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Introduction: Ambition and Momentum for Eco-Compensation Policy

The People’s Republic of China (PRC) is at an exciting phase in the development of its national environmental policy framework. The fast-paced economic growth of the past 3 decades has lifted hundreds of millions of rural dwellers out of poverty, but it also greatly multiplied the environmental challenges for policy makers at all levels of government, has increased the pressure on fragile ecosystems, created a range of new pollution and environmental safety issues, and further strained the country’s already limited per capita natural resource base. The imbalanced economic growth between regions was partly due to the regional differences in environmental resources. Regions with relatively fast economic growth have exerted greater demand on natural resources for food, water supply, and energy consumption, much of which are provided by poorer regions. Policy makers are debating the extent to which the economically advanced regions should pay poor regions for the provision of these environmental services. “Eco-compensation,” as it is known in the PRC, is important to sustainable use of natural resources and more balanced growth across regions.

Having experienced growth as it has, the PRC must now use its financial capacity to reverse environmental damage through closer monitoring, enforcing its environmental laws, and funding new initiatives and policies (Figure 1). The more prosperous regions now have the financial capacity to compensate poorer regions for the ecosystem services they provided during the rapid growth periods and will continue to provide for future growth.

Figure 1Government Revenue versus Selected Pollution Indicators, People’s Republic of China, 1998–2007


CNY = yuan, CO2 = carbon dioxide, COD = chemical oxygen demand, GDP = gross domestic product.

aWastewater discharges are calculated as discharges from consumption plus untreated industrial wastewater discharges.

Source: National Bureau of Statistics of China, various years. CO2 emissions data are from the International Energy Agency (2009).

In response to both the need and potential for addressing environmental damage, policy makers have been experimenting with new approaches to environmental management, resulting in a wide array of policy and program innovations under the broad heading of eco-compensation. Many of these incorporate or provide a policy framework for market-based approaches to payment for ecosystem services (PES).

PES attracts respectable government financing levels

Today, the PRC can be credited with driving some of the largest public PES schemes in the world. The government has

•spent more than CNY130 billion ($19 billion) since 1999 on the Conversion of Cropland to Forest and Grassland Program (also known as “Grain for Green”), which has paid farmers to retire and afforest or plant grass on more than 9 million hectares (ha) of sloping or marginal cropland;

Today, the PRC can be credited with driving some of the largest public PES schemes in the world

•spent more than CNY13.34 billion ($2 billion) since 2001 on the Forest Ecosystem Compensation Fund, a program that pays households, communities, and local governments to protect about 44.53 million ha of key forest areas across 30 provinces in the country; 2 and

•conducted a total estimated transaction value of $7.8 billion on a variety of payment schemes for watershed services, which has escalated from eight in 1999 to more than 47 in 2008 and covering about 290 million ha.3

PES policy gains momentum

In 2005, the fifth Plenary Session of the 16th Central Committee of the Chinese Communist Party issued, for the first time, the principles for developing eco-compensation mechanisms. As a result, the State Council released Document No. 39, State Council Decision Regarding Using the Scientific Development View to Strengthen Environmental Protection, which states that the government “…should improve eco-compensation policy, and develop eco-compensation mechanisms as quickly as possible” (State Council 2005).4 The PRC’s Ministry of Environmental Protection (MEP) has also issued its own Guiding Opinions on the Development of Eco-compensation Pilot Work, which targets four pilot areas: western PRC; key ecological function reserves (e.g., nature reserves and restricted construction zones); natural resource use (e.g., forests, grasslands, wetlands, and mineral resources); and watershed services. MEP also set out five fundamental principles for developing eco-compensation policies and mechanisms (MEP 2007a):

•Those who develop and exploit resources should also protect the environment, those who destroy the environment should repair it, those who benefit from it should subsidize it, and those who pollute should pay.

•Responsibility, right, and power are synonymous.

•Agreement on public construction of the environment and public benefit can help achieve “win–win” development.

•Government guidance and market regulation should encourage diversification of funding sources and harnessing of market forces.

•Adapt central policy to local conditions and energetically innovate.

The ambition and momentum of these initiatives is evident in the 11th Five-Year Plan (2006–2010), which calls for policy makers to innovate in environmental policy, develop eco-compensation pilot projects and accelerate the development of eco-compensation mechanisms (especially intraregional and watershed-related eco-compensation mechanisms), and resolve issues over funding conservation.

As part of implementing the 11th Five-Year Plan, the 2007 State Council workplan called for “…deepening product pricing and emissions fee reforms for key natural resources, perfecting a resource taxation system, and improving a paid mineral resource use system; quickening the development of eco-compensation mechanisms.” The PRC’s revised water pollution control law now states that “the PRC will, via such means as financial transfers and payments, develop sound environmental protection compensation mechanisms for regions located in drinking water source protection areas, and river, lake, and reservoir upper watershed conservation and ecological protection areas.”5

In 2009, both President Hu Jintao and Premier Wen Jiabao also made clear statements reiterating that the PRC will develop a “sound system of paid use of (mineral and natural) resources” and “eco-compensation mechanisms” (Jin and Zuo 2010; Wang et al. 2010).6 Against this backdrop, the central government is developing a national eco-compensation policy framework, and possibly a law, in preparation for the drafting of its 12th Five-Year Plan (2011–2015).

Local government innovation influences central policies

The contribution of local governments to building momentum and innovation in this PES frontier deserves recognition and study. They are adapting centrally designed eco-compensation programs to meet their own needs, drawing upon multiple central and provincial policies and funding sources. The result is a diverse catalogue of initiatives and public programs that incorporate both direct payments for ecological services renders and incentive-based elements at all government levels. These hybrid programs often feed back into central government policy development, stirring a healthy debate on how to improve these programs while exploring more market tools and regulatory innovations (Bennett 2009). For example, current experiment and experiences with emission trading in Jiangsu and Zhejiang provinces, particularly in the Tai Lake Basin, suggest that such a system may soon be replicated in various locations across the country, and will provide valuable insights into the types of institutional and legal reforms that the country will need to develop this system.

An Eco-Compensation Policy Framework for the People's Republic of China

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