Towards an environmental tax on aggregates

A study of the environmental costs of aggregates production has been published by the Department of the Environment, Transport and the Regions (DETR) as part of the Government's deliberations on an aggregates tax.1 The "externalities" assessed in the study were valued at an average of £4.77 per tonne for primary aggregates. Producers are disputing the make-up of that figure, but it also appears to be an underestimate because of the exclusion of important environmental impacts. Further research is to be commissioned by the DETR to inform the next Budget as the dispute about the merits of a tax - and its potential impact on aggregates recycling - rolls on.

The Chancellor signalled his intention to consider the case for an environmental tax on aggregates last July. The Quarry Products Association (QPA) and Confederation of British Industry (CBI) were quick to begin lobbying against the idea, with producers of other minerals watching anxiously from the sidelines fearing they might be next.

The industry may yet win the argument, or at least persuade the Chancellor to start the tax at a low rate. But, judging by an address made by Planning Minister Richard Caborn in May, the DETR's view now appears clearly to be in favour of a tax.

Speaking at a joint QPA/Royal Town Planning Institute seminar on 12 May, he urged delegates to make it their "working assumption" that a tax is on the way. There was, he said, "a sufficiently good case, in the broad terms in which these matters are judged, to proceed to a tax - at an appropriate level - to deal with the remaining external impacts" of aggregates extraction - those not addressed by planning controls. A tax, he added, would also help to make recycled material more attractive in the marketplace.

Rough justice
The Minister's comment about the "broad terms in which these matters are judged" anticipated one of the industry's arguments against a tax - that it would dispense rough justice to operations which may have invested to minimise their environmental "externalities". The same argument was heard in the run-up to the landfill tax, when operators with high-quality leachate and gas management schemes protested that their externalities were much lower than those of poorly run sites, and urged a differentiation of the tax rates to take those differences into account.

With administrative simplicity at the forefront of Customs & Excise thinking, those pleas came to nought - and the same looks to be on the cards with an aggregates tax. Taxes, said Mr Caborn, cannot be "the fine-tuned mechanisms that you are used to in planning law and planning guidance. They give much broader signals."

The Minister went on to urge the QPA and CBI "to reserve at least some energies" from their lobbying against a tax to consider the alternatives. It was unthinkable, he suggested, that the Government would do nothing if it was persuaded to drop the idea - and so the industry should turn its mind to other initiatives to mitigate its environmental impacts.

Mr Caborn offered a checklist against which such ideas would be judged. They would have to be credible in tackling the impacts of aggregate extraction; deliverable across the industry; permanent in application and benefit as a tax would be; and "proportionate to what a tax might yield", whatever that means. It would not be easy, he acknowledged, to pass these tests, but he promised to give ideas from the industry full weight in putting the DETR's views to the Chancellor in the run-up to the next Budget.

Other minerals
Almost as an afterthought, the Minister stirred up other mineral producers' suspicions. "The scope of the tax remains for the Chancellor," he noted, "but if he decides to proceed on aggregates it would be open to him to extend the tax to other surface minerals extraction, either in launching the tax or at some later stage."

Looking at the Government's current policy preoccupations, opencast coal may well be a prime candidate for a tax. Its thinking on that issue may be clarified when its review of fuel sources for the electricity industry is completed in the next few weeks. But producers of other minerals look to have won at least a breathing space from the DETR's research on the environmental costs of aggregates, which concluded that other mineral operations are different enough to warrant specific valuation studies of their own.

That research, led by London Economics, was carried out hastily between last September and January. The findings have now been published for consultation by the DETR. The key findings are summarised in the table. The values for local environmental costs were mostly obtained from interviews with 1,406 people living within five miles of ten aggregates production sites. These were three hard rock quarries, three sand and gravel quarries, the Glensanda coastal superquarry in Argyll, two demolition waste recycling sites, and a wharf receiving marine-dredged aggregates. The sites were chosen to reflect a wide range of operations by virtue of their age, scale, location and other features.

The values were obtained by asking individuals about their "willingness to accept" (WTA) compensation for environmental damage. The WTA method has been shown to yield values typically 3-5 times higher than when people are asked about their "willingness to pay" to avoid damage, but was felt to be appropriate in this case because an existing situation was being addressed.

Variation in valuations
The table shows that the local environmental impacts for the primary aggregates sites, when weighted by UK output from the various sources, were valued at an average of £4.77 per tonne. The costs of noise and air pollution associated with average journeys to market by road and rail beyond five miles for each site were drawn from another study, giving a total average external cost of £4.99 per tonne.

