Country Name: China
Author: Michael Bennett

We’ve all heard how China’s voracious economic growth is destroying its air, water, and forests – but few know of the country’s burgeoning market-based response, which aims to halt environmental degradation by incorporating the value of nature’s services into the production process.  EM parent Forest Trends has published an exhaustive inventory of these efforts.

NOTE:  This is the sixth in a series of articles leading up to and supporting the 17th Katoomba Meeting, to be held on June 23 and 24 in Vietnam.  The article has been adapted from Markets for Ecosystem Services in China: an Exploration of China’s “Eco-Compensation” and Other Market-Based Environmental Policies, a comprehensive inventory of Payments for Ecosystem Services (PES) in China published by Ecosystem Marketplace parent Forest Trends, together with the Peking University College of Environmental Sciences and Engineering, the Policy Research Center for Environment and Economy, Ministry of Environmental Protection, China, and the Natural Capital Project.  You can download the full report to the right.

15 June 2010 | China, today the world’s second-largest economy, has quietly seized a leadership role in the evolving field of environmental markets. Its global financial force drives some of the largest public payments and markets for ecosystem services (PES/MES) schemes in the world, particularly with carbon and water markets.  China has more than US$90 billion in existing or planned programs, hosts 22 percent of registered Clean Development Mechanism (CDM) carbon offset projects and by 2007 had supplied 73 percent of global CDM carbon credits. 

Yet China’s market-based initiatives remain relatively unknown. This is surprising, given the country’s increasing importance in the world economic order and critical role for future international climate negotiations.

A study of China’s developing ecosystem services reveals the amazing breadth and scale of what is currently happening on the ground. The environment is an important area for engagement with China; the central government says it is eager to learn from outside experience and collaborate with international organizations to develop capacity, broaden and refine its policy toolkit, and better evaluate and improve its current programs.

The world, as well, has much to learn from China; the sheer scale of the country’s ongoing ecological payment programs and policy innovations suggests a hidden wealth of untapped experience exists that could provide valuable lessons and insights to both domestic and international policymakers and practitioners of PES and MES schemes.

Ecosystem Markets Serve Economic Growth

Policymakers in China have become increasingly interested in developing new approaches for environmental policy to address the country’s multiplying conservation challenges and resource constraints in the face of break-neck economic growth. This led China’s central and local governments to rapidly expand its range of policy and program innovations, many under the broad heading of “eco-compensation,” which lay the groundwork for the development of ecosystem services markets.

As a result, the country’s public sector drives some of the largest public payment schemes for ecosystem services in the world – and this includes local governments, which are rapidly adapting centrally-designed eco-compensation programs to their own needs.  They are also creating hybrid programs that weave together and draw upon multiple central and provincial policies and funding sources.  They create their own distinct initiatives that often feed back into central government policy development.

The result has been a highly diverse mosaic of initiatives and public programs.  They incorporate payments or market-based concepts into national, provincial and municipal levels. And they are almost all primarily developed and funded domestically, with relatively little involvement of international expertise or funding. 

Range of Programs

China’s broad range of ecosystem programs includes watershed, carbon, timber, landscape amenities, biodiversity conservation and anti-desertification services. An increasing number of initiatives aim to protect watershed services and resolve conflicts over the rights and access to water resources. China has also actively embraced the Clean Development Mechanism (CDM) of the Kyoto Protocol as well as voluntary carbon markets as means to finance a transition to renewable, cleaner and more efficient energy systems. 

Other programs include China’s green and organic food certification system, the central government’s green procurement program and green product label certification system, promotion of energy efficiency, central and local government subsidies and fees regarding the impacts of development and infrastructural projects on soil erosion and watersheds, as well as continuing experimentation with air and water pollution emissions trading.

Policy circles have been abuzz with debate on how to improve these programs as well as how to explore and develop other market-based tools and regulatory innovations to better address China’s environmental and development challenges.

Inside China’s Markets

To understand these market’s potential, it is important to first understand how they operate today.

Most of China’s eco-compensation policies and market-based environmental initiatives are domestically driven and funded.  They are geographically concentrated in China’s richer, coastal regions.  Beijing, for example, which serves as a key local hub for provincial and local eco-compensation policies, ranked second among China’s 31 provinces for per capita income in 2006.

Watershed ecosystem services are by far the biggest driver of eco-compensation policy in China, and where most local innovation is occurring.  Even forest-related programs have been initiated due to water-related problems.  For example, large-scale flooding in Southwest and Northeast China in 1998 spurred China to launch its Conversion of Cropland to Forests and Grassland program.

