1 Introduction

Due to the rapid development of China’s economy, ecological and environmental problems have increasingly become bottlenecks, restricting the overall sustainability of the country’s socio-economic development. The Chinese government has proposed a concept of scientific development with an emphasis on people-centred, integrated, coordinated and sustainable development. Special attention has been placed on ecological construction through various policies and means, which has contributed significantly to the improvement of ecological conditions in China. However, policies related to ecological conservation are not readily in place. In particular, economic policies for ecological construction are still lacking, leading to an unequal distribution of ecological benefit and economic benefit between protectors and beneficiaries, polluters and victims. Consequently, beneficiaries are gaining from ecological benefit without bearing the responsibilities and costs of deteriorating the ecosystem, whereas the protectors are not being offered the necessary economic incentives. In China, both purely public goods and the common pool of resources have the common issue of externality generated in the process of supply and consumption. Most ecosystem services are public goods (MEA, 2003*) and rivalrous in consumption. For this reason, PES from the government is required to internalise the externality caused by consumption activities (Yu and Ren, 2007*). Externality is divided into positive externality (external economical) and negative externality (external uneconomical). Positive externality refers to the fact that the production or consumption of some economic entity benefits other economic main bodies, albeit without gaining compensation from the latter, such as ecosystem conservation in nature reserves and upper reaches of river basins. Negative externality refers to the fact that the production or consumption of some economic entity damages other economic main bodies, albeit without providing compensation to the latter, such as environmental pollution by enterprises and the eco-environmental destruction caused in the process of mineral resources development. Negative externality also involves the damaging economic agent not incorporating the negative external costs into his economic decision-making. With respect to ecosystem services (ES) and PES, this implies the consumption of ES at unsustainable levels. As to the internalisation of externality, there are three different approaches in the economic circle: “Pigovian Tax”, Coase’s “Ownership” and PES (Pigou, 1932*; CCICED, 2007*).

The unique feature of most ecosystem services is that they are unaccounted for and unpriced, and therefore remain outside the domain of the market. Against this national backdrop, policymakers in China have become increasingly interested in developing new approaches in environmental policy to address the country’s multiplying conservation challenges and resource constraints (Zhang et al., 2010). This includes a growing number of programmes that are increasingly utilising Payments for Ecosystem Services (PES) schemes, in line with international trends towards applying PES primarily as a way to improve economic efficiency through market-based instruments to internalise environmental externalities (Engel et al., 2008*; Pagiola and Platais, 2007*). The Chinese government has made the development of “PES schemes” a priority. The State Council release no. 39 [2005] entitled State Council Decision Regarding Using the Scientific Development View to Strengthen Environmental Protection states that the government “…should improve PES policy, and develop PES schemes as quickly as possible,” (State Council, 2005, Section 23, sentence 7). China’s 11th Five-year Guidelines (2006 – 2010) call for innovation in environmental policy, and the development of PES pilots, and for policy-makers to quicken the pace of development of PES schemes, to develop intra-regional and watershed-related PES schemes, and to resolve funding issues regarding conservation. In response to the 11th Five-year Guidelines, China’s Ministry of Environmental Protection (MEP) issued Guiding Opinions on the Development of Eco-compensation Pilot Work (MEP, 2007*), and set up prioritised fields for implementing PES.

This paper aims to review PES programmes in China. It starts with an introduction to the terms relevant to PES amongst scientific communities and decision-makers across the globe. This is followed by general principles used in PES and a discussion of the major PES programmes that have been implemented in China, as well as future perspectives concerning PES. This paper will provide a basis for the scientific community to carry out further PES research and for policy-makers to review and improve their decision-making processes on the basis of previous experiences and lessons made.

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