China’s Eco-Compensation Programs for Improving Environmental Quality

For nearly two decades, China has been rolling out a collection of fiscal instruments for improving environmental quality. These programs, collectively termed “eco-compensation,” include not only payments for environmental services (PES), but also an array of taxes, fees, subsidies, funds, compensation payments, and interstate compacts.  Many of these programs are large and innovative, as I recently learned at an international conference in Kunming on eco-compensation, organized by China’s National Development and Reform Committee (NDRC) and the Asian Development Bank.

Eco-compensation has its origin in the 1998 Yangtze River floods, which killed thousands of people and left millions homeless. The Chinese government realized the importance of maintaining upstream forests for flood protection and introduced payments to landowners who protected or restored forest. (For more on how forests protect people from natural disasters, see Frances Seymour’s and my new book Why Forests? Why Now? The Science, Economics, and Politics of Tropical Forests and Climate Change.)

Since then, China has spent more than $150 billion on eco-compensation, according to one government official who spoke at the conference, including to reduce erosion, prevent sandstorms, combat desertification, and protect parks. China now claims forest cover of more than 21 percent, up from a low of 16 percent, according to another government official. (Independent scientific estimates confirm that China’s forest cover has increased, mostly with plantation monocultures rather than restored native forests.) Speakers described how China has recently passed a series of environmental protection laws, and how in 2015 “eco-civilization”—harmony between economy and environment—was inscribed as one of five pillars of the national Five Year Plan.

One new eco-compensation program, discussed by several speakers at the conference, is an interprovincial “horizontal” agreement for water quality along the Dongjiang River. The downstream province of Guangdong pays the upstream province of Jiangxi based on the quality of the water. The better the water quality, the more Guangdong pays. The agreement builds on dozens of similar arrangements between municipalities. One innovative feature of this agreement is that it’s two-sided: if the water quality is below a certain benchmark, Jiangxi has to pay Guangdong.

One of the most consequential programs discussed at the eco-compensation conference is China’s growing carbon market. Currently composed of pilots in eight cities, the program is set to expand in 2017 to a national market covering eight industrial sectors and 3-4 billion tons of carbon dioxide per year. It’s expected to be a $10 billion-per-year market. It is envisioned that after 2019 the carbon market will grow to cover all sectors, with offsets for agriculture and forestry projects.

The conference featured international speakers too. There were presentations on South Africa’s “Working For” environmental public works programs, which employ 70,000 people; Vietnam’s PES program; wetland mitigation banking in the United States; experiments with PES in Central Asia; forest planting programs in the Philippines; and biodiversity offsets in France.

I was invited to talk about recent global developments in reducing emissions from deforestation (REDD+). I discussed the Paris climate agreement; bilateral pay-for-performance deals in Brazil, Guyana, and Indonesia; the Forest Carbon Partnership Facility’s Carbon Fund; California’s moves to incorporate tropical forest offsets into cap-and-trade; the International Civil Aviation Organization’s pledge of “carbon neutral growth”; and India’s pro-forest tax reform—all topics we explore in depth in Why Forests? Why Now? I noted the current opportunity for a big buyer to access low-cost, high-volume emission reductions through REDD+, and to gain global goodwill by doing so.

The conference featured a number of recurring themes. Several speakers highlighted that eco-compensation brings institutional side benefits—including new data collection and monitoring and evaluation, as well as governance cooperation across districts that might not otherwise interact.

But several speakers stressed that eco-compensation can’t solve every problem.  Complementary policies are needed to address other issues, in particular poverty alleviation. As one speaker put it, government planners should ask critically “what can eco-compensation do that other policies can’t?”

There were frequent debates over whether polluters should pay for environmental damages or whether beneficiaries should pay for improvements in environmental quality. Ronald Coase and his interpreters would surely be smiling.

So, are market-based approaches to environmental protection taking over in a land where the Hammer and Sickle is still a common sight? Well, not quite. Eco-compensation programs have been a complement to—not a substitute for—direct regulation of polluting industries. For example, after the 1998 floods the Chinese government instituted a logging ban as well as payments to upstream landowners. China’s fledgling carbon market functions alongside powerful government authority to clean up or shut down power plants; thanks to these efforts, CO₂ emissions have been falling since 2013 or 2014.

Thus, policy sticks and carrots go hand in hand in China as elsewhere. In Costa Rica, the world’s premier PES program was the political sibling to a concurrent deforestation ban. And in Brazil, where restrictive policies caused a drop in Amazon deforestation of 80 percent between 2004 and 2014 even while beef and soy production increased, commenters have long warned that unless sticks are paired with carrots, deforestation could resurge. Worryingly, this now appears to be happening: deforestation in the Amazon in 2016 rose by 29 percent from the previous year (though it’s still 71 percent below the peak in 2004).

I was asked at the conference what the outcome of the US election means for the Paris climate agreement. I discuss this subject in a companion blog, If the Trump Administration Abandons Climate, Will China Take Global Leadership? In short, if the US retreats from global climate leadership, China will have an opportunity to claim the mantle, along with both the domestic responsibilities and international goodwill and influence that come along with it.

Can China lead on climate? If the commitment to improved environmental quality, openness to both market-based and regulatory approaches, and strategy of learning by doing that I observed at the eco-compensation conference are indicative of China’s climate efforts more broadly, there is good reason for hope.