Economic Aggregates

With a focus on sustainable development at this year’s 3 July Quarry Products Association (QPA) Showcase, QPA economics director Jerry McLaughlin ponders, in his regular MQR column, whether sustainability is affordable as he counts the cost of internalising externalities.

The increasing focus on sustainability combined with declining volumes across most of the aggregates sector raises an interesting question. In short, is sustainability affordable?

A theoretical approach would argue that if improvements in sustainability add to costs then this is reasonable because it just means that the price of products will better reflect the environmental and social costs of production.

In the jargon it is called “internalising the externalities”. The Treasury favours this logic when looking for reasons to increase tax revenues, as some in the industry may have noticed. The basis of this theory is that higher costs can be passed on in the market.

Pressure groups have been arguing for years that the price of energy has been too low to take account of the wider costs of burning fossil fuels or to allow the commercial development of renewables.

Now thanks to the apparent inability of oil supply to meet demand and speculators not being known for their environmental concerns, the market has delivered energy price increases campaigners could only dream about.

The relentless advance of new and enhanced regulations, which seem to go hand-in-hand with more bureaucracy and the associated costs, is a hidden form of cost increase which is also based on sustainability.

Anyone from the aggregates industry unfortunate enough to be involved in the implementation of the EU Mining and Waste Directive into UK legislation will be tearing hair out at the sheer complexity and confusion which this measuremight add to our businesses.

Of course, it is very reasonable in sustainability terms to introduce measures aimed at preventing toxic waste from metal mining polluting local environments – as happened in Romania.

But is such toxic waste a similar level of environmental risk as overburden from a sand and gravel site?

Obviously not, but whether the regulations will be rational and proportionate remains to be seen.

Similarly, who could question the sustainability credentials of Defra’s Carbon eduction Commitment (CRC), targeted at reducing the carbon emissions of “less intensive” energy users.

But the 5,000 businesses to be caught up in the CRC, likely to include a number of minerals-related businesses, will have to come to terms with buying and trading carbon allowances and writing out very big cheques for the privilege. When not dealing with the complexities of such regulations there may even be time to do some business!

And what do customers want? More sustainable buildings and structures – or at least the appearance of more sustainability for the more cynical….

Again a worthy aim. But how to assess the sustainability of the materials used?

Get familiar with the Code for Sustainable Homes, related BREEAM schemes and the BRE Green Guide. Look at the ever expanding number of sustainability and carbon calculating tools on the web. Look at the 70 detailed actions for the construction sector listed in the Strategy for Sustainable Construction published in June. It’s a whole new world of intellectual pain.

So does sustainability have to cost more? Of course not. Better management of resources can save money and emissions. An example is reducing energy use and improving the efficiency of transport operations.

But equally clearly, the costs associated with adhering to new regulations and meeting customer requirements are real. This may mean that higher sustainability standards cost more – or it may mean that setting up systems to “prove” sustainability are the main cost.

The payoff should be that a business with higher sustainability standards has this reflected through more constructive relationships with regulators, including the planners, and local communities.

The payoff should also be that customers are willing to pay for products from sustainable suppliers.

This may or may not be cloud-cuckoo-land, but customers are increasingly going to require suppliers to prove sustainability to get on tender lists – the new Sustainable Construction Strategy wants 25% of products used in construction projects to be from responsible sourcing schemes by 2012.

It comes down to whether or not customers are willing to pay more for higher sustainability costs and standards.

And those businesses unable or unwilling to demonstrate sustainability through participation in responsible sourcing schemes will find themselves increasingly excluded from supply chains.