Ecological Compensation in China Trends and opportunities for incentive-based policies towards a greener China ©2021 The World Bank International Bank for Reconstruction and Development The World Bank Group 1818 H Street NW, Washington, DC 20433 USA DISCLAIMER This report is a product of the staff of the International Bank for Reconstruction and Development/The World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of the World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. COPYRIGHT The material in this publication is copyrighted. 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Cover Photo: Wulong Karst limestone rock formations in Longshui Gorge Difeng. iStock. Ecological Compensation in China Trends and opportunities for incentive-based policies towards a greener China Contents Executive Summary......................................................................................................2 CHAPTER 1: Introduction............................................................................................16 CHAPTER 2: Eco-compensation within China’s Evolving Ecological and Environmental Governance Framework...............................................................................................22 2.1 The Starting Point: Droughts and Floods................................................................................................................................. 23 2.2 Local Innovation and National Uptake...................................................................................................................................... 24 2.3 Equity Considerations: Looking to the Western Regions....................................................................................................... 25 2.4 The Eco-compensation Concept Broadens............................................................................................................................. 26 2.5 A Guiding Vision: Ecological Civilization................................................................................................................................... 26 2.6 The Institutional Landscape Underpinning Eco-compensation........................................................................................... 29 CHAPTER 3: Eco-compensation Types, Trends, and Outcomes......................................34 3.1 Eco-compensation Type by Resource Management Issue............................................................................................................................................ 35 3.2 Eco-compensation Type by Government Role........................................................................................................................ 44 3.3 Eco-compensation Evaluation Indicators................................................................................................................................ 47 3.4 Program Performance and Outcomes..................................................................................................................................... 48 CHAPTER 4: Eco-compensation for River Basin Management........................................58 4.1 Overview of the Yangtze and Yellow River Basins.................................................................................................................. 59 4.2 Key Challenges for the Yangtze and Yellow River Basins............................................................................................................................................... 59 4.3 Recent Reforms in River Basin Management.......................................................................................................................... 61 4.4 The Envisioned Roles of Eco-compensation in the Yangtze and Yellow River Basins................................................................................................... 63 4.5 Opportunities for Water Pollution Emissions Trading............................................................................................................ 66 4.6 Drawing Conclusions from across the Basins ....................................................................................................................... 69 CHAPTER 5: Recommendations for Eco-compensation Development.............................72 CHAPTER 6: Conclusion..............................................................................................90 References.................................................................................................................94 APPENDIX A: China’s Environmental and Fiscal Governance System............................. 100 iv Ecological Compensation in China: Trends and opportunities for incentive-based policies towards a greener China Figures Figure ES.1: Growth in Eco-compensation Programs by Major Program Category.............................................................................5 Figure ES.2: Annual Investments by China’s Eco-compensation Programs..........................................................................................6 Figure ES.3: A Summary of Recommended Measures for Improved Eco-compensation Programs, with Envisioned Outcomes....................................................................................................................................................................................................... 13 Figure 1.1: China's Environmental Performance: International Comparison...................................................................................... 18 Figure B1.1: Common types of Eco-compensation Programs and Examples from China and Internationally............................ 19 Figure B1.2: A Conceptual Framework for Assessing Eco-compensation across Multiple Dimensions...................................... 20 Figure 2.1: The Issuance of Laws and Policies Directly Concerning Eco-compensation................................................................. 25 Figure 2.2: Key Policy Milestones in Eco-compensation Policy Development................................................................................... 28 Figure B2.3: Chinese Government Fiscal and Organizational Structure, with an Emphasis on Environmental Management................................................................................................................................................................................................. 30 Figure 3.1: Growth in Eco-compensation Programs by Major Program Category............................................................................ 37 Figure 3.2: Coverage and Fund Flows for National Key Ecological Function Zone Eco-compensation........................................ 42 Figure 3.3: National and Provincial Forest Ecological Compensation Fund Subsidy Rates............................................................ 44 Figure 3.4: National FECF Area and Number of Provincial FECFs, 2001–2016................................................................................. 45 Figure 3.5: Annual Investments of China’s Eco-compensation Programs.......................................................................................... 45 Figure 4.1: Development level across the Yangtze River Economic Belt Region............................................................................... 60 Figure B4.2: Institutional Arrangements and Fund Flow Proportions under the RBECP Program................................................. 65 Figure 5.1: Summary of Framework Recommendations and Envisioned Outcomes...................................................................... 74 Figure 5.2: Expected Results and Costs of Combinations of Monitoring and Enforcement and Mandates................................ 78 Figure B5.3: An Overview of Economic Approaches for Valuing Ecosystem Services..................................................................... 82 Figure A.1: Chinese Government Fiscal and Organizational Structure, with an Emphasis on Environmental Management............................................................................................................................................................................................... 100 v Tables Table 2.1: Environmental Management Reforms and Interactions with Eco-compensation.......................................................... 31 Table 3.1: Programs by Government Role and Resource Management Issue.................................................................................. 47 Table 3.2: Programs by Evaluation Indicator Type.................................................................................................................................. 48 Table B3.5: Qualitative Indicators for Assessing Eco-compensation Programs............................................................................... 50 Table 3.3: Qualitative Evaluation of Select Eco-compensation Programs: Mature Programs......................................................... 51 Table 3.4: Qualitative Evaluation of Select Eco-compensation Programs: Medium-term Programs............................................ 53 Table 3.5: Qualitative Evaluation of Select Eco-compensation Programs: Newer Programs.......................................................... 54 Maps Map ES.1: Eco-compensation Programs by Major Program Category and Province in 2020...........................................................5 Map ES.2: Eco-compensation Program Case Studies Examined in This Report.................................................................................9 Map 3.1: Eco-compensation by Major Program Category in 2020 (top) and Growth in Number 2005–2020 (bottom)............ 38 vi Ecological Compensation in China: Trends and opportunities for incentive-based policies towards a greener China Acknowledgments This report was prepared by a World Bank team led by sor, Environmental Economics and Management, Renmin David Kaczan (Economist), comprising Michael T. Bennett University), Liu Jin (Senior Environmental Specialist), Li Jia (Environmental Economist, consultant and lead contributing (Environmental Specialist), Jin Leshan (Professor and Exec. author), Xiaojun Yang (Associate Professor, Xi’an Jiaotong Director, China Eco-compensation Research Center, China University), Zeng Xiangang (Environmental Economist, Renmin Agricultural University), Xueming Liu (Senior Economist, Food University), Xiawei Liao (Water Resources Specialist), Si Gou and Agriculture Organization), and Weihua Xu (Professor, (Water Resources Specialist), Marcus Wishart (Lead Water Chinese Academy of Sciences). Resources Specialist), and Daniel Mira-Salama (Senior Environmental Specialist). Research assistance and data This report is a contribution to the program on “Evaluating collection were provided by Jingjing Sun (PhD candidate, and Realizing the Value of Water in the Construction of an Xi’an Jiaotong University). Jieli Bai (Program Assistant), Dan Ecological Civilization for China,” a collaborative venture Xie (Program Assistant), Ru Xin Zhao (Program Assistant), and between the World Bank and the Development Research Center Jehona Gashi (Program Assistant) provided administrative of the State Council of the People’s Republic of China (DRC). and research support. The DRC team is led by Dr GU Shuzhong (Deputy Director General of the Institute for Resources and Environmental The team thanks Martin Raiser (Country Director, China), Policies) and includes Li Weiming (Director of Research Division, Harold Bedoya (Manager, Operations, China), Ann Jean- Institute for Resources and Environmental Policies) and Yang nette Glauber (Practice Manager), Sudipto Sarkar (Practice Yan (Associate Research Fellow, Institute for Resources and Manager), Christian Peter (Practice Manager), and Liu Jin Environmental Policies), along with other researchers from (Senior Environmental Specialist) for guidance and support. the DRC, the Chinese Academy of Sciences (CAS), the Chinese The team is grateful for the advice provided by the peer Academy of Agricultural Sciences (CAAS), the Institute of reviewers: Halla Maher Qaddumi (Senior Water Economist), Water Resources and Hydropower Research (IWHR), and Giovanni Ruta (Lead Environmental Economist), Stefano the DRC of the Ministry of Water Resources (MWR). Pagiola (Senior Environmental Economist), and Sebastian Any errors or omissions are the responsibility of the authors. Eckardt (Lead Economist, China). Further valuable reviews, advice, and guidance were provided by Hua Wang (Profes- Graphic design by Sarah Hollis. vii Acronyms CCFP Conversion of Cropland to Forest Program CNY Chinese Yuan COD Chemical Oxygen Demand CPGP Conversion of Pasture to Grassland Program FECF Forest Ecological Benefit Compensation Fund FYP Five-Year Plan GDP Gross Domestic Product KEFZ Key Ecological Function Zone MEE Ministry of Ecology and Environment MNR Ministry of Natural Resources MOF Ministry of Finance MWR Ministry of Water Resources NDRC National Development and Reform Commission PES Payments for Ecosystem Services RBECP River Basin Eco-Compensation Program (Jiangxi) SFA State Forest Administration SFGA State Forest and Grasslands Administration TN Total Nitrogen TP Total Phosphorus US$ United States Dollar YREB Yangtze River Economic Belt viii Ecological Compensation in China: Trends and opportunities for incentive-based policies towards a greener China Photo: Marcus Wishart. World Bank. 1 Executive Summary China is a global leader in the use of eco- In response, the national government embarked on large logical compensation (“eco-compensa- public investments from the late 1990s onward to restore tion”)—fiscal transfers for environmental degraded ecosystems and river basins. The government invested a cumulative US$378.5 billion (in 2015 US$) in land and natural resources management. and watershed management interventions, representing China is restructuring and rationalizing its system of environ- over 0.3 percent of GDP annually (Bryan et al. 2018). These mental and natural resource management. Eco-compensation interventions—which focused on soil and water conservation is central to this process, with its evolution and growth over in the Yellow and Yangtze basins, forest conservation in the past three decades reflecting the government’s increasing the northeast and southwest, mitigation of desertification desire for environmental management reforms that can support in north-central China, and agricultural productivity in the a greener, high-quality growth model. While this process is center and south—have covered 623.9 million hectares of challenging—involving numerous national and subnational land and involved over 500 million people. Environmental agencies, stakeholders, and interests, with intersecting and objectives are paired with poverty reduction and national sometimes overlapping programs and policies—there are food security goals. These efforts represent the largest such significant opportunities to build on existing successes and programs in the world, and while the challenges remain incorporate domestic and international lessons learned. substantial, China has done more in absolute terms than any other country to reverse land and water degradation.1 China’s rapid economic ascendance over the past four decades brought large economic gains, but at high envi- These investments constitute substantial fiscal transfers ronmental costs. Market reforms from 1978 onward fueled a from the national government to subnational levels of roughly thirtyfold increase in per capita output and lifted 850 government (and in some cases, onward to individual million people out of poverty. Yet rapid growth—and many landholders). China is one of the most fiscally decentralized of the policy reforms that supported it—has led to equally countries in the world, with 85 percent of government spending rapid increases in pressure on the environment and natural occurring at subnational levels (Wingender 2018). Such na- resources, and an implied environmental cost associated tional-to-local transfers are one of the national government’s with the rapid depletion of natural capital averaged 3.6 most important tools for motivating and aligning actions across percent of gross domestic product (GDP) annually between levels of government and across jurisdictional boundaries. 1978 and 2018. They are particularly important in the context of land and water management issues with large spatial spillovers, such These costs were seen in the degradation of rural landscapes, as river basin management, and integral to China’s fiscally water systems, natural habitats, and ecosystems. While decentralized governance system. impacts in recent years have slowed or reversed, around 40–50 percent of China’s total land area (3–4 million km2) remains adversely affected by overgrazing, deforestation, desertification, and salinization (Deng and Li 2016). This has reduced agricultural productivity, degraded water quality, impaired the resiliency and functionality of major river systems such as the Yangtze and Yellow, and contributed to natural disasters—including major flooding in the late 1990s that was exacerbated by siltation buildup and deforestation, 1 By comparison, the largest equivalent program in the US—the US Conser- vation Reserve Program—covers around 12 million hectares with a total and regional dust storms arising from denuded landscapes. expenditure of US$46.2 billion from 1987–2016. 2 announced China’s commitment to peaking its carbon dioxide Eco-compensation is becoming an in- (CO2) emissions by 2030 and achieving carbon neutrality by creasingly important part of the country’s 2060. China’s target and associated nationally determined environmental and natural resources contribution under the United Nations Framework Convention governance framework, even while the on Climate Change will likely require substantial contributions term continues to evolve in meaning. from improvements in agriculture practices, forestry, and Eco-compensation is not a single program or policy land use change. Such “nature-based” strategies to climate mechanism; it is a conceptual approach to environmental emissions reductions would complement mitigation efforts in management rooted in the use of fiscal transfers and market the energy and transport sectors, reduce overall economic mechanisms to reduce negative environmental externalities. costs of decarbonization, and if designed appropriately, It is grounded in the use of payments to reapportion the provide co-benefits such as biodiversity. Future international costs and benefits of environmental protection between commitments, such as the proposed 30 x 303 initiative or beneficiaries and suppliers of ecosystem services. Over the others for biodiversity conservation, would also require past decade, the term has broadened substantially to include contributions from land use sectors. Eco-compensation, direct government payments to individuals and communities as China’s primary tool for incentivizing environmental for the provision of ecosystem services; compensation to management and land use change, will be central to these households, communities, or governments for regulatory and related efforts. takings or environmental damages; environmental markets and trading mechanisms; and frameworks for cooperation This report traces the rise of eco- and fiscal transfers between jurisdictions of the same level, compensation, explores its current use, among others. quantifies trends, and provides recom- The national government has signaled a clear commitment mendations to strengthen impacts. to expanding the use of eco-compensation to address Eco-compensation is poorly understood outside of China; environmental challenges. Eco-compensation features even within China, the disparate nature of data and the prominently in the 14th Five-Year Plan, which calls for an diversity of programs means that key trends and lessons increase in transfer payments for ecologically sensitive areas are easily overlooked. Drawing on a unique dataset of and river basins. A National Regulation on Eco-compensation eco-compensation programs from records across government, (draft) was published by the National Development and academia, and the news media, this report tracks the rise Reform Commission (NDRC) in December 2020, providing of programs in terms of number, expenditure, governance a definition of eco-compensation in broad terms,2 allocating structure, and function across provinces in China (box ES.1). high-level responsibilities across ministries, and instituting an Key emerging trends include: inter-ministerial council to guide eco-compensation’s further • A range of program types have begun to solidify under development. As funding to eco-compensation programs grows, national government guidance. Eco-compensation so does the need to ensure that programs are effectively, programs include those focused on water management, efficiently, and equitably delivering on their potential. ecological protection, and reforestation and rural land Eco-compensation is also likely to play a key role in use change, among other natural resource issues. China’s efforts to meet global environmental and climate These categories contain a wide diversity in de facto commitments. In September 2020, President Xi Jinping design and implementation approaches, given China’s highly decentralized framework for environmental and 2 The draft National Regulation defines eco-compensation as financial transfers payments or market transactions that provide appropriate 3 The 30 x 30 initiative is a commitment to protect at least 30 percent of compensation for costs incurred for ecological protection. This is applied the world’s land and ocean by 2030. It was proposed by a group of “high broadly, to include fiscal transfers between governments, incentives to ambition” countries in January 2021 and will be discussed at the 15th Con- individuals, compensation for regulatory takings, environmental markets, ference of Parties to the Convention on Biological Diversity, in Kunming, green financing, procurement, and certification mechanisms. China, October 2021. 3 Ecological Compensation in China: Trends and opportunities for incentive-based policies towards a greener China Box ES.1: Report Objectives This report aims to explore the broad and evolving concept of The report documents China's success in harnessing such mechanisms eco-compensation in China. Specific objectives include: for both domestic and international audiences, and proposes framework policy recommendations for policy makers and stakeholders. 1. Defining the concept of eco-compensation as it is currently understood and applied in China; The breadth of the eco-compensation concept means that this report does 2. Tracing the rise of eco-compensation, exploring its current use, not make recommendations for specific programs, but instead informs and quantifying trends in its evolution; broader policy considerations of relevance to a range of programs. 3. Deriving lessons from select programs with a focus on the Yangtze Land and water management are the primary topic areas of focus. and Yellow River basins; and Given the prominent role of government in China's most influential 4. Documenting challenges to improved eco-compensation in China, and programs, this report places relatively greater emphasis on public offering framework recommendations to address these challenges. fiscal transfers relative to environmental markets. Source: Authors. fiscal policy (i.e., the national government provides within national programs focused on key ecological funding and broad guidelines, and provides subnational zones, reforestation, and land use change), yet it is an governments with the latitude to interpret and adapt important indicator of institutional experimentation, them). Programs are widely distributed, both due to innovation, and current policy focus.4 the spatial scope of large national programs and • A majority of the newer water-related programs target due to ongoing and increasing experimentation by water quality, with performance-based rewards and provinces (map ES.1). penalty payments linked to water quality outcomes. • While watershed co-benefits have always been an Often under these programs, water quality improve- important goal of eco-compensation, new programs ment beyond a baseline entails a payment from the are increasingly directed explicitly toward water lower to upper watershed county to defray costs, quality and quantity management challenges. Such while worsening water quality entails the opposite, water-related programs increased from 2 in 1999 to constituting a penalty to compensate for damages an estimated 67 in 2020 (figure ES.1). These include downstream. These often involve up-front financial (1) cross-border agreements between provinces within contributions by the participating counties/districts river basins (interprovincial “horizontal” programs), (2) into a program fund, out of which rewards are paid cross-border agreements between upper and lower for performance (Peng and Xiao 2019). watershed municipalities (intra-provincial horizontal • The national government has been strongly promoting programs), and (3) water source protection programs the development of this type of program to strengthen based on funding pools supported by downstream beneficiary contributions (localized water funds). It is 4 The number of programs is indicative of trends but should not be important to note that the number of programs is only considered definitive given difficulties in determining the “boundaries” of some programs (i.e., some programs are subprograms within, or are one metric of eco-compensation’s prominence and supported financially by other programs, while others undergo reforms or name changes). The data collection process used for this report is use (expenditure, for instance, remains concentrated described in chapter 3. 4 Executive Summary MAP ES.1: Eco-compensation Programs by Major Program Category and Province in 2020 Source: Custom data collected by authors from a systematic review of available news, and academic and provincial government sources. Note: The number of programs should be considered indicative rather than definitive given challenges in determining the precise “boundaries” of some programs (see box 3.1). FIGURE ES.1: Growth in Eco-compensation Programs by Major Program Category 140 Conservation Soil Erosion 120 Agriculture Wetland 100 Grassland Watershed Number of Programs Water Source Protection 80 Cross-border Forestry 60 40 20 0 1999 2002 2005 2008 2011 2014 2017 2020 Source: Custom data collected by authors from a systematic review of available news, and academic and provincial government sources. Note: The number of programs should be considered indicative rather than definitive given challenges in determining the precise “boundaries” of some programs (box 3.1). 5 Ecological Compensation in China: Trends and opportunities for incentive-based policies towards a greener China FIGURE ES.2: Annual Investments by China’s Eco-compensation Programs 200,000 All other programs 175,000 MWR Soil Erosion Prevention/Control National Key Ecological Function Zones 150,000 Grazing to Grassland Program Annual Investment (CNY, million) Forest Ecological Benefit Compensation Fund (National) 125,000 Conversion of Cropland to Forests Program 100,000 75,000 50,000 25,000 0 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 Source: Custom data collected by authors from a systematic review of available news, and academic and provincial government sources. watershed management at more localized scales.5 area—has planted trees and increased vegetative This includes joint management and coordination cover on 17.5 million hectares (ha), reaching a total capacity. A key value of these schemes, beyond the of 41 million households with a national government direct financial incentive to align actions with policy cumulative expenditure of Chinese yuan (CNY) 511.2 goals, is to promote knowledge transfer, shared billion (US$78.7 billion) since its launch in 1999. The monitoring systems, agreement on data, and basin program is being extended with increased subsidies management coordination across local jurisdictions. to households and added rural welfare guarantees. • The mainstay of eco-compensation in China, in terms • Yet these large land management and forestry of total funding and impact, remains the large-scale programs are also diversifying, as provinces introduce land management and forestry programs introduced downscaled versions operating in parallel (often with national government funding), tailored to local in response to the severe droughts and floods of the conditions. Forestry programs, for example (which late 1990s (figure ES.2). Many of these programs involve support restoration or conservation of forestlands direct, performance-based contracts with individual rural of higher ecological value), grew in number from 4 households as key stewards of ecosystem services, with large-scale programs in 1999 to 35 large- and small- funding passed through provinces.6 For example, the scale programs by 2020. Wetlands and grasslands Conversion of Cropland to Forest Program (CCFP)—the eco-compensation programs have also been developing largest eco-compensation program in the world by quickly, starting from zero in 1999, and growing to around 12 and 13, respectively, in 2020. 5 For example, see MOF. 2016. Guiding Opinions on Accelerating the Establishment of a Compensation Mechanism for Horizontal Ecological • Another important trend is the increasing use of Protection of Upper and Lower Watershed Areas. Beijing, China. eco-compensation to support China’s spatial planning 6 These programs are thus closest to the payments for ecosystem ser- vices (PES) concept widely used internationally. systems. The most prominent of these is the national 6 Executive Summary function-based land zoning system, which delineates 1 and 3.4), indicates that they have been effective at zones where development should be either concentrated, building scaled but shallow management frameworks expanded (in the future), or restricted or banned for that can now be refined and built upon with gradual environmental purposes. Transfer payments from the adjustments to program configurations and targets. national government to counties, districts, and cities • There remain significant opportunities for improvements are used to ease the burden of restrictions, and have in efficiency and equity. Diversification and leveraging steadily increased from CNY 6 billion (US$937 million) of funding sources is generally low, payments are in 2008 to CNY 83 billion (US$13 billion) in 2019. not always fully responsive to outcomes, and room Payments are based on a composite of environmental exists for better capturing and leveraging synergies indicators, including water quality, air quality, and in ecological services provision. Across program forest area, and weighted by county area, population, types, greater efficiency (i.e., greater environmental and the type of key ecological function zone. China’s outcomes per unit of spending) may be possible Ecological Redlines Policy—spatial zoning by provinces through strengthened monitoring and enforcement, at a more refined scale (currently in development) and tighter spatial targeting, use of reverse auctions and based on a “no net loss” principle—is also envisaged market-based mechanisms, and better alignment with to draw on eco-compensation mechanisms when fully landscape-level or basin-level objectives. Many programs functional. also have room for greater use of co-management • Across these program types and trends, many mechanisms between governments and communities. eco-compensation programs depend on input-based These opportunities are elaborated in a series of proxies of achievement, rather than outcomes, for framework recommendations presented below, and payments. The two main classes of indicators used to in detail in chapter 5. evaluate performance are on-site land use investments (94.3 percent of programs used these) and management The government has signaled that an activities (69.1 percent). Outcome-based environmental important focal area for eco-compen- quality and quantity indicators are used by 26.8 and 26.0 percent of programs, respectively.7 Quality indicators sation will be the Yangtze and Yellow are more heavily used by water-focused programs, River basins. although water source protection programs still often The Yangtze and Yellow River basins are home to the focus on traditional input-based land investment majority of the Chinese economy and population.8 proxies. In some contexts, this is inevitable: for example, Growing environmental impacts have led to national within individual landholder targeting programs, the government prioritization of improved land and water actions of a specific landholder cannot be seen in management within these basins. Eco-compensation has water quality outcomes. In other contexts, greater been used extensively over the past three decades within use of payments conditioned on outcomes could help these basins (for example, the CCFP was first piloted in drive improved results. the upper watershed provinces of both the Yellow and • Many programs have done very well to achieve Yangtze Rivers). The national government has called for outcomes at scale. The national framework programs new eco-compensation programs and policies to address focused on reforestation and rural land use cover large these basins’ ongoing issues, including in the 14th Five-Year areas with hundreds of millions of rural participants. Plan (FYP); however, programs are yet to be defined or A qualitative evaluation of these programs, based designed, providing opportunities for learning based on on a three-part evaluation framework (see sections previous experience. Provinces are implementing and 7 Programs can use multiple indicator types, and so totals sum to greater 8 If the Yangtze River basin was a country, it would have the world’s third than 100 percent. largest GDP. 7 Ecological Compensation in China: Trends and opportunities for incentive-based policies towards a greener China experimenting with eco-compensation mechanisms in short case studies of water management–related programs response to the national government’s call to action. in the Yangtze and Yellow River basins (map ES.2). Drawing on their experience, the report highlights opportunities The institutional landscape for river basin management for strengthening outcomes as these programs scale, or is developing, albeit with some degree of fragmentation. as they are replicated in other locations. New Watershed Ecological and Environmental Supervision and Management Bureaus have been established with There are opportunities to better align subnational responsibility for water pollution monitoring and enforcement; government efforts through the setting of basin-level these will function in parallel to the existing river basin objectives and the development of interprovincial commissions under the Ministry of Water Resources (MWR), coordination mechanisms. Basin objectives would be but are under the Ministry of Ecology and Environment (MEE). well served by basin-wide hydrological and water quality The government’s objectives for the Yangtze River basin’s modelling, and codified in basin environmental and water protection were codified in the Yangtze River Protection management plans. Hot spot analyses could be used to Law, which was issued in December 2020 and represents identify most cost-effective intervention locations, which the first legislation for a specific river basin in China. The could be further incentivized using matching funds from national and provincial governments have been increasing the national government. Basin management authorities investment in line with these priorities. could be further supported in convening and coordinating between sectors and jurisdictions. Within this landscape, new horizontal eco-compensation mechanisms—both interprovincial and within-province There are opportunities to increase the use of water cross-border watershed eco-compensation—are envisioned. quality trading for lower cost pollution control. Despite To catalyze horizontal program development, the Yangtze three decades of piloting, as well as recognition in high-level River Ecological Belt (YREB) Ecological Protection Rewards policy documents, water quality trading has not scaled in Policy in 2018 committed CNY 18 billion (US$2.76 billion) line with its potential. There is a need for national-level laws from the National Water Pollution Prevention and Control and regulations that define emission trading practices, and Special Fund to incentivize their establishment. Funding the rights and obligations of emissions permit holders, to for the Yangtze portions of existing national programs has take advantage of this potential. There is also a need to also increased: from 2017 to 2020, transfers under National resolve conflicts in the regulatory regime and harmonize Key Ecological Function Zone eco-compensation to the 11 regulations across subnational jurisdictions that share provinces in the YREB increased from CNY 23.99 billion watersheds. Scale and impact will be further supported by to CNY 32.51 billion, with funding concentrated toward more predictable program administration and transaction the relatively less-developed upper reach provinces. As a transparency (see section 4.5). result of these incentives and others, all provinces in the YREB have developed at least some form of a cross-border More broadly, eco-compensation horizontal eco-compensation scheme for the river systems programs of varied types can benefit within their borders. from reforms in at least five areas. Lessons are emerging from the growing China’s achievements with eco-compensation are undoubtedly impressive; refinements to existing number of programs within these river programs, based on lessons to date, could deliver a basins, with implications for ongoing new generation of further improved outcomes. This design and implementation efforts. report draws on findings from the three-part evaluation There is considerable experimentation in the water of existing programs—based on indicators of efficiency, management–related eco-compensation underway, effectiveness, and equity outcomes (see section 3.4) —to providing lessons for new programs. This report presents identify five target areas for reform (figure ES.3). 