The results have a number of noteworthy features. One is the very wide range of monetary values attached to sites of the same kind. For the three hard rock quarries the values were almost 100 times apart.

The QPA points out that the small size of the populations interviewed may have distorted the results for this sector. At the rock quarry with the highest externality, 70% of the 113 people interviewed lived within three miles of the site. Relatively high WTA bids were made by a handful of individuals living 3-5 miles from the quarry, and when these were multiplied by the population of 121,000 resident in that zone the effect was that their valuations accounted for 70% of the total externality of £2.90 per tonne for that site - and boosted the average for the hard rock sector as a whole.

The variation between sites was narrower for sand and gravel quarries but still more than ten-fold - and might have been greater but for the fact that the environmental cost attributed to one quarry was divided by the output from this and a neighbouring quarry on the grounds that residents' valuations may have reflected the impacts of both. Even so, the figure in this case was the highest at £34.72 per tonne - and was depressed by the apparent absence of a resident population beyond two miles.

Secondly, the figures vary markedly between types of site. The average local environmental costs of sand and gravel quarries were, at £9.00 per tonne, valued at more than three times the average for hard rock quarries. Moreover, this differential doubles when the sand and gravel pit with a high externality of £34.72 per tonne is included.

Marine aggregates fell between these two types of sites in the externalities league, while the Glensanda superquarry had much the lowest calculated externality at £0.18 per tonne. Sites recycling demolition waste had the second lowest externality at £1.06 per tonne.

These findings hardly make it easy to fix an appropriate tax rate, or even two. Across all the sources of primary aggregates, the calculated externality varies by more than 1,100 times. The QPA's concern is that the Government may simply pick the headline average figure of £4.50-5.00 per tonne and set a tax at this rate - even though, a spokesman noted, the study sites were chosen to represent the range of quarrying operations in Britain rather than more typical sites. Only similar research at additional sites will show whether the externality values found in the study are broadly representative.

"Adjustments" for recycling sites
The QPA is also concerned about the procedure used in the study to calculate the environmental costs of demolition waste recycling sites. The average externalities of the two sites were valued at £10.57 per tonne. However, since both were in residential areas, the figure was then adjusted to reflect the best information available on the location of recycling sites. Most are believed to be either in urban industrial areas, where their externality was assumed to be zero, or in rural areas where their impacts were assumed to be limited. The externality value was therefore adjusted downwards by 90% to £1.06 tonne. The QPA's concern is that if this imperfectly justified differential was reflected in a tax regime, recycled aggregates would gain a significant market edge.

A similar exercise was carried out for the marine aggregates wharf, with the initial value of £10.57 per tonne being adjusted downwards to £4.67. Here, though, there is another issue.

Externalities underestimated
The valuation covered only the local environmental impacts arising from the unloading, loading and off-site transportation of marine-won aggregates. The report maintains that the impacts of marine dredging for aggregates on coastal erosion and deep-sea fishing are "negligible". But it concedes that there may be important impacts on inshore fisheries - through damage to nets or pots, interference with fishing activities, siltation of crustaceans, and destruction of benthic organisms which form an important part of the food web for other crustacea and fish. Damage to sand eel populations may also reduce an important food source for other marine organisms. None of these impacts was valued in the study.

Equally, by no means all of the environmental externalities of quarrying were calculated in the study. Impacts more than five miles from each site were not quantified. Neither were impacts on visitors - an important consideration for quarries in National Parks and Areas of Outstanding Natural Beauty. The researchers also acknowledge that the valuation technique used probably gave an understimate of impacts on biodiversity. The same may be said of "wilderness" or "existence" values attached to locations such as Glensanda. And the transport impacts valued beyond five miles from each site were confined to air and noise pollution.

Another important feature of the study which resulted in an underestimate of externalities was the exclusion of WTA bids from people who did not wish to be compensated individually, but wanted the local community to be compensated for the impacts of the local quarry. While 60% of the individuals questioned reported one or more "problems" caused by the quarry, only 19% wanted personal compensation - but 58% wanted compensation for the community.

Compensating communities
The report merely notes that "this is an important result in itself and suggests that future contingent valuation studies should consider this option, if appropriate survey questions can be framed." For policy-making purposes, though, the finding points to the desirability of a similar arrangement to the landfill tax credits scheme, under which landfill operators can pay a part of their tax liabilities to independent bodies to fund local environmental and amenity improvements.

