3 Major components of PES schemes in China

The eco-compensation scheme comprises three key components: responsibility scheme, compensation criteria and compensation methods. The responsibility scheme defines the identities of and the responsibilities to be borne by the interested parties in the eco-compensation scheme. The responsibilities borne by the interested parties may be defined following the property right system and the PPP (Polluter Pays Principle), UPP (User Pays Principle) and BPP (Beneficiary Pays Principle) in addition to the specific requirements of the applicable laws (CCICED, 2007*).

The compensation criteria may either be identified based on the evaluation and calculation of the cost of environmental treatment (i.e. input in environmental protection) (Bai et al., 2008) and the loss caused to the ecological environment (the value of ecological services) (CCICED, 2007*) or, as another option, through gaming and negotiations between both interested parties (Yu and Ren, 2007).

The methods and approaches of compensation may be defined in accordance with many systems. However, the key factors involved therein are the compensation subjects and operational schemes. Based on the difference between the subject and the operational schemes of such compensation, eco-compensation may fall into two major categories, i.e., government compensation and market compensation (Bennett, 2009*; Yin, 2009*).

3.1 Basic financial principles for PES schemes

The principle parts of PES have been identified in accordance with the responsibilities and roles of the stakeholders involving in ecological conservation or damage. The following principles have been applied for PES in China (CCICED, 2007*):

• Damager Pays Principle (DPP): Here the damager should take responsibility for the negative impact of his activities on the ecosystem and pay for the rehabilitation of damaged ecosystems.
• User Pays Principle (UPP): This refers to users of environmental resources having to compensate the state or public representatives for using scarce resources due to their public ownership. The principle could be embodied in other ecological management fields at different scales, such as the taxation of individuals for arable land occupation, cutting trees and non-wood resources, mineral resource exploration; the enterprises should pay resource use fees after obtaining permission for use.
• Beneficiary Pays Principle (BPP): The beneficiary should pay the provider for ecological services at upstream and downstream locations. For the majority of ecosystem services that are “public goods”, the establishment of PES requires governmental support. The government should take great pains to protect natural reserves that play an important role in the ecological security of the country, such as upstream, wind-break and sand-fixing areas, flood regulation areas, etc. However, BPP is broader in coverage than the UPP principle in the sense that, in some cases, benefits do not need to be derived from the use of resources; for instance, benefits gained could be clear air and landscape amenities generated due to ecosystem conservation by other individuals.
• Compensation to the protectors: Those groups and individuals who contribute to ecological construction should be compensated according to their investment and opportunity costs, the benefits provided by ES, beneficiaries’ gains and the rehabilitation cost of damage.
• Property rights: Within the context of the mainstream conceptual basis for PES, i.e. Coasean economics, eco-compensation in fact attempts to reduce transaction costs by allocating property rights and establishing bargaining processes between those who provide the services and those who are willing to maintain or enhance the provision of such services through a payment (i.e. buyers of services) (Muradian et al., 2010; Pascual et al., 2010*). In the Chinese context, property rights are closely related to land use rights and the right to commercialise services generated from land resources, such as payment for the conversion of crop land into grass and forest to improve ecosystem services and functions.

3.2 Determination of compensation standards

Compensation standards could be determined in accordance with four values: investment by protectors and opportunity costs, beneficiaries’ gains, rehabilitation costs of damage and the value of the ecosystem services.

• Direct investment and opportunity costs incurred by protectors: Protectors’ investments in terms of human resources, materials and capita resources should be taken into consideration when devising compensation standards. In addition, the opportunity costs of protectors should also be considered. In theory, the sum of direct investment and opportunity costs should be the base-line for setting the standard (CCICED, 2007*).
• Beneficiaries’ gains: A positive externality results when the benefits of conservation activities are not fully received by those involved in these activities (e.g. if beneficiaries have free use of ecological services and products without payment) (Li and Liu, 2010*). In order to internalise such externality, beneficiaries should pay the full amount for ecological service providers. Thus, eco-compensation standards can be accounted for via the price and volume of market transactions.
• Costs of rehabilitating damage: Resource development can cause biodiversity extinction, water loss, soil erosion and water pollution, and can affect ecosystem services such as soil and water conservation, climate regulation, etc. The costs incurred for pollution treatment and ecological restoration should therefore be paid.
• Value of ecosystem services: Evaluation of ecosystem services is used to calculate the value of soil and water conservation, climate regulation, biodiversity conservation, landscape beauty, etc. Many studies on the evaluation method have been carried out both in China and abroad. However, due to lack of standards for indicator selection and the valuation of the services, as well as the fact that ecosystem service values are much higher than compensation capacity, the evaluation results could only be considered as theoretical ceiling values when setting compensation standards (CCICED, 2007*).

A practical standard could be determined through negotiation amongst stakeholders and in accordance with the real situation in the country and its regions, for instance, levels of economic development and ecological deterioration, and dynamic adjustment is required that takes into account ecological conservation and socio-economic development.

3.3 Approach for PES

According to the compensation methods, major approaches can be divided into compensation in cash, compensation in kind, compensation via appropriate policies and compensation via appropriate technologies and knowledge (Zhen et al., 2010*; Li et al., 2011*). Implementation bodies and their operational schemes are key to determining the chief characters of compensation methods, which can generally be categorised into two types: government compensation and market compensation.

• Government compensation: The government compensation scheme is currently the most important and easily implementable type in China. The government identifies who should be compensated and how much should be paid by taking the provision and protection of ecosystem services into account. It aims to ensure national ecological security, social stability and regionally coordinated development, and adopts the financial subsidy, policy support, project implementation, taxation reform and talent input as the compensation methods. The government compensation scheme includes financial transfer payment, policy support with regional differences, ecological protection projects and an environmental taxation system.
• Market compensation: The objects of market compensation could be the property of the ecological and environmental elements, ecosystem services or the performance or quota of the environment pollution treatment. Pigou (1932*) theorised that market schemes, such as taxes and subsidies, could be used to align private and social costs and benefits in a society more closely. In practice in China, the government usually provides subsidies to those who protect ecosystems, for instance, by providing subsidies to farmers for converting their land from farmland into grassland and forest. The specific amount of subsidies may be based on economic loss from farming products, e.g., total income from selling harvests from farmland. Meanwhile, taxes are collected from developers on the basis of the total turnover from selling the products, e.g. from mining activities.

Although it follows the same theoretical basis, eco-compensation in China is a broader concept than PES because it has a built-in penalty concept. The unique characteristics of PES in China are summarised as: (1) the government domination of PES with a focus on institutional and policy aspects to determine compensation schemes; (2) a lack of a real marketing mechanism due to low marketisation, and externality cannot be totally solved by pure market instruments; (3) top-down approach of implementing PES; and (4) adoption of the penalty concept by setting, for instance, the “damager pays principle,” and so on.