4 The rapid rise of PES in China

4.1 Major PES programmes in China

The Chinese government has been experimenting tentatively with PES programmes for decades. In the early 1980s, the Ministry of Water Resources began to directly contract out fragile lands in some small watersheds to households for management, though with limited success (Liu, 2005). These initiatives have been embodied in the Water and Soil Conservation Act of the P.R.C. (1991), one of the first pieces of legislation passed to introduce market schemes into watershed management. It allows some small watersheds to be auctioned or leased to farmers or other private investors for development, with the lessee being obligated to protect against soil erosion and degradation. Since 1999, there have been a growing number of programmes that, in line with international trends, are increasingly utilising Payments for Ecosystem Services (PES) schemes. Several initiatives have been carried out successfully at national, regional and local levels. One example is the flagship Sloping Land Conversion Programme (SCLP – tuigeng huanlin huancao), which, for example, is arguably a PES programme (Wunder, 2005; Pagiola and Platais, 2007; Engel et al., 2008; Bennett, 2008*). Table 2 summarises the major eco-compensation programmes that have been realised in China in recent years, and their magnitude.

As shown in Table 2, subsidies are part of eco-compensation instruments in China. According to Pigou (1932), market mechanisms such as taxes and subsidies, could be used to align private and social costs and benefits in a society more closely. Specifically, taxing or subsidising an individual by exactly the amount of the positive/negative externality they produce by a given activity “internalises” the externality (i.e. the full social cost and benefit of the activity are also the individual’s private cost and benefit), so that the individual’s private decisions reflect socially optimal decisions. Thus, if a damager is taxed by exactly the amount of damage he creates, he would chose production and damage levels that are socially optimal. If a person who protects an important ecosystem is subsidised by exactly the amount of public benefits created by the ecosystem, the individual’s private decisions would also be socially optimal. As such, the government should make use of such “Pigouvian Taxes” when the private and social environmental costs and benefits of an activity diverge.

As indicated above, most of the PES programmes in China are targeted to improve water quality and quantity, to control soil erosion, and promote eco-agriculture production. The watershed PES programme aims to ensure watershed ecological security and the sustainable use of water resources. It is useful in dealing with the ecological and economic relationship between upstream and downstream locations to promote the economic development and environmental protection of upper reaches and to realise the sustainable development of the entire watershed. In developing countries, several billion dollars are spent on watershed payments. The watershed compensations in China are currently being carried out at three levels. The first is the national project to protect the eco-environment of rivers in western China. The second is the trans-watershed water rights trading and fiscal transfer project, dominated by the government of Zhejiang province. The third is the watershed compensation system created by Fujian provincial government of southern China. Unlike international experience of market-based compensation for watershed (CCICED, 2007), market-based compensations are scattered in some areas in a quasi-market or semi-market status. The free trade market has not yet formed in China, but is foreseen as an effective means of compensation for watershed.

The eco-agricultural programme was established to promote the adaptation of organic production and sustainable resource management activities. The Chinese government provides subsidies for the use of organic fertilisers and bio-fuel energy, and promotes conservation tillage techniques. Meanwhile, a national green and organic food certification system has been widely implemented in China. These measures have contributed considerably to the improvement of ecosystem services, such as soil and water conservation, emissions reduction and water purification.

The main goal of SLCP is to reduce soil erosion and desertification, and to increase China’s forest coverage by retiring steeply sloping and marginal lands from agricultural production. Available data indicates that soil erosion affects roughly 360 million hectares of land in China, some 38% of its total area, more than three times the world average (Huang et al., 1999; World Bank, 2001; SFA, 2003). The programme covers 25 provinces. The forest area of SLCP implementation increased by 22.9 × 10⁶ ha from 1995 to 2005, including 9.0 × 10⁶ ha of afforested land converted from farmland, 12.6 × 10⁶ ha of waste hills and unreclaimed lands suitable for forestation and 1.3 × 10⁶ ha of mountain areas sealed for forestation.

Figure 1* presents a graphical illustration of converted land area under SLCP by year. During the pilot phase, an average of 408,000 hectares of cropland was converted per year. Upon full-scale implantation beginning in 2002, however, this jumped to 2.9 million hectares per year, a more than six-fold increase. The number of enrolled counties also rose significantly, by 374%, between the end of 2001 and the end of 2002 (Bennett, 2008).

Figure 1: Distribution of land converted from cultivated land to other uses, 1986 to 2000 (Deng et al., 2006)

The total investment in this programme hit the 103 billion RMB mark by the end of 2005. SLCP mandates that farmers who participated in land retirement and conversion be compensated. It stipulates that farmers who convert degraded and steep sloping cropland into either “ecological protective forests” (defined by the State Forestry Administration as timber-producing forests), or “economic forests” (orchards or plantations of trees with medicinal value) will be compensated with an annual in-kind subsidy of grain, a cash subsidy and free saplings at the beginning of the planting period. The grain subsidy is set at 2,250 kg/ha in the Yangtze River Basin and 1,500 kg/ha in the Yellow River Basin. The cash subsidy is 300 RMB/ha per year. Both grain and cash subsidies are for 8 years if ecological forests are planted and for 5 years if economic forests are planted (in the more recent policy, the 8-year and 5-year compensation period can be extended another round, but with half the payment). However, payment for land converted may often be small and variable compared to household income. For instance, research conducted in southern China revealed that annual payments received by farmer households comprise a small share of the total household income (i.e. around 2%, see Zhen et al., 2006, 2010; Li et al., 2011) because these households and communities already have the incentive to protect and improve their local environment – this is considered a successful aspect of the programme. Our survey has shown (Figure 2*) that most farmers were Willing To Pay (WTP) between 750 and 1,125 RMB/year, and the consensus rate decreases steadily with increasing bid value, and an average annual per household payment was 956 RMB/ha. Even so, whether farmers would reclaim converted land into agriculturally productive land as soon as the programme and associated payments are terminated is still a challenge for policy-makers to achieve ecosystem conservation objectives. Other case studies (Uchida et al., 2005; Xu et al., 2010) have indicated that those households that originally did not wish to participate in the programme, or who are not compensated adequately for their opportunity costs of participation, will simply return land to cultivation at the end of the subsidy period. Results from the survey indicate that this is not a small share of participants, although some farmers are overcompensated.

Figure 2: Functional relationships between bid amount, consensus rate and probability density of WTP (from Zhen et al., 2011).

4.2 Pilot studies on PES implementation in China

As a 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). In this, the MEP detailed four main areas of focus for the development of PES pilots: watersheds, key ecological function areas, mineral development areas and nature reserves. Based on the research progress and urgent needs for decision-making, the China Council for International Cooperation on Environment and Development (CCICED) established the Task Force on PES and policy research, with the aim of establishing national strategies and sectoral policies for PES, and making concrete proposals and recommendations to the government. Table 3 lists the major findings from the pilot studies, which includes subject to pay, approach for payment, capital sources and standards for payment.

It is concluded from this programme that local governments are responsible for establishing PES of urban water sources and local small watersheds within their administrative boundaries and that they should cooperate with the central government to establish PES for cross-boundary medium-sized watersheds. With the exception of the further improvement of existing ecological protection programmes, an urgent issue is to establish long-term effective schemes for PES. Meanwhile, compensation standards could be determined following the four kinds of values: investments by protectors and opportunity costs, beneficiaries’ gains, rehabilitation costs of damage and ecosystem services. According to Rule of Thumb, the sum of direct investment and opportunity cost should be the base-line for determining the standard, while the value of ecosystem services is considered to be the theoretical ceiling values for compensation.