APPENDIX 6
Memorandum from the Quarry Products Association
(QPA)
SUMMARY
— The Treasury Review "Tax and
the Environment: using economic instruments" sets out policies
and principles to be used in the development of environmental
taxes. The process leading to the implementation of the aggregates
levy provides a case history to assess the practical application
of these polices and principles.
— Following the introduction of the
aggregates tax concept in 1997, through the consideration of the
QPA's alternative proposals, to the decision to introduce a tax
announced in March 2000, Government did not identify criteria
to be used in assessing the most appropriate policy option.
— The research basis for the aggregates
tax was a contingent valuation analysis to derive monetary values
for the negative environmental impacts of aggregates. The QPA
raised significant concerns about the conduct and interpretation
of this research which the Treasury/DETR failed to respond to.
The Treasury Review continues to repeat misleading interpretation
of this research.
— During the process of aggregates
tax/levy policy development, the QPA submitted to Government the
results of two research projects commissioned by the QPA from
eminent environmental consultancies. Both research projects examined
the likely environmental impact and efficiency of aggregates taxation,
and concluded that aggregates taxation would be a highly inefficient
policy option. The lack of Government criteria for assessing policy
options was also highlighted in the research. Government took
little account of this research, while remaining uncritical of
its contingent valuation research. At best this demonstrated a
lack of openness and objectivity in policy analysis. At worst
it suggests that the outcome of policy assessment was pre-determined
in favour of a taxation option.
— Following the implementation of the
aggregates tax in April 2002, based upon the policy decision announced
in March 2000, Government has yet to announce any criteria, benchmarks,
or targets with which to assess the environmental impact of the
aggregates levy.
— The recent results of ODPM-commissioned
research into the use of recycled and secondary aggregates has
confirmed that the historic (and pre- aggregates levy) use of
these materials has risen much more rapidly than previously recognised
by Government. The scope for further marginal increases in the
use of these materials is very limited relative to existing utilisation
and the overall size of the UK aggregates market. Hence the aggregates
levy is demonstrably not a cost-effective means of generating
further recycling in the sector.
— The experience of the policy development
and implementation of the aggregates levy has highlighted basic
shortcomings in the process, the most apparent being a consistent
inability or unwillingness on the part of Government to identify
in any detail the purpose and expectations of the levy/tax. Government
continues to rely on very general and unsubstantiated statements
about environmental impacts to justify the aggregates levy.
— There is little evidence that the
basic policies and principles for the development and implementation
of environmental taxes set out in the Treasury Review have been
followed in respect of the aggregates levy.
INTRODUCTION
1. The Quarry Products Association (QPA)
is the major trade association representing the UK quarrying industry.
2. QPA members include major national and
international quarry companies, and many small and medium sized
businesses significant in regional and local markets. QPA members
account for 90% of the output of aggregates in the UK. The scope
of QPA membership includes supply of crushed rock and sand and
gravel aggregates—both land won and marine dredged—recycled
aggregates, asphalt, ready-mixed concrete, lime, mortar and silica
sand.
3. The QPA evidence will focus on the aggregates
levy, and issues associated with the development and implementation
of the levy. The prospect of an aggregates tax or levy was introduced
in the July 1997 Budget, the levy was announced in the March 2000
Budget and implemented in April 2002, therefore providing an appropriate
case history to test the policies and principles set out in the
Pre-Budget Report and associated review, "Tax and the environment:
using economic instruments".
4. The Treasury review sets out a process
of policy consideration and development, and the principles associated
with this process. The development and implementation of the aggregates
levy, however, raises serious doubts as to the credence that can
be given to the review. These issues are detailed under the following
two headings:
— Environmental Tax—Policy development
— Environmental Tax—Policy implementation
Environmental Tax—policy development
5. The Treasury Review defines the process
of policy development as follows (paragraphs 24 to 29).
— First, the Government will identify
the environmental policy objective.
— Second, the Government will assess
the rationale for becoming involved in helping to achieve the
objectives.
— Third, the Government will evaluate
the benefits and costs of intervention.
— Fourth, the Government will determine
the most efficient instruments for achieving the objectives.
— Finally, the Government will take
forward the process of policy development and implementation.
6. 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).
7. The other principal rationale for an
aggregates tax was articulated by Treasury Financial Secretary
Stephen Timms MP in evidence to the Environmental Audit Committee
in January 2000.
| 332 | So what is the point of a tax?
|
| (Mr Timms) | A tax would be a very direct incentive for increasing recycling
|
333 | 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 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 EAC Tuesday 18 January 2000—witness
Stephen Timms MP, Financial Secretary, Treasury).
8. In general terms, therefore, Government identified
the major potential impacts of aggregates tax/levy policy as:
(i) The reduction in environmental impacts of quarrying,
notably noise, dust, visual intrusion, damage to wildlife and
other (unspecified) impacts.