8 Executive Summary MAP ES.2: Eco-compensation Program Case Studies Examined in This Report 9 Ecological Compensation in China: Trends and opportunities for incentive-based policies towards a greener China Photo: Tiger Leaping Gorge, Yunnan Province, China. Xiawei Liao. World Bank. AREA ONE: STRENGTHEN MONITORING AND simplify the process of monitoring. These include blockchain ENFORCEMENT CAPACITY for automated and secure environmental payments, earth Flexible, incentive-based eco-compensation systems observation satellites and drones for cost-effectiveness, require high capacity in monitoring and enforcement. and spatially and temporally comprehensive water quality This could be supported by a stronger national government monitoring (Harshadeep and Young 2020). role at the whole-of-basin level through actions, including AREA TWO: ADDRESS GAPS IN TECHNICAL AND strengthening of the river basin commissions, more tightly SCIENTIFIC CAPACITY AT LOCAL GOVERNMENT integrating management and planning responsibilities LEVELS within ministries, and further developing platforms for Needs within monitoring and enforcement functions coordination across ministries. highlight the broader importance of addressing Monitoring data could be further standardized and scientific and technical capacity gaps at provincial broadened. Further expansion could include a wider and sub-provincial government levels. As key actors array of indicators capturing watershed ecosystem health, in operationalizing eco-compensation on the ground, such functionality, and resiliency, and would complement recent gaps constrain the ability of these actors to design and improvements in water quality data. To ensure credibility implement programs. Such constraints are particularly and well-aligned incentives, agencies responsible for pronounced for poorer inland and western regions, which environmental monitoring should be independent from are also the key repositories of much of China’s critical agencies responsible for achieving ecological and envi- biodiversity and important headwaters for the Yellow and ronmental targets. Yangtze Rivers. Monitoring and enforcement could also be supported Special-purpose grants could support training of provincial through emerging technologies. While technology is government staff—with a priority focus on knowledge no substitute for sound policy design, recent innovations areas of high need—along with the provision of technical 10 Executive Summary support where local expertise is lacking. Priority areas of major land and water use activities in the basin to inform could include (among others): nonpoint source pollution government priorities around which eco-compensation control, market design (for water pollution emissions programs to develop (or support with national government trading), and consultation methods for participatory funding) and where interventions should be made. program design. Capacity-building and standard setting A public expenditure review could be used to ensure around economic analyses (for example, standardizing and better alignment between current fiscal flows and land- regularizing the use of benefit-cost analyses, including scape- or basin-wide planning objectives. The magnitude ecosystem services valuation) would also be valuable. of financing under eco-compensation programs is large Not all elements of these capacities are required at every and disparate, and targets a wide array of objectives. A level—specialized economic evaluation, for instance, is systematic analysis would aim to account for such flows likely best concentrated in ministries or research institutes at the national or basin level, assessing what outcomes (or left to third-party service providers) and provided to those flows are achieving, and establishing the degree to subnational governments as needed. However, the ability which gaps or overlaps exist in funding flows in relation to utilize and interpret such technical functions remains to top-level planning objectives. Such a process would crucial at the subnational level. employ methods well-established internationally and Further development of forums for cross-learning could identify opportunities for scale-up or redirection between local government decision-makers and of misaligned spending. stakeholders would also be valuable. Gaps in some local This would be well complemented by a comprehensive government capacities are exacerbated by challenges in regulatory review, which would focus on identifying knowledge sharing of China’s varied eco-compensation preexisting regulatory incentives and disincentives experiences. National government guidelines, opinions, that may be conflicting. This would help strengthen and policy documents have, to date, primarily provided programs by identifying where eco-compensation can broad frameworks and principles for the development of be most effectively positioned within the current regula- eco-compensation programs, leaving the heavy lifting in tory framework, and what reforms in other sectors (e.g., operationalizing concepts to provincial and sub-provincial removing environmentally harmful agricultural subsidies) governments. The 2020 draft National Eco-compensation could best complement the programs. It could also aide in Regulation calls for such platforms at the central level the removal of contradictory policies. For example, water (through a conference of ministries); river basin commissions quality trading has been hampered in some situations by could also be formally mandated to support these efforts. dueling regulations: traditional mandates that conflict with trading’s flexible approach should be reconciled. AREA THREE: GREATER ADOPTION OF HOLISTIC LANDSCAPE-LEVEL OR BASIN-LEVEL PLANNING AREA FOUR: IMPROVE INTERAGENCY AND INTER- Limitations in holistic landscape- or basin-level planning REGIONAL PLATFORMS TO SUPPORT ECO-COMPEN- constrains provincial and sub-provincial governments SATION ACROSS SUBNATIONAL BOUNDARIES in developing programs aligned with higher-level policy Platforms for joint decision-making and planning at the goals. This is especially true regarding the contributions basin level would help ensure coordination of actions of localized programs to basin-wide management goals, and resolve disputes across administrative boundaries. such as flood mitigation, environmental flows, and stable The recent establishment of the Watershed Ecological long-term water quality. A basin-wide management framework and Environmental Monitoring Bureaus under the MEE could be used to help guide disparate provincial-level shows a national government commitment to building such programs, starting with the development of a comprehensive platforms. Long term, these commissions either need to basin-level plan that incorporates all sectors and activities. be sufficiently strengthened, or be a higher-level unified The framework would need to consider the status and trends management framework with functions and responsibilities 11 Ecological Compensation in China: Trends and opportunities for incentive-based policies towards a greener China Photo: Rice terraces and farming village in Longsheng, Guangxi province, China. iStock. that encompass a more comprehensive range of land use of program implementation through co-management. Such and economic planning and enforcement responsibilities. capacity will be critical for effectively addressing China’s Explicit channels for interagency and interregional knowledge largest source of surface water pollution, rural nonpoint sharing could also be created, such as departments or source pollution. units within ministries solely dedicated to intra-government Greater adoption of competitive and market-based coordination and information sharing (with incentives for mechanisms, such as tradeable emissions permits and official’s tied to these data sharing goals). Development of reverse auctions, could support flexibility and adaptation. further mechanisms and protocols for conflict resolution Such mechanisms will give programs the ability to rapidly among the regional governments and other stakeholders adjust subsidy or payment rates to reflect changing relative would also be valuable (and could potentially be housed prices in the economy due to changing socioeconomic and within the strengthened basin-level authorities). environmental conditions. Incorporating local knowledge AREA FIVE: ADOPTION OF ADAPTIVE AND PARTICIPA- into program designs may also help identify lower-cost TORY DESIGN AND IMPLEMENTATION APPROACHES options by understanding the needs, constraints, and interests of local actors. Building flexibility and adaptivity into monitoring and management frameworks will be critical for addressing Adaptive and participatory management would be well uncertainty and improving outcomes over time. This served by improved program tracking and periodic includes a strengthened capacity of provincial governments evaluation. Monitoring of varied socioeconomic and to refine approaches to address changing conditions, and environmental dimensions—e.g., ecological outcomes; the ability to better engage local communities as key agents leakage to other areas; program impacts on income, structure 12 Executive Summary FIGURE ES.3: A Summary of Recommended Measures for Improved Eco-compensation Programs, with Envisioned Outcomes KEY TARGET AREAS RECOMMENDED MEASURES ENVISIONED OUTCOMES A. STRENGTHENING MONITORING AND ENFORCEMENT CAPACITY A.1. STRENGTHEN basin-level management platforms and E ectiveness authorities at the national level. → Quantification of ecosystem services flows and land use impacts on them improved. A.2. STANDARDIZE and broaden the monitoring data → Better attribution of the impacts of di erent interventions given di erent contexts and baselines improved. collected and published. → Targeting of investments improved. A.3. ENSURE that monitoring and implementation functions E ciency are separate. → Capacity to evaluate the cost-e ectiveness of di erent approaches strengthened. → "Price discovery" mechanisms facilitated through verifiability of ecological outcomes. → Conservation finance flows catalyzed via real profit opportunities linked to attributable ecological outcomes. Equity → Greater adoption of market-based mechanisms ensures that schemes benefit participants, and costs and benefits of ecological restoration, protection, and management are more equitably shared among the key stakeholders. B. ADDRESSING GAPS IN TECHNICAL AND SCIENTIFIC CAPACITY AT LOCAL GOVERNMENT LEVELS B.1. TRAIN provincial government personnel in knowledge E ectiveness areas important for eco-compensation program → Capacity to deliver ecological management outcomes strengthened. development and implementation. (See A.1) → Rate of innovation in eco-compensation increased. B.2. PROVIDE technical support to provinces where gaps in → Scaling up of e ective approaches facilitated. expertise exist. (See A.2) → Development of an environmental services sector catalyzed. B.3. DEVELOP and strengthen knowledge-sharing platforms. E ciency B.4. PROVIDE stronger guidance on program design options. → Capacity to more e ciently use available resources to achieve outcomes strengthened. → Capacity to conduct cost-benefit analyses of potential and current programs improved. → Capacity to development and utilize market-based program design components improved. Equity → Stakeholder needs and constraints better incorporated into planning and design. C. DEVELOPING TOP LEVEL HOLISTIC PLANNING FRAMEWORKS TO INFORM PROGRAM TARGETS AND METRICS C.1. CREATE a comprehensive basin-level plan. (See A.1) E ectiveness C.2. CONDUCT a public expenditure review. → Targeting of investments within a larger landscape improved. C.3. REVIEW the regulatory framework → Landscape- and basin-level outcomes improved through stronger linkages with local eco-compensation program comprehensively. design and indicators. → Improved eco-compensation program design to accord with the regulatory landscape. E ciency → Regional targeting of investments to capture comparative advantages and synergies in ecological services provision improved. Equity → Ability to identify locales where ecological and rural welfare co-benefits could best be achieved with program interventions improved. D. DEVELOPMENT OF MORE EFFECTIVE CROSS SECTORAL, INTERAGENCY, AND INTERREGIONAL GOVERNANCE PLATFORMS D.1. ESTABLISH platforms for joint decision-making on E ectiveness basin-level planning. (See A.1) → Scaling up of e ective approaches facilitated. D.2. CREATE explicit institutional channels for interagency → Development of interprovincial programs quickened. and interregional knowledge sharing. (See A.1) → Landscape-level planning and management improved. D.3. DEVELOP mechanisms and protocols for conflict → Rate of innovation in eco-compensation increased. Lessons learned better captured. resolution. (See A.1) E ciency → Improved regional targeting to improve cost-e ectiveness improved. Equity → Stakeholder needs and constraints incorporated into planning and design. E. GREATER ADOPTION OF ADAPTIVE, PROCESS BASED AND PARTICIPATORY MANAGEMENT, PROGRAM DESIGN, AND IMPLEMENTATION APPROACHES E.1. BUILD adaptivity into monitoring systems. (See A.1 & A.2) E ectiveness E.2. EXPAND the use of market-based mechanisms. (See B.1 & B.2) → Capacity to deliver ecological management outcomes strengthened. E.3. EXPLORE greater adoption of adaptive co-management mech- → Scaling up of e ective approaches within rural landscapes improved. anisms in program design and implementation. (See B.1 & B.2) → Program ecological management outcomes made more stable and sustainable via local stakeholder buy-in. → Capacity to address uncertainty strengthened. E.4. USE lessons learned in co-management mechanism develop- ment to create guidelines and protocols. (See B.1 & B.2) E ciency → E ciency improved via identification of lower-cost approaches. E.5. MINIMIZE equity-e ciency trade-o s via stronger guarantees of voluntarism. Equity → Rural welfare outcomes strengthened and improved. → Capacity to build partnerships with local communities strengthened. 13 Ecological Compensation in China: Trends and opportunities for incentive-based policies towards a greener China of livelihoods, and community equity; and household and conditions, but are not easily adapted to a broader community attitudes and awareness—could be made an range of contexts. China has also used pilots extensively explicit part of program development from early stages, (discussed throughout this report), but has also moved with formal mechanisms for feeding results into periodic rapidly to achieve scale before subsequently refining program reviews and community consultations. Program interventions further within the context of a scaled impact evaluation could be included in the training and framework. This is not to discount the value of piloting technical support activities outlined in (2) above. to refine mechanisms and address the specifics of local conditions, and the utility of pilots in China could be China’s eco-compensation experience improved if paired with greater tracking and evaluating also offers broad insights that may of program impacts and success factors. However, be useful for other countries as they China’s experience suggests that scaling while also using flexible approaches (see above) may offer a develop their own incentive-based valuable middle ground. environmental programs. • The value of using programs as capacity-building Despite the scale—and in many respects the impressive processes: China’s experience at the local level success—of China’s eco-compensation developments, shows that program development serves as a they are not well known and understood internationally. critical capacity-building exercise, both for the China’s experience is unique, and important caveats exist implementation of the program being developed, to the transfer of specific lessons abroad.9 Yet broad as well as for broader environmental management insights in the development of incentive-based programs functions. This contrasts with discussions around and environmental management systems can be drawn. setting “preconditions” for certain investments or This report highlights four general lessons: interventions. China’s experience suggests that in • The value of allowing flexibility in how programs many cases eco-compensation can be developed are developed: Allowing flexibility on the ground is in contexts where such preconditions are relatively as an important factor in the successful expansion weak, and the process of policy implementation and of eco-compensation across China. The national experimentation will serve to establish the preconditions government provides funding and broad guidelines, and themselves. This must be balanced with ambitions for it provides subnational governments with the latitude rapid scaling (as above) which requires some baseline to interpret and adapt within that framework. Flexibility of capacity. is also facilitated through blended government finance • The value of monitoring, information sharing, and opportunities, wherein local governments have some transparency: Gaps in monitoring, transparency, ability to mix and match different tranches of national and data sharing have resulted in some missed government funds. Other countries may similarly be able opportunities in China to improve program outcomes, to harness elements of such framework approaches. and to tap into a wider range of sources of finance for • The value of striving for scale in the early stages of environmental management. While China is prioritizing program development: Many environmental inter- the strengthening of its environmental monitoring ventions and investments struggle with the challenges capacity, much work remains. Other countries can of achieving impacts at scale. Often approaches are avoid these potential challenges by adopting rigorous carefully piloted and refined to address specific local monitoring and data transparency measures earlier. 9 For example, few countries have China’s depth of finance available for investment, or its subnational government coverage and reach. 14 Executive Summary 15 CHAPTER 1. Introduction 16 View of the first bend of the Yangtze River in Lijiang, Yunnan Provnice, China. iStock. Photo: costs. Market reforms from 1978 onward fueled a roughly China is embarking on a difficult path thirty-fold increase in per capita output, driven initially by that promises substantial rewards: low wage labor and capital investment in resource-intensive restructuring and rationalizing its system sectors. As a result, China’s share of the world economy of environmental management. increased from 1.5 percent in 1978 to 15.0 percent today, It is a system comprising numerous national and subnational and more than 850 million people have been lifted out of agencies, stakeholders, and interests, with intersecting and poverty. This constitutes an impressive economic success sometimes overlapping policies and programs for land and story. However, extractive growth has also caused significant water management. The system has evolved substantially over damage to the country’s ecosystems and natural resources. the past three decades and delivered important improvements World Bank estimates suggest these impacts have had an in China’s ecological and environmental conditions. There implied cost of 3.6 percent of gross domestic product (GDP) also remain gaps in scientific, technical, institutional, and annually on average between 1978 and 2018.10 financial capacity, especially at provincial and sub-provincial While such challenges linked to growth reflect global levels. Strengthening this system to achieve an improved trends, their scale, complexity, and rate of change in level of environmental management remains an important China have been unprecedented, as has been the ongoing endeavor. government’s response. Multiple large-scale disasters The Chinese government recognizes the significant oppor- in the late 1990s motivated development of programs to tunities available in this process. China can jump ahead to a improve land, water, and forest management outcomes, and more innovative and effective management regime by building to increase the sustainability and productivity of agriculture. on its existing successes and incorporating lessons learned These programs have invested more than US$378.5 billion,11 domestically and internationally. This includes expanding the covered 623.9 million hectares of land, and involved over policy toolkit to encompass a wider range of instruments via 500 million people, mostly since 1998 (Bryan et al. 2018). adopting and adapting incentive-based approaches to achieve Drawing on a mixture of mandates, incentives, and direct outcomes more efficiently. It also includes mainstreaming government investments, they have made progress toward natural capital and ecosystem services into overall economic reducing soil and water degradation, increasing forest cover, planning, investments, and management. and gradually nudging rural land use into a more sustainable pathway. China has done more in absolute terms than any “Ecological compensation”—one of the most important other country to tackle these challenges. mechanisms in China for bridging national vision and local reality in environmental outcomes—is central to Continued investment—and improvements to the institutions this process. The term “ecological compensation,” or that channel such investment—is required to deal with “eco-compensation,” encompasses a broad range of policy the substantial challenges that remain, and to address mechanisms and instruments aspiring to introduce more an expanded scope of environmental issues. Despite flexible performance- and market-based components into the substantial improvements made to land and water environmental management. First used in the early 1990s, management, China’s environmental conditions continue it was revived in the early 2000s and now often serves in to rank below countries of comparable income. In 2020, the government documents as a placeholder for “innovative Yale Environmental Performance Index ranked China 120 environmental policy approaches.” Its evolution reflects trends out of 180 countries based on its performance on multiple in the government’s broader environmental management environmental dimensions. Notably, China’s environmental reforms that are critical for realizing China’s desired shift performance ranked below that of other income-comparable, to a greener, high-quality growth model. upper-middle-income countries, such as Turkey, Brazil, Mexico, and Russia. All countries with equivalent or higher per capita China’s rapid economic ascendance over the past four decades has brought huge economic and social rewards; 10 World Bank Staff estimates based on National Bureau of Statistics data. however, it has also come at significant environmental 11 In 2015 US$. 17 Ecological Compensation in China: Trends and opportunities for incentive-based policies towards a greener China income exhibited higher environmental performance than term eco-compensation has broadened substantially. While China (figure 1.1). still evolving in meaning, eco-compensation is grounded in the idea of environmental fiscal transfers, and of utilizing Recognizing that environmental issues undermine market-based, direct pay, and/or performance-based long-term economic growth and human development, payments to equitably and efficiently apportion the costs promoting more sustainable patterns of consumption and benefits of environmental protection and management and production has become a major priority. This is between key beneficiaries and suppliers of ecosystem being pursued through productivity and innovation-driven services. It encompasses payments for ecosystem services development; rebalancing toward consumption and services; (PES)—a term used internationally to describe conditional improving equitable access to basic public services; and and incentive-based environmental policies—but goes reversing degradation through improved environmental well beyond PES to include compensation for regulatory management. National government funding of environmental takings, direct government to government transfers, and protection and pollution control increased to US$35.7 billion frameworks for cooperation (box 1.1). in 2019, a fivefold increase from 2017 (Hu, Tan, and Xu 2019). China has started to slow greenhouse gas emissions Eco-compensation’s growing prominence and breadth of meaning represent both opportunities and risks. The growth, reduce air and water pollution, improve resource national government is increasingly linking the term to a efficiency of the economy, and enhance land management. growing range of desired improvements in environmental “Ecological compensation,” or “eco-compensation,” outcomes, but has yet to map out a clear pathway for their is becoming an important part of this drive toward realization. Provinces are implementing new eco-compensation sustainability. First used to denote a fee levied to support mechanisms in response to the national government’s call China’s former National Environmental Protection Agency, the to action, with some degree of repackaging of preexisting FIGURE 1.1: China's Environmental Performance: International Comparison 70 Bulgaria Costa Rica Albania Colombia Turkmenistan 2018 Environmental Performance Index (EPI) 65 Russia Belarus Romania Brazil Malaysia Argentina 60 Mexico 55 Maritius Turkey Maldives 50 China Grenada South Africa 45 Gabon 40 3,995 6,090 1,185 10,280 12,375 GNI per capita (Atlas method, 2018 US$) Source: World Bank and Development Research Center (forthcoming). Note: Environmental outcomes are quantified by the Yale Environmental Performance Index (2020), a composite of metrics covering air, soil, water, biodiversity, fisheries, and carbon emissions, among others. Gross national income (GNI) is based on World Bank data. 18 Chapter 1. Introduction Box 1.1: Programs and Mechanisms Commonly Encompassed by the Term Eco-compensation Eco-compensation covers a wide range of program mechanisms, actors, • Top-down financial transfers to subnational governments to fund and scales, including: and incentivize environmental management; and • Direct government payments to individuals and communities for • Top-down financial transfers to less developed western regions for the provision of ecosystem services; compensation for past extractive and environmentally damaging resource use as part of the country’s economic development, and • Compensation to households, communities, or subnational gov- to strengthen current environmental management capacity. ernments for regulatory takings associated with environmental policies (e.g., due to the creation of protected areas or other The varied forms of eco-compensation are based on the principle of development restrictions); internalizing environmental externalities, in which financial transfers • Frameworks for cooperation and financial transfers between ensure that the environmental costs and benefits of resource use subnational governments to provide incentives for ecosystem reflect the costs and benefits to wider society. However, programs service provision by apportioning responsibilities, rights, costs, differ significantly on: (1) whether payments come from government or and benefits; other actors, (2) whether environmental improvements are mandatory or voluntary, or (3) whether payments flow to individuals or jurisdictions • Fees, levies, or taxes on natural resources used to raise funding (figure B1.1). for (and to incentivize) sustainable use and management of those resources; Few countries have the diversity of eco-compensation programs found in China, where almost all of the below categories are represented in one form or another. FIGURE B1.1: Common types of Eco-compensation Programs and Examples from China and Internationally LEGALLY MANDATED ENVIRONMENTAL IMPROVEMENTS? No Yes STATE IS THE PAYER? 1a. User-financed voluntary PES schemes (e.g., water funds) 3. Environmental compliance markets (e.g., carbon trading No markets, biodiversity offset programs) 1b. Voluntary carbon markets (e.g., carbon offsets) 2a. Government-financed voluntary PES schemes (e.g., US 4a. Compensation payments to individuals in restricted conservation reserve program) areas (e.g., protected area payments) Yes 2b. Ecological fiscal transfers to jurisdictions (e.g., India's 4b. Foregone development compensation to jurisdictions in provincial payments system) restricted areas (e.g., National Key Ecological Function Zones) Note: State refers to the overarching government that represents both those who receive benefits from, and those who face costs in creating environmental improvements. Type (a) refers to individual or firms as payment recipients; type (b) refers to jurisdictions such as provinces or counties. Sources: Zhang et al. 2010; Lopez and Bennett 2018; Authors. 19 Ecological Compensation in China: Trends and opportunities for incentive-based policies towards a greener China Box 1.2: How Should Eco-compensation Programs Be Assessed? The breadth of the eco-compensation concept means it is difficult No program can achieve all goals. There are trade-offs between these to provide a single metric of assessment. However, there are clear metrics (for instance, between targeting for high-impact locations, and principles that all programs can strive for to balance economic, targeting socioeconomic goals in addition to environmental goals). environmental, and social goals. This report considers the following Programs should define goals up front, be explicit about trade-offs, and characteristics to be important in designing and evaluating programs: continually measure progress and adapt implementation and design efficiency defined by the return on public or private spending, equity by to improve performance on the goals prioritized. This report draws social outcomes (including transparency and stakeholder participation), on this framework to assess programs and make recommendations and effectiveness by the environmental impact the program has relative (see chapters 3 and 5). to the baseline and relative to the outcomes in the absence of the program (Figure B1.2). FIGURE B1.2: A Conceptual Framework for Assessing Eco-compensation across Multiple Dimensions Is the program fair, and supported by communities? Is participation (within incentive programs) truly voluntary? Is compensation (within mandatory programs) fair? EQUITY Is program design and implementation based on consultation? Are program data (inputs and outcomes) publicly available? Does the program achieve its goals in a cost-effective way? Does public expenditure match public good outcomes? Are private sector contributions leveraged, where possible? Are potential synergies and tradeo s between ecosystem services recognized? Is funding secure for program with ongoing needs? EFF CY Does the program deliver meaningful environmental improvements? TI EC E N VE CI EF FI Are achieved outcomes beyons what would happen without the program? NESS Are high-impact locations priorized, and detrimental spillovers avoided? Are results credibly monitored and attributable to the program? Is the program’s scale (extent and time horizon) meaningful and appropriate? Source: Authors. 20 Chapter 1. Introduction activities taking place. Meanwhile, most national govern- complemented by short case studies. By necessity, the ment eco-compensation consists of top-down payment report provides framework recommendations and principles programs targeting broad ecosystem types. Overall, what for improvement, rather than recommendations directed is taking shape is a system of geographically scaled but toward specific programs. relatively shallow overlapping management frameworks, The report includes a special focus on the Yangtze and with varying levels of efficiency, effectiveness, and equity Yellow River basins. These geographic regions are home to (box 1.2). The national government has signaled a clear some of China’s most important water-related and ecological commitment to improving environmental outcomes, and natural resources, and are home to a majority of the Chinese is increasing eco-compensation financing toward this economy and population (if the Yangtze River basin was goal. However, at present, growth in eco-compensation a country, it would have the world’s third largest GDP). risks replicating existing inefficiencies. There is a need for They are also extremely complex hydro-ecological and strategic thinking on how eco-compensation policies and economic systems, with competing users across sectors, programs should be refined within China’s complex and jurisdictions, and ecosystem types. Growing environmental evolving environmental governance landscape to meet impacts have led to the national government prioritizing current challenges. improved land and water management within these basins. This report presents eco-compensation’s current and Eco-compensation has been used extensively over the envisioned role within China’s evolving environmental past three decades in these basins; new instruments are governance landscape, and makes recommendations now envisaged, but are yet to be defined or designed, for improvement. The objective of this report is to identify providing opportunities for learning from experience. how eco-compensation is taking shape, how it contributes The remainder of the report is organized as follows. Chapter to China’s environmental management regime, and what 2 presents the rise and evolution of eco-compensation, opportunities exist for its refinement and improvement. linking its development to the broader environmental The report places eco-compensation within the context management reforms to which it has contributed. Chapter of China’s overall environmental management reforms, 3 then presents distinct types of eco-compensation as exploring how it has contributed to, and been facilitated by, well as an assessment of trends, based on a database of those reforms. It provides recommendations for Chinese programs developed for this report. Chapter 4 explores policy makers for further refinements to eco-compensation how eco-compensation is being used to address water based on an assessment of existing programs and remaining management challenges of the Yangtze River and Yellow River institutional challenges. Throughout, the report highlights basins. Chapter 5 provides framework recommendations China’s considerable success with eco-compensation. It to improve eco-compensation outcomes and help realize takes a whole-of-China view, assessing national-level trends, China’s ambitious environmental goals. 21 CHAPTER 2. Eco-compensation within China’s Evolving Ecological and Environmental Governance Framework Photo: The Yangtze river in Hubei Province, China. iStock. 22 billion) in direct economic losses and damage, and affected Eco-compensation has become a key 22.3 million hectares (ha) of cropland in 29 provinces (Xu component of China’s overall drive and Cao 2001; Xu et al. 2010). toward sustainability. Of the programs developed in response to these disasters It has become both an increasingly broad concept encompassing (the “Six Key National Forestry Programs”), the Conversion a wide range of performance-based policy instruments and of Cropland to Forests Program (CCFP) was the most approaches, and an important coordination tool within the innovative (Liu 2002; Hyde, Belcher, and Xu 2003).13 The Chinese government’s fiscal and organizational structure. CCFP directly engaged rural households as stewards of This chapter presents the evolution of eco-compensation, ecosystem services, providing subsidy payments to retire and demonstrating its role within China’s environmental management afforest their sloping or marginal cropland, and to manage the regime and fiscal system. planted trees to ensure survival, with the level and duration of subsidies depending on the region and type of plantation.14 2.1 THE STARTING POINT: The CCFP expanded quickly, starting with around 300,000 hectares of enrolled cropland across three pilot provinces DROUGHTS AND FLOODS in 1999, and growing to 7.2 million hectares by the end of The term “ecological compensation” first appeared in 1993, 2003, at which time it was being implemented in more than when the then National Environmental Protection Agency 25 provinces (Uchida, Xu, and Rozelle 2005; Xu et al. 2010). (NEPA) began collecting a Pilot Ecological Environment This flagship program provided crucial policy learning for Compensation Fee. This fee was used by the agency to raise a range of subsequent programs and the development of revenues to finance environmental rehabilitation and protection, eco-compensation in China more generally. while around the same time, the national government was While the CCFP regrew forests, the Forest Ecological laying broader foundations for eco-compensation. In 1992, Benefit Compensation Fund (FECF) protected existing the State Council announced12 a “forest price system and a forests. The FECF targeted standing forest area that was forest ecological benefit compensation system for paid use deemed to provide important ecological goods and services of forest resources” (Zhang and Crooks 2012). This led to the (“public benefit forests”). The idea for a such a program had inclusion in the 1998 revision of the Forest Law, of a plan long been discussed by policy makers.15 Under the FECF, to “establish a forest ecological benefit compensation fund payments are made to households who are the land users for the construction, tending, protection, and management for a “public benefit forest area,” primarily in eastern and of forest resources and trees for ecologically beneficial shelterbelts and special-purpose forests” (CCICED 2008). Disaster accelerated the process of turning these ambitions into reality. Severe drought in the Yellow River basin and flooding in the upper Yangtze River basin and northeast 13 These programs were motivated by a growing understanding that the China in 1997–1998 motivated the launch of a portfolio of severity of these disasters was significantly magnified by degradation of large-scale forest sector programs. The Yellow River witnessed riparian and upper watershed forests and ecosystems due to agricultural extensification and timber overharvesting. The programs focused in large a historic dry out in 1997, failing to reach the sea for 267 days. part on shifting the forest sector away from extractive timber production to The summer of the following year witnessed catastrophic a more balanced management and utilization of forest resources based on the full range of ecological services they provide. flooding along the Yangtze River, and along the Songhua 14 The initial subsidy scheme paid part of these subsidies in grain. This was and Nen Rivers in Northeast China that claimed more than subsequently shifted to cash-based subsidies. 4,000 lives, caused an estimated CNY 255.1 billion (US$37.2 15 While the legal foundations for FECF were set down in the revised Forest Law (1998), it was in 2000 that the State Council agreed that the money for compensation be directly allocated from the fiscal budget, putting in place a formal source of funding (Zuo et al. 2005). In January of the same year, 12 Notice on the Essential Points of the 1992 Economic System Reform, the Forest Law Implementation Regulations were put in place, with Article National Issue [1992] No. 12; Notice on Further Strengthening Afforestation 15 of Section 3 stating that those who manage and protect public benefit and Greening Work [1993] No. 15. forests have the right to receive compensation (State Council 2000). 