China's Xin'an River is a source of drinking water for millions of people as well as a source of tension between Anhui and Zhejiang Provinces. For decades, pollution from factories and agricultural run-off in Anhui negatively impacted Zhejiang's potable water supply. Unfortunately, the transboundary nature of the pollution problem as well as the significant economic inequality between the two Provinces made coming to a resolution particularly difficult.
Over the decades, China's central government has tried to find means of solving transboundary pollution issues like the one surrounding the Xin'an River. However, neither provincial-level negotiations nor top-down command-and-control policies like the Huai River Pollution Control Project led to sustainable environmental changes. Then in the early 2000s, China's central government laid out a new method for meeting environmental challenges: eco-compensation.
Eco-compensation, short for ecological compensation, is loosely based on market mechanisms, which applies economic principles to valuing environmental solutions, and payment for ecosystem services, which assigns a monetary value to the important roles nature plays in everyday living in order to better preserve those functions. Still, eco-compensation is distinct from these two ideas, as the Asian Development Bank explained:
- The state is the primary driver.
- The state is the primary payer.
- Market mechanisms are incipient.
- Participation is usually mandatory.
- Eco-compensation is both vertical and horizontal.
- Natural, social, and administrative diversity influence eco-compensation.
Eco-Compensation for the Xin'an River
In the Xin’an River case, eco-compensation became an agreement between Anhui and Zhejiang Province on a conditional cash transfer which was heavily mediated and sponsored by the central government. In practice, this meant that all three stakeholders agreed to limit pollution of the Xin’an River to below a certain level.
If the pollution was controlled sufficiently, then Zhejiang agreed to pay Anhui for its successful abatement costs. If the pollution exceeded the agreed upon amount, then Anhui agreed to pay Zhejiang for the cost of cleaning its water supply. To support Anhui with start-up costs in greening its industries and to keep Anhui in the agreement, the central government also agreed to give Anhui a sum of money every year, regardless of the pollution level outcome.
This eco-compensation pilot scheme was launched in 2012, and over the first five years, contributions from central and provincial governments totalled over US$500 million and pollution levels were maintained below the stipulated amount.
An evaluation of the agreement described the results as “remarkable.”
However, there are still some challenges that must be addressed. One study, while still recognizing the importance of the agreement, also found some areas of increased economic inequality due to inadequate compensation to the individual households impacted by policy changes to limit pollution.
Financial sustainability is also a long-term challenge, as currently, the central government’s political and economic support of the project is essential for its continuation. However, the amount each party was liable for has been able to change over time. Initially, the government was providing US$48 million to Anhui every year, while either province would be liable to the other for US$16 million.
Since 2017, all three parties were made liable for US$32 million annually.
Moving Forward with Eco-Compensation
Despite some challenges, China and other international organizations have largely deemed eco-compensation a success.
China has since implemented dozens of other eco-compensation projects all over the country for environmental issues from forests to mineral deposits. The World Bank, Asian Development Bank, and others have also provided financing worth more than US$300 million in total for issues including improved watershed management, gender mainstreaming, and rural outreach related to eco-compensation and the Xin’an River.
While eco-compensation has so fair remained a method used only within China, there is clear potential for scaling up and outsourcing these principles internationally. The environmental challenges in the world today are many, and so the solutions must be just as diverse. Transboundary issues in particular have proven difficult to solve through policy intervention. Thus the case of eco-compensation in the Xin’an River may provide an example of how national and local-level stakeholders can work together to reach an agreement beneficial to all sides and beneficial to the environment.
(Photo credit: chinadaily.com.cn)
Read more about the case study Eco-compensation in China: Mediating Water Demands on the Xin’an River written by Alta Joyce Alonzi, which was awarded the Distinguished Prize in the Case Writing Competition 2020/21 at the Lee Kuan Yew School of Public Policy.
Access more case studies from the Lee Kuan Yew School of Public Policy.