(ii) Increasing the use of recycled materials in aggregates
markets.
9. However, at no time leading up to the implementation
of the aggregates levy did Government attempt to detail or quantify
these general policy objectives. This failure to identify policy
objectives created real problems in the discussions between the
QPA and Government relating to the environmental package proposed
by the QPA as an alternative to an aggregates tax. The QPA proposal
was eventually rejected by Government as inadequate, but in over
12 months of discussions the QPA was never advised as to what
would constitute an "adequate" proposal.
10. In addition to the details of the environmental package,
the QPA commissioned two independent reports on the environmental
efficiency of aggregates taxation. These reports concluded:
CONCLUSION
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 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.
11. These two reports, both produced by individuals and
organisations with considerable experience and reputations in
the field of environmental economics, highlighted very significant
concerns about the environmental efficiency of aggregates taxation,
and the lack of clarity of Government policy objectives.
12. The QPA commissioned the research and submitted it
to Government because of our concerns that Government had produced
no assessment of the potential environmental effective of aggregates
taxation, yet was clearly moving in that policy direction. We
were therefore extremely disappointed that there was never any
response from Government on the two research projects, nor any
apparent wish to discuss the research findings.
13. In contrast, the Treasury Review identifies only
one research process used in the development of the aggregates
levy. This is set out in Box 5.1 of the Treasury Review, and refers
to contingent valuation (CV) work commissioned by the (then) DETR
to calculate a monetary valuation of the environmental impacts
of aggregates supply. Box 5.1 is not, however, an objective assessment
of that research. The annex to this evidence is a detailed QPA
assessment of the contingent valuation research which highlights
significant concerns about the conduct of the research and the
interpretation of the results.
14. Not least of these concerns is the persistently erroneous
claim repeated in Box 5.1 that the CV analysis produced an average
external cost of aggregates supply of £1.80 per tonne, and
the Government "set the rate of aggregates levy at a more
cautious £1.60 per tonne."
15. In reality, the CV research results (The Environmental
Cost and Benefits of the Supply of Aggregates—London Economics—May
1999, Page 3, Table1) identifies an environmental cost equivalent
to £1.33 per tonne, and not £1.80 per tonne. The annex
to this memo details this and other concerns.
16. The purpose of these observations about the questionable
weight and faith accorded by Government to the DETR research on
external costs, and the lack of interest in significant independent
research commissioned by the QPA, is not to whinge about events
which have now passed us by, but to highlight the reality of policy
development in respect of the aggregates levy. This reality was
neither as objective nor rational as the process described in
the Treasury Review.
Environmental Tax—Policy Implementation.
17. We would like to highlight two issues, again based
upon the practical experience of aggregates tax implementation.
18. First, the Treasury Review emphasises that a policy
decision is followed by "further consultation on the design
of measures . . ." (para 2.9). Following the introduction
of the aggregates tax legislation in the 2002 Finance Bill, there
were long discussions between the industry and Customs and Excise
leading up to the tax implementation in April 2002. The industry
welcomed the process, which succeeded in making the tax implementation
more consistent and workable. However, such consultation-while
welcome-cannot disguise the fact that the aggregates levy legislation
is extremely complex. To put this in context, the legislation
introduces a tax for crushed rock and sand and gravel. It then
identifies four potential tax points, sets out a range of materials
which are exempt from the levy, lists 19 minerals which are not
subject to the levy, and also lists 45 uses of aggregates minerals
which are entitled to tax relief.
19. The assimilation of this legislation into company
systems and commercial relationships with customers, including
the detailed discussions and monitoring requirements on a site
by site basis with Customs and Excise officials, has added another
significant tier of bureaucracy and regulation into the business.
This burden of administering and collecting the new levy has been
added to business when there is little indication that the levy
is having any significant environmental benefit. No amount of
"consultation" or "stakeholder dialogue" has
altered this fundamental inefficiency.
20. Second, and the key outstanding issue, there are
in place no criteria, no benchmarks, and no targets with which
to make any environmental assessment of the impact of the aggregates
levy.
21. In the 2002 Pre Budget Report the environmental impacts
of the introduction of the aggregates levy were listed as (table
7.2):
— Reductions in noise and vibration
— Reductions in dust and other emission to air
— Reductions in visual intrusion
— Reductions in loss of amenity
— Reductions in damage to wildlife habitats.
22. The Pre-Budget Report also (para 7.72) states that
the levy "promotes greater efficiency in the use of virgin
aggregate and the development of alternative materials. . ."
23. With regard to the environmental benefits listed
in table 7.2, there is no attempt to quantify (even approximately)
the levy effect on these impacts. The rationale appears to be
that the levy will reduce demand for virgin aggregates, with a
corresponding reduction in the environmental impacts.
