Journal of Cleaner Production 279 (2021) 123630

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Journal of Cleaner Production

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Framework of basin eco-compensation standard valuation for cross- regional water supply e A case study in northern

* ** Zhou Fang a, 1, Junyu Chen b, c, 1, Gang Liu c, , Huimin Wang a, , Juha M. Alatalo d, e, Zhangqian Yang f,EnyiMug, Yang Bai h, i a State Key Laboratory of Hydrology Water Resource and Hydraulic Engineering, Hohai University, Nanjing, 210098, China b School of Business, Suzhou University of Science and Technology, Suzhou, 215009, China c College of Management and Economics, University, Tianjin, 300072, PR China d Department of Biological and Environmental Sciences, College of Arts and Sciences, Qatar University, P.O. Box: 2713, Doha, Qatar e Environmental Science Center, Qatar University, P.O. Box: 2713, Doha, Qatar f University of Maryland, 1124 Lefrak Hall, 7251 Preinkert Dr., College Park, MD, 20742, USA g School of Land Economics, University of Cambridge, Cambridge, CB2 1TN, UK h Center for Integrative Conservation, Xishuangbanna Tropical Botanical Garden, Chinese Academy of Sciences, Menglun, 666303, China i Center of Conservation Biology, Core Botanical Gardens, Chinese Academy of Sciences, Mengla, 666303, China article info abstract

Article history: Basin eco-compensation (BEC) helps balance development opportunities and ecological protection. With Received 1 May 2020 rising demand for water and severe ecological problems driven by rapid economic growth, an appro- Received in revised form priate BEC standard is urgently needed for basins in China. The BEC standard should comprehensively 3 August 2020 cover ecosystem services flow and ecological protection cost. This study proposes a BEC valuation Accepted 4 August 2020 method developed by combining gross ecosystem product (GEP) accounting with total cost accounting Available online 12 August 2020 (TCA). The method was applied to the cross-regional water transfer project involving province, Handling Editor: Cecilia Maria Villas Boas^ de Beijing city, and Xiong’an new district, which requires a BEC mechanism to coordinate payers and ac- Almeida ceptors. The results revealed that water-related ecosystem services (WESs) received a minor proportion (<3%) of the compensation, owing to deficiencies in the current WESs pricing standard, and that Keywords: stakeholder interests may be infringed by the imperfect profit distribution system. Multi-agent joint Eco-compensation bargaining, a BEC fund, and hydrological monitoring should be implemented to improve BEC valuations. Water retention © 2020 Elsevier Ltd. All rights reserved. Water purification GEP TCA