Overall, the research points to an unhappy conclusion for the primary aggregates industry. While there may be some minor offsetting environmental benefits of quarrying - such as restoration of degraded sites to better than pre-extraction standards - the full value of the externalities of quarrying is not reflected in London Economics' conclusions.

Ways of addressing these impacts are proposed in the report's recommendations for further research. It suggests a national sample survey to assess the "non-use" values attached by non-residents to areas of countryside affected by quarrying, as well as a visitor survey around one or more quarries in amenity areas. Valuation studies around more sites are also advocated, as is a study to assess the value of bids for compensation of communities.

How much of this work will in fact be done in the immediate future will not be known for a few weeks. The London Economics study is currently out for peer review by environmental economist Professor David Pearce - keener than some in his trade, as the study itself notes, on the monetary valuation of "existence" values. A decision on the scope of the further research will be taken once he completes his work, although Mr Caborn suggested that the DETR will be "looking among other things at the best way to value more subjective elements such as landscapes and habitats."

Precious little time is left for the extra studies to be planned and executed in time to inform the Chancellor's pre-Budget report in November. A QPA spokesman commented that this constricted timetable spells "a repetition of the whole rush again, so that we get a second unsatisfactory piece of work."

A nice little earner
Be that as it may, the current pointers are that a tax will be introduced. Set at £5 per tonne for primary aggregates, it would raise over £1 billion per year - more than double the revenue from the landfill tax. It remains to be seen whether any tax, or a lower tax rate, will be set for secondary aggregates, and whether there will be any differentiation of the kind favoured by the Council for National Parks,which wants a higher tax rate for quarries in National Parks.

The quarrying industry has been quick to point out that 40% of the tax cost would fall on the public sector, although this figure has been diminishing with the reduction in the roads programme. However, even if measures to offset the full extra cost to public bodies were introduced, the Treasury would still be left with a healthy addition to its revenues. Unknown as yet is whether these would be used to offset employers' national insurance contributions, as with the landfill tax, or whether provision would be made to pass some of the potential tax take to benefit local communities.

The litmus test for the tax will be its effectiveness in reducing demand for quarrying. There appear to be no strong dissenters from the industry's view that a modest tax would do little on its own to curb overall demand for aggregates because these constitute only a small proportion of the total cost of most construction projects other than roads.

The effects of a tax on the balance between primary and secondary sources are more contentious. The CBI told a recent parliamentary inquiry that the supply of secondary aggregates is "extremely inelastic" to price changes - but it may have been pushing the point too far.

Impact on recycling
According to the DETR, the amount of demolition and construction waste used as aggregates has doubled to around 25 million tonnes per year in England since 1990. The landfill tax has been an important influence on this trend even at the lower rate of £2 per tonne for inert wastes. Ironically, the Government announced in March that the tax is to be waived for inert wastes used for infilling old quarries - though it is possible that this was done in anticipation of a tax on primary aggregates which would maintain the incentive for recycling demolition and construction waste.

The quarrying industry's response to this trend has been to argue that recycling is clearly increasing without the need for an aggregates tax. Indeed, Mr Caborn pointed out that the official target to use 40 million tonnes of secondary materials as aggregate by 2001 has probably already been beaten when wastes such as pulverised fuel ash and furnace ash are included in the total. But he went on draw a rather different conclusion from the industry: "I do not think that we are yet at, or even near, the limits of the tonnages we can recycle," he said, "with benefit to the landscapes and habitats of the areas where primary aggregate is dug."

One way in which demand for recycled aggregate could be increased by a tax is by expanding the radius over which it can compete with primary supplies. The average ex-works price of primary aggregate is around £5 per tonne. Transporting the material by road doubles this figure after about 30 kilometres. Most primary aggregate sales are made within 50 kilometres - indeed, London Economics' report shows that product from half the sites in the study is carried less than 20 kilometres by road on average.

These figures suggest that a tax which increased the price differential between primary and secondary aggregates by around £4-5 per tonne would be sizeable enough to tilt the balance in favour of secondary supplies over some distance where demolition waste was available for recycling. However, even with the more competitive long-distance haulage rates now being offered by rail freight operators, a bigger differential would be needed before the large volumes of mineral wastes suitable for replacing primary aggregates in some uses but generated in more remote areas of Britain could be tapped into economically.

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