Valuing Ecosystem Services: An Answer for China’s Watersheds?

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Government officials and researchers in China are increasingly trying to solve the economic piece of the nation’s environmental puzzle. Policy suggestions include subsidies for technologies that save both energy and money, taxation schemes that provide financial disincentives for polluters, and funding mechanisms that support ecosystem conservation. The latter approach—financing conservation—is particularly crucial to China’s future stability, says Dr. Liu Guihuan, who has spent her career at the Ecology Institute of the Chinese Academy of Environmental Planning searching for economically viable solutions to ecosystem protection.

According to Liu, the primary obstacle to ecosystem protection in China is not the cost of protection itself, but how this cost is allocated. “It is always cheaper to protect ecosystems than to have to rebuild and restore them once they are destroyed. But it is a question of who is paying those costs,” she observes. Liu argues that protecting China’s ecosystems requires putting the burden of payment on the appropriate resource users.

Protecting watersheds—Dr. Liu’s research focus—is a case in point. Liu and her colleagues point to the many benefits intact watersheds provide beyond supplying humans and wildlife with water. These so-called “ecosystem services” include soil and water purification, habitat for biodiversity, and carbon sequestration. “The beauty of healthy watersheds is that these services are provided for free, and indefinitely,” she notes. But as with any free public resource, ecosystem services are prone to overexploitation and degradation by some users, making the services unavailable to others. By the same token, “costly protection and restoration efforts by some are usually enjoyed by others who do not pay for them,” Liu adds.

This problem is particularly evident with riverbed systems, where the protection of ecosystems downstream often depends on the sacrifice of economic development upstream. “Everyone along a riverbed has a stake in maintaining a healthy river system,” Dr. Liu explains. “But it is the communities upstream that end up bearing the costs of limited industrial activity and ecosystem restoration”—at least in theory. Dr. Liu is quick to point out that in reality, watersheds in public domains “always result in the overuse of resources in both upstream and downstream communities, which almost always leads to deficient investment in environmental protection upstream.” The results are clear and devastating, she says. “This imbalance in the supply and demand of ecosystem resources results in soil erosion, water pollution, and flooding.”

Many major Chinese regions obtain their water from rivers that flow through poorer communities that live upstream. For example, Hebei Province provides much of Beijing’s water, and Guangdong gets its water from Jiangxi. Protecting these water resources requires enormous material, financial, and human resources, with upstream regions bearing a heavy burden as well as economic losses, Dr. Liu says. This leads to “obvious inequalities and conflicts of interest” in these regions, she notes.

To address these conflicts, Dr. Liu’s research team has been working with international experts to introduce a system of “payments for ecosystem services” (PES) to China. The PES mechanism works at the levels of both policy and the market to ensure that beneficiaries of ecosystem services also pay to protect these services. Payments can take several forms, including direct agreements between commercial entities up and downstream, the trading of policy-led environmental quotas or credits between communities up and downstream, and direct government compensation.

Under such schemes, downstream communities such as industries or government offices in Beijing or Guangdong help pay for conservation initiatives upstream, Dr. Liu explains. The power of this approach is that both the ecosystems and those responsible for their protection can benefit, she notes. “This economic approach becomes a mechanism for collaboration between upstream and downstream communities for comprehensive protection that does not hinder economic development in either region.” The understanding is that every county along a river is entitled to make use of its resources, but it is also obliged to protect the ecosystem, either through direct conservation and restricted industry or through economic compensation to those who carry out these activities.

Although PES is still in its pilot stages in China, Dr. Liu contends there is already a legal basis for the mechanism. Existing Chinese statutes require downstream parties to compensate for economic losses upstream. Exactly who those parties are, and how the compensation is to take place, is not articulated, but Dr. Liu believes this legislation is a strong start. She points to Article 83 of China’s General Principles of Civil Law, which requires that “an estate must correctly deal with mutual relations in water catching, drainage, transit, aeration” and states that “[a]nyone who damages or causes loss to a neighborhood should discontinue the damage, eliminate obstacles and compensate for the damage.”

Article 41 of China’s Environmental Protection Law has similar clauses for “compensating for the loss to entities or individuals who are directly influenced” by pollution, and Article 9 of the nation’s Constitution prohibits “the destruction of natural resources by any organization or person by any means.” Dr. Liu also looks to specific water-related laws, such as the Detailed Rules on the Implementation of the Water and the Statute of Collection and Use of Effluent Fees, which outline basic principles for the remunerative use of water resources, such as water-use permits and fees, water-transfer rights policy, effluent fees, and subsidies committed for water protection. Perhaps most directly related to PES is the State Council’s recent focus on “scientific development,” which includes a mandate that “[e]cological compensation policy must be enhanced, and an ecological compensation system must be established as soon as possible.”

Despite this existing policy basis, Dr. Liu argues that “thorough and flexible use” as well as further development of this legislation is critical if PES is to effectively protect China’s watersheds and other ecosystems. For this, hope lies in the various pilot projects being implemented throughout the country. The best known of these is the Natural Forest Protection Project, in which the government has provided financial compensation to individuals and companies throughout the country for halting logging activities and conducting reforestation and river restoration. This is an impressive effort, with over 100 billion RMB (US$13 billion) committed for the project overall. While the project provides an economic incentive for conservation activities, however, it still does not overcome the traditional dilemma of conservation as an economic burden.

Other PES schemes are trying to address this concern. Zhejiang Province has set up a special subsidy for ecological protection in the headwaters of the Qiantangjiang River, which supplies water for the province’s major cities. The effort aims to allocate economic resources from urban areas downstream to improve conservation and pollution control upstream. Several local governments are also exploring multi-provincial cooperation for watershed protection. For example, Beijing hopes to establish policies for water-rights transfers between upstream and downstream communities.

“This would work on the market and would carry its own incentives,” Dr. Liu explains. “Upstream entities would pay water resource fees to the region regularly according to the market price.” Under such a scheme, the prices for water and for wastewater treatment downstream would be increased to compensate for the loss of traditional industry and water-intensive agriculture. In addition, an “environmental compensation” tax would be levied in regions downstream. The governments of Shenzhen, Guangzhou, and Guangdong provinces are looking into similar PES arrangements with communities on the Dongjiang River.

Although several standards for eco-compensation have been established in China, they are not yet suitable for application at the national level. Initial negotiations and policy research on these schemes reveal lingering technical obstacles, including the need for better assessment of specific ecosystem services from a given region, whom they benefit, and how to value them. But despite these difficulties, Dr. Liu believes PES is the most economically effective means of solving China’s watershed environmental problems. “Economic interests have the strongest ability to change regional and social development patterns in China. Once integrated into the system, PES will have strong social and environmental value,” she says.

Lila Buckley is assistant executive director of the Global Environmental Institute, a Worldwatch affiliate based in Beijing. Outside contributions to China Watch reflect the views of the author and are not necessarily the views of the Worldwatch Institute.

China Watch is a joint initiative of the Worldwatch Institute and Beijing-based Global Environmental Institute (GEI) and is supported by the blue moon fund.