23 Ecological Compensation in China: Trends and opportunities for incentive-based policies towards a greener China southern China.16 Over 124 million ha of forest area in China has been delineated as key public benefit forest 2.2 LOCAL INNOVATION AND areas, and generally include areas suffering from severe NATIONAL UPTAKE soil erosion or desertification (47 percent of total area), The CCFP and FECF served as important catalysts for areas along riverbanks (24 percent), and areas in the broader development of eco-compensation. The scale of watersheds (primarily upper) of the Yellow and Yangtze the CCFP—one of the most widespread rural programs in Rivers (75 percent) (SFA 2008, 2012). China at the time (among all programs, not only those focused The Ministry of Finance allocated CNY 1 billion (US$150 on the environment)18—generated significant momentum million) to launch the pilot phase of the FECF program and local government capacity-building. The programs in 2001, covering 13.33 million hectares across 685 helped motivate a variety of local, provincial, and national counties and 24 national-level reserves. Local governments environmental policy innovations, often but not always in Guangdong, Fujian, Zhejiang, and other provinces also under the term eco-compensation. These included numerous budgeted for similar funds and began implementing pilots programs targeting watershed ecological services, such as (Zuo et al. 2005). The national FECF was formally launched experiments in compensated water use rights transfers, in 2004, and by the end of the decade had scaled to 30 and fiscal transfer programs aimed at financing watershed provinces with almost 70 million ha enrolled and annual protection and forest conservation (Bennett 2009). payments of CNY 7.59 billion (US$1.12 billion). Annual In 2005 the State Council issued, for the first time, principles subsidies are paid to the owners of targeted forestland to for developing eco-compensation mechanisms,19 and compensate for the rezoning to a key public benefit forest the 11th Five-Year Plan (FYP) (2006–2010) subsequently area, which bans the use of the trees on that land for timber, called for accelerated eco-compensation mechanism fuelwood, or non-timber forest products.17 Importantly, development. Eco-compensation has been prominent funding for this program was often interwoven into a range in all subsequent FYPs and incorporated into a range of other eco-compensation programs, demonstrating a key of high-level policy documents. This included the 2007 characteristic of national framework-type eco-compensation State Council Work Outline, which called for “... deepening in China: a tendency to facilitate and financially support product pricing and emissions fee reforms for key natural supplementary local programs tailored to local conditions, resources, perfecting a resource taxation system, and and in doing so, drive innovation. This report returns to improving a paid mineral resource use system; accelerating the FECF and CCFP in section 3.1.c. the development of eco-compensation mechanisms,” and the 2008 revision of the Water Pollution Prevention and Control Law, which enables the use of financial transfers and payments to underwrite watershed protection in drinking water source areas. The national government’s promotion of eco-compensation resulted in significant provincial government efforts in developing eco-compensation policies and programs (figure 2.1). 16 This forest-type classification was developed in 1996 as part of China’s reform of its classified management of forestry. As part of this, two main 18 Zhang et al. (2006) finds in a survey of investment projects during forest classifications were developed: “commercial forests” (where 1998–2003 in 2,459 sample villages across six provinces that the CCFP harvesting is permitted) and “public benefit forests” (those deemed to was the third most common project being implemented at the village provide important ecological services, such as sapling and seed provi- level, behind roads and bridges, and irrigation investments. sion, watershed protection, biodiversity, and carbon sequestration, with 19 Document No. 39: State Council Decision Regarding Using the Scientific harvesting not permitted) (Hyde et al. 2003; Xu, White, and Lele 2010). Development View to Strengthen Environmental Protection stated that the 17 Use rights owners include communities or households in collective government “. . . should improve eco-compensation policy, and develop forest areas, or state forestry enterprises in state-owned forest areas. eco-compensation mechanisms as quickly as possible” (State Council 2005). 24 Chapter 2. Eco-compensation within China’s Evolving Ecological and Environmental Governance Framework FIGURE 2.1: The Issuance of Laws and Policies Directly Concerning Eco-compensation 240 Provincial 200 National Cumulative number of laws and policies 160 120 80 40 0 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Year of issuance Source: Compiled by Authors with data from the China Eco-compensation Policy Research Center, China Agriculture University. Department of NDRC21 was tasked with coordinating the 2.3 EQUITY CONSIDERATIONS: CCFP as well as the related Conversion of Pastures to LOOKING TO THE WESTERN Grasslands Program (CPGP), as part of its mandate over REGIONS broader economic development of lagging regions. 22 The original three CCFP pilot provinces—Sichuan, Gansu, and The idea that richer coastal “beneficiaries” of ecosys- Shaanxi—are in key upper watershed areas for the Yellow and tem services should provide compensation to poorer Yangtze Rivers, while the CPGP is an important contributor inland “providers” is an important theme in the rise to protection of the source region of these rivers (and the of eco-compensation. Western Region provinces20 have Mekong River). Governments have increasingly focused on long lagged behind China’s more prosperous coastal incorporating poverty alleviation goals and indicators into areas, are important headwaters areas for the Yellow eco-compensation programs, especially for key ecological and the Yangtze Rivers, and are repositories for China’s function zones, many of which are nationally designated richest and most internationally significant biodiversity. poverty counties in the Western Region. For this reason, the then Western Region Development 21 In 2019 the Western Region Development Department of the NDRC became the Regional Opening Department responsible for China’s “Belt and Road” initiative (Jing 2019). The Regional Revitalization Department inherited the role of coordinating eco-compensation policy. 22 The Western Region Development Strategy was initiated with guidelines in 1999 and the establishment of a State Council leading group in 2000. 20 The Western Region in China is comprised of Chongqing, Gansu, The strategy focused on infrastructure development and improved Guangxi, Guizhou, Inner Mongolia, Ningxia, Qinghai, Shaanxi, Sichuan, transport links with the eastern and coastal provinces, incentives for Tibet, Xinjiang, and Yunnan. foreign direct investment, and ecological protection (Jun et al. 2014). 25 Ecological Compensation in China: Trends and opportunities for incentive-based policies towards a greener China with and adoption of incentive-based policy instruments; 2.4 THE ECO-COMPENSATION (2) create interagency, intersectoral, and interregional CONCEPT BROADENS management frameworks; (3) diversify funding sources for environmental management; and (4) directly engage a The State Council soon called for mainstreaming of wide range of stakeholders. The extent to which these and eco-compensation approaches in environmental man- other goals are being achieved is examined in chapter 3. agement. This is seen in the Opinions of the General Office of the State Council on Improving Ecological Protection Compensation Mechanisms (State Council 2016), and the 2.5 A GUIDING VISION: Action Plan for Establishing Market-oriented and Diversified Ecological Compensation Mechanisms (NDRC 2018). In ECOLOGICAL CIVILIZATION both the Opinions and Action Plan, the national government The “ecological civilization” concept (shengtai wenming called for incorporating and improving eco-compensation 生态文明) is the guiding vision for China’s sustainable mechanisms in preexisting programs targeting specific land development. Ecological civilization is an ideological types/ecosystems—forests, grasslands, wetlands, deserts, framework for the country’s transition to a lower-impact, oceans, and cultivated land—as well as to support key resource efficient economy. The concept goes beyond the ecological function zones and ecological redline areas. traditional definitions of sustainable development—built around environmental, social, and economic elements—to In recent years the concept has significantly broadened incorporate political and cultural dimensions, and is as part of the national government’s desire for eco- sometimes called “sustainable development with Chinese logical and environmental “institutional innovation.” characteristics” (box 2.2). The concept was enshrined in Desired outcomes include interagency and interregional China’s constitution in 2018 (Hansen et al. 2018). coordination mechanisms, a formalized system for calcu- lating eco-compensation subsidy standards, “horizontal Ecological civilization embodies the goal of reframing eco-compensation” programs (i.e., transfers between the and reorientating China’s economic development to same level of government), compensation other than fiscal incorporate the values of ecosystem services; this is transfers (such as providing downstream development also central to the concept of eco-compensation. This rights), and environmental trading platforms—including alignment is seen in the phrase “Lucid waters and lush for water use rights, water pollution emissions, and carbon mountains are invaluable assets” (绿水青山就是金 emissions. Other objectives now commonly referred to 山银山), first stated by President Xi Jinping in 2016 in as eco-compensation include green product standards, recognition of the importance of natural capital and the green financial standards, and preferential green public value of ecosystem services.23 This is now a regularly procurement. In the context of this conceptual expansion, a quoted expression in official government documents national eco-compensation policy framework was needed. and public speeches, referred to as the “two mountains Its development continues, with a draft National Regulation concept.” Conceptually, eco-civilization is thus aligned with for Eco-compensation (NDRC 2020) currently open for market- and incentive-based approaches to environmental public comment (box 2.1). management. Eco-compensation has been evolving side by side with the concept of ecological civilization, and As a result, it has become increasingly challenging to is an increasingly important tool to operationalize this pin down eco-compensation’s exact meaning. The draft vision (figure 2.2). National Regulation continues to define eco-compensation only loosely. However, throughout this conceptual broad- 23 Xi, Jinping. 2016. “A New Starting Point for China’s Development: A ening, four key goals for eco-compensation remain clear. Blueprint for Global Growth.” Keynote Speech. The phrase is a play on a classic Chinese idiom for beautiful natural scenery: “Lush Mountains Eco-compensation is expected to (1) drive experimentation and Lucid Rivers” (青山绿水). 26 Chapter 2. Eco-compensation within China’s Evolving Ecological and Environmental Governance Framework Box 2.1: A National Regulation for Eco-compensation A draft National Regulation for "Compensation for Ecological Protection" of information. Specific requirements and guidelines for data standards, was issued in December 2020 for public comment, representing the along with platforms to facilitate publication, would be useful complements. first national-level regulation on the topic (NDRC 2020). The regulation The draft regulation institutes an interministerial joint conference defines eco-compensation broadly as financial transfer payments or for guiding the development of eco-compensation. The conference is market transactions that compensate for costs incurred for ecological expected to evaluate the implementation of eco-compensation regulations protection. It nominates priority areas for the use of eco-compensation, by subnational governments, synthesize local experience, and provide namely public benefit forests, grasslands, wetlands, rivers, and lakes; guidance for further policy development. If successful in implementation, restoration of desertified areas; compensation for fishing bans; promotion this body would represent a substantive contribution toward more adaptive of sustainable agriculture practices; and support for the protection of policy development by capturing lessons across programs and provinces, national key ecological function zones and nature reserves. and through time. The regulation also calls for the acceleration of mechanisms to protect The draft regulation delegates monitoring and evaluation responsibilities the Yellow and Yangtze River basins (explored further in section across branches of government. Under the draft regulation, national 4.4). These may be facilitated by rewards and co-financing from the government ministries are expected to monitor and publicize results national government to provinces that form such agreements. Notably, on indicators contained within interprovincial agreements, while the it supports the development of trading mechanisms for water allocation equivalent requirement is made of provincial governments for agreements and pollution control. However, these remain broad statements of intent; by sub-provincial governments within their jurisdiction. The regulation further regulations clarifying property rights and trade will be needed to makes broad calls for increased transparency, including the public release support operationalization of these principles. Source: Authors. Box 2.2: Elements of the Ecological Civilization Concept ironmental Env Ecological environment Physical protection and restoration of the environment cal Cu Ecological economy A resource efficient economy that incorporates ltura Politi the value of ecosystem services Sustainable l Ecological society A society with heightened environmental awareness and social participation Development Ecological politics A political system that rewards ecological performance and establishes political accountability for environmental impacts So ic no m Ecological culture A culture that values the environment cia l Eco Source: World Bank and DRC (forthcoming). 27 Ecological Compensation in China: Trends and opportunities for incentive-based policies towards a greener China FIGURE 2.2: Key Policy Milestones in Eco-compensation Policy Development 1992 Establishment of an eco-compensation fee to help fund the National Environmental Protection Agency 1994 1996 Yangtze River floods, Forest Law Revised Yellow River droughts Paves way for Forest Ecological Benefit Fund Linked to deforestation 1998 and land degradation The Conversion of Cropland to 2000 Forests Program commences Major investments Forest Ecological Benefit Fund in land management established The “six key forestry programs” 2002 Document No. 39 State Council Decision Sets out first principles for development of 2004 eco-compensation Opinions on Accelerating the Construction The River Chief 11th Five –Year Plan 2006 of Ecological Civilization System Commences Calls for innovation in environmental policy National Key Ecological and accelerated 2008 Water Pollution Prevention and Function Zone Transfer eco-compensation Control Law Revised Commence as pilot in 2008, development Enables the use of financial transfers and scales dramatically over time 2010 payments to underwrite watershed protection 12th Five-Year Plan State Council's National Main Proposes market- Function Zoning Plan oriented ecological 2012 National land zoning plan for development compensation and conservation mechanisms Plan for the Establishment 2014 of a National Park System Guiding Opinions on Accelerating the Calls for developing eco- Establishment of Watershed Upstream- compensation to support Downstream Horizontal Eco-compensation Increasing focus on ecological civilization 13th Five-Year Plan 2016 conservation of key ecological emphasis on areas ecological protection Action Plan for Yangtze in line with River Protection and 2018 Creation of two environmental ecological civilization Restoration “super-ministries:” Ecology and Environment, and Natural Resources Calls for improved river basin ecological compensation and 2020 Yangtze River Protection Law increased national govern- Indicates intention to establish new eco- ment support 14th Five-Year Plan compensation in the Yangtze, increase fiscal Increased fiscal 2022 transfers, and calls on provinces to develop transfers for horizontal programs in the Basin ecologically sensitive areas and river basins 28 Chapter 2. Eco-compensation within China’s Evolving Ecological and Environmental Governance Framework and strengthening property rights. These have served to 2.6 THE INSTITUTIONAL make eco-compensation a more prominent part of the fiscal LANDSCAPE UNDERPINNING and institutional structure of management, both explicitly ECO-COMPENSATION and by addressing key issues needed for eco-compensation to be effective. Eco-compensation has, in reality, been Throughout China’s economic development, eco-com- evolving alongside these management reforms with ongoing pensation has also become an important component of cross-fertilization: eco-compensation is both influenced environmental and fiscal governance. China’s environmental by and influencing these reforms (table 2.1). management system began taking shape in the 1970s and was formalized in the Environmental Protection Law of 1. Strengthening and Streamlining 1989 (Zhou 2020). It is supervised by the National People’s Institutions Congress and has been managed by the national environmental The national government has been significantly strengthen- protection authorities—now the Ministry of Ecology and ing ecological and environmental management authority Environment (MEE) and the Ministry of Natural Resources and oversight. This has included both a consolidation of (MNR)—with the onus of implementation on provincial and environmental responsibilities at the national level, as well sub-provincial governments and agencies (Zhou 2020; as strengthening vertical management and oversight and Cai, Li, and Shen 2015; PRC 2014). de-linking environmental agencies from their respective The Chinese government is structured with overlapping regional governmental levels, with varying levels of success vertical and horizontal lines of management and oversight, (Zhou 2020; Shen and Jiang 2020). traditionally termed the tiao-kuai (条块) system (Lieberthal Consolidation of ecological and environmental management 1997). This consists of the horizontal “blocks” (kuai) of responsibilities into China’s two “super-ministries” has governmental levels (i.e., national, provincial, municipal, been the most comprehensive institutional reform for county, and township) overlaid by the vertical “lines” (tiao) environmental management in the past 40 years. In of the top-down hierarchical relationships within agencies broad terms, the MNR now serves as the overall environ- (box 2.3). As a result, for a given subnational agency, both mental planner and natural resource owner and manager, its regional level of government and its superior counterpart while MEE is the country’s top regulator of pollution. agency exert management and oversight authority (Zhou This consolidation of responsibilities—which extends to 2020; Deng 2016). subnational government levels—has significantly clarified This overlapping system has traditionally resulted in the institutional landscape within which eco-compensation ecological and environmental management conflicts. programs can operate. For example, water pollution Local protectionism in the “blocks” has often overridden management responsibilities have been consolidated the hierarchical “lines” of the superior agency, impeding within MEE, meaning that eco-compensation programs implementation of the national environmental policy targeting water can function through this single ministry (Eaton and Kostka 2014; Mertha 2009). Environmental and its subnational counterparts. management responsibilities have also been fragmented Vertical management reforms have also consolidated and spread across multiple ministries, and the funding for management and monitoring in upper governmental environmental management has long been folded into levels (national and provincial). These reforms aim to other funding streams within the fiscal system. remove potential conflicts of interest at local government To resolve these conflicts, the national government has levels, while increasing the directness of oversight; MEE been introducing measures to strengthen environmental can now directly intervene in subnational government governance. These are (1) streamlining institutions; (2) environmental management emergencies and issues. The strengthening fiscal support and funding channels; (3) consolidation of these lines of authority have strengthened developing spatial planning frameworks; and (4) clarifying the ability of national and provincial governments to monitor 29 Ecological Compensation in China: Trends and opportunities for incentive-based policies towards a greener China Box 2.3: The Role of Eco-compensation in China’s Environmental Governance and Fiscal System As a fiscal and cross-governance coordination tool, eco-compensation the national government makes transfers to provincial governments, is itself part of the organizational structure of the Chinese government. provincial governments to municipal or county governments, and so on. China is one of the most fiscally decentralized countries in the world, In this context it is not surprising that eco-compensation is widely with 85 percent of government spending occurring at subnational used for meeting environmental management goals. With provincial (or levels (Wingender 2018).a Sub-provincial governments are the key sub-provincial) governments responsible for implementing higher-level implementers of national government policy (Shen and Jiang 2020; objectives, there is a need for mechanisms that can provide coordination Zhou 2020). Generally, the national government provides funding and across boundaries, motivate and incentivize subnational governments to broad policy guidelines, and provides subnational governments with implement a national government vision, and provide financial resources the latitude to interpret and adapt them. Fiscal transfers remain the for implementation. Eco-compensation is well suited to meeting these dominant source of revenues of subnational governmental levels and needs, and is often described as a platform for coordination as much are made vertically to the next subordinate level of government, so that as a fiscal transfer mechanism. a This increases to 89 percent when including local government financing. Source: Authors. FIGURE B2.3: Chinese Government Fiscal and Organizational Structure, with an Emphasis on Environmental Management Top-down “lines” (tiao) of government hierarchy Horizontal "blocks" (kuai) of governmental level Central government NDRC MOF MEE MNR MWR MARA etc. administrative and oversight power Provincial government PDRC DOF DEE DNR DWR DARA Sub-provincial government* DRC BOF BEE BNR BWR BARA Economic planning and oversight Fiscal transfers and oversight Abbreviations: NDRC = National Development and Reform Commission; MOF = Ministry of Finance; MEE = Ministry of Environment and Ecology; MNR = Ministry of Natural Resources; MWR = Ministry of Water Resources; MARA = Ministry of Agriculture and Rural Affairs. Subnational agencies simply sustitute the M for a D = Department or B = Bureau with the exception that PDRC = Provincial Development and Reform Commission and DRC = Development and Reform Commission (at the relevant level of government). Note: Management and fiscal transfers generally go to municipalities then counties, but some provinces have direct province-county management and funding linkages. See Appendix A for more information on the fiscal and organizational structure of environmental governance. Source: Adapted from Deng et al (2016), Shah and Shen (2006), Zhou (2020). 30 Chapter 2. Eco-compensation within China’s Evolving Ecological and Environmental Governance Framework TABLE 2.1: Environmental Management Reforms and Interactions with Eco-compensation (i) STRENGTHENING (ii) STRENGTHENING (iii) DEVELOPING SPATIAL (iv) CLARIFYING & & STREAMLINING FISCAL SUPPORT & PLANNING FRAMEWORKS STRENGTHENING INSTITUTIONS FUNDING CHANNELS PROPERTY RIGHTS 1. What are the key components of these reforms? • Consolidation of responsibilities • Continual increase in • Creation and deepening of a • Clarification of natural into MEE and MNR; environmental funding at all function-based land use zoning resource property rights; • Clarification and strengthening levels of government; system; • Development of a system for of agency and regional govern- • Increasing use of national • Creation and deepening of private sector contracting ment roles and responsibilities; grants (special use funds) to “ecological redlines” demark- and use of natural resources; • Strengthening of vertical incentivize capacity-building ing conservation priority areas; • Catalyzation of a third-party management and oversight; and reform. • Environmental indicators environmental services • More direct mechanisms for increasingly central for gov- sector. monitoring and enforcement. ernment official performance • Promotion of markets to evaluations. determine prices; • Removal, when necessary, of countervailing laws and regulations. 2. How do these reforms influence eco-compensation? • Clearer roles and responsi- • Eco-compensation is • Ecological targets are osten- • Clearer delineation of bilities strengthen the use becoming a key channel sibly to be informed by these property rights creates of eco-compensation as an through which increased spatial planning frameworks; opportunities for the creation incentive mechanism; funding flows; • Local officials are incentivized of meaningful eco-compen- • Consolidation of responsibilities • Eco-compensation is to create effective programs to sation arrangements (i.e., removes barriers to effective being used as a target for achieve targets. with rights holders); functioning of eco-compensa- national grants, through • Removal of regulatory tion. the encouragement of pilot conflicts will improve the development. functioning of eco-compen- sation instruments. 3. How is eco-compensation facilitating these reforms? • Program development • Eco-compensation serving • Eco-compensation serving as • Development of programs encouraged as a means to as a platform to catalyze and the primary means to support encouraged as a means to facilitate strengthening of leverage increased funding; “key ecological function zones” clarify property rights and management oversight; • Eco-compensation serving as delineated by this system; the contracting of these; • Program development a mechanism to explicitly link • Ecological redline areas are to • Via program development encouraged as a means to beneficiaries with suppliers be supported by eco-compen- governments are encour- facilitate clarification of roles and clarify costs and sation. aged to better let market and responsibilities. benefits. forces determine prices and quantities. Source: Authors. 31 Ecological Compensation in China: Trends and opportunities for incentive-based policies towards a greener China the performance of sub-provincial eco-compensation much development activities can encroach on key eco- programs. National government policy documents also systems, generally in line with the principle of “no net suggest that eco-compensation should be used to support loss.”26 Eco-compensation is now explicitly being used to the needed capacity-building to realize these reforms. support the “key ecological function zones” delineated in the first component (explored in section 3.1.b), and 2. Strengthening Fiscal Support national government documents encourage provincial-level and Funding Channels eco-compensation mechanisms, particularly “horizontal” Along with overall prioritization of the environment eco-compensation mechanisms (i.e., between government and ecology, the government has been continuously entities at the same administrative level), to be developed strengthening funding and fiscal support for environ- to support the management and enforcement of these mental protection and ecological conservation. This redline areas (though such programs are yet to be op- was facilitated early on by reforms to government revenue erationalized). These reforms have also helped to make and expenditure classifications to make environmental environmental indicators an increasingly important part protection a distinct fiscal budget item. Annual expenditures of the performance criteria used for evaluating provincial for environmental protection have significantly increased, and sub-provincial government officials, with this in turn from CNY 99.58 billion in 2007 to CNY 853.81 billion in further incentivizing governments to prioritize developing 2018. This constitutes an increase in the environmental effective eco-compensation programs. expenditures’ proportion of total national fiscal expenditures from 2.0 percent in 2007 to 3.9 percent in 2018, and from 4. Clarifying and Strengthening Property 0.4 percent of GDP in 2007 to 0.9 percent in 2018 (Xu and Rights for Natural Resources Wang 2020).24 With these increases, eco-compensation A final key reform effort is the clarification and strengthening has become an important and increasingly formalized of property rights over natural resources. While the state channel for environmental funding flows, as well as a remains the owner of natural resources in China, property mechanism for catalyzing increased provincial and local rights have in practice been ambiguous across many contexts, government funding contributions. leading to management failures. To address this, reforms aim to accelerate the development of formalized systems 3. Developing Spatial Planning Frameworks for private sector contracting of use rights, including for The national government began setting an improved extractive uses and for third-party ecological restoration spatial planning framework in 2010. Two key elements and management tasks, with market forces to determine are (1) a national function-based zoning system to better prices and allocations.27 The clarification of property rights integrate economic planning with conservation;25 and is an important underpinning for the development of (2) an ecological “redline” policy to set limits on how eco-compensation and environmental markets. 26 The development of ecological “redlines”—lower limits for ecological land types—has been in process in China since at least 2004, and was 24 By comparison, expenditures on environmental protection for EU-27 given legal status in 2014 (PRC 2014). In 2017, the national government countries were on average 0.8 percent of GDP in 2019, ranging be- called on provinces to develop the legal and regulatory foundations tween 0.2 percent to 1.4 percent (Eurostat 2021). for an enforced system of ecological redlines, and set timelines for completion of this demarcation (Beijing-Tianjin-Hebei and Yangtze River 25 The National Main Function Area Plan was issued in 2010 (State Council Economic Belt regions by the end of 2017, and remaining jurisdictions by 2010). The system divides China into four function-based zone types: the end of 2020; the latter target date has been delayed). See Article 29 preferential development zones, key development zones, restricted of the Environmental Protection Law (2014). Several Opinions Regarding development zones, and banned development zones. Development the Delineation and Strict Protection of Ecological Redlines (GOCCCPC is banned or restricted under the last two categories, which are also 2017) classified as “key ecological function zones,” deemed to provide nation- ally important ecological functions and services. Banned development 27 See Guiding Opinions on Promoting Reform of the Natural Resources zones are the administrative regions that encompass China’s preex- Asset Property Rights System (GOCCCPC and GOSC 2019), detailing isting protected areas, nature reserves, and national parks. Restricted tasks and targets for improving the clarification, registration, rationaliza- development zones allow for some production of agricultural goods and tion, and enforcement of natural resources ownership and manage- services but not urban development. ment. 32 Chapter 2. Eco-compensation within China’s Evolving Ecological and Environmental Governance Framework 33 CHAPTER 3. Eco-compensation Types, Trends, and Outcomes 34 Photo: Marcus Wishart. World Bank. or mechanisms utilized. These are (1) eco-compensation for As described in the previous chapters, watershed management, (2) eco-compensation for ecological eco-compensation has been an import- protection, and (3) eco-compensation for reforestation and ant component of China’s drive toward land use change. These categories contain a wide diversity sustainability and is integral to ongoing in de facto design and implementation approaches, and can ecological and environmental manage- often have a degree of overlap. There are, of course, many ment reforms. ways to categorize eco-compensation, and the following The report now takes a more focused look at the programs subsection provides an alternate view based on the roles themselves: i.e. what types of eco-compensation are being and relationships between levels of government. This section developed, for what issues, and where? What role do different presents these categorizations in turn. levels of government play, and how are programs performing? Data collected for this report show the composition These underpin the assessment of prospects and needs for and growth of eco-compensation over time. In total, 150 eco-compensation, which the report turns to in chapters 4 programs28 were identified in 2020, an increase from 8 (application and prospects for river basin management) and eco-compensation programs in 1999. Of these programs, 5 (recommendations). water-related programs have seen the most growth, from 2 in 1999 to 67 in 2020. Forestry programs—primarily Although developing a complete picture of eco-compensation’s comprising funding for provincial ecological public benefit status, trends, and performance is challenging given the forests—have also grown significantly, from 4 in 1999 (albeit range of programs and data constraints, broad conclusions large-scale, including the Conversion of Cropland to Forest can be drawn. Centralized data were unavailable for this Program [CCFP]), to 35 in 2020. Wetlands and grasslands study given the diversity of programs, the role of subnational eco-compensation programs progressed from 0 in 1999 to governments in implementation and monitoring, and limited 12 and 13, respectively, in 2020 (figure 3.1). reporting of program outcomes (a key point returned to in chapter 5, recommendations). In this context, the study Program growth is seen in almost all provinces with a develops a comprehensive dataset of programs by drawing concentration in the east (map 3.1.). Water management– on available secondary sources, including publicly available related programs (described in detail in the next section) online government sources, news sources, and academic are more common in the southeast and within the Yangtze journals, with a systematized search process (box 3.1). In River Economic Belt (YREB), consistent with government aggregate, these data indicate important statuses and trends prioritization of green development and improved water in program development. The report augments these data management (the focus of chapter 4), and explicit calls for with qualitative insights on a selection of key programs, provincial and sub-provincial programs in this region. The based on government and academic literature, highlighting growth in program numbers between 2005 and 2020 is program performance in terms of effectiveness, efficiency, greatest in the relatively wealthier coastal provinces, but and equity considerations (see box 1.2 in chapter 1). is occurring in almost all provinces. 3.1.a Watershed management and water 3.1 ECO-COMPENSATION source protection programs TYPE BY RESOURCE Water management issues have long been an important MANAGEMENT ISSUE driver of the development of eco-compensation programs, with a common focus on important watershed co-benefits A range of program “types” have begun to solidify under (e.g., soil erosion prevention and control, seasonal flow national government guidance. Broadly speaking, these types conform with ecological targets, though sub-types in 28 The number of programs is indicative of trends but should not be consid- ered a definitive account, given difficulties in determining the “boundaries” some cases are related to the envisioned governance structure of some programs. See box 3.1. 