Annex B
An assessment of Professor David Pearce's
report
THE ECONOMIC BENEFITS OF ENVIRONMENTAL AWARENESS
AND TRAINING PROGRAMMES IN THE AGGREGATES INDUSTRY
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.
ELASTICITY
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.
THE LOCATION
OF ENVIRONMENTAL
IMPACT
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.
EXTERNALITIES
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.
VOLUNTARY AGREEMENTS
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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