Select Committee on Environmental Audit Minutes of Evidence

Annex B

An assessment of Professor David Pearce's report


  These comments represent the views of some of our members but not all. They are on four aspects of the paper by Professor David Pearce (Appendix 1 of the New Deal II) namely—the elasticity of demand for primary aggregate; the geographical aspect of environmental damage from quarrying; the utility of the London Economics results; and, the credibility of voluntary agreements.


  1.  Professor Pearce accepts the industry estimates of elasticity of demand for primary aggregates as an argument against the proposed aggregates tax. We see considerable problems in using this argument when innovation and the impacts of wider concerns over sustainability are already making a significant difference to such estimates. This is particularly important when the aim of an aggregates tax is to effect change over the medium term.

  2.  His argument that "demand for aggregates is almost certainly inelastic" needs to be qualified. Professor Pearce himself points out that the estimates, taken from the 1998 ECOTEC report, are uncertain and that "it is unclear why long-term elasticities are lower than short run elasticities, since in the longer term there should be more opportunities for adjustment". Furthermore, ECOTEC in their memorandum of evidence submitted to the House of Commons Environmental Audit Committee in June 1999, acknowledges:

    "Even when elasticity estimates based on past price movements are available, there are good reasons to believe that actors' response to a tax will be quite different to their response to market price fluctuations. Taxes, especially environmental ones, are perceived almost without exception as `likely to go up', and may also imply non-marginal changes in the price of a good or service subject to the tax (in which case, the assumptions of a constant elasticity of demand, or a linear extrapolation in response to prices, almost certainly breaks down)".

  3.  In the light of the above, we suggest that the Treasury carefully reviews the supposed inelasticity of tax in the context of conventional economic limitations for predicting the impact on demand. Moreover, there are strong overriding reasons for introducing a tax on environmental grounds, where a compulsory incentive is needed.

  4.  In addition, central to the reasoning behind these estimates of elasticity is the view that "primary and secondary (presumably including recycled aggregates) are not good substitutes" (para 2.6). This flies in the face of investment activities of several aggregate supply firms and indeed the opinions expressed by some of them as well. Tarmac, for example, makes clear it believes the potential for substitution to be substantial and capable of reducing the demand for quarrying when it states that "innovative processing of recyclable resources can produce quality aggregates that are fit for a wide range of applications which then ensures the preservation of primary reserves"[11]. As a consequence Tarmac is developing a wide network of aggregate recycling facilities and has entered into several joint ventures. Although Tarmac may be at the forefront of this trend it is not alone, several other QPA members see the growing market for recycled aggregate as a replacement for primary aggregates.

  5.  Moreover, as such investment continues and innovation finds new uses for recycled aggregate, (and cheaper and more efficient methods of processing it both inside and outside of the industry) so the elasticity will improve further. Confidence in making such investments has been strengthened by the Government's Sustainable Development Strategy and its aim of ensuring the prudent use of natural resources. In our view the assessments of elasticity based on an assumption of low substitution of primary aggregate by secondary and recycled aggregates are not realistic. There is a clear and substantial potential for recycled aggregates to increasingly substitute for not just lower-grade uses, but increasing for higher grade use too. The market is young, expanding and benefiting from technological advances, but a key barrier to further progress is that the price of primary aggregate does not reflect the significant environmental costs of quarrying.


  6.  We also disagree with several of the issues raised concerning the location of environmental impact. The first point to make is that either an aggregates tax, or the New Deal II, have to be considered in the context of the wider package of policies relating to aggregates extraction. The planning system, including Minerals Planning Guidance, is clearly the key process by which many of the issues of location will be considered. For instance, WCL is actively campaigning for regulation to properly protect SSSIs, the country's most valuable wildlife sites, rather than economic instruments or voluntary agreement. Regulation is the most appropriate policy instrument for this task.

  7.  Beyond the more detailed issues of site by site location, quarrying within areas such National Parks could attract a premium rate of the tax which could provide exactly the targeted effect mentioned. The alternative mechanism proposed in the New Deal II, although broadly welcome in principle, has been less than convincing in practice. Indeed, the broad caveats relating to national demand and potential local benefits, included in the provisions on National Parks, call into question whether any signficant protection can be achieved. Companies are already well versed in presenting applications on the basis of the issues included in these caveats, not least in National Parks.


  8.  We agree with Professor Pearce that some externalities need to be considered differently to others. However, our concern is that several of the most important externalities, typicaly those that are longer-term and more irreversible, such as loss of habitats and landscape, simply cannot be measured by the same metric as many of the reversible and direct impacts. We disagree with the assertion that these externalities, largely described as fixed by Professor Pearce, cannot be addressed by an aggregates tax. The tax will reduce demand for new quarries over the medium term, as implied by Tarmac's statement (above), which will help reduce these external costs.

  9.  The concern that it is the product that is taxed and not the externalities appears to be confused. Firstly, as the debate over the external costs of quarrying has made clear, there are several externalities to be considered. Although attempting to design a tax that varies according to each may be a theoretically interesting exercise, it is not a real world alternative. The product does embody these externalities in the same way that quantity of waste embodies the various externalities of landfill. In addtion, as key externalities are not costed in the conventional way, such as landscape loss, the most effective way is to tax the product.


  10.  The weakest part of this paper, however, is the analysis of the voluntary approach in environmental policy and the assertions made about its utility. Professor Pearce, in passing, does allude to the fact that the vast majority of studies of the voluntary approach have pointed to considerable real world difficulties with getting them to deliver. Most of these problems centre around the fact that, in general, the approach relies on motivations for firms to comply with the agreement that are either not strong enough or affect too few firms14.

  11.  It is instructive to look at countries such as the Netherlands where the Government has put considerable effort into using voluntary approaches in environmental policy. From the first approach of drawing up board agreements with trade sectors (that were not enforceable by law), the trend has been toward negotiating agreements that are legally binding and fit within the regulatory framework, thus allowing swift action to be taken over non-compliance. In addition there has been a trend towards: requiring firms to sign the agreements rather than trade associations; setting clearer targets and milestones; and increased verification of individual firms. In contrast the New Deal II has most of the hallmarks of a bad voluntary agreement:

    —  it does not have clear quantitative environmental targets;

    —  the agreement is with the trade association which will tend to water down the motivation felt by firms and can protect free rider behaviour;

    —  enforcement relies upon the QPA, which as a trade association does not have the authority or the ability to enforce compliance from its members;

    —  there is no independent verification of the scheme overall, or more crucially of individual firms' compliance;

    —  there is no clear signal from Government on what will happen if the scheme fails—it is currently defined in terms that are open to wide interpretation and difficult to measure. This raises barriers to the Government being able to make the case that it has failed; and

    —  it is also worth noting the meagre progress that the QPA has managed in response to the Chancellor's assessment that the original New Deal had fallen well short of what was required. In that context the long list of the minimum necessary changes that Professor Pearce lists off in Table 13.2 are simply not going to be forthcoming.

October 1999

11   Tarmac (1999) Working Together for the Environment and the Future, p16. Back

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