35 Photo: Chuishui grand waterfall in Guizhou Province, China. Shutterstock. Ecological Compensation in China: Trends and opportunities for incentive-based policies towards a greener China Box 3.1: Developing the Eco-compensation Dataset A unique dataset of current programs was developed using available variables of program characteristics with data extending across all secondary sources for this study. Building on earlier data collected programs. and published by Forest Trends,a collection of data followed four steps: 4. Filling of key gaps in data 1. Systematic online keyword search The final step included filling of data gaps using informed judgment for Keyword searches were set up using Google Alerts to identify English the categorical data or interpolation/extrapolation for the quantitative and Chinese language news articles, academic publications, and variables. government website documents and reports that contained “ecological Programs were included in the dataset based on several criteria. compensation” or related terms, including “ecological protection,” Only programs reasonably identifiable as “eco-compensation” were “ecological red lines,” “cross-border watershed,” and “water source included. Given the focus of this work, only those programs targeting protection.” These automatic alert searches were run for eight months. watershed ecological services either directly or as key co-benefits (i.e., 2. Program list development and secondary source research via conservation, rural land use interventions, or mining area ecological Results were grouped by program and researched to extract key charac- restoration) were included. For example, while several eco-compensation teristics. Additional online sources were searched using program-specific programs targeting air pollution management were identified, these keywords to calibrate/triangulate and deepen available information. were not included in the final dataset. These included, where possible, expenditure, location, time frame, The number of programs should be considered indicative rather government roles, monitoring, and land area coverage. Data from than definitive. There are difficulties in determining the “boundaries” previous research efforts were added to the dataset, with entries on of some programs: some are sub-programs within, or are supported earlier categorized programs updated to reflect new developments. financially by other programs, while others undergo reforms or name 3. Development and revision of program categorical data changes. The dataset allows for exploration of key trends rather than Program data were revised to best leverage the commonalities of precise accounting. information provided across sources, creating a range of categorical Source: Authors. a These data focused on market-based programs for ecosystem services in China until 2014 (see Bennett 2009; Stanton et al. 2010; Bennett, Carroll, and Hamilton 2013; Bennett and Carroll 2014). regulation, flood mitigation). However, programs explicitly upper and lower watershed administrative districts. targeting watershed and water quality management issues These generally target water quality, with rewards and and institutions have grown significantly over the past penalty payments made between adjacent administrative decade. These include cross-border agreements between districts, the direction and size of which are dependent provinces within river basins, agreements between provinces on water quality outcomes. Water quality improvement and county governments, and localized eco-compensa- beyond a baseline entails a payment from the lower to upper tion funds for water source protection. This category of watershed county to defray costs, while worsening water eco-compensation has been important for introducing quality entails the opposite. These payments often involve innovations in watershed and river governance in China. up-front financial contributions by the participating counties/ districts into a program fund, out of which the rewards 1. INTRA-PROVINCIAL CROSS-BORDER “HORIZONTAL” are paid for performance, as determined by cross-border WATERSHED ECO-COMPENSATION water quality measurements (Peng and Xiaoyao 2019). “Horizontal” or “cross-border” eco-compensation Significant variation exists across provincial programs, programs consist of contractual arrangements between including in program structure, direction of payments, size 36 Chapter 3. Eco-compensation Types, Trends, and Outcomes FIGURE 3.1: Growth in Eco-compensation Programs by Major Program Category 140 Conservation Soil Erosion 120 Agriculture Wetland 100 Grassland Watershed Number of Programs Water Source Protection 80 Cross-border Forestry 60 40 20 0 1999 2002 2005 2008 2011 2014 2017 2020 Source: Custom data collected by authors from a systematic review of available news, and academic and provincial government sources. Note: The number of programs should be considered indicative rather than definitive given challenges in determining the precise “boundaries” of some programs (see box 3.1). of penalties and rewards, and the metrics and formulas 2. INTERPROVINCIAL CROSS-BORDER “HORIZONTAL” used for performance evaluations. WATERSHED ECO-COMPENSATION The national government has been strongly promoting The national government has also been promoting the the development of these programs as a means to development of interprovincial horizontal eco-compen- strengthen watershed management at more localized sation, again focusing on key tributaries of the Yangtze scales.29 The Ministry of Finance (MOF) has directed River. These programs embody the same principle as provinces and sub-provincial administrative areas to those described for intra-provincial horizontal programs, develop these programs across (1) all administrative though are instead between provinces and so typically districts covering within-province watersheds, and (2) involve a stronger national government role. In most cases, provinces with cross-provincial watersheds that have cross-border pollution or water quantity flows trigger a drinking water functions and important ecological service set payment based on an agreed target. The national values. In response, all YREB provinces have established government has been incentivizing these programs by cross-border horizontal eco-compensation schemes for providing essential start-up financial support and funding water systems within their borders (box 3.2). (in the form of co-contributions to interprovincial payments) for programs that are considered most important in terms of ecological function.30 The Xin’an River-Qiandao Lake Eco-compensation Program between Anhui and Zhejiang 29 See: MOF. (2016). Guiding Opinions on Accelerating the Establishment of a Compensation Mechanism for Horizontal Ecological Protection of 30 Article 9 of MOF (2019) Water Pollution Prevention and Control Funds Upper and Lower Watershed Areas. Management Measures. 37 Ecological Compensation in China: Trends and opportunities for incentive-based policies towards a greener China MAP 3.1: Eco-compensation by Major Program Category in 2020 (top) and Growth in Number 2005–2020 (bottom) Source: Custom data collected by authors from systematic review of available news, academic and provincial government sources. Note: The number of programs should be considered indicative rather than definitive given challenges in determining the precise “boundaries” of some programs (see box 3.1). 38 Chapter 3. Eco-compensation Types, Trends, and Outcomes Box 3.2: Examples of Horizontal Intra-provincial Eco-compensation: Jiangxi and Sichuan Provinces Jiangxi Province developed a horizontal river basin eco-compen- Sichuan Province established a horizontal eco-compensation sation program for the river systems within its borders in 2019. mechanism for the Tuo River watershed in 2010, involving 10 The program targets water quality and has to date resulted in 81 municipalities. Unlike other horizontal examples, this program does not horizontal eco-compensation agreements signed by 79 counties that involve direct rewards and penalty payments between the participating share common river courses. In total CNY 325 million (US$50 million) municipalities, but instead features indirect payments via a system of has been allocated from provincial and national government sources to provincial-to-municipality annual allocations. These are drawn from a incentivize the establishment of these agreements, while the counties pooled fund to which the municipalities and the province contribute. involved have committed an additional CNY 313 million (US$48 million). Contributions are based on a formula that includes water quality and In addition to linking watershed targets to penalties and rewards, the water use efficiency improvements, in comparison to the average for the resulting agreements have helped to engender joint management and group, conditioned on the land area and population of the municipality decision-making across county boundaries. in question. More detail on this program is presented in chapter 4. Sources: 2019 Jiangxi Intra-provincial River Basin Horizontal Eco-compensation Implementation Plan; Authors. provinces is an early example of this type of program environment departments. Participation in the Xin’an River (box 3.3). eco-compensation program has spurred the participating provinces—Anhui and Zhejiang—and their neighbors, to These programs are important platforms for the provinces’ both strengthen their capacity for management of their own joint management of shared watersheds, and have watersheds, as well as to coordinate with other provinces further helped catalyze and reinforce intra-provincial on the management of shared watersheds.31 watershed programs. Provinces engaged in interprovincial programs face an incentive to improve their portion of the 3. WATER-SOURCE PROTECTION cross-border watershed; an intra-provincial program is one ECO-COMPENSATION option for doing so, essentially nesting an intra-provincial The national government has been urging provinces to program within the interprovincial program. As an example, Anhui Province, a party to the Xin’an River scheme between address drinking water management issues, leading to Anhui and Zhejiang, has 29 cross-border joint prevention growth in water-source protection eco-compensation. and control agreements between municipalities and coun- Drinking water sources, such as reservoirs and lakes, are ties, which helps the province achieve its interprovincial required to achieve at least a Class II or Class III water agreement target. quality based on the Surface Water Environmental Quality The value of these schemes again goes beyond the 31 For example, Anhui Province now has 29 cross-border joint prevention and control agreements between municipalities and counties, 12 of direct incentives provided to also include knowledge which are interprovincial agreements signed with Zhejiang and Jiangsu. transfer and management coordination. For example, Anhui and Jiangsu, and Zhejiang and Shanghai have also collaborated on multiple rounds of joint supervision and cross-learning on water Anhui, Jiangsu, Zhejiang, and Shanghai have collaborated sources in the region and emergency linkages. Since September 2018, since 2018 via joint monitoring of water metrics and the ecological environment departments of these four provinces/mu- nicipalities have also organized joint supervision and learning activities co-hosting of learning events between their ecological (Xinhua News Agency 2019). 39 Ecological Compensation in China: Trends and opportunities for incentive-based policies towards a greener China Box 3.3: The Xin’an River Cross-provincial Eco-compensation Scheme Anhui and Zhejiang provinces launched one of China's first interprovincial This has stabilized the water quality of Qiandao Lake—which now ranks eco-compensation schemes in 2012. This targets water quality in the in the top tier of 61 key national lakes—and has catalyzed improvements Xin’an River, the main tributary to Qiandao (i.e., “thousand islands”) in the larger watershed area and significant transformation of upstream Lake reservoir, a key regional water source. Deteriorating water quality activities.c Next steps include tapping into a wider range of funding in the lake pushed the national government to launch negotiations sources (including private sector finance), developing more efficient between upstream Anhui and downstream Zhejiang beginning in 2004, approaches to reduce rural nonpoint source pollution, and developing leading to the creation of the program.a sustainable alternate eco-industries and livelihoods, including organic tea production and cultural/eco-tourism. The national government invested CNY 2.05 billion, and Zhejiang and Anhui each invested CNY 750 million during the two pilot The Xin’an River scheme has served as an example for subsequent phases (2012–2014 and 2015–2017). These funds were used for programs. These include programs on the Dong River (between program start-up, watershed management, and pollution prevention, Guangdong and Jiangxi provinces), the Chishui River (between Sichuan, including sewage and solid waste management and treatment, ecological Yunnan, and Guizhou provinces), the Chu River (between Anhui and protection and restoration, and industry structural adjustment. Jiangsu provinces) (see box 3.4), the Lushui River (between Jiangxi and Henan provinces) and the Youshui River (between Hunan and Chongqing provinces). Sources: Lopez and Bennett 2018; Xinhua News Agency 2018b; Authors. a The 290 km Xin’an River—of which 54 percent of its watershed area and 77 percent of its population resides in upstream Anhui Province—contributes 68 percent of Qiandao Lake’s water inflow. Qiandao Lake experienced deteriorating water quality and eutrophication during the late 1990s and early 2000s with recurring algal blooms. b With 2008–2010 averages as the benchmark, a composite index combines the average concentration values of four water quality indices—permanganate index, ammonia nitrogen, total phosphorus, and total nitrogen—for a given year. An index value below/equal to/above the benchmark means the Zhejiang pays/ keeps/receives CNY 100 million to/from Anhui for the given year, with this increased to CNY 200 million during the second pilot phase. c Upstream Huangshan Municipality in Anhui Province has retired and afforested 24,000 hectares (ha) of farmland, has shut down more than 220 polluting companies, relocated more than 90 companies, and is promoting rural tourism (with the participation of more than 100,000 farmers). Box 3.4: Examples of Horizontal Interprovincial Eco-compensation: Chishui River and Chu River An interprovincial program that has benefited from national government Anhui and Jiangsu provinces have signed an agreement for the support is that for the Chishui River, a primary tributary of the Chu River, another important tributary of the Yangtze River. The two Yangtze that is shared between Yunnan, Guizhou, and Sichuan provinces implement a two-way compensation system based on the provinces. These three provinces are co-signatories to the Chishui principle of “whomever exceeds standards will compensate, whomever River Basin Horizontal Ecological Protection Compensation Agreement, meets standards shall benefit.” The agreement uses annual water in which they jointly contribute CNY 200 million (US$30.7 million) each quality category targets jointly agreed to by the Ministry of Ecology year to a Chishui River horizontal watershed eco-compensation fund and Environment (MEE) and the two provincial governments. Jiangsu (Yunnan pays CNY 20 million, Guizhou CNY 100 million, and Sichuan compensates Anhui CNY 40 million if the annual water quality reaches CNY 80 million). From this fund, payments for ecological restoration Class II or better, and CNY 20 million if it reaches Class III. Conversely, and management are allocated at a set ratio (Yunnan receives CNY Anhui will compensate Jiangsu CNY 20 million if water quality falls to 60 million, Guizhou CNY 80 million, and Sichuan CNY 60 million). Class IV, and CNY 30 million if it is Class V or worse. Source: Authors. 40 Chapter 3. Eco-compensation Types, Trends, and Outcomes Standards.32 The growing challenges of rural nonpoint These programs have shown considerable success due source pollution in upper watersheds has pushed provinces to their supplier-user links. Experience to date suggests and municipalities to develop localized eco-compensation that these programs help clarify roles and responsibilities, focused on these areas. An important distinction between and help to begin the process of identifying key stressors this type of eco-compensation program and cross-border of watershed ecosystem services through more integrated, watershed programs is that these often involve the creation cross-sectoral, and cross-agency communication, planning, of an eco-compensation fund supported by downstream and management frameworks. They have also, through beneficiary contributions in the form of water fee surcharges their focus on local sources of financing, helped to build the and downstream district government fiscal earmarks, “business case” for nature-based watershed investments. Close links between beneficiaries and suppliers have usually based on the previous year’s government revenue supported these programs’ impacts, with beneficiaries growth and some weighting by district size (for example, (generally downstream municipalities) directly concerned the share of the downstream watershed area covered by with protecting key drinking water supplies. Beneficiaries the district). Often such funds also fold in some portion of are concentrated, have the pooled economic resources provincial and national government funding streams, or to be able to effectively target sustainable financing to align interventions supported by other funding streams protect their drinking water supplies, and are incentivized toward a common goal. Examples include using the CCFP to resolve interagency and intersectoral conflicts. funding to target reforestation of important riparian areas. Given that most upper watershed areas in China contain a 3.1.b Ecological Protection and Conservation complex patchwork of rural land users and stakeholders, such programs involve a wide range of interventions. Eco-compensation is used to support ecological protection This can include agricultural best management practices, and conservation, and spatial zoning by compensating installing or upgrading rural sewage and solid waste treatment jurisdictions and households affected by development facilities, environmental remediation activities such as the restrictions and by funding investments in protection. closing of mining and industry facilities, the treatment of The government is expanding spatial planning systems—key ecological function zones, and ecological redlines—with soil pollution and tailings, reforestation, and riparian zone eco-compensation as a mechanism of support. Ecological investments such as artificial wetland construction. Like redlines identify important ecological systems based on intra-provincial eco-compensation programs, water source biodiversity, susceptibility to erosion, and susceptibility protection eco-compensation involves contracts with upper to natural disasters (such as sandstorms and floods), and watershed district governments, and links rewards and designate them for protection by limiting development. Key penalties to water quality outcomes. While not originally ecological function zones play a similar role, but at a larger labeled as such, water source protection programs are spatial scale. The national system of functional zoning, now commonly described as “eco-compensation,” with launched in 2010, designates land according to (1) areas the number of programs growing rapidly. where development should be concentrated; (2) areas for future development; and (3) Key Ecological Function Zones 32 MEE classifies water quality into six classes, depending on the con- centration of the worst individual pollutant in the water sample. These (KEFZs), which include areas where development should classes are: Class I—suitable for drinking without treatment; Class be limited and China’s protected areas where development II—suitable for use as a Class A water source for centralized drinking water supply, sanctuaries for rare species of fish, and spawning grounds is prohibited. These KEFZs consist of 818 counties, cities, for fish and crustaceans; Class III—suitable for use as a Class II water source for centralized drinking water supply, sanctuaries for common and districts, comprising over 50 percent of China’s total species of fish, and for swimming; Class IV—suitable for use as a gen- land area (NDRC 2016). eral industrial water supply and for recreational use involving no direct human contact with the water; Class V—only suitable for agricultural Transfer payments from the national government to water supply and general landscaping use; and Class V+—unsuitable for any use. counties, districts, and cities covered by the program 41 Ecological Compensation in China: Trends and opportunities for incentive-based policies towards a greener China FIGURE 3.2: Coverage and Fund Flows for National Key Ecological Function Zone Eco-compensation 90 900 818 818 818 80 725 800 81.1 83 Number of Key Ecological Function 70 700 Zones/counties/districts covered Annual spending (CNY, billions) 72.1 60 556 600 492 512 62.7 50 451 452 466 500 372 50.9 40 48 400 42.3 30 37.1 300 221 30 20 24.9 200 10 100 6 12 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: Compiled by authors with data from Table 4 in Ma et al. 2020; Xinhua News Agency 2014, 2018a; MOF 2019. have been increasing steadily (figure 3.2). For the KEFZs, management processes. Like KEFZ payments, these aim payments compensate for development restrictions and to balance community and conservation objectives given incentivize improved management. Payments are based the restrictions park designation entails (i.e., compensation on a composite of environmental indicators, including for regulatory takings).34, 35 water quality, air quality, and forest area, and are weighted by county area, population, and the type of KEFZ,33 with 3.1.c Forestry and land use change payments based on the change in indicator rather than the A third category of eco-compensation program targets absolute value. Payment guidelines provide some flexibility forest activities and rural land practices, combining for the provinces to adjust to local circumstances and elements of both ecological protection and watershed provide additional funds within this framework. Since many management. These programs include some of the largest of the zones are also national poverty counties, poverty national programs, but their funding is also often used to alleviation indicators are currently being considered for support other regional and provincial eco-compensation inclusion in the allocation of funds. schemes. China’s longstanding large-scale forestry and Other eco-compensation programs target critical 34 From modest beginnings, China’s protected areas have expanded to ecosystems and biodiversity at localized scales, in- today covering over 17 percent of China’s landmass, consistent with cluding support for protected areas. Provincial and local Aichi Target 11 for terrestrial areas (Zhang et al. 2017). The national government is currently reforming the protected area system under a programs are used to cover costs imposed on landholders unified management framework that will align decision-making with in conservation areas of high value, such as the migratory ecosystems and biomes rather than administrative zones (GOCCCPC 2017). Ten national park management pilots have been established from bird habitat around Poyang Lake, Jiangxi Province (see existing nature reserves to test these principles (Forest and Grassland Bureau 2019), with eco-compensation expected to support these box 4.2 in chapter 4). Eco-compensation is expected to changes. support an expanded national parks system, part of an 35 One response has been the direct provision of conservation-oriented expansion of conservation areas, and a standardization of jobs: CNY 14 billion (US$2.16 billion) was provided in subsidies for ecological park rangers as a means of supporting local livelihoods be- tween 2016–18. More than 500,000 ecological forest rangers across 22 33 MOF. 2017. Measures for National Government Transfer Payments to provinces, mainly from poorer communities in these nature resources, Local Key Ecological Function Zones. are receiving this support (SFGA, MNR 2019). 42 Chapter 3. Eco-compensation Types, Trends, and Outcomes grassland programs, most prominently the CCFP and the programs.37 In return, these areas are rezoned to ban use Forest Ecological Benefit Compensation Program (FECF), for timber, fuelwood, or non-timber forest products. The and soil erosion prevention and control programs fall into national-level annual subsidy rate has increased from CNY this category, and target improved watershed functionality 5 per mu (US$ 11.6 per ha) in 2001 to currently upward via improved rural land management practices and land use of CNY 16 per mu (US$ 37 per ha). Provincial FECFs have change. Unlike the former two categories, most programs in also added provincial-level public benefit forest areas, these categories provide payments directly to households. with some providing subsidies at upward of CNY 70 per mu (US$ 162 per ha) (figure 3.3). The CCFP is the largest and most influential eco-com- pensation program within this category. Involving direct, The national program has steadily expanded the subsidized performance-based contracts with individual rural households national public benefit forest area from 100 million mu as recognized stewards of ecosystem services, the CCFP (6.67 million ha) in 2001 (the pilot phase), to 1.904 was a catalyst of current trends in eco-compensation (see billion mu (126.9 million ha) by 2015 (figure 3.4). Along section 2.1). This direct-to-households approach has since with this, provincial-level FECFs have increased from 6 been incorporated into a wide range of rural land use in 2001 to 31 in 2020. These provincial programs either programs in China. The CCFP is the largest eco-compensation delineate and subsidize provincial-level public benefit program in the world in terms of geographic coverage forest area, top-up national subsidies for national-level and expenditure, having retired and afforested 13.27 public benefit forest area within the province, or often million hectares (ha) of marginal and sloping cropland, both (so that subsidy rates are equal across forest types). and planted forests and vegetative cover on 17.5 million ha since 1999.36 To date, the national government has The Conversion of Pastures to Grasslands (“Grazing to spent CNY 511.2 billion (US$78.7 billion) on CCFP (see Grasslands”) Program (CPGP) is a similar households-oriented figure 3.5). The program is currently being extended for program targeting degraded and over-grazed grasslands.38 a new round with increased subsidies to households and This program was launched in 2003 as an offshoot of CCFP. added rural welfare guarantees. Grasslands cover over 4 million square kilometers of China, accounting for over 40 percent of China’s land area; of this, The FECF is another important program in this category, and complementary to the CCFP. As discussed in section 2.1, this program targets the protection and rehabilitation of 37 This forest type classification was developed in 1996. Two main forest classifications were developed: “commercial forests” and “public forest area deemed to provide important ecological goods benefit forests.” Commercial forests—consisting of “timber forests,” and services, and thus are denoted as “public benefit forests.” “economic forests,” (i.e., orchard crops) and “fuelwood forests”—are those allowed to be harvested for commercial use. Public benefit for- The FECF has also served as an important template for more ests—consisting of “protection forests” and “special-use forests”—are recent developments in eco-compensation, since it has those forest types deemed to provide important ecological services, such as sapling and seed provision, watershed protection, and biodiver- catalyzed the development of provincial-level analogues. sity and carbon sequestration, and so are not allowed to be harvested (Hyde, Belcher, and Xu 2003; Xu, White, and Lele 2010). Guidelines for Under either national or province FECFs, annual payments what constitutes a public benefit forest area have been laid out in the are made to households or local forestry agencies who National-Level Public Benefit Forest Zoning Definition Measures, jointly issued by the State Forest Administration (SFA) and Ministry of Finance are the land use rights holders for the public benefit forest (MOF) in 2004 and updated in 2009 (SFA-MOF 2004, 2009). area covered by either the national- or provincial-level 38 Several other programs also fall under this category and use the same naming rubric as CCFP. These include the “Conversion of Paddy Rice to Dryland Agriculture” program, wherein Beijing has paid farmers in the Chaobai watershed in upstream Hebei Province to abandon water-in- tensive rice cultivation so as to improve water inflow to the Miyun Res- ervoir, as well as “Conversion of Cropland to Wetlands,” “Conversion of Cropland to Lake,” and “Conversion of Aquaculture to Lake” programs and policy interventions across China, which have generally involved subsidy-based voluntary or mandatory restoration of the functionality of 36 CCFP has contributed more than one-third of the total area of planted specific riparian zone ecologies that have been encroached upon, often forests in China. A total of 41 million households, or 158 million rural as a result of previous subsidy-based policies to encourage “productive people, have participated in the program. development” of such areas for agriculture. 43 Ecological Compensation in China: Trends and opportunities for incentive-based policies towards a greener China FIGURE 3.3: National and Provincial Forest Ecological Compensation Fund Subsidy Rates 45 Highest provincial subsidy rates Provincial FECFs, provincial- 40 level forests, median subsidy level (with highest and lowest borders) 35 National FECF subsidy rate, state-owned forests CNY 70 National FECF subsidy rate, collectively-owned forests 30 Subsidy rates (CNY/mu/year) 25 20 15 10 5 Lowest provincial subsidy rates 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: Custom data collected by authors from a systematic review of available news, and academic and provincial government sources. approximately 1.6 million square kilometers is degraded. function zones (figure 3.5) as well as a rise in number, The program provides direct subsidies to herdsmen to if not in value, of watershed programs, these “original” pen their flocks, reseed and restore degraded grassland land use programs continue to provide support to rural areas, and provide household livelihood support, along households, funds for improved land management, and with a range of subsidies to help husbandry households capacity-building and familiarization with eco-compensation improve the efficiency and productivity of their activities. principles for local governments. Cumulative investment reached CNY 30 billion (US$4.62 billion) by 2018. 3.2 ECO-COMPENSATION While newer developments in eco-compensation receive TYPE BY GOVERNMENT ROLE much focus (including in this report), these rural land use eco-compensation programs remain central to China’s The role of eco-compensation as a fiscal transfer mech- eco-compensation efforts. These programs are some of anism—specifically its function to incentivize and align the most important drivers of China’s success in slowing the disparate interests within China’s hierarchically land degradation and reversing deforestation and erosion layered government—can also be used as a meaningful trends over the past two decades (Bryan et al. 2018). basis of categorization. Along these lines, programs can While trends favor growing payments to key ecological be described in four major classes: (1) national framework 44 Chapter 3. Eco-compensation Types, Trends, and Outcomes FIGURE 3.4: National FECF Area and Number of Provincial FECFs, 2001–2016 45 2,000 40 1,800 1,600 35 National FECF area (million mu) Number of provincial FECFs 1,400 30 1,200 25 1,000 20 800 15 600 10 400 5 200 0 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Custom data collected by authors from a systematic review of available news, and academic and provincial government sources. Note: 1 mu ≈ 1/15 ha FIGURE 3.5: Annual Investments of China’s Eco-compensation Programs 200,000 All other programs 175,000 MWR Soil Erosion Prevention/Control National Key Ecological Function Zones 150,000 Grazing to Grassland Program Annual Investment (CNY, million) Forest Ecological Benefit Compensation Fund (National) 125,000 Conversion of Cropland to Forests Program 100,000 75,000 50,000 25,000 0 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 Source: Custom data collected by authors from a systematic review of available news, and academic and provincial government sources. 45 Ecological Compensation in China: Trends and opportunities for incentive-based policies towards a greener China programs; (2) interprovincial programs; (3) intra-provincial national government sets goals and general envi- programs; and (4) provincial and sub-provincial hybrids. ronmental indicators,39 and provinces then develop All have a role for the national government, often as a approaches for meeting those goals independently. This source of funding, or through actions to bring subnational program “type” encourages piloting through implicit governments together. Based on this study’s data collection rewards—additional national grants and recognition exercise (see box 3.1), intra-provincial programs are the given to the more eager and nimble provinces that most prominent (46.2 percent of programs), followed by develop innovative approaches and with the best subnational hybrids (30.3 percent), national framework cases used as models elsewhere. programs (22.1 percent), and interprovincial programs • Provincial and sub-provincial hybrids: This category (1.4 percent). carries the greatest degree of program diversity. These • National framework programs: These are programs consist of provincial and sub-provincial eco-compensation created, configured, and funded by the national programs directed at localized areas (e.g., rivers, government. They often have the explicit expectation watershed areas, or specific municipalities). These of provincial government matching funding as part of generally involve the weaving together of multiple implementation, and provide provinces with flexibility funding sources and utilization of approaches. Funding in how they implement these programs within a broad from national framework programs are often drawn framework set at the national level. Examples of these on by these, and they potentially contain the greatest programs include the CCFP, the FECF, the CPGP, and the wealth of information, innovative approaches, and KEFZ programs. With the exception of the latter—which lessons learned, and have high potential to feed into involves transfers to subnational governments (see and influence national policy or practices elsewhere. section 3.1.b)—most national framework programs However, they are also the least well documented, target rural households. They are often designed to given decentralized administration and data limitations. encourage the creation of parallel provincial-level Empirical data highlight the focus of national framework programs, as seen in the FECF, wherein provinces programs on rural land use interventions: forestry, soil have created their own forest ecological benefit erosion prevention and control, and grassland protection compensation funds and provincial-level key public and restoration (table 3.1). Programs that more explicitly benefit forest areas. and directly engage individual households and communities • Nationally led/enabled interprovincial programs: These tend to be the large-scale national framework programs. are relatively new programs indicative of the national Somewhat newer developments have been in water quality government’s focus on addressing cross-provincial and watershed management, with these programs generally environmental issues. They are programs in which the being either nationally catalyzed intra-provincial programs national government facilitates, coordinates, and financially or subnational hybrids. This division is expected: when supports platforms for interprovincial cooperation and targeted activities have more concentrated, local impacts formal agreements. Within the framework of national (e.g., for watershed and water quality services), local program government support, provinces shape the program’s design and implementation are likely better suited, relative agreement itself. Water quality–focused programs to programs focused on more dispersed benefits (e.g., for are the most prominent examples (see section 3.1.a). carbon sequestration, biodiversity, anti-desertification, • Nationally catalyzed intra-provincial programs: and larger-scale watershed impacts). These are programs developed directly by provinces in response to national government policy signals and 39 For example, as seen in the broad guidelines provided by the Guiding include cross-county watershed eco-compensation Opinions on Accelerating the Establishment of Watershed Up- stream-Downstream Horizontal Ecological Protection Compensation and water source protection eco-compensation. The Mechanisms (MOF 2016). 46 Chapter 3. Eco-compensation Types, Trends, and Outcomes TABLE 3.1: Programs by Government Role and Resource Management Issue BY GOVERNMENT ROLE Nationally National Nationally-led Sub-national Catalyzed Framework interprovincial Hybrid intra-provincial ALL PROGRAMS 29.4% 4.4% 39.7% 26.5% Forestry 25.0% 24.3% 0% 0.7% 0% Water Watershed 8.8% 0% 0% 1.0% 7.4% Cross-border 24.3% 0% 4.4% 19.9% 0% BY OBJECTIVE Water Source Protection 17.6% 0% 0% 1.0% 16.9% Soil Erosion Prevention/Control 0.7% 0.7% 0% 0% 0% Wetland 8.1% 3.0% 0% 5.2% 0% Grassland 8.1% 0.7% 0% 6.6% 0.7% Agriculture 3.7% 0% 0% 3.7% 0% Conservation 3.7% 0.7% 0% 1.5% 1.5% Source: Custom data collected by authors. livelihoods); and outcome-based indicators—environmental 3.3 ECO-COMPENSATION quality indicators (e.g., water quality, forest age, and/ EVALUATION INDICATORS or species structure), environmental quantity indicators (e.g., number of saplings planted, area of land covered), The indicators that programs use to condition payments socioeconomic indicators and composite environmental are a key design characteristic with implications for indices (e.g., weighted combinations of multiple indicators). program outcomes. Based on the empirical data, these include financial indicators (related to confirming the Based on the empirical data, most programs still rely proper use of funds, timing, and disbursement of funding primarily on input-based indicators—on-site investments tranches) and institutional milestones (often regarding and management activities—to evaluate program goals concerning targeted regional shifts in economic performance (table 3.2). Outcome-based indicators are structure); input-based indicators—on-site investments generally used much less, though the newer water-related (generally concerning land use interventions and other eco-compensation programs rely heavily on water quality investments), management activities (inspections, training) indices. Composite indicators are also seeing greater and livelihoods transformation activities (involving com- adoption in newer programs, particularly conservation munity and household skill development for alternative programs and some water source protection programs. 47 Ecological Compensation in China: Trends and opportunities for incentive-based policies towards a greener China TABLE 3.2: Programs by Evaluation Indicator Type EVALUATION INDICATORS USED INPUT-BASED OUTCOME-BASED On-site Investments Financial indicators Quantity Indicators Quality Indicators Transformation Socioeconomic Environmental Environmental Environmental Management Institutional Livelihoods Milestones Composite Indicators Activities Activities Indices PROGRAM TYPE All programs 62.7% 7.8% 60.8% 13.7% 5.9% 84.3% 54.9% 8.8% 8.8% Forestry 100% 0% 100% 0% 0% 100% 100% 0% 0% Water Watershed 27.3% 0% 27.3% 18.2% 0% 91% 36.4% 0% 0% Cross-border 20% 8% 20% 16% 8% 80% 12% 8% 16% BY OBJECTIVE Water Source 41.7% 8.3% 58.3% 50% 16.7% 83.3% 58.3% 16.7% 8.3% Protection Soil Erosion Prevention/Control 100% 100% 0% 0% 0% 0% 100% 0% 0% Wetland 89% 44% 67% 0% 11% 78% 44% 33% 11% Grassland 67% 0% 100.0% 0% 0% 33.3% 33.3% 0% 0% Agriculture 100% 0% 60% 0% 0% 60% 20% 0% 0% Conservation 75% 0% 75% 50% 25% 75% 75% 50% 75% National framework 97% 5% 95% 0% 5% 97% 97% 8% 5% BY GOVERNMENT Nationally-led 40% 20% 40% 20% 20% 80% 20% 20% 0% Interprovincial ROLE Nationally Catalyzed 42% 11% 34% 11% 3% 74% 21% 5% 11% Intraprovincial Sub-national Hybrid 45% 5% 55% 41% 9% 82% 50% 14% 14% Source: Custom data collected by authors. Note: Programs can use multiple indicators, and so rows do not necessarily sum to 100 percent. to address a combination of factors behind ecological 3.4 PROGRAM PERFORMANCE and environmental management shortfalls, particularly AND OUTCOMES in the case of locally developed programs. Although the To complement the examination of eco-compensation main objectives may be land and water improvements, status and trends, a qualitative assessment of performance these programs are also implicitly focused on catalyzing by a selection of programs was developed. Assessing and facilitating local innovation, institutional change, and the successes and difficulties facing programs in China is capacity-building. An assessment based on one set of challenging. First, in many cases, attribution is difficult due outcomes may be missing signifiers of success in other to programs’ evolving nature within overall management important dimensions. Third, data on eco-compensation is reforms, which mean they arise in changing institutional limited—particularly social and environmental outcomes and environments that are themselves affecting program outcomes payment flows—and highly dispersed across governments, (as examined in section 2.6). Second, programs often aim even when made publicly available. 