Determining Fair Payment for Ecosystem Services

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Contributed by: Margaret Garcia

Contributor Perspective(s): Academic
Article last edited 19 Mar 2013 by Margaret
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This article is linked to Water Quality Control of the South-to-North Water Diversion (SNWD) Middle Route Project (MRP)

The Millennium Ecosystem Assessment defines ecosystem services as “the benefits people obtain from ecosystems” . Payment for Ecosystem Services (PES) is a voluntary exchange where a defined environmental service is bought from the provider as long as the provider meets a given standard . In the case of the SNWTP MRP, the downstream WRA is buying water quality protection services from the WSA with the condition that the water quality must meet or exceed the Chinese Surface Water Standard Class II criteria.

Shiyan City has been the focus of PES schemes for the MRP because it is the largest city located in the Danjiangkou Reservoir source protection area and is significantly impacted by both the MRP construction and water quality control plans. Shiyan City covers an area of 2,368,000 ha and includes Danjiangkou Town, Yun County, Yunxi County, Fang County, Zhu County and Zhuxi County . The economy of Shiyan City is based on natural resources such as agricultural, mining and papermaking; due to industry and untreated sewage there are significant water quality problems in the Danjiangkou Reservoir and its tributaries . MRP construction will flood 17,000 ha of land and force 116,000 to emigrate while the water quality control plan will convert 27,000 ha of cropland into forest and grassland . Additionally the water quality control plan will require polluting facilities to close, including 3622 paper mills . While the water quality control plan will clearly improve environmental quality in the WSA, the majority of the benefits will be enjoyed by the WRA.

The central government has committed to financing 60% of the water quality control projects in the WSA with the remaining 40% to be financed locally; according to this split the central government has budgeted 2.60x109 CNY of an estimated total cost of 4.33x109 CNY . However, calculations by Dong and Wang, estimate total water quality control project cost to be 9.45x109 CNY, leaving a large budget gap. Additionally, neither cost estimate considers the indirect costs incurred by the WSA including loss of development potential and lowered tax base through submergence of agricultural land, closing of polluting factories, conversion of agricultural land to forest in erosion prone areas, and restrictions on future industry which is estimated to be 6.75x109 CNY .

In 2008, in an effort to compensate the source area, the Chinese Ministry of Finance authorized a transfer payment of 3.07 x108 from the receiving area to the source area . While useful, the transfer still leaves the WSA bearing the majority of the cost. Taking the indirect costs and the existing economic disparities between the regions into consideration further highlights the inequities of the current scheme. In an effort to illuminate this disparity and provide quantitative guidance for future transfer payments, two research teams have investigated alternate methods for determining fair PES.

Dong and Wang, analyzed three criteria for burden sharing in water transfer projects: water consumption, benefit from ecological services and maximum payment capacity. The team used these three frameworks to determine the cost split for water quality control for the SNWTP MRP. They found that the three criteria yielded three different burden sharing splits: 3% WSA and 97% WRA for water consumption criteria, 31% WSA and 69% WRA for ecological benefit criteria, 12% WSA and 88% WRA for maximum payment capacity criteria (Dong and Wang 2011).

Dong et al. investigated an upper and lower bound for PES for the MRP: the net direct-opportunity cost for the WSA is proposed as the lower bound and the net benefit for the WRA is proposed as the upper bound. The net direct-opportunity cost is found by adding the direct costs and the opportunity costs and subtracting the national financing contribution and the internal effect of the project. Direct costs include capital construction costs as well as ongoing maintenance and monitoring costs. Opportunity costs include industrial opportunity costs which were computed by comparing the annual GDP of two regions with and without the industries in question and agricultural opportunity costs which were computed based on surveys of local farmers. The internal effect, or the local benefit of the project, was not computed directly due the complexity of estimating the benefit on health, tourism, industrial development, etc. Instead, the internal effect was estimated using a cost effectiveness ratio (the amount of local benefit per CYN invested). The net benefit for the WRA focuses on water treatment costs avoided .

While Dong and Wang or the Dong et al. analyses differ in fair PES recommended, both offer clear methodologies for determining a fair payment. The Dong and Wang study highlights that agreement on fair PES hinges on agreement on criteria. For example, while water consumed and cost of ecological benefits are both measures of benefits consumed, resulting payment splits differ greatly. Dong et al , attempts to balance costs incurred by the WSA with the benefits and assistance the WSA communities receive.