Treasury hits rocks over aggregates levy

The Treasury has been forced into an ignominious retreat over one of its flagship environmental taxes by conceding that there is no prospect of the aggregates levy meeting its environmental objectives in Northern Ireland. Compounding the embarrassment, the Quarry Products Association has relaunched its campaign against the levy with a report which claims that it has resulted in net environmental damage by stimulating extraction of untaxed minerals.

The levy was introduced in April 2002 at a rate of £1.60 per tonne of virgin aggregate. Its objectives were to reduce the environmental costs of quarrying by curbing demand for primary aggregates, and to stimulate sales of recycled and secondary aggregates.

Barely 20 months on, the Treasury has admitted that the levy will not work in part of the UK. On 5 November, Economic Secretary John Healey told the House of Commons Northern Ireland Affairs Committee that the twin objectives of the levy were "unlikely" to be met in Northern Ireland - and the Treasury had therefore turned its attention to "options for further reform and relief of the levy" in the Province.

Repeated warnings of difficulties in making the levy work effectively in Northern Ireland - mainly because it was expected to promote large-scale smuggling of untaxed aggregates from the Republic of Ireland - were sounded before its introduction (ENDS Report 311, p 39 ). But Treasury Ministers rejected them as "unconvincing".

QPA spokesman Jerry McLoughlin commented that the Treasury had now "discovered the blindingly obvious". In 2002, officially recorded stone production in Northern Ireland dropped by 10%, even though the value of construction spending on infrastructure increased by almost one-third.

Mr McLoughlin attributed the downturn to two main factors. One was major cross-border imports, largely unhindered by Customs, to construction sites in Northern Ireland. These are supposed to pay the levy, but "surprise, surprise, no-one's volunteering," he said.

The second factor is a flourishing black market in untaxed aggregates, usually from unauthorised quarries, 38 of which are known to have come into operation since April 2002.

This picture was substantially confirmed later in November by a report prepared by consultants Symonds for Customs & Excise.1 One new revelation was that a survey in September 2002 counted up to 89 lorries per day bringing aggregates into Northern Ireland via eight of the more important border points - whereas the officially declared quantity for 2002 equated to just one truck per working day for the whole of Northern Ireland.

The report also identifies the prevalence of cheap, illegal landfill sites where no landfill tax is paid as one of the main reasons why recycling of construction and demolition waste has failed to take off in Northern Ireland. Annual arisings are estimated at 1.28 million tonnes, but barely 20% of these are being recovered.

In an indictment of official enforcement regimes for the aggregates levy, the landfill tax and planning rules, the report says: "The aggregates levy did not create a climate of opinion in which regulations are flouted, but it is the existence of the levy which has encouraged several operators who thrive in such a climate to open unauthorised quarries and waste disposal sites beyond the ability of current enforcement regimes to address them adequately."

The Treasury is now in a sticky position because it cannot reduce or abolish the levy in Northern Ireland without obtaining clearance from the European Commission under EU state aids rules. It is hoping that the quarrying industry will help devise a face-saving formula in the form of a voluntary agreement which meets the levy's environmental aims by other means.

Mr Healey told the Commons inquiry that "the onus [was] now on the industry" to propose an agreement. The difficulty is that this will need to contain compelling environmental commitments to persuade the Commission that Northern Ireland's producers will not be receiving preferential treatment.

Moreover, the Treasury will be negotiating with an industry which is still sore over Ministers' rejection of its proposals for a voluntary agreement instead of a levy three years ago. The QPA complained at the time that the Treasury never explained what environmental objectives it wanted from an agreement. "It was very difficult to have a clear idea of what might be successful," Mr McLoughlin recalled, "and this is still the problem with what Healey's said."

The QPA is still hoping to get the levy scrapped throughout the UK. Its latest contribution to the debate is a report evaluating the levy's impacts to date.2Although it is probably still too early for the post-levy market to have reached an equilibrium, the major impact so far has occurred at the bottom end of the market, where sales of "scalpings" - low-grade by-products from rock quarries which are used mainly as fill - have been hit particularly hard. Again, this was predicted by the industry before the levy's introduction (ENDS Report 315, pp 36-37 ).

According to the report, major QPA members have recorded reductions in sales of low-grade rock of 10-20%, with one site reporting that scalpings are accumulating at a rate of 800,000 tonnes per year.

At an average loss of 15% in scalpings sales, this would translate into a reduction of some 6.0 million tonnes of crushed rock per year. The QPA believes that around a quarter of this would have happened anyway as a result of the long-term trend to substitution of low-quality rock by recycled and secondary materials.

Of the remaining 3-4 million tonnes in Britain, an estimated 1.0 million tonnes is being displaced by untaxed china clay and slate wastes - perhaps the major positive effect of the levy.

However, the QPA believes that the remaining 2-3 million tonnes mainly comprises materials which are exempt from the levy and would generally not have been extracted without it. These include aggregate by-products from various construction operations, and rock, sand or gravel which are exempt from the levy as long as they account for less than 50% of a mixture with other materials such as slate or shale.

According to the QPA, the 50% rule "has stimulated new mineral workings of these 'mixed' materials, and other reactivation of old workings of poor quality materials." Such workings are, it argues, likely to be run to poorer environmental standards than mainstream quarries.

Overall, the report argues, the levy has stimulated an increase in quarrying and created net environmental disbenefits. This is because the growth in output of untaxed minerals has not been offset by reduced extraction from rock quarries, where scalpings for which there is no longer a market have to be removed anyway to allow access to higher grades of rock. Instead, more scalpings are generally being stockpiled on-site, posing growing problems for operators in avoiding sterilisation of reserves and complying with planning conditions.

The QPA is also critical of the Government's handling of the £30 million per year sustainability fund established under the levy to support local community and environmental projects.

Short-term thinking was built into the scheme by restricting the initial funding to two years and allowing no carryover of expenditure from one year to the next. The QPA also warns that severe underspending is likely on grants for transport and aggregates recycling projects because of a combination of these restrictions and the Government's inability to devise funding mechanisms which do not require EU state aids clearance.

Summing up the QPA's current views on the levy, director general Simon van der Byl said: "It has generated perverse environmental and economic impacts. We welcome the fact that these failures have been officially recognised in Northern Ireland, and we believe the Government should now seriously consider withdrawing the levy throughout the UK and focus instead upon effective regulation and environmental initiatives."

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