Background and Context
The UK Aggregates Levy was introduced in 2002 with the dual aims of reducing the negative environmental impacts of quarrying and increasing the recycling rate of construction materials, by reducing the rate of primary material extraction. The scope of the UK levy includes all sand, gravel and rock that has either been dug from the ground, dredged from the sea in UK waters or imported into the country. The current rate of the levy is £2 per tonne of aggregates.
The Scotland Act 2016 devolved powers to the Scottish Government for the Aggregates Levy, although the devolution has been delayed by ongoing European Court procedures over the exemptions for secondary aggregates. In anticipation of a resolution of the legal proceedings, Scottish Government wanted to establish the current role of the Aggregates Levy in Scotland, with a view to designing and implementing a Scottish Aggregates Levy. This project has investigated the historical complexities and impact of the Aggregates Levy in the UK and used these findings to develop some illustrative future tax policy options for a Scottish Aggregates Levy, with modelled associated scenarios and potential impacts.
Based on the above background and context, the following objectives were identified for the project for each of the two delivery phases:
- Review existing literature on UK Aggregates Levy, and similar environmental taxes in other European countries, including modelling studies and environmental planning policies;
- Development of the Business as Usual (BaU) illustrative model for Scottish Aggregates Levy based on aggregates market behaviour in Scotland and the rest of the UK;
- Prepare a case study examining the impact of adjustments to levy exemptions in Northern Ireland (NI) and their impacts on the aggregates industry in NI and the Republic of Ireland given the obvious parallels for Scotland and RUK potentially having two different tax regimes either side of a land border;
- Develop a broad set of illustrative policy options varying the levy rate and structure as well as changing other relevant policies (e.g. landfill tax for inert materials);
- Model and analyse the economic and environmental impacts of these illustrative policy options including impacts on import and export of aggregates between Scotland and the rest of the UK, as well as between Scotland and the rest of the world;
- Understand and model the interaction of the levy with Scottish Government policies such as the Scottish Landfill Tax; and
- Develop a report on the aggregates market in Scotland setting out the current demand, production, distribution and reserves of aggregates from Scottish quarries within the currently restricted level of Scottish data that is available
Review of the UK Aggregates Levy and Similar Taxes in Other Countries
As a part of this research, the UK Aggregates Levy and similar taxes in some of the other European countries have been reviewed, which suggests a complementary role for landfill tax in increasing substitution towards recycled aggregates, as observed in the UK and the Danish case. The review also suggests applying the same rate of levy on domestic production and imports will eliminate any comparative disadvantage for local producers.
Northern Ireland Case Study
Prior to and following the introduction of the UK Aggregates Levy in April 2002, concerns were repeatedly raised that the levy would promote illicit imports to Northern Ireland from the Republic of Ireland. The experience from Northern Ireland indicates that, implementing a different levy rate in Scotland compared to the levy rate in England would be likely to increase illegal cross-border movements of aggregates, and therefore a strict monitoring and enforcement regime would be required to minimise illegal cross-border trade in untaxed aggregate.
Analysis of the Scottish Aggregates Market
Analysis of the Scottish aggregates market revealed that aggregates production has followed a declining trend over the past few years, especially for sand and gravel.
It was observed that Scotland imports very little aggregates, as it produces sufficient amount of crushed rock, and sand and gravel locally. It was also observed that Scotland exports a small amount of sand and gravel, but it exports a very large amount of crushed rock (mainly from Highland & Moray). We know from secondary data sources that this level of crushed rock exports has remained high over time.
Observation of the price trends for aggregates supplied in the UK indicates that, the price of crushed rock has increased by 21%, compared to a 50% increase for sand and gravel over the last 15 years despite the Aggregates Levy remaining at £2 per tonne over this period.