24. However, as identified in the research results of
Ecotec and Pearce/EFTEC, this is a very weak relationship. This
weak relationship between aggregates output and environmental
impacts/external costs is described by Pearce/EFTEC as follows:
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 burden. The only way a product tax helps
is by reducing the quantity of the 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 known9. Environmental
taxes should, as far as possible, always be targeted at the externality
itself, not the product embodying the externality10.
Source: Para 2.5 The Economic Benefits of Environmental
Awareness and Training Programmes in the Aggregates Industry-Pearce/EFTEC
1999.
25. Since the decision to introduce the aggregates levy
in the March 2000 Budget, Government has had nearly three years
to define in more detail the actual impacts of aggregates supply,
and the differences the levy will make to these impacts, but it
has failed to do so.
26. To use one issue as an illustration, the Treasury
claims that the levy will reduce "damage to wildlife habitats."
To the best of our knowledge, however, there is no available assessment
of the impacts of aggregates supply on wildlife habitats. Aggregates
extraction has the potential to damage habitats, although this
will be very much a site-specific issue. On the positive side,
the restoration and afteruse of quarries will often produce habitats
which are more valuable to wildlife than the pre-quarry landscapes.
English Nature, for example, estimates that over 700 current Sites
of Special Scientific Interest have their origin in quarry and
mineral workings.
27. An assessment of the net effect of quarrying activities
on wildlife habitats requires a whole life analysis of the quarrying
cycle, from extraction through to afteruse. We believe such an
analysis would be as likely to demonstrate a net benefit in terms
of wildlife habitats as a net loss.
28. Therefore, in spite of the assertion made in the
Treasury Review, the Treasury has produced no evidence of the
net impact of quarrying on wildlife habitats, nor the extent to
which the levy will improve these impacts.
29. The other major justification for the aggregates
levy—to increase the use of recycled materials in the sector—is
easier to quantify.
30. Once again, neither the Pre-Budget Report nor any
related documentation has included any targets for the impact
of the levy on increasing recycling. However, speaking in a Westminster
Hall debate on aggregates tax on 13 March 2002, Treasury Financial
Secretary Panel 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 tax.
31. Assessing the scope for the use of recycled materials
has since been clarified by the publication in November 2002 of
two reports commissioned by the Office of the Deputy Prime Minister.
— Survey of Arisings and Use of Construction and
Demolition waste in England and Wales in 2001.
— Survey of Arisings and Use of Secondary Materials
as Aggregates in England and Wales in 2001.
The construction and demolition waste survey concludes that
"38.02 million tonnes of hard C and D and excavation waste
was recycled as aggregates," and that a further 2.68 million
tonnes of C and D waste had "varying potential for recycling
as aggregates." The survey results related to England and
Wales.
32. These results indicated that the level of recycling
of construction and demolition waste in aggregates markets is
significantly higher than previously assumed, and the scope for
further recycling relatively low.
33. This relatively high level of recycling in the sector
is confirmed in the Mineral Planning consultation paper issued
by the ODPM in August 2002 "Consultation Paper—Draft
National and Regional Guidelines for Aggregates Provision in England
2001-2016." Paragraph A15 of the consultation paper reads:
"The available evidence suggests that there has been
a rapid increase in the use of C and D waste (construction and
demolition waste) since 1990. 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."
This recorded increase in recycling pre-dates the introduction
of the aggregates levy.
34. In general terms the latest information on recycling,
if extrapolated to the UK as a whole, indicates the following
market breakdown:
| UK Demand for Aggregates (2001) million tonnes
| |
| Primary aggregates | 240 MT
|
| Recycled/Secondary Aggregates | 60 MT
|
| Total Market | 300 MT |
The evidence suggests that most recycling is now taking place,
and that the potential for further increase is no more than 10mt,
increasing the UK use of recycled/secondary aggregates from c.
60mt to c. 70mt pa.
35. If the main purpose of the aggregates levy is—as
indicated by Stephen Timms MP when Financial Secretary-to increase
recycling, the scope for further increase would appear to be up
to 10mt pa.
36. The aggregates levy, at £1.60 per tonne, will
increase the annual cost of supply of aggregates in the UK by
c. £460 million pa. (this assumes that the cost of both primary
and recycled aggregates will increase by £1.60 per tonne
on average, and taking into account the partial and diminishing
aggregates levy derogation for specified products in N. Ireland).
37. Consequently each additional marginal tonne of recycled
aggregates supplied as a result of the levy will, in effect, receive
an average aggregate levy subsidy of £46 per tonne (£460
million divided by 10 million tonnes). The average ex works selling
price of aggregates is around £7.00 per tonne—subject
to significant product and geographical variations.
38. Bearing in mind that there are environmental costs
and issues associated with the supply of recycled as well as primary
aggregates, we would question if the levy represents an environmentally
or economically effective means of encouraging a relatively small
marginal increase in recycling in the sector. There is no evidence
that such assessments have been made by the Treasury or elsewhere
in Government.
December 2002
| 