Private-sector involvement has been small but opportunities for growth exist. The majority of existing market-based initiatives in China are government-mediated, publicly-administered programs that use public funds to pay land users for the stewardship of ecosystem services on their land. Although the public sector is clearly the dominant player in these ecosystem service provision programs, government ministries and provincial governments often emphasize in their policy documents the development of multi-jurisdictional and multi-sectoral policy frameworks that diversify funding sources.

Local Innovations

Meanwhile, the wide variety of ecosystem markets developing locally throughout China reveals a significant degree of local innovation. This innovation is spurred by resource constraints and the need to find innovative ways to improve resource management and resolve regional administrative and property rights issues that span geographic boundaries. 

Local variations in eco-compensation policies in China take three main forms.  They include central government policies, local innovations independent of central policies and hybrid developments. 

In the majority of cases, central-government policies provide frameworks for local innovation by stipulating for local matching funds or administrative support, or delegating management authority and the development of standards and fee structures to provincial or local governments. Examples include the Conversion of Forests to Cropland and Grassland Program (CCFG), China’s water and soil conservation law, and policies governing the implementation and support of local eco-agricultural programs.

Significant local-level innovation also occurs in the creation of eco-compensation schemes and market-based instruments for environmental policy. The vast majority of these innovations resolve issues surrounding water resources, their effective sustainable protection and equitable and efficient distribution. Examples include arrangements between Beijing and Hebei regarding the upper watershed of the Miyun reservoir; water rights trading and water-based eco-compensation policies between various municipalities and irrigation districts and cost-sharing and integrated watershed management between various city governments.

Perhaps the most interesting and clearly the most innovative policies involve hybrid policies where local governments draw upon and weave together multiple central and provincial policies and funding sources to address local environmental concerns. The Jinhua River Watershed provides a good example of this type of hybrid innovation.  Here, in addition to local water rights trading and downstream development zone policies, governments also draw upon funding from State Forestry Administration policies. 

The Property Rights Issue

Significantly, the Chinese term shengtai buchang jizhi, meaning “eco-compensation mechanisms”, encompasses PES schemes as well as policies that foster cooperation between various levels of government to finance and share environmental protection and restoration costs. The term’s growing use and importance within China’s developing environmental policy framework indicates the greater emphasis on not only developing innovative market-based instruments for environmental policy, but also on resolving property rights and equity issues surrounding the use and protection of natural resources.

Getting the Word Out

Developments on the ground in China have been rapid, and policymakers still face numerous challenges in creating effective and financially sustainable policies. Part of this is because many of China’s policymakers are still new to PES and market-based instruments in general. This, combined with a dearth of platforms for dialogue and information-sharing in China between government ministries, academic institutions and the private sector results in having a significant share of PES and MES-like programs, activities and initiatives unrecognized, undocumented and “off the radar.” Existing information sources are generally sector-specific, with minimal cross-sectoral information, comparison and analysis.

Moving Forward

As a result, policymakers and practitioners in China and internationally have not been able to fully benefit from China’s own growing wealth of experience gained in just under 10 years developing innovative market-based policies for conservation. China’s experiences provide insight into the implementation and outcomes for evolving ecosystem markets worldwide.  They can illustrate relationships between local institutions, social capital, property rights, local environmental conditions, equity and poverty, and how these interact with different program designs influence program efficiency and outcomes.

A clearer and more comprehensive picture of the status of markets for ecosystem/environmental services in China, the key actors, and the distribution of these activities and programs across ecosystem services and regions could provide valuable insights for policymakers.  Cross-learning and collaboration across government ministries would benefit, illustrating where further research should be targeted, and where the private sector could most easily and effectively be brought in as a key partner and stakeholder in environmental programs.

To move forward, there is a need for greater documentation and analysis of existing programs and developing cross-sectoral platforms for dialogue, information-sharing and cross-learning between policymakers, practitioners, stakeholders and experts and linking to global innovations.

China Today; the World Tomorrow

China’s extensive innovations in ecosystem markets offer tremendous opportunities for knowledge and growth in these evolving markets.  China’s ongoing, large-scale experiments in PES and other environmental policy innovations should be comprehensively studied to learn where further research should best be targeted and where the private sector could most easily and effectively be brought in as a key partner and stakeholder in environmental programs.

As nations face ongoing challenges to fund conservation, China’s initiatives can provide guidance and insights that offer untapped lessons on policy experiments of potentially great importance for policymakers worldwide. 

Michael Bennett is leading  Forest Trends' efforts to assess and track the current status and  development of PES in China, and to lay the groundwork for a China Katoomba  Group. Prior to working with Forest Trends, he was a post-doctoral researcher at the Center for  Chinese Agricultural Policy, Chinese Academy of Sciences. He is also currently a research fellow at the Environmental Economics Program in China, College of Environmental Sciences and Engineering, Peking University.  He can be reached at mbennett (at) forest-trends.org.

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