Approach to Developing the Scottish Aggregates Levy Model
The Scottish Aggregates Levy model was developed over Phase 1 and Phase 2 of the project. Phase 1 involved developing the business as usual (BaU) model using historical data and econometric forecasting of aggregates production. The BaU model produced the following projections for the modelling period 2018 - 2030:
- Production of primary aggregates including aggregates imports and exports (million tonnes);
- Production of recycled aggregates (million tonnes); and
- Estimates of Aggregates Levy revenue for Scotland (£million).
Phase 2 involved selecting illustrative policy options for the Scottish Aggregates Levy, and extending the Phase 1 BaU model to develop the detailed Aggregates Levy model for analysing the impacts of the selected policy options. The detailed scenario modelling in Phase 2 also included the changes in the level of import and export of aggregates due to hypothetical levy rate differentials between Scotland and the rest of the UK that were implied by the illustrative policy scenarios.
Modelling the Business as Usual Scenario
According to the project scope two types of aggregates were modelled:
- Primary aggregates, which includes crushed rock and sand and gravel; and
- Secondary aggregates, which include recovered material from construction and demolition (C&D) waste which is sold as a secondary material for use in construction projects.
The approach to modelling the BaU scenario comprised two key stages:
- Historic aggregates production, import and export - all available aggregates data were reviewed and used to compile a historic dataset on production, import and export of aggregates for Scotland; and
- Forward projections - projections of aggregates production, import and export out to 2030 were created for the BaU scenario i.e. where the current rate of aggregates levy is assumed to stay constant in future years.
The forward projections were developed based on econometric forecasting using the historic data on aggregates production and other relevant factors. The forward projections of both crushed rock, and sand and gravel production in Scotland displayed a declining trend over the next few years.
Illustrative Impacts from Changes to the Levy
Different illustrative policy options were discussed with the project governing team at Scottish Government throughout Phase 1, and the following four options were selected for inclusion in the Phase 2 modelling:
- Option 1 - High levy rate (tax increase scenario): Under this option, the Scottish levy rate is set above the UK levy rate.
- Option 2 - Low levy rate (tax decrease scenario): Under this option, the Scottish levy rate is set below the UK levy rate.
- Option 3 - Scottish Government baseline (no tax scenario): The levy rate is set to zero under this option. Results from this option is required for developing future tax legislation in Scotland where the Scottish Government needs to set out the impacts of a 'do nothing' approach.
- Option 4 - New landfill tax band for aggregates (Landfill tax scenario): The levy rate is kept at the same level as the UK levy rate, while creating an additional band of landfill tax for aggregates which is higher than the rate for landfilling inert materials. This should increase the recycling of aggregates through increasing the cost of landfilling aggregates.
Option 1 (tax increase) displays an overall reduction in demand for primary aggregates due to the increase in levy rate. Similarly, Option 2 (tax decrease) displays an overall increase in primary demand due to the reduction in levy rate. Options 1 and 4 generate the highest level of recycling activity, due to an increase in Aggregates Levy or the introduction of a new banding in landfill tax rates related to aggregates (e.g. inert rate), respectively.
Both Option 1 and Option 4 would generate the highest level of recycled aggregates production. However, Option 1 would also generate significantly higher levy revenue and has lower externality costs compared to the BaU scenario and all other options. So, if the most desirable objectives are to maximise levy revenue and/or to reduce the externality costs of aggregates extraction in Scotland along with increasing the production of recycled aggregates, Option 1 seems to be the preferred option.
However, it should be noted that the amount of additional recycling generated through change in a Scottish Aggregates levy or by introducing a new landfill tax band for aggregates is very small, given that approximately 87% of C&D wastes are currently being recycled under the BaU scenario. Choosing such an option will also require additional monitoring and enforcement, which will increase the implementation costs of such a measure. Finally, various provisions for the exemption of C&D wastes from the landfill tax will need to be revised to ensure that C&D wastes are recycled to the highest quality possible for using as a substitute of primary aggregates rather than other low value uses e.g. pipe bedding or backfilling.