48 Chapter 3. Eco-compensation Types, Trends, and Outcomes Nevertheless, considerable information is available; this Peng 2010).40 Conversely, eco-compensation for KEFZs report uses those sources available to make a broad faces apparent gaps in the ability to monitor outcomes, assessment of programs and program types (tables as well as in attribution, additionality, and conditionality. 3.3–3.5). Conclusions are developed via a synthesis of While many KEFZs were selected based on their high a collection of available sources, including descriptive conservation value, the degree to which these natural information from the eco-compensation dataset, combined areas are under threat, and whether the threat level is with additional news articles, government reports, and being considered in selection, appears to vary significantly academic literature. Programs and program types are across zones. considered through the lens of the three dimensions Though forestry eco-compensation programs have of the eco-compensation assessment presented earlier generally achieved effectiveness, they still have room in this report: effectiveness, efficiency, and equity (box for improvement. The CCFP scores better on additionality 3.5). This assessment is necessarily subjective, intended than does the FECF; households with use rights over to indicate broad strengthens and weaknesses, and to forests generally already face significant administrative motivate framework recommendations. barriers to timber harvesting, and so the rezoning of such land under FECF in many contexts has likely done little to The results of the assessment provide important insights. change the status of threats. The broad literature on CCFP These inform the framework recommendations (section has also highlighted issues of conditionality, though this 4.5) developed by this study to address the gaps identified has been strengthened as the program has progressed. here and in other sections. In aggregate, many programs Often poorer households and regions have been targeted score well on effectiveness, especially in achieving suffi- by the program to capture welfare co-benefits, though cient scale (Bryan et al. 2018). It is expected that ongoing the need to ensure rural welfare outcomes has meant strengthening of technical and monitoring capacity will that conditionality regarding ecological outcomes was further improve outcomes along this dimension. However, weakened during earlier program stages, i.e., households there are opportunities for improvement in efficiency, with were generally not penalized for poor tree survival rates scores that are middling across programs and indicators. for fear of harming their livelihoods (Bennett 2008; Uchida Diversification and leveraging of funding sources is generally et al. 2007; Gutierrez-Rodriquez et al. 2016). In addition, low, payments are not always fully responsive to outcomes, there remain opportunities for better bundling of ecological and room exists for better capturing and leveraging synergies services. Xu (2011), for example, notes adverse impacts on in ecological services provision. Many programs also have biodiversity from forestry programs in China’s southwest room for improvement regarding equity. Co-management due to the introduction of fast-growing exotic tree species is relatively low across programs, with many primarily or the creation of rubber plantations. top-down in their design and implementation, as specifically Most of the programs examined have done very well discussed below. to achieve scale. The CCFP, FECF, and CPGP cover large Programs targeting watershed ecological services score areas with hundreds of millions of rural participants. These highest in terms of effectiveness, while KEFZ eco-com- programs have been effective at achieving scaled but shallow pensation scores the lowest. Watershed programs appear management interventions that can be built upon—by to help catalyze needed shifts in management frameworks first prioritizing expansion and coverage, with gradual by introducing conditionality, and better align and improve adjustments to program configurations and targets occurring the sustainability of funding flows via a clearer framing after sufficient scale has been achieved. Water-related eco-compensation programs have also generally been of management in terms of beneficiaries and suppliers. Targets are being achieved beyond the status quo, and 40 This is based on assessments of the “River Chief System,” which facili- are attributable (Li et al. 2020; Li, Tong, and Wang 2020; tates cross-border eco-compensation programs. 49 Ecological Compensation in China: Trends and opportunities for incentive-based policies towards a greener China Box 3.5: The Assessment Approach and Evaluation Framework Qualitative indicators were developed to align with the three Selected programs and program types were grouped by general dimensions of the assessment framework presented in chapter 1, length of time they have been in operation—categorized either as effectiveness, efficiency, and equity (table B3.5). These were “mature programs,” “medium-term programs,” or “newly developed decomposed into component indicators, based on academic literature programs.” This is to account for both the amount of time programs on payments for ecosystem services, conservation finance, and rural have had to improve implementation and outcomes, as well as for the development. For each indicator, programs (or program categories) availability of information to make well-grounded assessments. The were given scores between 1 (poor) to 5 (excellent) based on qualitative programs included in this assessment were also selected based on information from the eco-compensation dataset, and government and the information available. Assessments for each program or program academic literature. grouping were made using these indicators. TABLE B3.5: Qualitative Indicators for Assessing Eco-compensation Programs INDICATOR DESCRIPTION Targets achieved? Are targeted outcomes being achieved? Attribution? Can observed outcomes be attributed to program interventions? Additionality? Are outcomes beyond what would have happened without program interventions? EFFECTIVENESS Conditionality? Are program mechanisms sufficiently performance based? Leakage? Are targeted outcomes being diluted by adverse program-induced impacts elsewhere? Sufficient scale? Is sufficient scale to achieve meaningful impacts being reached? Sustainable funding? Is program funding or budgetary planning sufficiently stable to ensure long-term outcomes? Innovative? Is the program innovative in how it achieves its targeted outcomes? Adaptive? Is the program sufficiently adaptive to address uncertainty and change, and to catalyze and capture learning-by-doing? Cost-effective? Are lowest cost approaches and/or locations to deliver targeted outcomes being utilized where reasonable? Best approach? Are program instruments the best means to deliver outcomes within the larger regulatory and EFFICIENCY socioeconomic landscape? Transactions costs? Does program design minimize transactions costs, and are they sufficiently low? Synergies captured? Are synergies in delivery of co-benefits being captured, and are trade-offs or conflicts in targeted outcomes being minimized? Leveraged funding? Are different funding streams being effectively combined, aligned, and/or rationalized to deliver targeted outcomes? Voluntary? Is participation voluntary? Opportunity costs? Does the program fully compensate providers for their opportunity costs of participation? Shared costs and benefits? Does the program facilitate a more equitable sharing of the costs and benefits of sustainable ecologi- cal services provision? EQUITY Livelihoods co-benefits? Does the program deliver improved livelihoods or community welfare co-benefits? Co-management? Are service providers being consulted and engaged in decision-making on design and implementation? Elite capture? Does the program minimize risk that program benefits are unfairly captured by a subset of the potential pool of service providers? Due diligence? Does program design minimize, where possible, risk of adversely impacting community equity? Source: Authors. 50 Chapter 3. Eco-compensation Types, Trends, and Outcomes TABLE 3.3: Qualitative Evaluation of Select Eco-compensation Programs: Mature Programs CCFP FECF INDICATORS Score + Summary Score+ Summary Targets achieved: 4.5 Afforestation targets achieved. 3.5 The program has facilitated a transition of forest rights. Improved protection. Attribution: 4.5 Outcomes able to be linked to program 3 Afforestation results clear. Impacts on interventions. deforestation rates unclear. Additionality: 4.5 Outcomes achieved beyond status quo. 3 Some afforestation beyond status quo. Rates of harvesting likely unchanged. Conditionality: 4 Earlier ecological-rural welfare target 2.5 Likely low. This is more in the form of EFFECTIVENESS conflicts have been resolved. regulatory taking with compensation. Leakage: 3 Some work has suggested that leakage has 3 Likely some leakage has occurred, though to occurred. some degree by design. Scale: 5 Program has achieved scale. 5 Program has achieved scale. Sustainable funding: 3 Future funding is unclear, though the 3 Future funding is unclear, though the government continues its support. government continues its support. Innovative: 3 Program was innovative in its beginning, but 3 Program was innovative in its beginning, but little has changed since then. little has changed since. Adaptive: 3.5 Some flexibility in local implementation 2.5 Compensation rates have increased, but encouraged. little else has changed. Cost-effective: 3 Cost-effectiveness has slowly been 3.5 Costs are low, likely due to low-subsidy, improved. top-down structure. Best approach: 3 Reasonably "second-best" approach within 2 Other regulatory approaches could likely EFFICIENCY context. obtain better outcomes. Transaction costs: 3 In early years, high transaction costs. These 3 In early years, high transaction costs. These have gradually been reduced. have been reduced. Synergies: 3 Some captured, but land selection criteria 3.5 Co-benefits important in selection of public vary widely across locales. benefit forest area. Leveraged financing: 1 Dependent on government funding. Other 1 Dependent on government funding. Other sources (carbon, water) not tapped. sources (carbon, water) not tapped. Voluntary: 4 Though some issues in early implementation, 2 This is primarily a top-down regulatory taking generally good. of forest rights. Opportunity costs: 4 Farmers are compensated above their 1 Common point in the literature is that opportunity costs. compensation is far too low. Shared Cs & Bs: 4 Program targets important environmental 2 Important environmental externalities externalities. targeted, but Cs & Bs not well shared. EQUITY Livelihoods: 4 Livelihood outcomes have been an important 2 Little focus on rural welfare issues. focus of the program. Co-management: 2 Households have had little voice in program 2 Households have had little voice in program design and implementation. design and implementation. Elite capture: 4 Unlikely given China's equitable land 3 Likely some degree of government capture distribution. Some early government capture. (local forestry agencies) by design. Due diligence: 4 Equity in participation has been an important 1 Not at all considered in program implemen- part of implementation. tation. Source: Authors. + Based on a scale of 1 to 5, with 5 being the best. 51 Ecological Compensation in China: Trends and opportunities for incentive-based policies towards a greener China TABLE 3.3: Qualitative Evaluation of Select Eco-compensation Programs: Mature Programs (continued) GRAZING TO GRASSLAND INDICATORS Score+ Summary Targets achieved: 3.5 Some degree of grassland recovery appears to have occurred. Attribution: 2.5 Based on many questionable assumptions on underlying causes of degradation. Additionality: 3 Outcomes generally beyond status quo. Conditionality: 3.5 Herdsmen required to change production activities. EFFECTIVENESS Leakage: 4.5 Unclear, but generally low potential for leakage to other grassland areas given comprehensive coverage. Scale: 5 Program has achieved scale. Sustainable funding: 3.5 Government appears to be committed to ongoing support, at least in the medium term. Innovative: 2.5 Use many of the approaches in previous programs targeting similar outcomes. Adaptive: 2.5 Primarily top-down in program design and implementation. Cost-effective: 2 Unlikely that the most cost-effective approach is being used. Best approach: 3 Likely that other regulatory interventions could be more effective. EFFICIENCY Transaction costs: 3.5 Transaction costs have been gradually reduced during implementation. Synergies: 3 Grassland area selections capture some synergies (e.g., important headwater areas) Leveraged financing: 1 Funding remians siloed and top down, with little interagency collaboration. Voluntary: 3 Husbandry households likely have little to say in participation choice. Opportunity costs: 2.5 Mandated subsidy standards generally below opportunity costs. Shared Cs & Bs: 4 Targets an important environmental externality. EQUITY Livelihoods: 3.5 Program prioritizes transitioning rural livelihoods. Co-management: 2 Households have little voice in program design and implementation. Elite capture: 4 Unclear, but unlikely given China's equitable land distribution. Possibly some local government capture. Due diligence: 2.5 Unclear, but livelihood transitions might be difficult for some households. Source: Authors. + Based on a scale of 1 to 5, with 5 being the best. 52 Chapter 3. Eco-compensation Types, Trends, and Outcomes TABLE 3.4: Qualitative Evaluation of Select Eco-compensation Programs: Medium-term Programs KEY ECOLOGICAL FUNCTION ZONE WATER SOURCE PROTECTION ECO-COMPENSATION INDICATORS Score+ Summary Score+ Summary Targets achieved: 4 Water quality targets are being achieved and 3 Monitoring ability still developing. Outcomes improved. targeted unclear. Attribution: 4 Program interventions are clearly the cause 3 Ability to attribute outcomes still developing, of improvements. but weak. Additionality: 4 Improvements beyond status quo are 3.5 Improvements in some, but other locations definitely being achieved. have uncertain threats. Conditionality: 3.5 Program structure suggests it, but likely 2 Once in the program, hard to make fiscal EFFECTIVENESS varies across programs. transfers truly conditional. Leakage: 3 Some potential leakage in the form of 2 Possibility for leakage to other areas. This is displaced industries and activities. to some degree by design. Sufficient scale: 5 Most are of local scale, but appropriately 3 Unclear, especially given lack of clarity on target relevant watershed areas. targeted outcomes. Sustainable funding: 4.5 They create direct links between beneficia- 4 The government is currently strongly ries and providers. committed to supporting this program. Innovative: 4 Improves management frameworks for water 4 Cadre evaluation system places increasing resources. weight on ecological indicators. Adaptive: 3.5 Management structures and funding appear 3.5 Some flexibility in local implementation to evolve. suggested. Cost-effective: 3 Unclear, but budgetary rigor supports 2 Unlikely, since this targets composite efficienct use of monies. environmental outcomes. Best approach: 3 Unclear, but budgetary rigor aligns with 2.5 Unlikely, in comparison to more targeted EFFICIENCY using best approaches. interventions. Transaction costs: 3 Unclear, but likely considered in working 4 Relatively low since interface at the county effectively with communities. government level. Synergies: 3 Unclear, but likely given comprehensiveness 3.5 While in principal being leveraged, still under of interventions. development. Leveraged financing: 4 Often tap into and combine or better align 1 Top-down funding suggests minimal access different funding streams. to other possible funding sources. Voluntary: 3 Unclear, though effective collaboration with 1.5 This program is a regional-level regulatory communities suggests it. taking. Opportunity costs: 3 Unclear, though effective collaboration with 2.5 Opportunity costs estimated at a regional communities suggests it. level, not on a community basis. Shared Cs & Bs: 4 Improves the apportioning of watershed 3 This program is a regulatory taking, though management Cs & Bs. benefits sharing could improve. EQUITY Livelihoods: 4 Rural livelihoods are often a priority to 2 Little consideration of rural community improve collaborative partnerships. welfare in program design. Co-management: 3 Some degree of input into desired design 2.5 Appears to be primarily top-down, though and interventions likely. with likely hidden variations. Elite capture: 4 Unlikely, given the need for comprehensive 3 Potential for some capture at relevant interventions. government levels. Due diligence: 3.5 Equity concerns in rural interventions make 1.5 Top-down general structure indicates that this likely. this was not considered. Source: Authors. + Based on a scale of 1 to 5, with 5 being the best. 53 Ecological Compensation in China: Trends and opportunities for incentive-based policies towards a greener China TABLE 3.5: Qualitative Evaluation of Select Eco-compensation Programs: Newer Programs INTER-PROVINCIAL CROSS-BORDER INTRA-PROVINCIAL CROSS-BORDER WATERSHED WATERSHED ECO-COMPENSATION INDICATORS Score+ Summary Score+ Summary Targets achieved: 4.5 Most of these programs have achieved 4.5 These programs have achieved improve- improvements in water quality. ments in water quality. Attribution: 5 Program interventions are clearly the cause 5 Program interventions are clearly the cause of improvements. of improvements. Additionality: 4.5 Programs are clearly improving outcomes 4.5 Programs are clearly improving outcomes beyond the status quo. beyond the status quo. Conditionality: 4.5 These programs strongly link payments to 4 Most programs link funding to the outcomes EFFECTIVENESS indicators. of indicators. Leakage: 3 Some degree of leakage, in terms of 3 Some degree of leakage, in terms of displaced industries, etc., likely. displaced industries, etc., likely. Sufficient scale: 4.5 These programs approapriately target 4.5 These programs appropriately target relevant watersheds. relevant watersheds. Sustainable funding: 4 Strong, since provinces vested in outcomes. 4 These projects tap into multiple funding sources. Innovative: 4 These have significantly advanced trans-pro- 4.5 These programs have clarified roles and vincial watershed management. responsibilities. Adaptive: 4 These programs are continuing to evolve. 4 These programs are continuing to evolve. Cost-effective: 2.5 Initiation conditional on large national 2.5 Likely not the most efficient approach, government start-up support. though could improve. Best approach: 3.5 Likely necessary to "get the ball rolling." 3.5 Has catalyzed important institutional EFFICIENCY Later programs could be different. reforms, though improvements possible. Transaction costs: 3.5 Provincial-level interface likely reduces 2 Potential for significant transactions costs. these, somewhat. Synergies: 3 Unclear how well these are being levereged 3.5 Likely variation across provinces. Could to achieve larger outcomes. improve over time. Leveraged financing: 3.5 Combination of multiple funding sources, but 3 Combination of multiple funding sources, but primarily governmental. primarily governmental. Voluntary: 3.5 These have generally involved detailed 3.5 Generally good, though some reports of negotiations between provinces. mandated participation. Opportunity costs: 3 Unclear in program designs, though likely 3 Unclear in program designs for the land some considerations made. users and other economic actors. Shared Cs & Bs: 2.5 More developed lower watersheds often get 3.5 Improved, but lower watershed developed the better deal. regions often get the better deal. EQUITY Livelihoods: 2 Unclear, with potentially significant variation 2.5 Possibly some considerations of this, but depending on interventions. depends on interventions. Co-management: 3 Primarily top-down in design and implemen- 3 Primarily top-down in design and implemen- tation. tation. Elite capture: 3 Likely minimal, given the comprehensiveness 3 Likely minimal, though possibly some of interventions. government capture. Due diligence: 3 Unclear, especially for land users and other 3 Unclear, especially for land users and other economic actors. economic actors. Source: Authors. + Based on a scale of 1 to 5, with 5 being the best. 54 Chapter 3. Eco-compensation Types, Trends, and Outcomes Photo: Panoramic view of the Li River and Karst Mountains in Guilin, China. iStock. good at intervening at the appropriate scales to achieve eco-compensation, these programs constitute regulatory targeted outcomes. takings, with little consultation with the communities in newly designated zones. While the focus on rural welfare In terms of equity, results are mixed. The CCFP, CPGP, outcomes are being emphasized in policy documents, and water source protection programs all score reasonably implementation may have space for improvement. well, especially in terms of facilitating a more equitable sharing of the costs and benefits of ecological services Most programs do well in helping to better apportion provision, and in delivering rural livelihood and community the costs and benefits of ecological services provision, welfare co-benefits. Common across these programs is but at the same time score poorly on co-management. the targeting of rural land use interventions. Water source Programs remain primarily top-down in design and im- protection programs, for example, commonly engage upper plementation, with relatively little consultation and joint watershed rural communities. FECF deviates from this, decision-making with targeted communities. Though since payment rates are consistently cited in the literature scoring low in co-management, CCFP has improved as too low to offset opportunity costs, and the program somewhat over time to include more consultation with constitutes a regulatory taking. communities, with rural welfare outcomes prioritized to ensure buy-in (Gutierrez-Rodriquez et al. 2016). However, It is unclear whether and to what degree interprovincial FECF has primarily been top-down in implementation. and intra-provincial watershed programs focus on equity The literature on the Grazing to Grassland program has dimensions in implementation. These programs involve also indicated that while livelihood issues are likely an collaborations between regional governmental levels, with important focus, communities and individual households implementation to address rural land use impacts likely are rarely consulted on design and implementation (e.g., implemented via traditional, top-down modes. For KEFZ Yeh 2010). 55 Ecological Compensation in China: Trends and opportunities for incentive-based policies towards a greener China All programs have significant room for improvement national government funding, despite calls in various policy regarding efficiency. Low scores on co-management are documents for greater funding diversification and utilization linked to this since limited engagement with key stakeholders of market forces. In all cases, there appears to be very and communities represents missed opportunities to identify little private sector funding support for programs. In the lower-cost approaches. The mature programs, despite case of forestry programs, other sources of finance for their age, have generally not significantly evolved. Though forests—such as for the watershed services they provide these target a range of ecological services, land targeting or for carbon sequestration—are in large part untapped. is often motivated by many considerations independent of Finally, monitoring capacity is an important factor underlying ecological services provision or the capturing of synergies in evaluations of both effectiveness and efficiency. Water these (Gutierrez-Rodriquez et al. 2016; Yeh 2010; Cao 2017). quality monitoring has seen significant improvements in Most programs also perform poorly in terms of the recent years, which has allowed for greater conditionality degree to which they are able to effectively combine, in water-related eco-compensation programs. Conversely, align, and/or leverage funding sources. The exception China still faces significant gaps in the more demanding are water source protection programs, which often involve requirements for assessing and monitoring the health interagency collaboration and joint support. Interprovincial and recovery of its wide diversity of regional ecosystems and intra-provincial programs are given a middle score and eco-regions, including the estimation of both static for this, but it is possible that finances for these are also and dynamic baselines, as well as ongoing issues with pooled and reasonably well leveraged, at least by the data quality (Brombal 2017). This has bearing for both its upper watershed provinces, to ensure that outcomes are mature programs, as well as KEFZ eco-compensation, achieved. Conversely, the mature programs, as well as which target bundled services, including harder to assess KEFZ eco-compensation, continue to depend heavily on ecological services and functions. 56 Chapter 3. Eco-compensation Types, Trends, and Outcomes 57 CHAPTER 4. Eco-compensation for River Basin Management 58 Photo: Guilin Messire mountain scenery. iStock. zhangguifu. the basin.41 The YREB contains over 42 percent of China’s While this report has to this point con- population and contributes around 45 percent of its gross sidered eco-compensation and China’s domestic product (GDP).42 With annual water resources of environmental management institutions over 995 billion m3, the Yangtze accounts for 35 percent of across geographies, types, and perfor- China’s freshwater resources,43 and is one of the world’s mance issues broadly, it now turns to most biologically diverse ecoregions (WWF 2020). river basin management specifically, The Yellow River, while smaller in geographic and economic with a focus on the Yangtze and Yellow terms, is similarly central to Chinese history, culture, River basins. society, economy, and ecology. Considered the cradle of Basin management has become a high priority for the national Chinese civilization, the river is known as “China’s Sorrow” government and is a growth area for eco-compensation. due to its flooding tendencies. As the river turns south from With these two basins covering a combined 27 percent of Inner Mongolia, it runs through the fertile but highly erodible China’s landmass and encompassing a majority of China’s soils of the Loess Plateau, resulting in sediment loads that economy, management of these basins will determine whether are the largest of any major waterway in the world. At 5,464 China achieves many of its environmental management km in length, the Yellow River is of similar length but much goals. Eco-compensation has played an important role within smaller in basin size and water resources volume than the these regions for decades, with floods and droughts in these Yangtze River, carrying 2 percent of China’s water resources. regions motivating the development of the country’s biggest The Yellow River basin is home to 15 percent of China’s programs, such as the Conversion of Cropland to Forest arable land and 12 percent of its population. (CCFP) and the Forest Ecological Benefit Compensation Fund (FECF) (see section 3.1.c). There is growing interest in expanding eco-compensation, in a variety of forms, to 4.2 KEY CHALLENGES FOR address the basins’ ongoing issues. This chapter provides an THE YANGTZE AND YELLOW overview of the Yangtze and Yellow River basins, including RIVER BASINS challenges and government responses to those challenges, The Yangtze River basin faces intense pressures from before considering the role of eco-compensation within this human activities. Urban, agricultural, and industrial activities framework. Case studies are used to derive lessons and have encroached upon natural ecosystems. Land covered opportunities. by roads and buildings in the overall Yangtze River basin roughly doubled between 2000 and 2017, increasing surface 4.1 OVERVIEW OF THE runoff and contributing to water pollution. Nonpoint source YANGTZE AND YELLOW RIVER agricultural pollution has created further water pollution challenges. From 1982–2017, total wastewater discharges BASINS to the Yangtze increased from 12.7 billion m3 to 31 billion m3. The Yangtze River and its catchment plays a major role in Deficiencies in waste management systems, particularly in the economic, historical, and cultural identity of China. rural areas, and widespread use of plastic films in agriculture, Extending more than 6,300 km from the Qinghai-Tibetan 41 These are Anhui, Guizhou, Hubei, Hunan, Jiangsu, Jiangxi, Sichuan, Yun- Plateau to the East China Sea, the Yangtze and its catchment nan, Zhejiang, Chongqing, and Shanghai. is a center of economic activity and a supplier of ecological 42 If it were a country, the YREB would be the third largest economy in the world after the US (US$22.32 trillion) and China itself (US$15.27 trillion) services and natural resources. The importance of the (IMF 2020). basin is seen in the national government’s growing focus 43 The Yangtze provides more than 200 billion m3 of water to industries and on the “Yangtze River Economic Belt” (YREB), a grouping populations, servicing around 580 million people in the basin and in north China. This includes 100–120 million people who are beneficiaries of the of 11 provinces and provincial-level municipalities along first phase of the South-to-North Water Transfer Project (WWF 2020). 59 Ecological Compensation in China: Trends and opportunities for incentive-based policies towards a greener China FIGURE 4.1: Development level across the Yangtze River Economic Belt Region GDP per capita (Thousand US$ per year) 30 100 25 80 Urbanization rate (%) 20 60 15 40 10 20 5 0 0 Sichuan Guizhou Chongqing Hubei Hunan Jiangxi Anhui Jiangsu Zhejiang Shanghai Yunnan Upper Middle Lower Province and Yangtze River Reach (upper, middle, or lower) contributed to high plastics loads in the basin’s rivers.44 An risks and water quality issues. More than 12 percent of the estimated 14 percent of lake area was lost between 1975 137 water quality sections in the main stem of the Yellow and 2015 due to agricultural extensification, conversion River had a water quality of Class V (poor), significantly to aquaculture, and land development (WWF 2020; Cong higher than the national average of 6.7 percent (Wang, et al. 2017). Climate change is set to exacerbate these Mao, and Xu 2020). pressures through increasingly variable regional water In both basins, poverty and regional income disparities cycles (Wu 2016; Cao 2017). compound the impact of resource scarcity and complicate The Yellow River faces similar pressures from human environmental protection efforts. GDP per capita at the activities, compounded by water-related scarcity mouth of the Yellow River (Dongying City, Shangdong constraints. A water utilization rate of up to 80 percent, Province) is tenfold that of its source (Yushu Prefecture, far exceeding the 40 percent ecological warning line of Qinghai Province). The poverty gradient in the Yangtze is river basins in general, has intensified water use conflict. less severe in relative terms but shows a similar pattern, Insufficient water for the environment continues to impact with GDP per capita three times higher in the basin’s richest the basin’s ecosystems, resulting in the drying of lakes, province (Shanghai, at the river mouth) than in its poorest tributaries, and estuary wetlands, and the degradation of (Guizhou, in the upper reaches) (figure 4.1). grasslands (Xu and Wang 2020; Jin 2019). In addition to agricultural, municipal, and industrial discharges, the Yellow 4.2.a Institutional and management issues River basin has long been prone to heavy sediment loads Basin-level management in China is based on a system due to erosion of the basin’s fragile soils, leading to flood of river basin commissions. The commissions have existed since the 1950s, when the Yellow River Conservancy 44 The Yangtze is the world’s leading plastics contributing river, estimated to contribute 0.31 to 0.48 million tons of the estimated 2.40 million tons Commission (YRCC) was established, followed by the deposited into oceans globally each year (Lebreton et al. 2017). creation over the following decades of commissions for 60 Chapter 4. Eco-compensation for River Basin Management each of China’s seven major watersheds.45 Under the responsibility of the Ministry of Water Resources (MWR), 4.3 RECENT REFORMS IN the purpose of the basin commissions is to manage water RIVER BASIN MANAGEMENT resources utilization and development, water resources As part of the national government’s concerted effort management and protection, soil and water conservation, toward environmental management reforms (see and flood and drought risk management. Their role is section 1.1), river basin management is improving. primarily advisory, with no implementation or enforcement One element of this effort focuses on expanding the mandate over provinces. river basin commissions. Rather than restructuring and The revised Water Law (2002) made the role of the river deepening preexisting institutions, seven new Watershed basin commissions more explicit, yet challenges remain. Ecological and Environmental Supervision and Management The MWR provides technical advice on implementation of Bureaus—parallel to the MWR commissions but under water policies and laws to provincial water management MEE—have been created to manage water pollution and bureaus. At the basin level, management of water quality coordinate ecological and environmental planning and (formerly managed by the Ministry of Environmental Protection management at the basin level. Again, these serve primarily [MEP], now by the Ministry of Ecology and Environment an advisory role, with the onus of implementation and [MEE]) has remained separate from that of water quantity management on provincial governments. (managed by MWR), maintaining a barrier between these Two policies—the Three Redlines and the Water Ten related policy domains. The commissions do not manage Policies—represent important further efforts by the subbasin activities, which are the purview of local gov- national government toward addressing unsustainable ernments. While consistent with a localized governance water use and water quality issues. The “three red lines” framework, this structure conflicts at times with basin-wide policy46 (santiao hongxian 三条红线), was issued in 2012 management goals and ecological dynamics. Land use and set national limits of aggregate consumption, and activities that have important watershed impacts are also required water use efficiency levels and water quality outside of the management purview of the commissions levels.47 The “water ten” policy (shui shitiao 水十条), (Hu, Tan, and Xu 2019). requires improved control of pollution discharge, improved The Yellow River exemplifies these challenges, with resource use efficiency and recycling, stronger enforcement ongoing water allocation issues between provinces. of laws, greater use of market mechanisms, and greater A key management objective for the Yellow River since public participation.48 the early 1980s has been to limit water extraction to sus- tainable levels, manifesting in a water resource allocation plan in 1987, to formal permits enforcing these quotas in 1999, to extended management control over tributaries 46 See State Council. (2012). 47 Specifically by 2030: (1) national water use is to not exceed 700 billion since 2006 (Moore 2013; Ringler et al. 2010). Despite m3 per year (approximately 75 percent of the country’s total exploitable these changes, overextraction persists, with provinces freshwater resources), (2) water use efficiency should increase so that industrial value-added per unit water use reaches or exceeds US$38 sometimes circumventing water quotas by extracting from per m3 (CNY 250/m3) and agricultural irrigation efficiency surpasses tributaries—where water quantity allocations are not clearly 60 percent, and (3) water quality compliance rates exceed 95 percent (State Council 2012; Wang 2018). defined—before they reach the main stem and become 48 More formally known as the State Council’s Water Pollution Preven- part of water allocation limits (Moore 2013; Deng 2020). tion and Control Action Plan, the water ten policy is one of the most comprehensive water policies issued by the national government. The plan covers four broad actions (Hu and Tan 2018): (1) control pollution discharge, promote economic and industrial transformation, and im- prove resource use efficiency and recycling; (2) promote scientific and technological progress, promote greater adoption of market mecha- 45 These are the Song-Liao (Songhua and Liao River basins in northeast nisms, and improve enforcement of laws and regulations; (3) strengthen China), the Hai River (and Luan River), the Yellow River, the Huai River, management and ensure water environmental safety; and (4) clarify the Yangtze River, the Pearl (Zhu) River, and the Tai Lake basins. roles and responsibilities and encourage public participation. 61 Ecological Compensation in China: Trends and opportunities for incentive-based policies towards a greener China A further recent development in watershed management The national and provincial governments’ investment is the “river chief” system. This system involves creating has increased in line with these priorities, leading to positions at provincial, municipal, county, and township improvements in water quality in the Yangtze. From levels that are responsible for managing river sections 2008 to 2017, Yangtze River basin provinces increased that run through their administrative areas.49 The system pollution control funding from CNY 106.3 billion (US$16.3 sets targets and rewards, with results included in the billion) in 2008 to CNY 228.6 billion (US$35.1 billion) in performance assessment of the officials involved. As 2017 (WWF 2020). Water quality across the Yangtze River of January 2019, over 1.23 million river chiefs had been basin has been improving over the past two decades, with appointed in 31 provinces, 75 percent of whom were at the the proportion of river sections that fail to meet targets village government level (Xu 2017; Hu, Tan, and Xu 2019). decreasing steadily from around 17 percent in 2004 to around The system faces some constraints at local levels, and is yet 3 percent in 2015 (Duan et al. 2018). Further investments to develop a mechanism for formal public engagement and in water quality and ecological protection in the YREB a third-party assessment of outcomes (CCICED 2019) but are planned under a National Green Development Fund, has been hailed as an important step toward alignment of launched in 2020 to provide financial support to green incentives and definition of responsibilities, with positive development initiatives. The fund has an initial capital of results (She et al. 2019).50 CNY 88 billion (US$12.59 billion), contributed by the Ministry of Finance (MOF), the 11 provinces/municipalities of the 4.3.a Reforms and objectives for the YREB, financial institutions, and state-owned enterprises. Yangtze River basin The national government has prioritized improvements 4.3.b Reforms and objectives for the in the Yangtze basin’s ecological and water quality Yellow River basin management in policy plans and law. The government’s Plans for the Yellow River are less well-developed, although objectives for the basin were set out in the Yangtze River the national government has signaled improvements Protection and Rehabilitation Strategic Action Plan issued in water quality and quantity management in line with by MEE and NDRC in 2018, and includes protection of “high-quality development.”51 Much of the national gov- drinking water sources, reduction of fertilizer and pesticide ernment’s focus on the Yellow River, apart from standard application, improvement of planning frameworks, and national-level water quality targets, is in broad strokes. These stronger emissions standards for industry. The Yangtze include improved basin-wide coordination and planning, River Protection Law, issued in December 2020, formalizes strengthening provincial government management of water the broad goals of the plan and is the first legislation quality, water use efficiency, adherence to water consumption for a specific river basin in China. The law establishes a quotas, mapping and management of pollution sources, National Yangtze River Basin Coordination Mechanism and the protection of important natural components of and infers obligations on the national line agencies and the water system. At the same time, the government is provinces to align with its goals of ecological protection also concerned with the significant regional differences in and improved water quality in the basin. the level of economic development, and so is focusing on improving rural livelihoods in upper reaches of the basin. 