and initiatives 2 This two-year funding commitment restriction has been compounded by the setting of annualised budgets for 2002/3 and 2003/4, with no scope for carrying over expenditure into the following year. We believe that this need 34

32 for the funding bodies to ensure all monies are spent on this annualised basis has led to projects being funded which are of marginal practical value or benefit, due to the inability of funding bodies to carry funding over and take a more considered view of the merits of some funding applications. In other words, the need for funding bodies to demonstrate that projects have been financed and money spent within the annual cycle has run counter to ensuring the most effective and efficient use of resources. At the time of writing, we understand that the Treasury has still yet to decide whether funding underspent in 2002/3 can be carried over into the current years. 3 The restrictions imposed by the need to get European Commission State Aids approval for certain categories of ALSF expenditure. Much of the capital investment to support recycling initiatives by WRAP has been held up by the delays inherent in the State Aids approval system. The combination of these delays and the annualised funding restrictions imposed by the Treasury means that there is a severe danger of the 15 million WRAP aggregates funding allocation for 2002/3 and 2003/4 will be significantly underspent due to the combination of these bureaucratic constraints. The ALSF funding allocated to financing transport improvements remains largely unspent due to the inability of Government to create funding mechanisms which would not fall foul of constraints such as the EC State Aids rules. 4 We believe that the ALSF allocations direct to local authorities in quarrying areas should be significantly widened and increased. Currently c. 250,000 35

33 Environmental Impacts of the Aggregates Levy each of ALSF funding is allocated to Derbyshire, Leicestershire, and Somerset. An extension of this principle to a wider range of local authorities with significant aggregates interests would be an effective means of ensuring that ALSF funds are genuinely used for the benefit of local projects and local communities. The Valuation of the Environmental Costs of Quarrying - and the Implications for Future Levy Policy The levy rate of 1.60 per tonne is derived directly from the cost research commissioned by Government before the implementation of the levy (The Environmental Costs and Benefits of the Supply of Aggregates - London Economics - May 1999) The QPA has consistently expressed major concerns about the conduct and assessment of this research, which are set out in Appendix Three. These concerns include the facts that: The London Economics research calculated a gross environmental cost of supplying primary aggregates of 1.33 per tonne, and not the figure quoted by Government ( 1.80 per tonne) and not the figure used for the levy ( 1.60 per tonne) These values do not represent assessments of net environmental costs - in spite of the research title the London Economics work took no account of environmental benefits such as those arising from the restoration and afteruse of sites 36

34 The survey process and questionnaire was biased to achieve higher environmental costs outcomes Survey results indicated that sites engaged in the processing of construction and demolition waste and wharf operations had significantly higher environmental costs than the quarry operations surveyed in the research, but these results were disregarded in the published report and assessment of the report for levy purposes In assessing the future of the levy, an objective approach would take into account the reality of the process which led to the use of the 1.60, as opposed to the uncritical references about the derivation of this cost which have appeared in successive Budgets and Pre-Budget Reports. More specifically, two issues, arising from the valuation of environmental costs by London Economics which underpins the levy, are critical to future levy policy: 1 Taking the 1.60 environmental cost valuation at face value, is there now any evidence for assuming that this cost has changed, hence the levy rate should be changed? Two factors would support the view that the valuations of environmental costs carried out by London Economics in 1998/99 are likely to have diminished. a The general level of environmental awareness, management and performance of the primary aggregates sector is likely to have improved between 1998/99 and The latest evidence from the Environment Agency (Spotlight on Business and Performance 2002) recognises that the sector is relatively well managed, and the sectoral incidence of serious pollution incidents affecting air, land and water is relatively low, and declining 37

35 Environmental Impacts of the Aggregates Levy b The fact that the original levy costing was based upon an assessment of only gross environmental costs should now be reconsidered and an acknowledgement made that the quality of restoration and aftercare of aggregates quarries is contributing social, environmental, and amenity benefits to society - so reducing the net environmental cost of quarrying 2 The cost research process identified that the environmental costs of different sources of aggregates supply, and different operations, can vary very significantly. In all sectors of supply, there are operations with lower and higher levels of impact, and operations with varying standards of environmental management. Our assessment of the impact of the levy to date has identified: a b A shift in supply from low quality crushed rock to non-taxed alternatives, including extracted minerals not previously contributing significantly to aggregates supply. Increasing tax - avoiding supply activities which are illegal or of marginal legality. The consequence of these trends is likely to have been a marginal shift in supply towards operators and supplies which are less well regulated and less well managed in environmental terms than the pre-levy supply mix. Government s Tests of Good Environmental Taxation In July 1997 Government published a Statement of Intent on Environmental Taxation, which stated that environmental taxes should meet five tests of good taxation. The five tests are set out in the 2000 Budget as follows: 1 Polluters should face the true costs which their actions impose on society 2 The social consequences of environmental taxation must be acceptable 38

