Eco-Compensation in China: Opportunities for Payments for Watershed Services

Water supply and availability could be the most pressing problem restricting China’s economic growth in the next 10-15 years, according to a new report by the Asian Development Bank. Not only are water resources limited (only about 30 percent of total water resources are available for use), but many surface and groundwater sources are suffering from severe pollution.¹ The Chinese government is now looking to invest in new ideas to improve water quality and supply, and WRI is using its water quality trading expertise to explore the potential of market-based methods to improve water quality and increase the supply of clean water from Chao Lake, the fifth-largest lake in China. China’s Macro Strategic Research Paper on the People Republic of China’s (PRC) Environment states that drinking water does not meet national pollution standards for one in seven Chinese, and 300 million rural Chinese lack access to safe drinking water. Out of 26 key national lakes monitored in 2010, 77 percent were classified as grade IV or lower (unhealthy for human contact).² Chao Lake, for example, has some of the worst water quality in the country with a classification of grade IV.³ The lake has experienced severe nutrient pollution, or eutrophication, since the late 1980s, resulting in blue-green algal blooms. As a result, Chao Lake is unsuitable as a drinking water source for the city of Hefei, despite its close proximity and size.

The majority of pollution coming into Chao Lake is from nonpoint sources (NPS), namely agricultural chemical and fertilizer runoff from farms. However, China’s water pollution control strategy for Chao Lake has long been centered on addressing point source pollution. Investments in point source controls alone will be insufficient to restore the water quality of Chao Lake. Hence, new strategies are needed.

In 2010, the PRC tasked the National Development and Reform Commission (NDRC), the agency responsible for formulating and implementing social and economic development strategies, with developing an Eco-Compensation Ordinance, which includes market-based methods to address water pollution. The Ordinance is currently in draft form and may be adopted in 2012.⁴

What is Eco-Compensation?

Eco-compensation seeks to compensate land users or suppliers of ecosystem services for lost income or land use rights due to environmental protection policies. It includes policy instruments such as fiscal transfer payments, support for sustainable land management and other ecological programs, Payments for Watershed Services, direct government payment programs, and improvement of environmental taxes and fees. Payments for Watershed Services (PWS) programs are a key component of eco-compensation and could play a vital role in reducing agricultural nonpoint source pollution into water bodies such as Chao Lake.

PWS programs are market-based mechanisms that pay land users to sustainably manage their land in exchange for the provision of one or more ecosystem services (e.g., water filtration, erosion control by maintaining forest cover, and improved watershed management). They could offer municipalities a cost-effective way to reduce pollutant runoff, especially from agricultural areas.

One example of a PWS program is a water quality trading market. Generally, a water quality trading market can be established where there is a clear economic driver, such as a regulatory target or maximum pollutant level for a water body. Credits or units of a given pollutant can be traded among entities to reach the target level cost-effectively. Farmers who reduce their nutrient runoff can generate credits at a lower cost and sell them to other actors who have difficulty reducing their own pollution level at a reasonable cost.

Payments for Watershed Services for Chao Lake

WRI is working with Anhui Province, Hefei municipality, and the recently created Chao Lake Management Bureau to help restore Chao Lake. Chao Lake’s restoration was adopted as a national priority in the “three rivers-three lakes” environmental protection program since 1995. WRI is evaluating the feasibility of a Chao Lake point source-nonpoint source water quality or “nutrient” trading program involving agriculture. If the preliminary findings indicate that such a program is feasible for Chao Lake, a detailed trading demonstration will be developed for implementation in a second phase of the project. WRI is also participating in a national-level study funded by the Asian Development Bank to assess nonpoint source pollution sources and develop a strategy for reducing agricultural nonpoint source pollution, with Chao Lake as the study area.

These two projects sit directly at the intersection of food security, farmer income, and water quality. They’re critically important to China’s efforts to control agricultural pollution while dealing with the unique societal aspects of the country’s agriculture, low farmer income, and very small farm size.

With to the Chinese government and Asian Development Bank paying increased attention to Payment for Watershed Services programs, eco-compensation, and market-based mechanisms for water pollution control, , it’s an opportune time to promote and develop more holistic, integrated strategies to prevent water pollution, restore degraded water bodies, and protect high-quality waters.