49 See the Opinion on Fully Promoting the River Chief Mechanism by the General Office of the Central Committee of the Chinese Communist Party in 2016. 50 As with general reforms noted previously, an important implicit com- ponent of this approach is that it leverages preexisting Chinese Com- munist Party institutional channels to incentivize better management, 51 President Xi Jinping recently called for a national strategy to achieve whereby local officials rather than local industries are held accountable effective ecological protection and high-quality development for the Yel- for pollution incidents and water quality outcomes. However, addressing low River watershed. Key documents include the Outline of the Yellow pollution from the large state-owned enterprises (SOEs) with links to River Watershed Ecological Protection and High-quality Development higher levels of government, remains a key challenge (Easton and Plan (MEE, NDRC, and MWR), and the Overall Work Plan for Yellow River Kostka 2017). Ecological Environmental Protection (MEE 2020). 62 Chapter 4. Eco-compensation for River Basin Management diversified funding sources that can draw on private sector 4.4 THE ENVISIONED ROLES finance, market mechanisms, improving performance metrics, OF ECO-COMPENSATION IN and improving local government management of national THE YANGTZE AND YELLOW fiscal contributions. Eco-compensation’s role thus remains RIVER BASINS conceptual at this point, with a need to define program parameters, mechanisms, and funding. 4.4.a Eco-compensation in the The national government has supported the development Yangtze River basin of new mechanisms with financial incentives. To catalyze As is made clear in the Yangtze Action Plan and Yangtze horizontal eco-compensation programs, MEE, MOF, the River Law, among other documents,52 eco-compensa- NDRC and MWR jointly issued the YREB Ecological Protection tion is envisioned as a key mechanism for improving Rewards Policy in 2018. This policy committed CNY 18 Yangtze water management. These documents indicate billion (US$2.76 billion) from the National Water Pollution that “horizontal eco-compensation mechanisms”—both Prevention and Control Special Fund to incentivize the interprovincial and intra-provincial cross-border watershed establishment of horizontal eco-compensation schemes in eco-compensation (see section 3.1.a)—are envisioned to the YREB, including both intra-provincial and interprovincial play a key role. Eco-compensation is expected to provide schemes. As a result of these incentives and stated national financial support for ecological protection and water objectives, all provinces in the YREB have developed quality management, and provide incentives to align local intra-provincial horizontal eco-compensation schemes (box government actions with overall basin goals. 4.1 and box 3.4). Some have developed vertical programs also, drawing on national funding sources such as the key The national government remains vague, however, on ecological function zones program (box 4.2). how eco-compensation is to accomplish its goals, how it will be financed, and what form programs should take. 4.4.b Eco-compensation in the Eco-compensation’s application toward Yangtze policy Yellow River basin goals is likely to involve the redirection of preexisting The Yellow River basin has seen a substantial and effective programs, including the KEFZ eco-compensation program. use of eco-compensation over the past two decades, The Yangtze River Protection Law of 2020 sets a goal including large-scale national programs and more recently, of establishing a national Yangtze River basin ecological provincial horizontal watershed programs (box 4.3). compensation system, of a form to be decided. Specific policy frameworks are less developed than those However, the national government has clearly signaled in the Yangtze. MOF, MEE, MWR, and the State Forest and an ambition for new horizontal eco-compensation. This Grasslands Administration (SFGA) issued an Implementation has consisted to date of encouraging provinces to develop Plan for Supporting and Guiding Pilot Implementation of horizontal eco-compensation programs, while emphasizing a Horizontal Eco-compensation Mechanism in the Entire broad goals and “tasks,” including steadily increasing Yellow River in 2020, with proposed tasks including national government financing, emphasizing a need for establishment of a river basin ecological compensation standard accounting system, improvements to the target 52 The intention to use eco-compensation toward Yangtze watershed goals assessment system, improvements to the compensation is referenced in prominent policies and guiding opinions developed fund distribution methods, and standardization of the use in the lead-up to the Yangtze River Protection Law in 2020. These include the Guiding Opinions on Strengthening Environmental Pollution of compensation funds. Prevention and Control in the Yangtze River Golden Waterway (2016) by NDRC and MEP, the Guiding Opinions of the Ministry of Finance on A basin-wide platform for Yellow River basin eco-com- Establishing and Improving Long-term Mechanisms for Ecological Com- pensation and Protection of the Yangtze River Economic Belt (2018) by pensation is proposed for data-sharing, and interprovince MOF, the Yangtze River Protection and Restoration Action Plan (2018) and interagency coordination. The national government is by NDRC and MEE, and the Outline for the Yangtze River Delta Regional Integration Development Plan (2019). developing technical and strategic plans to help provinces 63 Ecological Compensation in China: Trends and opportunities for incentive-based policies towards a greener China Box 4.1: The Tuo River Watershed Cross-border Eco-compensation Pilot in Sichuan Province The Tuo River is a primary tributary of the Yangtze River and one of continued improvement over the performance of peers); however, the most important rivers in Sichuan Province. Its watershed accounts alignment with larger frameworks would ensure strong contribution for 5.25 percent of the province and comprises the most densely to provincial-level and Yangtze-level goals. populated and economically developed areas. The provincial government 2. Strengthening the data used for calculating pollution load launched a pilot cross-border eco-compensation program in 2018 to indicators: allocations are based on a fuzzy weighting of available combat agricultural and industrial water pollution. Ten cities—Chengdu, data and do not consider flow factors, the frequency of monitoring, Zigong, Luzhou, Deyang, Mianyang, Neijiang, Leshan, Yibin, Meishan, and data quality. Upgrading and publishing the data at fine scales and Ziyang—signed an agreement and pooled CNY 0.5 billion per year. will improve program transparency. Central and provincial governments provided supplementary funding 3. Incorporating a stronger beneficiary-pays element: downstream of CNY 0.4–0.5 billion per year. Cities contributed according to: water using municipalities are only partially paying for the benefits Fund contribution from city A = total fund amount x (GDP contribution they receive from upstream water quality improvements. Incentives + water utilization rate + Surface Water Environment Index) x 1/3 for upstream cities to improve management could be improved if the allocation formula considered a city’s location in the watershed, GDP contribution refers to the share of a city’s GDP out of the total with increased contributions from those that more strongly benefit. basin GDP; the water utilization rate refers to that city's water use divided by the total water available in the basin; and the Surface Water Environmental Index captures the proportion of river sections with good water quality. The fund's proceeds are allocated based on each city's: (1) area in the basin; (2) water use efficiency per unit of GDP; and (3) water quality improvement. The water quality improvement is determined by chemical oxygen demand (COD), total nitrogen (TN), and total phosphorus (TP). Preliminary results suggest that the program has catalyzed important institutional and technical capacity-building. The program has stimulated joint research, experimentation in management approaches, and third-party performance evaluation. It has also encouraged other local governments in Sichuan to innovate: Chengdu and Mianyang municipalities have launched a cross-border water quality system for the Fu River, and Nanchong municipality has launched a system for the Xichong River. Opportunities exist to improve the system and inform the design of other systems. A stronger linkage of payments and results could strengthen program efficiency and effectiveness. For example: 1. Linking the allocation formula to overall basin or subbasin goals: ecological, water quality, and water use efficiency targets can be derived from basin-wide planning frameworks. At present, cities in the watershed are simply compared to the average of the group. This provides a useful dynamic incentive (i.e., an incentive for Photo: Farmland in the Tuo River basin. Shutterstock. Source: Authors. 64 Chapter 4. Eco-compensation for River Basin Management Box 4.2: The Jiangxi River Basin Eco-Compensation Program Jiangxi launched its Provincial River Basin Eco-Compensation Lessons and opportunities based on RBECP experience include: Program (RBECP) in 2015, aiming to protect key ecological areas • Match the scale of eco-compensation to basin processes: There including Poyang Lake, the Yangtze River, and the Dong River are opportunities to increase effectiveness under the RBECP via basin. It is a vertical program providing payments to 100 counties, coordinated approaches between administrative units, informed with funds generally used (but not mandated) for projects on ecological by basin-level plans. Environment goals at a basin level can guide restoration, forest improvement, water quality protection, and livelihood the design of eco-compensation, including priority locations based improvement, among others. on hot spots and synergies. • Combine mutually reinforcing instruments and use eco-com- The RBECP draws on the national key ecological function zones pensation to build capacity: Horizontal eco-compensation across (NKEFZ) funding, demonstrating the way in which national gov- the basin would reinforce command and control mechanisms, as ernment programs often interact with and facilitate provincial well as the vertical RBECP. It would also promote more robust programming. Jiangxi received between CNY 1.6 and 2.6 billion per monitoring of environmental outcomes and develop incentive-based year in the 2016–19 period. RBECP funding flows to counties according management capacity among local governments. This could provide to four sets of indicators: (1) water quality; (2) forest quality; (3) water the foundation for subsequent cap and trade mechanisms for water resource management; and (4) the ecological importance of the county. pollution emissions. The program also supports poverty reduction, and makes increased • Strengthen monitoring: Limitations in RBECP monitoring limit allocations for those counties (cities, districts) with relatively lower the possibility of robustly evaluating outcomes. Demonstrating local fiscal revenues. impact could support efforts to increase funding from other levels of government. Evaluation would be strengthened by using third-party Like many programs, the RBECP is a cross-sector program involving monitoring. multiple provincial departments. The Department of Finance (DOF) • Support counties with the potential for improvement (in addition manages and disburses the funds, while the Department of Ecology to those with high performance): The fund allocation method and Environment, Department of Water Resources, the Department prioritizes counties with high environmental performance; some of Agriculture and Rural Affairs, and the Department of Housing and counties may lack the initial support required to reach high levels of Rural-Urban Development, are responsible for monitoring the relevant performance. A tranche of funding could follow a hot spot approach, indicators. Counties are required to submit self-reviewed reports on in which particularly difficult environmental problem areas are the funding usage and impacts. identified and supported with time-bound up-front investments. FIGURE B4.2: Institutional Arrangements and Fund Flow Proportions under the RBECP Program Fund Department of Informs fund Development and disbursement Finance allocation for Reform Commission the next year Water Environment Department of Ecology Improvement and Environment Monitoring and evaluation Forest Quality Techincal inputs Forestry Bureau and Improvement Counties Fund use Department of Water Resources Water Resource Department of Agriculture Management and Rural A airs Department of Housing and Rural-Urban Development Sources: PDRC and DOF, Jiangxi Province; compiled by Authors. 65 Ecological Compensation in China: Trends and opportunities for incentive-based policies towards a greener China improve the design of programs and link them to larger emissions can sell unused permits to other firms, providing basin-wide goals. The Implementation Plan indicates that a dynamic financial incentive to improve efficiency, and the national government will provide supporting funds for drive emissions reductions among firms that face the provinces to improve their water resources management lowest costs to do so. Emissions markets do not require frameworks. These funds are to be distributed with stronger a price of permits to be set by the government; prices are weighting toward the middle reach provinces, based on determined by the demand for permits among firms and achievement of water saving and water pollution reduction their supply (the cap). goals. It also indicates that penalties (i.e., reduced payments) Emissions trading has been piloted in China for over will be applied if provinces fall behind in the development and implementation of management frameworks, with two decades. Shanghai embarked on China’s first water provinces that are “more advanced” in their eco-compensation quality trading pilot in 1987, implementing a system of frameworks given greater rewards. transferable permits for chemical oxygen demand (COD) emissions for 60 large emitters along the Huangpu River. In 1988, the then National Environmental Protection Agency 4.5 OPPORTUNITIES (NEPA) issued and began enforcing the Water Pollutant FOR WATER POLLUTION Emissions Permit Management Provisional Measures, which stipulated that “the total emission allowances for EMISSIONS TRADING water pollutants may be flexibly distributed among the Emissions trading is a market-based approach to emission entities in the same region” (NEPA 1988). Pilots controlling pollution. This report has focused so far on were subsequently developed in a range of cities. The 9th eco-compensation that takes the form of fiscal transfers Five-Year Plan (1995–2000) saw the official inclusion of and conditional payments for environmental outcomes, a total emissions control policy for major pollutants, and primarily with government as the source of payments (see nationwide implementation of an emission permit system box 1.1). However, the term eco-compensation is often also in Chinese cities. Water pollution emissions trading was used in conjunction with environmental markets, such as able develop in the context of these reforms. emissions trading and water trading. The draft National Despite these efforts, and unlike other forms of eco-com- Regulation for Eco-compensation (box 1.3), for example, calls for further establishment of market-based trading pensation, these pilots have not yet scaled in line with mechanisms for emissions rights (although it does not their potential. These and subsequent directives from the identify specific mechanisms). Both emissions trading and national government motivated further pilots, such as the water allocation markets are likely to play an increasing high-profile pollutant trading program in the Tai Lake basin role in water and pollution management in the Yangtze (box 4.4). The scope of these pilots has focused on select and Yellow River basins. large-scale industrial emitters, and on select pollutants (COD and ammonia nitrate). There has been much less Emissions trading allows firms with high abatement focus on nonpoint source emissions such as agricultural costs to purchase pollution discharge reductions from activities; these are more diffuse and thus challenging to firms with lower abatement costs, allowing for efficient regulate within a market structure. emissions reductions. A well-designed market will set an overall cap on emissions in line with ecosystems limits and Most fundamentally, there is a need for national-level water policy objectives. Within the cap, emitters falling laws and regulations that define emission trading within regulated categories—such as firms over a particular practices and the rights and obligations of emissions size within the target sector—purchase permits to cover permit holders. At the national level, the status of water their emissions. Total permits sum to the value of the discharge rights is not clearly defined in the law, despite cap, providing environmental certainty. Firms who reduce the existence of important water quality legislation and 66 Chapter 4. Eco-compensation for River Basin Management Box 4.3: The Wei River Interprovincial Eco-compensation Program in Shaanxi and Gansu Provinces The Wei River is the largest tributary of the Yellow River, shared The Shaanxi-Gansu interprovincial river basin compensation policy between Gansu and Shaanxi. Management of the Wei River basin has did not proceed beyond this three-year initial period. Contributing been hampered by a lack of investment in watershed protection associated to this was a question around program additionality, given that water with low levels of economic development of the key upper watershed quality in the upper Wei had been improving regardless of payments. areas in Gansu, and the lack of mechanisms to coordinate between upper Additionally, a regulatory framework and contractual arrangements and lower watershed areas. In 2011, the Shaanxi government proposed between Shaanxi and Gansu were never finalized, and the program thus the establishment of the Wei River Basin Environmental Protection Cities lacked an institutional framework to support its continuation following Alliance following an interprovincial study tour. Members consisted of a change in the provincial governor. Xi’an, Baoji, and Weinan municipalities and Yangling district in Shaanxi The program represents an important start toward interprovincial Province, and Dingxi and Tianshui municipalities in Gansu Province. As cooperation of the Wei River watershed. The program inspired part of this framework, an interprovincial eco-compensation program was Shaanxi Province to develop an intra-provincial upstream-downstream established, with payments to be made by Shaanxi to upper watershed eco-compensation system among the four key municipalities of Baoji, areas in Gansu in return for meeting water quality targets. Xianyang, Xi’an, and Weinan. A compensation standard was developed Assessments focused on water quality at provincial and municipal based on water quality targets. If the pollutant concentration exceeded borders. A monitoring network was established with stations at provincial the benchmark, the provincial Department of Finance would penalize the and municipal boundaries, with chemical oxygen demand, ammonia, municipality in question by reducing, the following year, that municipality’s and nitrogen being used as indicators of water quality. Water quality allocation. Of the annual eco-compensation funds allocated to these assessment results were jointly approved by the (former) Shaanxi municipalities, 60 percent was stipulated to be used for pollutant treatment, and 40 percent was an untied reward. Provincial Environmental Protection Department and the (former) Gansu Provincial Environmental Protection Department. If the water quality Experience in the Wei River highlights the importance of choosing at the border reached the target set by the two provinces, Shaanxi targets that drive outcomes over and above the likely counterfactual. Province provided ecological compensation funds to Tianshui and Dingxi Nevertheless, important capacity-building benefits occurred regardless municipalities in Gansu. Funds were to be strictly utilized for pollution and set the stage for further programs. The experience also highlights control projects, water source ecological construction projects, and the durability benefits of a contractual or regulatory framework, as water quality monitoring capacity improvements, further improving well as the value of knowledge exchange between programs and quality for future assessments. During the three-year pilot period, levels of government, which saw the subsequent development of Shaanxi Province paid a total of CNY 11 million (US$1.69 million) in the intra-provincial Shaanxi program. This is well recognized by the ecological compensation to Tianshui municipality and CNY 12 million national government, which is promoting platforms for harnessing (US$1.84 million) to Dingxi municipality (Dong et al. 2020). learning opportunities from provincial and sub-provincial experiences. Source: Authors. policies.53 Where programs are developing locally, such basis for permits as property rights would also help firms as in the pilot provinces, there is a lack of convergence access finance for water pollution control investments. between local legislation, which prevents cross-border Scaling will be further supported by predictable program scaling of programs (Zhanfeng et al. 2021). A stronger legal administration, transaction transparency, and permit caps that reflect regional environmental quality goals. Frequent local government administrative changes in the 53 Notably, the Environmental Protection Law of People’s Republic of China context of a limited legal framework may cause uncertainty (2015), and the State Council’s Water Pollution Prevention and Control Plan (2015). among firms, who thus hold back in participating, reducing 67 Ecological Compensation in China: Trends and opportunities for incentive-based policies towards a greener China market liquidity. Regulatory stability, along with transparency Water quality markets have the potential to be an in transactions information via online platforms, will help important tool in the Yangtze and Yellow River basins encourage participation in trades and thus market efficiency. to achieve water quality targets more flexibly and at a As programs move past the piloting stage and scale over lower cost than command and control instruments. The larger areas, there is also a need to ensure a regionally international experience with water pollution emissions appropriate aggregate emission cap, i.e., a quantity of trading is substantial, and can be instructive for China’s permits that reflects environmental carrying capacity and development of these mechanisms (box 4.5). the wider basin water quality goals. This connection is not yet seen in many of the current pilot programs. Box 4.4: Tai Lake Water Pollution Trading Program Tai Lake, in the Yangtze Delta region, is the third largest freshwater subsequently permitted to buy and sell permits depending on their need lake in China. The lake's basin occupies the majority of Southern to cover emissions. Fiscal revenues for the government from selling Jiangsu, three cities in Zhejiang, and the majority of Shanghai city. permits were used for Tai Lake water quality improvement measures. The basin is one of the most economically developed regions in China, Trading of permits is facilitated by a trading center that provides market responsible for around 10 percent of national GDP. The lake itself is information and serves as a clearinghouse. Firms are also permitted important for irrigation, navigation, fishery production, and tourism, to negotiate among each other directly for bilateral trades. and is the source of water for over 20 million people. The program's experience provides lessons for China's further Deteriorating water quality in Tai Lake resulted in toxic algae blooms development of water trading programs. Key among these lessons is and a drinking water crisis in 2007, precipitating government action. the need to avoid conflicts between different elements of the water quality Wastewater discharge elevated levels of nitrogen and phosphorus in the regulatory framework. The program initially laid costs of the permits on lake, causing eutrophication and toxic algae growth. In May 2007, this top of existing obligations on firms to pay discharge fees, essentially resulted in a crisis in Wuxi, Jiangsu Province, a city dependent solely on double charging. In addition, the firms faced conflicts in regulation: Tai Lake for its water supply, after an algae bloom left approximately emissions permitted under the trading system could technically be in 2 million people without drinking water for over a week. In response, breach of firms' environmental impact assessment (EIA) obligations. the national government pledged more than US$14 billion as part of a Command and control pollution measures were also imposed in parallel large-scale cleanup. A number of industrial facilities were closed, and to the market, reducing firms' flexibility (e.g., mandating technology water treatment regulations were enhanced. Wuxi city introduced river standards, rather than allowing them to be incentivized by the market chiefs, assigning government officials the responsibility for stretches where cost-effective) (Zhang, Zhang, and Bi 2012). An overarching of river or lake. policy framework that resolves such conflicts and provides clarity to firms is critical. The Jiangsu provincial government introduced a pilot pollution emission permit and trading system the following year. By 2010, the More fundamentally, trading programs would benefit from a stronger Provincial Environmental Department, Financial Department, and Price legal basis for permits. This would provide more certainty to firms Bureau launched the full pollution emission permit and trading system, about the durability and value of their permit, and allow them to treat covering 1,357 enterprises with annual COD discharges of more than it as a financial asset. Property rights over emission allowances are 100 ton. Tradeable emissions permits were initially allocated based on not stipulated in laws as they are for other resources, such as forests a government set price representing the estimated externality value and land, and are instead administrative permissions that are easily (i.e., the cost of restoring the watershed to its original state). Firms were changed. Source: Authors. 68 Chapter 4. Eco-compensation for River Basin Management forestry type, age and health, wetlands classification 4.6 DRAWING CONCLUSIONS and status, location and distribution of build hydrological FROM ACROSS THE BASINS infrastructure), information availability to the public remains limited, and flows of that information within The Yangtze and Yellow River basins are in many ways governmental systems remain siloed. Information the crucibles of eco-compensation in China. The CCFP, transparency will be increasingly important for the for example, was first piloted in upper watershed provinces development and deepening of effective interprovincial of both the Yellow and Yangtze Rivers. These river basins agreements, for credible attribution of a wider range are again the focus of much eco-compensation innovation, of outcomes beyond simple water quality, and for as the national government calls for investments and improving opportunities to leverage private sector institutions for improved land and water management participation (a priority of the government and a in these regions. This innovation and the lessons arising largely unfulfilled opportunity to date). Third-party are as diverse as these basins, yet the case studies and monitoring and verification could help improve and dataset assessment informing this report suggest some ground truth data quality, and promote accessibility important common themes: and transparency. 1. There is an opportunity to better harness intra-provincial 3. River basin eco-compensation requires interprovincial and interprovincial water management eco-compensation coordination and consultation mechanisms. These toward basin-level objectives. The setting of basin-level programs require the cooperation of governments objectives, developed through basin-wide hydrological across provinces, and the cooperation of multiple and water quality modelling and subsequent basin departments within governments. There is not presently management plans, would provide valuable guidance an authoritative platform for consultation at the basin for the multitude of subnational eco-compensation level. River basin authorities could be given the mandate programs currently arising. Basin-level plans could offer to act as a convenor to promote coordination between a consistent framework for monitoring and assessment sectors and jurisdictions; interprovincial river chief (for example, to determine program baselines). Hot spot coordination mechanisms could be harnessed for analyses to identify locations for the most cost-effective these purposes also. interventions would help prioritize eco-compensation 4. Market-based systems are underutilized but widely development. Given that subnational eco-compensation applicable. This is well recognized by high-level programs are almost always supported by national government policy documents on eco-compensa- government funding, there are opportunities to guide tion, including by the draft National Regulation on and incentivize the programs’ development in line Eco-compensation (box 1.3). Water quality trading with basin-level objectives. has been widely piloted in the Yangtze River basin 2. Data transparency would improve collaboration between (since 1987 in Shanghai municipality), but unlike other governments and broader stakeholders. The extent forms of eco-compensation, has not scaled in line and detail of water quality monitoring has improved with its potential. This is partially due to a lack of substantially in recent years. Further improvements in a national-level or basin-level water quality trading programs will need to take account of a wider range policy, along with insufficient technical guidance on of ecological indicators, and be able to integrate these permitting systems, initial allocations, and application to build more comprehensive pictures of watershed to nonpoint source pollution. These could be developed health and resiliency. While many metrics useful for based on experience so far; international experience developing overall assessments of watershed health also can offer guidance (see box 4.5). are already collected by various agencies in China (e.g., 69 Ecological Compensation in China: Trends and opportunities for incentive-based policies towards a greener China Box 4.5: International Experience on Water Pollution Emissions Trading Well-designed markets are reducing costs of meeting water quality • Clean Water Revolving Fund in Canada: Emissions trading in standards in river basins in many countries. These examples demonstrate China is largely limited to systems regulating point source pollution markets' ability to provide flexibility in how regulatory requirements entities. There will be an increasing need to extend systems to are met; create new sources of revenue for government from the sale nonpoint source emitters in the agriculture sector. The Clean of permits support increased accountability and transparency around Water Revolving Fund in Canada comprises nonpoint and point water quality improvements; and create new relationships between source representatives who manage a Clean Water Fund, which businesses, farms, and other communities. Notably, international allocates money to farmers to pay for best management practices examples have faced many of the same challenges as those facing that generate credits. Chinese pilots and indicate that program design is an iterative process Discussion on water quality markets sometimes proposes that of establishment, monitoring, and refinement. Specific examples include: markets can only develop after certain regulatory, institutional, • Water quality trading in the US: A lack of a national-level or and technical prerequisites and capacities have been achieved; basin-level water quality trading policy has created barriers to this need not be the case. Many initiatives internationally have been scaling water pollution emissions trading in China. In the US, the developed in contexts initially lacking in at least some of these conditions, 1972 Clean Water Act required the US Environmental Protection with the market development process itself catalyzing changes in the Agency (EPA) to establish total maximum daily load (TMDL) pollution broader management regime. This includes building better platforms limits, and allocate emissions permits within this limit for point for collaboration and joint decision-making, implementing measures and nonpoint sources. necessary to improve understanding of the watershed in question • Water quality trading in Sweden: The Swedish Environmental (pollution sources, most important pollutants, range of abatement Protection Agency developed a fee system with trading for nitrogen costs, relevant geographical boundary), developing approaches and and phosphorus, a combination of a cap and trade, and a baseline protocols for more process-based problem solving and management, and credit system. Regulated point sources receive allocations and introducing greater economic rationality into water resource under an absolute cap, while nonregulated sources can create management and planning. allocation credits by reducing their emissions beyond a set baseline. Source: Authors. 70 Chapter 4. Eco-compensation for River Basin Management 71 CHAPTER 5. Recommendations for Eco-compensation Development 72 Photo: Afforestation project in Gansu, China. iStock. programs and the breadth of the eco-compensation concept, Eco-compensation represents the recommendations are necessarily broad. These areas are: gradual transitioning to environmental and ecological management involving 1. Strengthening monitoring and enforcement capacity; more performance-based mechanisms 2. Addressing gaps in technical capacity at local government and cross-regional management frame- levels; works. 3. Developing holistic planning frameworks to inform programs and performance metrics for both interprovincial and More broadly, it is promoting a more explicit discussion intra-provincial watersheds and ecosystems; on the apportioning of costs and benefits, and rights and responsibilities of ecological management. While these are 4. Developing more effective platforms and protocols important developments, many elements of eco-compensation for interagency and interprovincial planning, joint policies and programs represent continuations of preexisting decision-making, and conflict resolution; and approaches. As discussed in section 3.4, programs remain 5. Adopting greater adaptive and participatory management, primarily top-down in nature, both in “vertical” eco-com- program design, and implementation approaches. pensation programs—for which top-down financial flows are central—but also for “horizontal” eco-compensation programs built around transfers between equal levels of government (such as interprovincial watershed programs). TARGET AREA A. OPPORTUNITIES TO National government leadership, facilitation, and technical STRENGTHEN MONITORING and fiscal support have been critical for these programs’ AND ENFORCEMENT establishment, and based on available information, no two Monitoring capacity is essential for effective and efficient counties or municipalities have to date established their own management mechanisms and expanded funding oppor- horizontal eco-compensation program without significant tunities. The government has significantly strengthened provincial-level encouragement and support. Programs monitoring of core water quality indicators, with improvements rely overwhelmingly on public expenditure, and as seen in in outcomes evident in recent years, and with opportunities section 3.3, payments are often primarily linked to input-based to now expand monitoring toward a more comprehensive indicators (on-site investments, management activities, set of ecological indicators and better integrate these into financial milestones). Water quality programs represent an detailed models and modelling scenarios. While the provinces important shift toward more outcome-based indicators, although remain important for implementing monitoring, a strong transparency regarding payment formulas remains limited. national government role remains critical to ensure data Thus, while China’s achievements with eco-compensation consistency nationwide, and to facilitate data sharing (and are clear, there are also substantial opportunities to improve thus learning) between jurisdictions. outcomes in a range of dimensions. Strong enforcement capacity—linked to mandates that are This report identifies five areas for improvement which based on rigorous science and tied to sufficiently strict, fair, can help eco-compensation programs become more and consistent penalties for lack of compliance—is also effective, efficient, and equitable (figure 5.1). This fundamental for achieving targeted outcomes. Enforcement chapter makes recommendations regarding these target mechanisms complement improved monitoring by upholding areas, highlighting how addressing each could be expected the results-based intent of eco-compensation programs, and to improve eco-compensation outcomes according to the creating the framework for robust and functional ecological three assessment dimensions used throughout this report: markets. The following recommendations are proposed to effectiveness, efficiency, and equity. Given the diversity of strengthen monitoring and enforcement further. 