36 3 Economic instruments must deliver real environmental gains cost-effectively 4 Environmental policies must be based on sound evidence but uncertainty cannot necessarily justify inaction; and 5 Environmental policies must not threaten the competitiveness of UK business. Looking at these tests individually, an assessment can be made of whether the aggregates levy meets the stipulated tests of good taxation. 1 Polluters should face the true costs their actions impose on society The official assumption for the aggregates levy is that the research underpinning the levy identified an environmental cost of supplying aggregates which is reflected in the 1.60, levy cost - hence the polluter pays. In practice, however, there are two main reasons why this test is not being met by the aggregates levy: i ii The calculation of the environmental cost of 1.60 per tonne is unreliable. The QPA analysis of the conduct and assessment of the research which generated the environmental cost of 1.60 per tonne illustrates fundamental shortcomings and errors in the derivation of the costs. This assessment of the levy has identified that the levy is not environmentally targeted, takes no account of the environmental impacts of different sources of aggregates supply, has generated additional extraction from untaxed and/or unregulated sources of supply, and provides no incentive for operators to improve environmental performances. 39

37 Environmental Impacts of the Aggregates Levy 2 The social consequences of environmental taxation must be acceptable As a test of good environmental taxation, this is entirely subjective and almost impossible to assess. One observation which can be made is that the levy is adding 200 million per annum to the cost of government programmes to improve the quality of our infrastructure and public services, and in this respect has a significant direct social cost. 3 Economic instruments must deliver real environmental gains cost effectively The levy includes no targets for environmental gains nor any criteria for measuring environmental change. The experience of the levy since implementation is that the balance of impacts appears to be environmentally perverse for reasons outlined earlier in this document. This reality has confirmed the pre-levy research commissioned by the QPA which highlighted the likely environmental inefficiency of the levy. The direct cost of the levy is c. 450 million per annum (see section 5 of this assessment for an explanation of this cost calculation), in addition to the costs imposed on industry to operate the levy. In these circumstances the levy has clearly failed this test. 4 Environmental policies must be based on sound evidence but uncertainty cannot unnecessarily justify inaction There are a wide range of environmental controls and regulations and voluntary actions designed to minimise the adverse environmental impacts of aggregates supply, and enhance the positive environmental impacts. These regulations and other initiatives are constantly being reviewed and updated to improve 40

38 environmental outcomes. In this context, the aggregates levy is a demonstrably inefficient and ineffective environmental mechanism which is making no significant contribution to improving the environmental impacts of the sector - in practice the overall environmental impact of the levy is likely to be perverse. As such the aggregates levy policy fails this test. 5 Environmental policies must not threaten the competitiveness of UK business The levy has added 450 million pa of additional costs onto construction clients in the UK. This cost exceeds the 350 million nominally returned to UK business through the 0.1% reduction in the rate of employers national insurance contributions. The impact on the quarrying and associated industries in N. Ireland has been particularly adverse. The levy has directly generated a substantial increase in illegal, black market supply of aggregates in N. Ireland, including the substitution of supply from operators in N. Ireland to operators in the Republic of Ireland. The structure of the levy also has additional negative implications for UK competitiveness. Under the levy, products made with aggregates in Great Britain (e.g. concrete blocks, concrete paving) are subject to the full levy cost, while similar products imported from overseas competitors include no levy cost. Similarly, exports, for example of concrete products, have to bear the cost of the aggregates levy and are therefore less competitive in overseas markets. The UK aggregates market is also exposed to the import of untaxed materials, for example iron and steel slags, for use UK aggregates markets and replacing domestic supplies of aggregates. 41

39 Environmental Impacts of the Aggregates Levy It is apparent that the aggregates levy is already damaging the competitiveness of UK business, and that this damaging impact will worsen if the levy rate is maintained or increased, so the levy clearly fails this test. Summary of tests of good environmental taxation Test Pass Fail Uncertain 1 X 2 X 3 X 4 X 5 X The conclusion is that the levy fails at least four of the five Government tests of good environmental taxation - it is a bad tax. 42