Scottish Aggregates Levy: evidence review and policy options

Modelling the Business as Usual Scenario

Results for the BaU modelling are presented in this section.

Econometric Forecasting of Future Aggregates Demand

The demand for crushed rock and sand and gravel in future years is estimated econometrically based on historical production data, and using time-series forecasting techniques. The modelled dependent variables in this case were:

• Production of crushed rock; and
• Production of sand and gravel.

Both of these dependent variables are likely to depend on external factors, such as, construction output in the economy, population, etc., as well as on internal factors, such as, the past demand for these two types of aggregates. Accordingly, both dependent variables were modelled using the ARMAX (Autoregressive Moving Average model with External factors) technique, which incorporates the dependence on past values along with the dependence on external factors.

Separate models were estimated to generate forecasts for crushed rock and sand and gravel. Both models were estimated in log-log form (log transformation has been applied to dependent and independent variables before estimation).^[56]

The data on production of crushed rock and sand and gravel were sourced from the UK Minerals Yearbook 2018.^[57]

Data on construction output in Scotland from ONS did not contain any data prior to 1999. So Scotland's GDP (with 1 year lag) was used as a proxy for construction output in Scotland. We have also used population in Scotland as another external factor that affects the demand for aggregates. Data on population were sourced from ONS.

Forecasting the production of aggregates for the period 2018 to 2030 also requires future projections of GDP and population in Scotland for the same period. The GDP forecasts were sourced from Scotland's Economic & Fiscal Forecasts by Scottish Fiscal Commission,^[58] while the population projections were sourced from ONS.^[59]

Figure 7 and Figure 8 present the actual and estimated values for crushed rock and sand and gravel, respectively, based on the annual production data between 1980 and 2017. The figures also present the forecast values, along with 80% and 95% confidence intervals (extremities of the light blue and grey shaded regions, respectively), for these two types of aggregates for 2018 to 2030. It can be observed that the production of crushed rock is predicted to show a slight downward trend while the production of sand and gravel is predicted to decline more rapidly.

Aggregates Production, Import and Export

Figure 9 depicts the historic data and the modelled projection for production, imports and exports of crushed rock for Scotland between 2012 and 2030 (lighter shades denotes modelled production, import and export based on econometric forecasting). During the initial period, production of crushed rock grew from 19 million tonnes to 23.6 million tonnes till 2016, and then it is projected to decline to 20.2 million tonnes in 2030. It can be observed that about 30 to 40% of the crushed rock produced in Scotland is initially 'exported' to England but a small proportion of this crushed rock is commercially exploited in England. The ultimate destination of the vast bulk of unprocessed, crushed rock is a number of European countries seeking large quantities of rock to protect undersea cabling (for example). The amount of crushed rock imported to Scotland is very small as the supply of crushed rock within Scotland is essentially adequate for its needs.

Sand and gravel production, import and export for Scotland for the same period are presented in Figure 10 (lighter shades denotes modelled production, import and export based on econometric forecasting). It can be observed that the production of sand and gravel has increased from approximately 5.8 million tonnes in 2012 to around 6.3 million tonnes in 2016, but predicted to fall to 3.8 million tonnes by 2030, following a declining trend after 2016, as observed in the econometric forecasting above. It can also be observed that, only a small amount of sand and gravel is exported to England and imported from England. This reflects the fact that sand and gravel produced across the UK is highly substitutable, and thus it is not cost effective to transport sand and gravel in and out of Scotland.

Regional Distribution of Aggregates Production, Import and Export

Figure 11 and Figure 12 present the Scottish regional distribution of crushed rock and sand and gravel production, import and export for Scotland based on 2012 data from the Scottish Aggregates Survey 2012.^[60] The largest amount of crushed rock was produced in Highland & Moray region (around 6.9 million tonnes). On the other hand, the 'West Central Scotland A' region produced the largest amount of sand and gravel (approximately 1.8 million tonnes)

It can be observed that crushed rock produced in most of the regions are retained within that region to meet local aggregates demand. However, SESPlan (the planning authority for Edinburgh and South East Scotland) and 'West Central Scotland A' regions export crushed rock to other regions, while Highland & Moray exports over 90% of the crushed rocks produced in the region to the rest of Scotland and England (we gather, anecdotally, for processing small amounts) but ultimately the bulk of Scottish exports go overseas.

It can also be observed that most of the regions export some of their production to other regions in Scotland. However, as discussed in the previous section, only a small fraction of the total sand and gravel produced in Scotland is exported to the rest of the UK.

Production of Secondary Aggregates

The forward projections of secondary aggregates production in Scotland up to 2030 is presented in Figure 13 (lighter shades denote modelled production based on predicted growth of C&D waste). It shows that C&D related aggregates waste generation is forecast to grow from 1.2 million tonnes in 2017 to 1.28 million tonnes in 2030. Based on the current recycling rate of C&D waste aggregates, the supply of recycled aggregates, on the other hand, may grow from 1.05 million tonnes in 2017 to 1.12 million tonnes in 2030.

Aggregates Levy Revenue

Forward projections of revenue from Scottish Aggregates Levy for the BaU scenario are presented in Figure 14 (lighter shades denote modelled revenues based on future projections of aggregates production and import). The estimated revenue from the Aggregates Levy in Scotland in 2012 was just over £39 million, which increased to approximately £46.7 million in 2016, and slowly estimated to reduce afterwards to approximately £36.6 million by 2030. The slow decrease in levy revenue between 2016 and 2030 could be explained partly by the reduction in crushed rock and sand and gravel production, along with the increase in recycling and reuse of C&D waste observed in the modelled BaU scenario.