73 Ecological Compensation in China: Trends and opportunities for incentive-based policies towards a greener China FIGURE 5.1: Summary of Framework Recommendations and Envisioned Outcomes KEY TARGET AREAS RECOMMENDED MEASURES ENVISIONED OUTCOMES A. STRENGTHENING MONITORING AND ENFORCEMENT CAPACITY A.1. STRENGTHEN basin-level management platforms and E ectiveness authorities at the national level. → Quantification of ecosystem services flows and land use impacts on them improved. A.2. STANDARDIZE and broaden the monitoring data → Better attribution of the impacts of di erent interventions given di erent contexts and baselines improved. collected and published. → Targeting of investments improved. A.3. ENSURE that monitoring and implementation functions E ciency are separate. → Capacity to evaluate the cost-e ectiveness of di erent approaches strengthened. → "Price discovery" mechanisms facilitated through verifiability of ecological outcomes. → Conservation finance flows catalyzed via real profit opportunities linked to attributable ecological outcomes. Equity → Greater adoption of market-based mechanisms ensures that schemes benefit participants, and costs and benefits of ecological restoration, protection, and management are more equitably shared among the key stakeholders. B. ADDRESSING GAPS IN TECHNICAL AND SCIENTIFIC CAPACITY AT LOCAL GOVERNMENT LEVELS B.1. TRAIN provincial government personnel in knowledge E ectiveness areas important for eco-compensation program → Capacity to deliver ecological management outcomes strengthened. development and implementation. (See A.1) → Rate of innovation in eco-compensation increased. B.2. PROVIDE technical support to provinces where gaps in → Scaling up of e ective approaches facilitated. expertise exist. (See A.2) → Development of an environmental services sector catalyzed. B.3. DEVELOP and strengthen knowledge-sharing platforms. E ciency B.4. PROVIDE stronger guidance on program design options. → Capacity to more e ciently use available resources to achieve outcomes strengthened. → Capacity to conduct cost-benefit analyses of potential and current programs improved. → Capacity to development and utilize market-based program design components improved. Equity → Stakeholder needs and constraints better incorporated into planning and design. C. DEVELOPING TOP LEVEL HOLISTIC PLANNING FRAMEWORKS TO INFORM PROGRAM TARGETS AND METRICS C.1. CREATE a comprehensive basin-level plan. (See A.1) E ectiveness C.2. CONDUCT a public expenditure review. → Targeting of investments within a larger landscape improved. C.3. REVIEW the regulatory framework → Landscape- and basin-level outcomes improved through stronger linkages with local eco-compensation program comprehensively. design and indicators. → Improved eco-compensation program design to accord with the regulatory landscape. E ciency → Regional targeting of investments to capture comparative advantages and synergies in ecological services provision improved. Equity → Ability to identify locales where ecological and rural welfare co-benefits could best be achieved with program interventions improved. D. DEVELOPMENT OF MORE EFFECTIVE CROSS SECTORAL, INTERAGENCY, AND INTERREGIONAL GOVERNANCE PLATFORMS D.1. ESTABLISH platforms for joint decision-making on E ectiveness basin-level planning. (See A.1) → Scaling up of e ective approaches facilitated. D.2. CREATE explicit institutional channels for interagency → Development of interprovincial programs quickened. and interregional knowledge sharing. (See A.1) → Landscape-level planning and management improved. D.3. DEVELOP mechanisms and protocols for conflict → Rate of innovation in eco-compensation increased. Lessons learned better captured. resolution. (See A.1) E ciency → Improved regional targeting to improve cost-e ectiveness improved. Equity → Stakeholder needs and constraints incorporated into planning and design. E. GREATER ADOPTION OF ADAPTIVE, PROCESS BASED AND PARTICIPATORY MANAGEMENT, PROGRAM DESIGN, AND IMPLEMENTATION APPROACHES E.1. BUILD adaptivity into monitoring systems. (See A.1 & A.2) E ectiveness E.2. EXPAND the use of market-based mechanisms. (See B.1 & B.2) → Capacity to deliver ecological management outcomes strengthened. E.3. EXPLORE greater adoption of adaptive co-management mech- → Scaling up of e ective approaches within rural landscapes improved. anisms in program design and implementation. (See B.1 & B.2) → Program ecological management outcomes made more stable and sustainable via local stakeholder buy-in. → Capacity to address uncertainty strengthened. E.4. USE lessons learned in co-management mechanism develop- ment to create guidelines and protocols. (See B.1 & B.2) E ciency → E ciency improved via identification of lower-cost approaches. E.5. MINIMIZE equity-e ciency trade-o s via stronger guarantees of voluntarism. Equity → Rural welfare outcomes strengthened and improved. → Capacity to build partnerships with local communities strengthened. 74 Chapter 5. Recommendations for Eco-compensation Development Recommendation A.1: and to assist in expanding the range of ecological Reinforce the roles of the basin agencies at the indicators collected. While provincial agencies remain national level a critical part of China’s environmental monitoring system, a national-level agency or unit could be created or reformed A stronger and more integrated national government to guide provinces in their data collection (box 5.1), ensuring role at the whole-basin level would help ensure that sufficient accuracy, transparency, and consistency across monitoring and enforcement are consistent and credible. the country. The breadth of the data collected, by this body While effective provincial coordination and authority remains or others, would benefit from expansion relative to current critical, successful achievement of basin-level ecological metrics. While water quality indicators have improved targets will ultimately require strong basin-wide authority. substantially in recent years, further ecological health and This could be furthered by: resiliency measures will be needed complements. These 1. Strengthening the river basin commissions. These include ecological function and biodiversity, status and commissions are at the level of a deputy minister—i.e., trends in ecological and riverine health, the distribution below that of both a minister and provincial governor; and impacts of built components of the water system, greater seniority would allow them to set and enforce and the mosaic of land uses and populations. Effective mandates within these watersheds to represent long-term management (particularly in the context of basin-wide interests; climate change and rapid socioeconomic development) 2. Tighter integration of management and planning will require this more comprehensive ability to monitor responsibilities for basins, including within the and model watershed ecological indicators and outcomes. National Development and Reform Commission Recommendation A.3: (NDRC). Currently, at least four departments within Ensure that monitoring and implementation NDRC have responsibilities over the Yellow and Yangtze functions are separate River basins and related environmental or ecological roles;54 and A stronger national government role could help ensure independence in monitoring functions. As noted in section 3. Developing a more unified management authority for 2.6, the national government has been strengthening basins, potentially through the joint conference of vertical lines of management and consolidating monitoring ministries proposed in the draft National Regulation responsibilities at national and provincial levels, and will for Eco-compensation (see box 1.3). likely continue to rely heavily on provincial governments Recommendation A.2: to conduct monitoring for the foreseeable future. In the Standardize and broaden the monitoring data absence of clear separation of monitoring and implementation collected and published roles and responsibilities, informational asymmetries and the potential for conflicts of interest at provincial and To improve overall planning and management of river sub-provincial levels could pose risks to data integrity basins, it will be important to put in place systems and and dissemination (Brombal 2017; Zhang 2017). Agencies protocols to ensure data consistency across locations, responsible for environmental monitoring should be separate from agencies responsible for achieving ecological and environmental targets. Ideally, the formulation of indicators 54 Within the NDRC they are: the Regional Revitalization Department (development and promotion of eco-compensation); the Infrastruc- and collection of monitoring data should be under one ture Development Department (implementation of the Yangtze River Ecological Belt [YREB] development plan); the Resource Conservation roof, with opportunities of promotion (i.e., incentives and Environmental Protection Department (promotion of green industry for officials) tied specifically to the quality of monitoring development, energy conservation, environmental protection, and clean production); and the Regional Economy Department (regional integrated (independent of actual outcomes). Another approach would development of the Yangtze River delta, ecological protection and be to engender greater third-party monitoring (which would high-quality development of the Yellow River basin, and comprehensive management of key river basins). also help develop the environmental services private sector). 75 Ecological Compensation in China: Trends and opportunities for incentive-based policies towards a greener China Box 5.1: Suggested Functions for Strengthening Monitoring at the National Level There are a range of functions that would help strengthen environmental 3. Build partnerships with academia to improve technical capacity, monitoring systems at the national level. While the institutional improve metrics, and undertake cost-effective evaluations by arrangement that could deliver such strengthened functions varies simply allowing academia access to data for research purposes. considerably, the following core functions are suggested: 4. Develop partnerships with the technology sector to utilize big 1. Develop, implement, and refine national environmental monitoring data, remote sensing, and distributed data systems to help lower systems with a recognized mandate. This includes (1) formulating monitoring costs and expand monitoring approaches (see box 5.2). and standardizing data collection protocols and methodologies; (2) 5. Provide training and technical support to provincial monitoring determining needed updates to technical standards for monitoring agencies, including assisting them in the development of appropriate technologies, methods, and indicators; (3) standardizing methodologies contracts to hire outside expertise where more suitable. for environmental and ecological valuation, including benefit-cost 6. Promote best practices to subnational governments for tracking analysis methods suitable for assessing nonmarket values (including program development and impacts through the entire program valuation data suitable for benefit transfer calculations); and (4) life cycle, including the tracking and evaluation of ecological and developing historical baselines, via preexisting data, for assessing socioeconomic inputs and outcomes, and the use of counterfactuals outcomes and developing counterfactuals. to better attribute results. 2. Serve as a clearinghouse for the compilation, aggregation, and improvement of preexisting environmental data. Source: Authors. Box 5.2: Emerging Technologies for Environmental Monitoring and Eco-compensation While technology is no substitute for sound policy design, an array automatically triggered (payment to landowners) when certain of recent innovations offers opportunities to reduce costs, improve criteria are met. The app automatically measures land use change monitoring and accountability, and empower individual payees (forests) at regular intervals based on the remote sensing data; if the in eco-compensation programs. China's advanced computing and forested area stays within agreed-upon limits, the smart contract communications sectors, and government familiarity with extensive and directly pays the enrolled landholders. The technology improves automated data collection, make China well placed to take advantage speed, traceability, efficiency, and transparency of payments, and of these innovations. Emerging examples include: reduces the need for government administration and verification. It is currently being developed for trial in a Namibia Wildlife Corridor. • Blockchain for automated and secure environmental payments: Blockchain's distributed ledger technology has the potential to • Mobile money payments for reduced transaction costs: A closely contribute to eco-compensation via its ability to (1) immutably related possibility is the use of mobile money (phone-based electronic register land titles and secure property rights; and (2) increase payments) for ecosystems services payments made to individual transparency in transactions, ensuring that funding is used as landholders. Use of this approach draws on the widespread use intended and corruption is minimized. An initiative currently in a and success in cash transfer programs, including micro-credit, preliminary development stage, Blockchain Ecosystem Payments, micro-insurance, and aid relief. China has high levels of mobile combines a "smart contract" with the remote sensing platform money penetration. Payments via mobile money lower transaction Google Earth Engine (Oberhauser 2019). Smart contracts are costs, enable higher frequency payments, and may improve the 76 Chapter 5. Recommendations for Eco-compensation Development traceability and security of disbursements. More frequent payments and sediment. Machine learning approaches can help fill gaps and (weekly or monthly, rather than annual lump sums) may help prompt estimate other water quality parameters to support decision-making more consistent action from landholders (Adhikari and Boag 2013). and eco-compensation payment triggers.a • Remote sensing for improved water quality: Earth observation Challenges remain for the adoption of these technologies. For via satellites and drones are providing growing opportunities for example, remote sensing can detect some forms of water pollution cost-effective, spatially, and temporally comprehensive water quality such as organic matter, but not dissolved nutrients. There is also a need monitoring (Harshadeep and Young 2020). They are particularly for governments to develop familiarity with distributed data systems beneficial for monitoring previously unsampled locations, areas and independent monitoring, and their willingness to increase data with limited access, and highly dynamic water phenomena. sharing and transparency. Fundamentally, technology does not replace Improved sensor technologies and associated algorithms can strong institutional design and governance, but it does offer ways to detect parameters such as chlorophyll (indicating algal blooms) reduce costs and operationalize key design principles on the ground. Source: Authors. a For more information, see AquaWatch, an initiative of the Group on Earth Observations (GEO), dedicated to supporting deployment of remote sensing technology for water resources management and decision-making. https://www.geoaquawatch.org/. ENVISIONED OUTCOMES: EQUITY Stronger monitoring, linked with enforced and sufficiently EFFECTIVENESS strict mandates, can also unlock innovation, which can Rigorous, science-based monitoring further improve efficiency. Allowing flexibility in how of ecological status, trends, and outcomes are achieved can engender innovation but is only EFF CY TI EC E N VE CI outcomes unlocks opportunities NESS EFFI feasible if outcomes are clearly observable and attributable. for the assessment of program effectiveness. It is only Specifically, in the absence of the ability to clearly monitor when outcomes are observable that they can be linked with outcomes, proxies for such outcomes (e.g., mandated program design and implementation effectiveness. This “input-based” interventions such as land use practices allows for results attribution—the linking of interventions to assumed to deliver ecological functions and services) are outcomes—and thus the ability to evaluate the effectiveness often targeted instead. With observable and attributable of different approaches. This then facilitates better targeting outcomes combined with clearly defined responsibilities, the of investments and confirms that they are achieving the inputs-based mandates can be relaxed, allowing provincial outcomes targeted. and sub-provincial government and business-sector actors greater flexibility in how they achieve outcome-based ENVISIONED OUTCOMES: EQUITY mandates (i.e., flexibility in what “inputs” they use). EFFICIENCY When either enforcement or monitoring capacity exists The ability to assess effectiveness without the other, targeted results are difficult to achieve (i.e., the degree to which outcomes (figure 5.2). Activities either cannot be verified or cannot be EFF CY TI EC E N VE CI NESS EFFI are being achieved) further unlocks enforced. When enforcement capacity, combined with the the means to improve efficiency. The ability to assess ability to monitor inputs exists and is couched in a regulatory effectiveness means that different eco-compensation regime that stipulates who is responsible for achieving approaches can be compared and their relative returns (e.g., outcomes and what input-based measures must be used, money spent per unit of outcome achieved) assessed. As moderate results are achievable (although this also depends highlighted in section 3.4, most current eco-compensation on the degree to which stipulated inputs are good proxies programs have significant room for improvement regarding for the targeted ecological outcomes). Once the capacity efficiency. to monitor and attribute ecological outcomes exists, and 77 Ecological Compensation in China: Trends and opportunities for incentive-based policies towards a greener China is couched in a regime that stipulates responsibility and linkages between land use interventions and ecosystem mandates either input-based or outcome-based targets, service provisions so that the attribution of outcomes is achievable results improve considerably. Within this, the use possible. Once basic information regarding these connec- of outcome-based targets rather than input-based targets tions is available, participants within eco-compensation can achieve results at lowest costs, and as noted above, schemes can negotiate agreements based on their own can catalyze innovation that further lowers these costs. costs and benefits, with the outcomes determining what the eco-compensation rate will be. Improved monitoring would also facilitate greater use of markets within eco-compensation. Many governments Made into a more formal process of ongoing, negotiated in China remain focused on using “scientific” methods to contracts or auctions, eco-compensation programs calculate the “correct” eco-compensation rate. A more could then realize their potential as a market-based productive and critical role for government is the quantification mechanism. One of the important functions of markets of ecosystem services flows, and the identification of the is price discovery. In the case of eco-compensation, FIGURE 5.2: Expected Results and Costs of Combinations of Monitoring and Enforcement and Mandates ENVIRONMENTAL MONITORING AND ENFORCEMENT CAPACITY MANAGEMENT Enforcement, Enforcement, Enforcement, Enforcement Monitoring REGIME monitoring monitoring monitoring only only inputs and outcomes only inputs only outcomes INCREASING COSTS Responsibilities HIGHER MODERATE and input-based COST RESULTS mandates GOOD ENVIRONMENTAL MANDATES Responsibilities RESULTS and outcome- based mandates LOWER COST Input- and LTS U ES outcome-based R mandates INCREASING COSTS OR Outcome-based mandates P O Stylized environmental management regime elements Responsibilities: Law clearly stipulates who is responsible for achieving mandates. Enforcement: Enforcement capacity exists and is exercised. Input-based madates: Law stipulates specific interventions that need to be made. Monitoring inputs: Capacity to monitor inputs exists and is exercised. Output-based mandates: Law stipulates specific outputs that need to be achieved. Monitoring outcomes: Capacity to monitor outcomes exists and is exercised. Source: Authors. 78 Chapter 5. Recommendations for Eco-compensation Development generally only ecosystem service providers know their TARGET AREA B. ADDRESSING GAPS costs of provision, while beneficiaries know their own valuation of the benefits. Negotiated contracts, or reverse IN SCIENTIFIC AND TECHNICAL auctions (in which participants bid for the right to provide CAPACITY AT LOCAL GOVERNMENT a certain level of ecosystem services at a given price) LEVELS reveal prices and incentivize cost-lowering competition. Such mechanisms can be a valuable additional tool to The needs within monitoring and enforcement func- help identify the actual costs and benefits of ecosystem tions highlight the broader importance of addressing services provision, as well as their regional and temporal scientific and technical capacity gaps at provincial and distribution, which could further help with improved targeting. sub-provincial government levels. Such constraints are Facilitating the adoption of voluntary agreements in some particularly pronounced for poorer inland and western contexts will require changes to the pricing and regulatory regions, which are also the key repositories of much of framework to ensure that beneficiaries do not double pay China’s critical biodiversity and important headwaters for for targeted services.55 the Yellow and Yangtze Rivers. Gaps in local government capacity are exacerbated by ENVISIONED OUTCOMES: EQUITY insufficient knowledge sharing of China’s eco-compensation EQUITY experiences. National government guidelines, opinions, Monitoring and enforcement capacity and policy documents have, to date, primarily provided lies at the heart of equitable program EFF broad frameworks and principles for the development of CY TI EC E N VE CI NESS EFFI design, ensuring that payments eco-compensation programs, leaving the heavy lifting in reach those responsible for real ecological improvement, operationalizing the concept to provincial and sub-provincial and that enforcement of program rules is consistent and governments. While this gives provinces welcome room equitable. In addition, greater adoption of market-based to innovate, and while there has been some degree of elements, made possible by improved monitoring and information sharing regarding successful domestic models, enforcement, could also help to make management regimes there remains a need to better educate policy makers on more adaptive and equitable. Market-based approaches, in best practice and the current state of innovation. Measures which prices and quantities of ecosystem services provision to catalyze innovation should be accompanied by knowledge are determined via repeated negotiations or auctions, platforms for sharing lessons, capturing experience, and ensures that prices paid match opportunity costs. Ecosystem promoting the scaling of successful approaches. To date, services beneficiaries or providers can decide whether or the magnitude of success in China and lessons from specific not to participate based on the negotiated prices, helping experience have yet to be fully captured and promoted. The to ensure that benefits and costs are fairly apportioned. following recommendations are proposed to address gaps in scientific and technical capacity at government levels: Recommendation B.1: Train provincial government personnel in knowledge areas important for eco-compensa- 55 In the case of Colombia, for example, a long-levied fee of 3 percent of revenues from hydropower producers to finance conservation has tion program development and implementation significantly dampened incentives for voluntary payment agreements, since producers would be paying twice for the same services. In con- Ongoing national government support for provincial trast, Costa Rica has dozens of voluntary agreements under which water government capacity-building will be important to facilitate users pay for watershed management. Key for this has been regulations to prevent double payments: the water tariff (part of which pays for improvements in management, especially for China’s conservation) is rebated to water users who enter into voluntary con- lesser-developed regions, and could help to catalyze servation agreements (personal communication Stefano Pagiola, 2021). See also box 4.4 for the example of Tai Lake, where regulatory conflict more effective problem solving and experimentation. was initially a challenge. 79 Ecological Compensation in China: Trends and opportunities for incentive-based policies towards a greener China Special-purpose grants could support training of provincial across regions and levels of government. China already government staff, with a priority focus on key knowledge has a wealth of experience regarding eco-compensation areas including: programs, but to date has not leveraged it effectively. The joint ministerial conference proposed in the draft 1. Agricultural best management practices (in light of National Eco-compensation Regulation is a welcome step the particular challenges around nonpoint source toward a knowledge-sharing platform. Special grants to pollution control); encourage study tours between provinces, and to facilitate 2. Land use—ecological impact linkages; workshops and working groups between different agencies 3. Climate change impacts and adaptation strategies; and regions, could help to speed up and catalyze innovation 4. Market-based approaches to environmental management; and program development. and Recommendation B.4: 5. Protocols and methodologies for developing programs Provide stronger guidance on program design with rural communities in a consultative and adaptive options fashion. While the national government has given provincial Recommendation B.2: governments significant flexibility in program development Provide technical support to provinces where and innovation, more explicit guidance on program design gaps in expertise exist options would significantly boost the effectiveness of provincial efforts. Flexibility should remain an important The national government has a strong role to play part of these policy frameworks, but with better use of in providing technical support to assist provinces in experience and lessons learned—what types of approaches developing effective programs. While strengthening generally work best in specific contexts and regarding capacity via training will be important, many provincial specific resources—provinces need not “reinvent the wheel” governments will not have the full range of expertise needed whenever they wish to develop a new eco-compensation for more sophisticated eco-compensation mechanisms. program. Providing flexibility, but also a more detailed Nor is it desirable that they do, since this would create menu of policy options, could help make provincial efforts redundancies and inefficiencies. Areas of technical more successful and speed up program development. support could include, for example, benefit-cost analysis, ecological/environmental market and trading platform ENVISIONED OUTCOMES: EQUITY design, hydrological and climate change modelling, and EFFECTIVENESS community consultation and engagement. This could be As the key developers and done via one of two channels: implementers of eco-compensa- EFF TI CY EC N E VE CI NESS EFFI 1. Direct national government provision of technical tion programs, strengthening of support—possibly from an institute created explicitly provincial government capacity will help to improve for this function (e.g., see Recommendation A.2); and effectiveness. If done systematically and in combination with other recommended measures, this will speed up 2. Provision of special-purpose grants to support the development of effective eco-compensation programs, hiring of needed expertise from third parties. improve overall management capacity, and engender Recommendation B.3: greater experimentation and innovation in management Develop and strengthen knowledge-sharing at provincial levels. platforms This could also serve to catalyze the development of both Strengthening of knowledge-sharing platforms will be national capacity and a third-party environmental services critical for capturing experience and lessons learned sector. National capacity would be developed via the use 80 Chapter 5. Recommendations for Eco-compensation Development of a specific agency with the express purpose of providing TARGET AREA C. GREATER ADOPTION such technical support (e.g., see Recommendations A.1 and A.2). The concentrated expertise that such an agency OF HOLISTIC LANDSCAPE-LEVEL would build through ongoing technical support work would OR BASIN-LEVEL PLANNING feed into more effective program design and development Lack of holistic landscape- or basin-level planning processes and insights, and could help to inform future constrains provincial and sub-provincial governments regulatory frameworks and guidelines. Providing grants and in their ability to develop programs with meaningful other incentives for third-party provision of such technical targets and metrics. This is especially true regarding the support would help to engender an environmental services contributions of such programs to basin-wide management sector, an important goal of the government. goals such as maintaining and strengthening watershed ENVISIONED OUTCOMES: EQUITY health, flood mitigation capacity, seasonal flow regulation, EFFICIENCY climate resiliency, and stable long-term water quality. This also greatly hinders the national government’s ability to Stronger provincial government strategically target interventions within the larger water capacity will also help to engender EFF CY TI system to improve the overall effectiveness and efficiency EC E N VE CI NESS EFFI efficiency via better use of available of ecological investments. Important contributors to this resources to achieve environmental mandates. One challenge are the ongoing barriers to interdepartmental way in which efficiency could be improved is through data sharing and the lack of open, collaborative database providing provinces with the technical support needed to systems (WWF 2020). The following recommendations are conduct an ecosystem services valuation and a benefit-cost proposed to develop greater adoption of landscape-level analysis, linked with scenario building to inform initial or basin-level planning: program development (box 5.3). Such an analysis is critical to clarify the assumptions behind program interventions, Recommendation C.1: identify where eco-compensation interventions could Create a comprehensive basin-level plan provide value, and identify how such programs could be A comprehensive basin-level plan is a core component designed to be cost-effective. More fundamentally, technical of improved management. This would be most effec- capacity-building and an environmental services sector tively conducted by a strong basin-level authority as per facilitate cost reductions through better program design Recommendation A.1. The creation of such a comprehensive and implementation. plan can in itself entail a valuable exercise in watershed ENVISIONED OUTCOMES: EQUITY governance development, since it can be used as a means EQUITY to identify, engage, and consult with key stakeholders, raise awareness, facilitate information-sharing, and identify where Providing provinces with support potential conflicts or synergies exist. A basin-level plan to conduct effective community EFF CY TI EC E N CI would also help ensure that provincial and sub-provincial VE NESS EFFI consultation and engagement as part targets accord with basin-level goals. of program development, and to incorporate adaptive co-management elements within program design, could Recommendation C.2: help improve equity. Such components will ensure the Conduct a public expenditure review longer-term outcomes of programs by building in elements to ensure that programs help to equitably apportion the Conducting a public expenditure review will help to costs and benefits of environmental management, and ensure better alignment between current fiscal flows that the needs and constraints of participant communities and landscape- or basin-wide planning objectives. are addressed. The magnitude of financing under eco-compensation programs is large and disparate, and it targets a wide array 81 Ecological Compensation in China: Trends and opportunities for incentive-based policies towards a greener China Box 5.3: Ecosystem Services Valuation for Eco-compensation Program Design Many eco-compensation programs can be understood as mechanisms be quantified, such as the existence value of an endangered species that perform the role of a market for ecosystem services in circumstances that provides no obvious economic or social benefit. Hypothetical where a market has failed to develop. In the absence of buyers and markets, presented in questionnaires, are used to assess these values sellers that would otherwise lead to markets (and market prices), (contingent valuation and choice experiments).b governments must decide on (1) where and when eco-compensation While indirect market values (and even nonmarket values) programs should be used, and (2) appropriate prices for ecosystem considerably expand the decision-making framework relative to services provision (i.e., subsidy rates) within those programs. traditional approaches, participatory approaches increase their The decision to proceed (or not) with a program may be supported by utility further. Ecosystems make contributions to human well-being ecosystem service valuation, which indicates the utilitarian benefits that go beyond the sum of individual, self-assessed economic welfare of changes to the natural environment. The results of valuation feed (Costanza et al. 2017). Group valuation exercises, using deliberative into decision-making frameworks such as a benefit-cost analysis, which processes such as multi-criteria analyses and participatory mapping, weighs the expected social benefits of the program against its social require stakeholders to converge on a shared assessment of ecosystems costs. A traditional benefit-cost analysis includes direct market values. values, providing a more community-minded and socially just assessment. Applied to an eco-compensation program aimed at increasing forest Public debate is captured in the values, and the process itself is often cover in a watershed, this may entail consideration of the direct market valued by participants, strengthening their subsequent commitment benefits of timber and carbon credits weighed against the cost of lost to the program. agricultural output and program administration costs.a An ecosystem services valuation may also help inform appropriate Ecosystems services valuation methods may add indirect market prices (i.e., eco-compensation rates). Payments should be lower than values and nonmarket values. In addition to the market values captured or equal to the marginal value of the expected ecological outcome for in the above example, an ecosystem services valuation would provide an economically efficient program. In addition, the techniques used a social cost of carbon (i.e., avoided damages from emissions), and to determine nonmarket values, such as choice experiments, may benefits of reduced erosion through avoided costs of water treatment also be used to determine how much landholders will be willing to due to reduced sediment loads, among others. These would be weighed accept, indicating the likely cost to government of the eco-compensation against the same costs. Other valuation techniques can be used to program a priori. These exercises provide initial indications of the cost develop estimates of nonmarket values. Ecosystem services which of ecosystem services delivery based on survey responses. Once the lack any market value can be assessed using surrogate markets. For program is in operation, reverse auction type mechanisms can be example, the value of a landscape is revealed by what visitors paid to used to reveal the true costs. This approach is relevant for programs reach it (travel cost method), or by the uplift in housing prices in nearby with voluntary landholders as payees. areas (hedonic pricing method). Yet more intangible values may also Source: Authors. a Note that these costs do not include the cost of payments to farmers; these are transfers (from government to farmers) and thus do not represent economic costs to society. By contrast, a financial analysis would include these payments. b Indirect market and nonmarket values are difficult to elicit; a careful use of benefit transfers can be used to make assessments practical. Benefit transfer takes existing nonmarket valuation studies from other areas and applies them to the area of interest, rather than undertaking new empirical studies. Given differences between the original site and the site of interest, a careful benefit transfer exercise will adjust values to take into consideration the local context (often by constructing a benefits function, a regression fitted to multiple existing studies to build a statistical relationship between observed benefits and site characteristics). While there are challenges with a benefits transfer, even rough values usually improve decision-making over an absence of the value entirely (Richardson et al. 2015). FIGURE B5.3: An Overview of Economic Approaches for Valuing Ecosystem Services Market-based valuation Nonmarket valuation DIRECT AND INDIRECT MARKETS HYPOTHETICAL MARKETS SURROGATE MARKETS • Market prices Stated preference methods Revealed preference methods • Production functions • Contingent valuation • Travel cost • Avoided damages/replacement costs • Choice experiments • Hedonic pricing Source: Authors. 