Scottish Aggregates Levy: evidence review and policy options

Research reviewing, modelling and analysing illustrative options for a Scottish specific Aggregate Levy.

Approach to Developing the Scottish Aggregates Levy Model

Overview of the Project Methodology

A main aim of this project was to develop an options appraisal model to analyse the potential impacts of various illustrative policy options related to the revision of the Scottish Aggregates Levy. The model was developed over Phase 1 and Phase 2 of the project. The key methodological steps for completing the study are presented in Figure 5.

Figure 5: Overview of Approach

Phase 1

  • Review relevant literature and data
  • Develop economic forecasts for future aggregate productions
  • Develop baseline projections for aggregates levy model based on historical data and econometric forecasts
  • Develop case study for Northern Ireland based on literature review and expert interviews

Phase 2

  • Complete literature review on UK and Aggregates Taxes
  • Develop and agree policy options
  • Develop econometric model and econometrically estimate price response functions (demand elasticities)
  • Develop detailed Scottish Aggregates Levy (including cross border flows) model and analyse policy options
  • Analyse Scottish aggregates market (production, reserve, imports) based on secondary data, model outputs and expert interviews.
  • Report modelling and analysis outputs and conclusions

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
  • Levy revenue (£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 model in Phase 2 also included the changes in import and export of aggregates due to levy rate differentials between Scotland and the rest of the UK that was implied by the scenarios. Figure 6 presents the key modelling elements in the Phase 1 and Phase 2 modelling described above.

Figure 6: Key Modelling Elements
Key Modelling Elements

The detailed Aggregates Levy model developed in Phase 2 was used to analyse the following impacts from the illustrative policy options:

  • Primary aggregates production and supply including exports and imports;
  • Production of recycled aggregates;
  • Revenue from the levy; and
  • Environmental impacts / externality costs.

Modelling the Business as Usual Scenario

According to the project scope, as set out above, two types of aggregates were modelled:

  • Primary aggregates, which includes crushed rock and sand and gravel; and
  • Secondary aggregates, which include recovered material from 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;[53] and
  • Forward projections - projections of aggregates production, import and export out to 2030 were created for a 'business as usual' scenario i.e. where the current rate of aggregates levy is assumed to stay constant in future years.

These modelling stages along with the data sources and assumptions are described further in the Appendix 2.

Modelling Illustrative Policy Options

Different illustrative policy options were discussed with the project governing team at Scottish Government throughout Phase 1 of the project. From these, selected options were presented in the interim project meeting. The following four options were subsequently selected for inclusion in the Phase 2 modelling:[54]

  • 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 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).[55]

Changes to the demand for primary aggregates and subsequent changes to the production, imports and exports of primary aggregates as well as the production of recycled aggregates were modelled based on the estimated price elasticities of demand. Table 3 presents the modelled levy rates along with direction of effects on demand and supply of primary and recycled aggregates under each policy option.

Table 3: Modelled levy rates and impacts under different policy scenarios
BaU Option 1 Option 2 Option 3 Option 4
Aggregates levy rate £2.00 £2.50 £1.50 £0.00 £2.00
Landfill tax for inert materials £2.90 £2.90 £2.90 £2.90 £2.90
New landfill tax band for aggregates - - - - £3.80
Demand for aggregates - Decrease Increase Increase Unchanged
Production of primary aggregates - Decrease Increase Increase Decrease
Imports (see footnote 85) - Decrease Increase Increase Decrease
Exports (see footnote 85) - Increase Decrease Decrease Unchanged
Production of recycled aggregates - Increase Unchanged Unchanged Increase

Further details on the estimation of price elasticities, along with assumptions behind effects on demand and supply of aggregates are discussed in the Appendix 3.

Useful Definitions and Identities

Here we present some useful definitions and identities that are used throughout the analysis to follow.

Domestic production is defined as the total amount of primary aggregates extracted in Scotland for consumption in Scotland and export.

Demand for primary aggregates (or Primary demand), is the total demand for primary aggregates in Scotland excluding their export of while including imports. Thus:

Primary demand = Domestic production + Imports - Exports

Finally, Total demand in Scotland include demand for both primary and secondary aggregates. Thus:

Total demand = Primary demand + Demand for Recycled Aggregates

The following two sections discuss the results of BaU and the scenario modelling, respectively.

A Note on the Data Gaps

Given the high level of confidentiality within the aggregates market in Scotland and the rest of the UK, there were large gaps in the data that were required for undertaking a robust modelling. Particularly, the lack of data on imports and exports of primary aggregates made the modelling of cross-border flows extremely challenging. As result, the robustness of estimated cross-border flow impacts of potential changes to the levy are highly dependent on the reliability of the assumptions that were made to fill the data gaps. A more robust modelling of cross-border effects can be undertaken in future, if better quality data are available.



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