Evidence Review and Illustrative Policy Options for a Scottish Aggregates Levy Final Report August 2020 Contents Executive Summary ................................................................................................ 5 Background and Context ....................................................................................... 5 Project Objectives .................................................................................................. 5 Review of the UK Aggregates Levy and Similar Taxes in Other Countries ........... 6 Northern Ireland Case Study ................................................................................. 6 Analysis of the Scottish Aggregates Market .......................................................... 6 Approach to Developing the Scottish Aggregates Levy Model ............................. 6 Modelling the Business as Usual Scenario ........................................................... 7 Illustrative Impacts from Changes to the Levy ....................................................... 7 Introduction .............................................................................................................. 9 Background and Context ....................................................................................... 9 Project Objectives ................................................................................................ 11 Scope of the Scottish Aggregates Levy ............................................................... 12 Review of the UK Aggregates Levy and Similar Taxes in Other Countries ..... 13 UK Aggregates Levy ............................................................................................ 13 Levy rate history .................................................................................................. 13 Scope of the levy ................................................................................................. 13 Collection and use of the levy revenue ................................................................ 13 Effectiveness of the levy ...................................................................................... 14 Other impacts ...................................................................................................... 14 European aggregates taxes ................................................................................ 15 Northern Ireland Case Study ................................................................................ 17 Analysis of the Scottish Aggregates Market ...................................................... 18 Market Overview .................................................................................................. 18 Aggregates Production ........................................................................................ 19 Aggregates Sales ................................................................................................ 20 Imports ................................................................................................................. 20 Exports ................................................................................................................. 21 Regional Distribution in Scotland ......................................................................... 22 Reserves .............................................................................................................. 22 Price Trends ........................................................................................................ 24 Costs .................................................................................................................... 25 End Use of Aggregates........................................................................................ 26 Limitations of the Current Market Analysis .......................................................... 26 2 Approach to Developing the Scottish Aggregates Levy Model ........................ 28 Overview of the Project Methodology .................................................................. 28 Modelling the Business as Usual Scenario ......................................................... 29 Modelling Illustrative Policy Options .................................................................... 30 Useful Definitions and Identities .......................................................................... 31 A Note on the Data Gaps .................................................................................... 32 Modelling the Business as Usual Scenario ........................................................ 33 Econometric Forecasting of Future Aggregates Demand ................................... 33 Aggregates Production, Import and Export ......................................................... 34 Regional Distribution of Aggregates Production, Import and Export ................... 36 Production of Secondary Aggregates .................................................................. 38 Aggregates Levy Revenue .................................................................................. 38 Illustrative Impacts from Changes to the Levy ................................................... 40 Aggregates Production, Import and Export ......................................................... 40 Production of Secondary Aggregates .................................................................. 43 Aggregates Levy Revenue .................................................................................. 44 Externality Costs of Aggregates Production ........................................................ 46 Discussion of the results ...................................................................................... 47 Conclusions ........................................................................................................... 49 Appendix 1: Introduction ...................................................................................... 51 Appendix 2: Phase 1 Modelling ............................................................................ 52 Primary Aggregates ............................................................................................. 52 Domestic Production Data ................................................................................... 52 Imports of Primary Aggregates ............................................................................ 53 Forward Projections ............................................................................................. 53 Secondary Aggregates ........................................................................................ 54 Appendix 3: Phase 2 Modelling ............................................................................ 55 Scenario Specification ......................................................................................... 55 Approach to Scenario Modelling .......................................................................... 55 Applying Price Elasticities .................................................................................... 55 Impacts on Aggregates Recycling ....................................................................... 57 Redistribution of Material to Production and Imports........................................... 57 Cost Assumptions ................................................................................................ 58 Environmental Impacts ........................................................................................ 59 3 Appendix 4: Review of Similar Taxes in Other Countries ................................. 62 Danish Raw Materials Extraction Tax .................................................................. 62 Swedish Tax on Natural Gravel ........................................................................... 62 Mineral Resource Extraction Charges in Estonia ................................................ 63 Appendix 5: Northern Ireland Case Study .......................................................... 64 Background .......................................................................................................... 64 Special Circumstances in Northern Ireland ......................................................... 65 Impact of the Aggregates Levy ............................................................................ 66 Imports ................................................................................................................. 67 Illegal operations .................................................................................................. 67 Sales .................................................................................................................... 68 Recycling ............................................................................................................. 68 ALCS ................................................................................................................... 69 State Aid .............................................................................................................. 71 Suspension of the ALCS ..................................................................................... 72 Special Tax Credit Scheme ................................................................................. 73 The Northern Ireland Aggregates Industry .......................................................... 74 Appendix 6: Additional Tables on the Analysis of the Scottish Aggregates Market ....................................................................................................................