82 Chapter 5. Recommendations for Eco-compensation Development of objectives. A systematic analysis would aim to account and directly linked to, landscape- and basin-level ecological for all such flows at the national government level, assess targets developed as part of holistic planning frameworks. what outcomes those flows are achieving (where possible), Again, the role of providing and refining such science-based and establish the degree to which redundancies or gaps frameworks, especially for interprovincial watersheds and exist in funding flows in relation to top-level planning eco-regions, is best provided by the national government. objectives. Such a process would employ well-established Developing a clearer picture of the larger regulatory international methods. landscape in which eco-compensation functions will also help to improve its effectiveness. Though evolving into Recommendation C.3: the national government’s stated primary tool for achieving Comprehensively review the regulatory landscape- or basin-wide objectives, eco-compensation is framework still couched within a larger regulatory framework. Improving A detailed review and examination of the overall regulatory understanding of this will help to identify where and how regime could be conducted to complement the public eco-compensation can best fill gaps in management, and expenditure review. This would focus on the identification how the unintentional creation of additional regulatory and mapping—across sectors and governmental levels—of conflicts can be avoided. For example, removing preexisting preexisting regulatory incentives and disincentives for regulatory disincentives (e.g., agricultural subsidies that land use and ecological conservation and restoration, incentivized adverse environmental outcomes) would be an as well as other activities that could affect watershed impactful complement to eco-compensation interventions outcomes. The joint ministerial conference proposed in in some settings. the draft National Eco-compensation Regulation could also help to facilitate such a review. Identifying where regulatory conflicts exist will also help to create the conditions for more effective programs. ENVISIONED OUTCOMES: EQUITY For example, water pollution emissions trading pilots have EFFECTIVENESS faced barriers due to conflicting elements of the regulatory Holistic planning would improve system. As noted in the example of the Tai Lake emissions effectiveness by facilitating greater trading pilot (box 4.4), initial tension between the older EFF CY TI EC E N VE CI impacts at scale and by identifying NESS EFFI command-and-control regulations and the new flexible how eco-compensation programs can best be designed market system hampered firms’ willingness to trade, and within the current regulatory landscape. Much work in risked double charging participating firms (Zhang, Zhang, land and water management internationally struggles to and Bi 2012). achieve impacts at scale; by contrast, China’s challenge ENVISIONED OUTCOMES: EQUITY is to improve the quality of already scaled approaches. EFFICIENCY The national government’s push for provinces to develop Holistic planning would improve watershed eco-compensation programs, and the ongoing efficiency by facilitating a more EFF CY expansion of key ecological function zone fiscal transfer TI EC E N VE CI NESS EFFI strategic assessment of the best eco-compensation, have resulted in significant scale and division of roles and responsibilities between central regional coverage, albeit with significant opportunities and subnational governments. Those ecosystem services for refinement. with disperse beneficiaries and suppliers often require a Improving impacts at scale will also require a strong greater national or provincial government role to achieve national government role. As highlighted in several effective outcomes. Conversely, cases where beneficiaries examples presented in this report, performance metrics and and/or suppliers are more concentrated can be left for local indicators remain insufficient. As was also discussed above, governments or even business sector interests (in the cases eco-compensation outcomes could be better informed by, of the most concentrated services provision or use, such 83 Ecological Compensation in China: Trends and opportunities for incentive-based policies towards a greener China as local watersheds) to address. Landscape-scale holistic consolidation of environmental responsibilities into the planning frameworks would also identify the distribution Ministry of Ecology and Environment (MEE) and the Ministry of the providers and beneficiaries of specific ecological of Natural Resources (MNR) are major steps forward, and services. the government continues to emphasize the importance of coordination, including via the development of basin-level ENVISIONED OUTCOMES: EQUITY bodies for both the Yangtze and Yellow Rivers. In the absence EQUITY of sufficiently strong interagency and interregional authorities, Holistic planning frameworks can whole basin and whole eco-region management goals will be unachievable through disparate and disconnected EFF also increase equity by strength- CY TI EC E N VE CI NESS EFFI ening the ability to achieve rural provincial interventions. The following recommendations welfare co-benefits along with ecological outcomes. allow for more effective platforms and products for planning, Holistic planning includes mapping of the distribution of decision-making, and conflict resolution: socioeconomic conditions and land uses across targeted landscapes. While this facilitates a more cost-effective Recommendation D.1: program design by better informing estimates of partici- Establish platforms for joint decision-making pant opportunity costs and constraints, this also creates on basin-level planning opportunities for identifying locations within landscapes Platforms for joint decision-making and planning between where synergies might exist in achieving both ecological the key agencies and provincial governments in the and socioeconomic targets. The government has been Yangtze and Yellow River basins should be established placing significant emphasis on better incorporating rural and strengthened. Current river basin commissions serve welfare co-benefits in eco-compensation programs, along an advisory role, with no institutional mechanisms for with its rural revitalization strategy. bringing in provincial governments or other ministries for joint governance activities. Furthermore, they lack the seniority to motivate other governments or ministries. The stronger basin-level management authorities as described in TARGET AREA D. MORE EFFECTIVE Recommendation A.1 thus have a valuable role to play, and PLATFORMS AND PROTOCOLS should explicitly incorporate such joint decision-making and planning components into its institutional and governance FOR INTERAGENCY AND structures. The joint ministerial conference proposed in INTERPROVINCIAL PLANNING, JOINT the draft National Eco-compensation Regulation could DECISION-MAKING, AND CONFLICT also help to facilitate this. RESOLUTION Recommendation D.2: As recognized by the national government, platforms Develop institutional channels for interagency for interagency and interregional communication, joint and interregional knowledge sharing planning, decision-making, and conflict resolution are Stronger interagency and interregional coordination and essential for good basin-level governance, and could be cooperation platforms and channels should be created. further improved. Gaps in this area remain a key challenge One approach could be to create specific departments within to more effective management of shared landscapes and each ministry—analogous to the traditional international watersheds, not only for interprovincial watersheds such as cooperation departments—whose sole purpose would be the Yangtze and Yellow Rivers, but within province landscapes to interface with different agencies and regional levels where planning and management have traditionally been of government and facilitate knowledge sharing. Another siloed by agency and governmental level (see chapter approach would be to use the basin-level authorities 2). The government’s vertical management reforms and suggested in Recommendation A.1 as platforms for such 84 Chapter 5. Recommendations for Eco-compensation Development sharing. The joint ministerial conference proposed in the management, and through improved conflict resolution draft National Eco-compensation Regulation could also and communication. Furthermore, strong conflict resolution help to facilitate and operationalize more formalized and mechanisms, combined with clarifications of property rights explicit mechanisms for effective knowledge sharing. and reduced regulatory overlaps, will give the economic actors in eco-compensation programs and environmental Recommendation D.3: markets the confidence required to participate (larger Develop mechanisms and protocols for conflict numbers of participants and trade volumes generally resolution improve efficiency). Mechanisms and protocols for conflict resolution among key stakeholders are core components of effective basin-level ENVISIONED OUTCOMES: EQUITY governance regimes. Again, such mechanisms could be EQUITY housed within the strengthened basin-level authorities Better incorporating the needs proposed in Recommendation A.1. Conflicts can also be and constraints of the different EFF CY TI EC E reduced through work to clarify property rights in envi- N VE CI NESS EFFI economic and governmental actors ronmental markets, as per Guiding Opinions on Promoting into planning and management frameworks and scenarios Reform of the National Resources Asset Property Rights would improve equity. This includes serving the valuable System,56 and the identification and removal of conflicts role of arbitrating trade-offs and conflicts between users in the regulatory regime, as per Recommendation C.3. within different parts of the basin to ensure that basin-wide distribution of the costs and benefits of sustainable river ENVISIONED OUTCOMES: EQUITY EFFECTIVENESS basin management is sufficiently equitable to incentivize the participation of all key stakeholders in basin-level Integrated basin-level authorities management frameworks. will help to improve effectiveness EFF CY TI EC E N VE CI NESS EFFI by better coordinating the disparate activities of the provinces. As a platform for information sharing, such authorities would also help to accelerate TARGET AREA E. ADOPTION OF innovation and adaptation. This would occur via improved channels of information sharing and cross learning, and ADAPTIVE AND PARTICIPATORY the improved facilitation of interregional joint management DESIGN AND IMPLEMENTATION approaches such as interprovincial eco-compensation APPROACHES schemes. Improved conflict resolution will also help to align incentives and better incorporate regional issues and Building flexibility and adaptivity into both monitoring constraints into planning frameworks, thereby improving and management frameworks are critical for addressing outcomes. uncertainty and improving outcomes. Rapid and complex social, economic, and environmental changes, and the ENVISIONED OUTCOMES: EQUITY uncertainties inherent in climate change and climate change EFFICIENCY impacts, can all conspire to challenge and potentially upend Efficiency would be improved by systems based on overly programmatic and rigid policy reducing transaction costs for EFF interventions and ecological targets. Effective management CY TI EC E N VE CI NESS EFFI the establishment of intergov- requires the ability to continually update assumptions, ernmental agreements. A basin-level authority could approaches, goals, and metrics based on the current help reduce transaction costs through joint planning and state of science, experience, and changing realities on the ground. The following recommendations are aimed to 56 GOCCCPC and GOSC (2019). support adoption of design and implementation approaches: 85 Ecological Compensation in China: Trends and opportunities for incentive-based policies towards a greener China Photo: Terraced fields along Leaping Tiger Gorge, Yunnan Province, China. iStock. Recommendation E.1: ecological benefits and the opportunity costs of ecological Build adaptivity into monitoring systems services provision. Market-based mechanisms explicitly allow for adjustments in subsidy rates or compensation Adaptivity should be explicitly built into environmental types to best accord with these changing relative prices. monitoring systems to account for uncertainty and improve Greater adoption can be facilitated and promoted through management capacity. This could include creation of specific the training and technical support activities outlined in teams and protocols for updating monitoring technology, Recommendations B.1 and B.2. and for experimenting with new approaches to help lower costs. Data collection and integration activities under Recommendation E.3: Recommendation A.2 could serve to facilitate such updating, Promote adaptive, joint, or integrated with the strong basin-level authorities in Recommendation management mechanisms A.1 functioning as the platform for dissemination of improved Approaches that closely and effectively partner with and updated monitoring technologies, standards, and the local governments, households, and communities protocols. Monitoring outcomes could also incorporate that supply targeted ecological services should be measurements of accuracy and statistical significance, promoted and scaled up. The training and technical with standards for these continually refined and updated. support activities detailed in Recommendations B.1 and Recommendation E.2: B.2 can serve to support and facilitate the exploration Expand the use of market-based mechanisms of these approaches. The knowledge sharing platforms outlined in Recommendation B.3 can also help to identify Adoption of market-based mechanisms should continue promising examples to pilot and emulate. to be promoted, where appropriate, as a means to make management frameworks more adaptive. As The co-management should be part of an overall balance socioeconomic and environmental conditions change, between top-down and bottom-up program development so do relative prices in an economy, such as the value of processes. National and provincial governments have 86 Chapter 5. Recommendations for Eco-compensation Development essential roles to play in program development. In contexts eco-compensation programs, and that ecological service with significant collective action problems, for example, provision is cost-effective, is to simply ensure that programs top-down goal setting and design might be necessary to are voluntary. Households for whom subsidy rates do not catalyze changes in management and achieve targeted offset opportunity costs will choose not to participate, outcomes. Technical issues, such as appropriate land while those households and communities who can provide use measures and locations to achieve targets, are also services at lowest cost will be more willing to participate. best addressed and resolved by technical experts (see An even more effective approach used internationally is Recommendation B.2). However, once a menu of options for “reverse auctions,” whereby potential program participants interventions is developed, consultations with communities “bid” to participate in the program (i.e., state the lowest are key to identify trade-offs, feasibility, and costs. subsidy they would need to receive in order to be willing to participate), with lowest bids per unit service provision Recommendation E.4: enrolled into the program first. To accord with the realities Use lessons learned in co-management to of rural China, reverse auction mechanisms could also be create guidelines and protocols applied at the village level, whereby whole villages would The process of better capturing and utilizing knowledge “bid” to be ecological services providers. could be made more explicit by developing guidelines and protocols. This would involve identifying the factors ENVISIONED OUTCOMES: EQUITY that lead to success and the pitfalls to avoid, and using EFFECTIVENESS these to create guidelines and protocols for use in other Adaptivity in monitoring and settings. Program tracking and periodic evaluation along management frameworks would EFF CY TI various socioeconomic and environmental dimensions—e.g., EC E N VE CI NESS EFFI improve effectiveness along a range ecological outcomes; leakage to other areas; program of dimensions. This includes improving the identification of impacts on income, structure of livelihoods, and community key ecological targets and goals through a more adaptive equity; household and community attitudes and awareness; and up-to-date monitoring system, improving rural program and changes in these—could be made an explicit part of program development from early stages. Program impact outcomes through more effective collaborations with rural evaluation methodologies are well developed internationally, households and communities, and facilitating more effective and should be an important knowledge area to include scaling up via development of protocols and guidelines in the training and technical support activities outlined from experience. in Recommendations B.1 and B.2. As discussed in section 3.4, eco-compensation pro- grams remain predominantly top-down in design and Recommendation E.5: implementation, with low scores for co-management. In Minimize equity-efficiency trade-offs via stron- the case of the Conversion of Cropland to Forest Program ger guarantees of voluntarism57 (CCFP), for example, initial stages involved limited local Program participation should be made strictly voluntary—where consultation in design and implementation, and so participant appropriate58—to minimize potential equity-efficiency farmers and local governments were unclear on program trade-offs in program implementation. One of the most goals and requirements. The development of watershed effective mechanisms to ensure that both rural household eco-compensation programs has also progressed in a and community welfare are not adversely impacted by primarily top-down fashion. Insufficiently consultative and 57 Equity efficiency trade-offs occur when ecological outcomes are weak- collaborative problem solving, target setting, and program ened or made more costly due to the joint pursuit of equity goals. design also raise the risk that stakeholders not vested in 58 Some eco-compensation programs provide payment in exchange for program outcomes will undermine those outcomes via regulatory takings. These are inherently nonvoluntary programs and so are not targeted by this recommendation. hard-to-monitor actions. Giving stakeholders a sense of 87 Ecological Compensation in China: Trends and opportunities for incentive-based policies towards a greener China ownership through engagement and consultation can, by ENVISIONED OUTCOMES: EQUITY itself, help to improve the durability of outcomes. EFFICIENCY This sense of ownership will be critical for China to More effective engagement partnership building with rural communities EFF effectively address its largest source of water pollution: CY TI EC E N VE CI NESS EFFI rural nonpoint source pollution. This comes from an can also help to identify ways to agricultural sector dominated by more than 250 million reduce program costs. Costs can be reduced via better household farmers (Huang, Wang, and Qiu 2012). While rural incorporation of local knowledge in program design and nonpoint source pollution has yet to be explicitly targeted management approaches, and the engendering of a local in eco-compensation policies, most current watershed community “sense of ownership” of programs, which management eco-compensation schemes necessarily involve would incentivize an ongoing search for more efficient the rural sector, and so improving approaches to engage approaches for achieving outcomes (box 5.4). Not all with communities will be critical for ensuring outcomes. communities in all contexts require cash compensation Greater adoption of market-based mechanisms will also to be willing to engage in programs for improving the local give programs the ability to rapidly adjust program subsidy environment. Strong community consultation during all or payment rates to reflect changing relative prices in the stages of program design can help to identify lower-cost economy due to changing conditions. options for compensation and program support. The process of ongoing refinement of eco-compensation ENVISIONED OUTCOMES: EQUITY approaches can, by itself, be a valuable exercise in EQUITY capacity-building and process-based management. While By making programs more about the process of improving ecological management requires “win-win” outcomes through the EFF CY TI EC E N VE CI a “destination” or set of goals, these are simply milestones consultation and joint develop- NESS EFFI in what is an ongoing and adaptive process. Often there ment process, equity issues can be more effectively is a perception that specific “preconditions” are needed addressed. Rural communities will be unwilling to engage in order to begin to develop certain types of management in programs that do not provide them with appropriate capacity and mechanisms. In reality, the process is what benefits to offset their costs, be they opportunity costs, develops many elements of these preconditions. The US program implementation costs, or other costs created experience in developing water quality trading programs through program interventions. A clear consultation with highlights this observation. While these trading programs communities to identify these costs and other issues will are meant to be innovative mechanisms for addressing ensure that the program design will achieve the goal of water quality management challenges, many US local improving equity. governments have benefited simply from embarking on the process of their development, and faced similar institutional and capacity gaps like many local governments in China. That the national government is encouraging provincial development of eco-compensation programs is partly due to recognition of this. Such encouragement should continue, based within a framework of appropriate support and capacity-building that can do much to help to catalyze improvements in environmental management more broadly. 88 Chapter 5. Recommendations for Eco-compensation Development Box 5.4: Stakeholder Consultation for Identification of Cost-Saving Designs: an Example from Poyang Lake The experience in Jiangxi for protecting Poyang Lake wetlands acceptance, which are important in a context of rapid socioeconomic shows ways in which consultation can improve the cost efficiency change. Consultations with communities in and around the Jiangsu of the design. Research on participant preferences suggested that a Yancheng Coastal Wetlands National Nature Reserve identified lower cost range of compensation types could be suitable, in addition or apart compensation options, minimizing the need for direct cash subsidies in from the traditional direct cash used in most programs. Research also some cases. Crop data collected from these consultations revealed that suggested that framing subsidies as compensation for crop damage due despite perceptions to the contrary, wetland birds were an insignificant to wetlands wildlife incursions risked engendering a victim-offender source of crop damage compared to other factors, including weather dynamic between communities and the local nature reserve. conditions, insects, and fungal pests, with important implications for program development. By incorporating these findings into program design, participatory approaches could help improve outcomes, lower costs, and build social Source: Authors based on Bennett, Gong, and Scarpa 2018. 89 CHAPTER 6. Conclusion 90 Photo: A bend in the Yangtze River in Yunnan Province, China. iStock. ability to mix and match different tranches of national China’s drive to address its complex government funds, for example, the Forest Ecological environmental and ecological manage- Benefit Compensation Fund (FECF) combined with local ment challenges is impressive. matching funds. Other countries may similarly be able Eco-compensation’s rapid expansion in recent years embodies to apply such flexible framework approaches. this drive. Governments across China have achieved significant scale in eco-compensation programs, but there remains 2. The value of striving for scale in the early much that can be done to improve how well these programs stages of program development: achieve their targets. In addition, despite the enormous scale Much work in environmental management interna- of China’s challenges and significant achievements, the rest tionally struggles with the challenges of achieving of the world knows relatively little about these programs. impacts at scale. Often interventions and approaches The goal of this report has been to shed light on China’s are carefully piloted and refined to address specific eco-compensation policy and program developments, local conditions, but are not easily adapted to a broader provide recommendations on how these programs can be range of contexts. The Chinese government has generally improved, and begin to synthesize the valuable insights approached policy development from the other end of provided by efforts to date. While China is unique, it can this spectrum, by focusing on achieving scale rapidly offer important insights from its eco-compensation experi- and then later refining interventions (although piloting ence for the rest of the world. Important caveats, of course, remains an important part of this process).59 For example, exist: few countries have China’s financial resources, nor its the national government’s push for provinces to develop multi-layered government reach and implementation capacity. watershed programs, and the ongoing expansion of key Nevertheless, the empirical and qualitative assessments of ecological function zone fiscal transfer eco-compensation, programs conducted for this report offer at least four broad have resulted in significant regional coverage. Now that insights that may be useful for other countries: these scaled but shallow program frameworks are in place, many opportunities exist for introducing impactful 1. The value of allowing flexibility in how improvements in program designs and approaches. This programs are developed: is a valuable paradigm for other countries that face Allowing flexibility on the ground is as an important broad diversities of conditions but need to address factor in the successful expansion of eco-compensation environmental management at scale. This is not to across China. “Adaptation to local conditions” (因地适宜) discount the value of piloting to address the specifics has been a motivation for China’s local capacity-building of local conditions—China used pilots effectively to via learning by doing, and has been an important part of inform scaling and subsequent refinements (although the national framework programs. In these programs, many of those pilots would be significantly improved the national government provides funding and broad if paired with more rigorous tracking and evaluating of guidelines, and also provides subnational governments program impacts and drivers of success).60 Nevertheless, with the latitude to interpret and adapt them. In more China’s experience suggests that scaling while also using recent developments, such as intra-provincial cross-border 59 Even with piloting, scale-up is often fast. In the case of the Conversion of eco-compensation programs, the national government Cropland to Forest Program (CCFP), for example, the pilot initially started has again created broad policy guidelines, strongly in the three provinces of Sichuan, Shaanxi, and Gansu in 1999. By the end of the pilot phase in 2001, it had scaled up to 20 provinces, with 1.2 million encouraged provinces to develop these programs, and hectares (ha) enrolled. This further jumped to 7.1 million ha by the end of provided support for piloting and some capacity-building 2003 (Xu et al. 2004; Bennett 2008). Many intra-provincial cross-border eco-compensation programs have similarly quickly scaled up to the whole to facilitate this process, again leaving provinces latitude province, though they still need to refine mechanisms and evaluation frame- in how these programs are developed. Flexibility is works. 60 For example, by using rigorous program impact evaluation methodologies also facilitated through blended government finance with data collected for both participants and nonparticipants (treatment ver- opportunities wherein local governments have some sus control) to construct plausible counterfactuals. 91 Ecological Compensation in China: Trends and opportunities for incentive-based policies towards a greener China flexible implementation approaches can include finding to a wider range of institutions (such as universities), a valuable middle ground. and/or the public, promotes objective and rigorous evaluation, helps make systems more adaptive, and 3. The value of using programs as capacity- opens opportunities for private sector involvement. It building processes: can also lower costs for the government by creating China’s experience also suggests that embarking opportunities for collaboration with academia and the on program development, by itself, can serve as a private sector to innovate on monitoring approaches valuable entry point to capacity-building, leading and technologies. Other countries can avoid missing to improved management. Often discussions of more such opportunities by adopting rigorous monitoring “advanced” market-based approaches include the and data transparency measures early on. importance of “preconditions” (e.g., having a strong water The scale and diversity in eco-compensation program management agency with consolidated responsibilities, developments in China suggest that these broad insights and with clear legal authority to issue and enforce are only the tip of the iceberg. Many of the program allowances). In practice, however, such approaches can “types” described in this report encompass significant be developed in contexts where such preconditions diversity in either formal or de facto program designs and don’t exist or are relatively weak, and still obtain implementation approaches, especially at provincial and valuable results. The US experience in developing water sub-provincial levels. Greater data transparency, combined quality trading programs highlights this observation: with fieldwork and ground-truthing, would allow for the many US local governments at times faced similar development of a more complete picture of current programs, institutional gaps as local governments in China, yet and a greater ability to link programs with outcomes. they benefited simply from embarking on the program Combined with best practice in program impact evaluation development process. China’s encouragement of methodologies, this could not only improve attribution provincial development of eco-compensation programs but—given wide diversity in socioeconomic, institutional, suggests that it recognizes this underlying value, and and ecological contexts—could unlock additional insights as highlighted in chapter 2, eco-compensation has regarding how these contexts influence and interact with been serving as a valuable vehicle to promote and program design elements to deliver targeted outcomes. establish the preconditions themselves. This must be balanced with ambitions for rapid scaling (as above) Such work could also serve to inform the key role which requires some baseline of capacity. eco-compensation has to play in China’s global environmental commitments. Better identification 4. The value of monitoring, information of what programs can most easily be refined to better sharing, and transparency: capture biodiversity and carbon co-benefits, and how such Gaps in monitoring, information sharing, and programs and the relevant wider regulatory framework transparency in China have potentially resulted can best be refined to expand financing opportunities, in some missed opportunities to improve program could do much to help China achieve its commitments design and adaptation, as well as potential missed under the Convention on Biological Diversity (CBD) and opportunities to tap into wider sources of finance the United Nations Framework Convention on Climate for environmental management. While programs in Change (UNFCCC). Moreover, better understanding of China are benefiting from recently improved monitoring its own experience could inform mitigation measures to and data sharing, particularly around water quality, minimize the environmental footprint of its growing global additional improvements are needed, including in infrastructure investments, as well as inform international the breadth of data collection and the sharing of best practice, which would strengthen China’s role as a environmental and program data. Making data available global development partner. 92 Chapter 6. Conclusion China’s success with eco-compensation at scale is capacity-building support to provinces, improved monitoring, motivating new programs, as well as efforts to further and greater adoption of adaptive and participatory program improve existing programs. 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China’s environmental The Chinese government is structured with overlapping management system began taking shape in the 1970s and was vertical and horizontal lines of management and oversight, formalized in the Environmental Protection Law of 1989 (Zhou traditionally termed the tiao-kuai (条块) system (Lieberthal 2020). It is supervised by the National People’s Congress and 1997). This consists of the horizontal “blocks” (kuai) of gov- has been managed by the relevant national environmental ernmental levels (i.e., national, provincial, municipal, county, protection authorities—now the Ministry of Ecology and and township) overlaid by the vertical “lines” (tiao) of the Environment and the Ministry of Natural Resources—with top-down hierarchical relationships within agencies (figure FIGURE A.1: Chinese Government Fiscal and Organizational Structure, with an Emphasis on Environmental Management Top-down “lines” (tiao) of government hierarchy Horizontal "blocks" (kuai) of governmental level Central government NDRC MOF MEE MNR MWR MARA etc. administrative and oversight power Provincial government PDRC DOF DEE DNR DWR DARA Sub-provincial government* DRC BOF BEE BNR BWR BARA Economic planning and oversight Fiscal transfers and oversight Abbreviations: NDRC = National Development and Reform Commission; MOF = Ministry of Finance; MEE = Ministry of Environment and Ecology; MNR = Ministry of Natural Resources; MWR = Ministry of Water Resources; MARA = Ministry of Agriculture and Rural Affairs. Subnational agencies simply sustitute the M for a D = Department or B = Bureau with the exception that PDRC = Provincial Development and Reform Commission and DRC = Development and Reform Commission (at the relevant level of government). Note: Management and fiscal transfers generally go to municipalities then counties, but some provinces have direct province-county management and funding linkages. Source: Adapted from Deng et al (2016), Shah and Shen (2006), Zhou (2020). 100 A.1). This overlapping system has resulted in environmental Fiscal transfers are made vertically to the next subordinate management conflicts; for a given subnational agency, both level of government, so that the national government its regional level of government and its superior counterpart makes transfers to provincial governments, provincial agency exert degrees of management and oversight authority governments to municipal or county governments, and (Zhou 2020; Deng et al. 2016). This has created conflicts so on. All such fiscal transfers are conducted between the wherein the local protectionism of the “blocks” overrides finance departments of the respective government levels, the hierarchical “lines” of the superior agency, impeding after which funding is distributed from finance to the individual effective implementation of national environmental policy departments of the respective levels of government. As a (Eaton and Kostka 2014; Mertha 2009). result, the financial departments are important gatekeepers of funding flows. Generally, no central to sub-provincial fiscal China is one of the most fiscally decentralized countries transfer channels exist, nor do they for interprovincial transfers in the world, with 85 percent of government spending whereby one province provides transfers to a sub-provincial occurring at subnational governmental levels (Wingender government in another (Shah and Shen 2006). Where 2018).61 The fiscal reforms in 1994, which created the State eco-compensation programs require such transfers, they Administration of Taxation and a rules-based revenue-sharing rely on provincial agreements. and intergovernmental transfer system, strengthened the national government’s ability to conduct fiscal policy and An exception to this is China’s “paired assistance” or redistribution across regions. However, as the national “counterpart support” (duikou zhiyuan, 对口支援) government took a larger share of local revenues, these programs, which have been in existence since the 1960s. reforms also left local governments initially struggling with These consist of central government-facilitated cross-regional budgetary shortfalls and increasing local government fiscal government fiscal and technical support transfers from more dependence on sales and value added tax (VAT) from local to less developed regions and provinces to address disaster enterprises (Brondolo and Zhang 2017; Ahmad, Singh, and relief, poverty alleviation, and economic development funding Fortuna 2004; Wang and Herd 2013; Qiao and Liu 2013; shortfalls. For example, mobilized funding via these paired Shen and Jiang 2020). assistance channels was important for disaster relief during the severe flooding in the Songhua and Nen Rivers in Northwest The national government’s spending power is one of its China in 1998, during the Wenchuan Earthquake in Sichuan most important tools to influence regional governments. Province in 2008, and for combating COVID-19 in Wuhan Sub-provincial governments are the key implementers of in 2020 (Zhong and Lu 2018; Zhang and Tao 2018; Hu et national government policy (Shen and Jiang 2020; Zhou al. 2020). However, despite the existence of these paired 2020). Central-provincial and provincial–sub-provincial assistance programs, and the fact that the government has fiscal transfers remain the dominant source of revenues advocated the establishment of horizontal fiscal transfer of subnational governmental levels in China. These take payments since the reforms of 1994, there has as yet been the form of ongoing “general-purpose transfers” (一般 no substantial progress toward embodying these programs in 性转移支付) and one-off “special-purpose transfers” a strong legal and institutional foundation. These programs (专项转移支付). Both transfer types are important tools thus generally require national government facilitation to of the national government for incentivizing subnational function (Yang 2018). governments to achieve national objectives and for influencing and aligning local priorities (Zhou 2020; Wingender 2018; Shah and Shen 2006).62 61 This increase to 89 percent when including local government financing vehicles. 62 In 2003, for example, these transfers financed 57 percent of prefecture and 66 percent of county and lower level expenditures (Shah and Shen 2006). A third group of transfers, “compensation transfers,” has also existed to reduce revenue loss accruing to some local governments after the 1994 reforms. In 2011, general trans- fers made up 46 percent, special transfers 42 percent, and compensation transfers 12 percent of total fiscal transfers from the national government (Wang and Herd 2013). 101