1. Introduction for maintaining guaranteed water quantity and quality, but up- stream areas have to bear many extra costs (including ecological Eco-compensation is a typical marketable environmental solu- protection, environmental investment, poverty issues, and resi- tion which regulates the relationships between stakeholders to dents’ wellbeing), which are often downplayed by downstream’s promote harmonious development of humans and nature (MNRC, interest (Jia and Meng, 2014). In essence, the externality of BEC 2019; Ouyang and Jin, 2018). In river basins, water is regarded as leads to high transaction cost among participants and ultimately the key carrier for generation and transmission of ecosystem ser- results in the occurrence of “market failure” (Shen et al., 2010; vices (ESs) (Geng et al., 2018; Wang, Y. et al., 2011). Thus, basin eco- Wang, J. et al., 2011). Moreover, information asymmetry between compensation (BEC) mostly refers to compensation for provision of the downstream beneficiaries (BEC payers) and upstream pro- water-related ecosystem services (WESs) and the cost of basin tectors (BEC acceptors) may intensify feelings of unfairness, ecosystem protection projects (Liu, G. et al., 2011; Shen et al., 2010; resulting in the relationship between participants tending to be Zhong et al., 2020). Downstream areas usually pay upstream areas antagonistic, rather than cooperative (Bellver-Domingo et al., 2016). The essential problem faced by all BEC is how to establish reasonable accounting standards to coordinate the interests of upstream and downstream areas and reach consensus, so as to * Corresponding author. stimulate the enthusiasm of BEC participants (Geng et al., 2018; ** Corresponding author. E-mail addresses: [email protected] (G. Liu), [email protected] (H. Wang). Wang, Y. et al., 2011). 1 Zhou Fang and Junyu Chen contributed equally to this paper. Existing BEC practice in various countries provides a possible https://doi.org/10.1016/j.jclepro.2020.123630 0959-6526/© 2020 Elsevier Ltd. All rights reserved. 2 Z. Fang et al. / Journal of Cleaner Production 279 (2021) 123630 answer: a BEC mechanism combined with government regulation. designated a cross-regional water source to address water short- The BEC systems applied in the Tennessee Valley in the USA, the ages in Beijing and XNA. For both Beijing and XNA, security of water Murray Darling river basin in Australia, the Rhine river basin in resources is critical to their continued development (Liu, D. et al., Europe, the Elbe river basin in Germany, and the Xin’anjiang and 2011). Further, due to the unique importance of Beijing and XNA Taihu basins in China are widely regarded as successful examples. In in China, stable development of these two cities is of great signif- these cases, BEC were not formed spontaneously by the market icance for political security in the country. players, but rather government regulation played an important role The main aim of this study was to establish a reasonable BEC (Wang,J.etal.,2011). The government, together with relevant min- framework that compensates for the foregone development op- istries and research organizations, guided determination of portunities for ensuring ecological protection in upstream regions, compensation standards, built information exchange platform, and and which could also help form a complementary economic mode coordinated the interests of all parties, which is conducive to for- acting on upstream and downstream regions in BEC. Specific ob- mation of an adaptive BEC mechanism (Li and Jin, 2007). In China, jectives of the study were to: (i) integrate the GEP accounting BEC guided by government could solve problems including: unbal- system and total cost accounting (TCA) into BEC standard evalua- anced development, unsustainable outputs from ecological or eco- tion; (ii) set the allocation coefficient of compensation for multiple nomic systems, unreasonable allocation of ecological assets, etc. (Sun agents involved in BEC; and (iii) improve the BEC framework for et al., 2017). However, the majority of existing BEC projects in China cross-regional water supply. The following chapters are arranged as focus mainly on socio-economic benefits and neglect ecological follows: after introducing the case area and the technical frame- benefits, which is mainly because: (i) decision makers (especially work of this paper (Chapter 2), BEC assessment of the case area and government) setting BEC underestimate regulating services and results feasibility were discussed (Chapter 3). We discussed the supporting services (Han et al., 2010); (ii) rough valuations of importance of the BEC standard formulation in China and its ecological functions cannot support compensatory activity (Kosoy implementation measures (Chapter 4), and gave the final conclu- et al., 2007); and (iii) there is no standard method for integrating sion of this paper (Chapter 5). WESs and basin ecosystem protection in BEC schemes in China. Ecosystem services theory provides a way to improve BEC in 2. Materials and methods China, where ESs are defined as the direct or indirect contributions of ecosystems to human wellbeing (MEA, 2000; TEEB, 2010). Many 2.1. Case summary studies using ‘payment for ecological/environmental services’ in BEC assessments have shown that it can be beneficial to include ESs The system requiring eco-compensation in this study was cross- assessment (Boisvert et al., 2013; Kallis et al., 2013). However, the regional water supply. The basin (SGB) is an impor- externality of ESs poses difficulties in identifying actual users of ESs, tant water source for the capital and the Daqing river basin (DQB) is which makes it difficult to allocate BEC claims to relevant stake- the water source for XNA (Han et al., 2020). The quantity and holders (Bruel et al., 2016; Kosoy et al., 2007). The demands of quality of water resources in SGB and DQB have profound in- stakeholders involved in BEC can be assessed based on water flows fluences on the socio-economic development of Beijing and XNA. (Bellver-Domingo et al., 2016), where WESs (e.g. water retention, Over the years, Shanxi province has actively taken protective water purification, sediment retention, etc.) are the main basin ESs measures and suffered loss of development opportunities to ensure related to generation and flow of water (Bai et al., 2019; Chen et al., water safety in Beijing and XNA, by investing much labor, material, 2018, 2019). This suggests that WESs assessment can be incorpo- and financial resources in ecological projects. Therefore, local offi- rated into BEC standard valuation (Zhong et al., 2020). cials are trying to build a cross-province horizontal compensation Gross ecosystem product (GEP), i.e., the total economic value of framework to resolve the contradiction between socio-economic products and services provided by ecosystems for human wellbeing development and ecological protection in Shanxi province. To this (Jin et al., 2019; Ouyang and Jin, 2018), proposed a way to quantify end, it is important to develop a reasonable BEC standard. In the value of ESs (Liu et al., 2013; Yu et al., 2020). In 2017, the Chinese examining the relationship between payer/s and acceptor/s of BEC, government proposed applying GEP accounting to monetization of the acceptor area in this study is defined as parts of SGB and DQB in ecological products in key ecological functional areas, to provided northern Shanxi province (Fig. 1). support for inclusion of WESs assessment in BEC standard valua- Shanxi province has made great efforts in ecological protection tion in China. The BEC standard based on GEP should cover direct and restoration within SGB and DQB, which have improved inputs, opportunity costs, and development costs, where direct ecosystem functions. In order to ensure stability of the water supply inputs are the total value of human and financial resources invested for Beijing, since 2013 Shanxi province has carried out cross-basin in ecological protection and restoration, opportunity costs are the water diversion from the basin (YRB) to SGB. Based differentiated benefits resulting from utilization of resources, and on water flow and compensation amounts, we identified development costs are the losses caused by avoiding socio- province and Beijing as the payers in the SGB eco-compensation economic development in order to protect the ecosystem. In the framework, while Hebei province and XNA are the payers in the final BEC standard, water allocation coefficients, ecological benefit DQB eco-compensation framework. Shanxi province is the acceptor correction coefficients, or water quality correction coefficients can in both frameworks. We used GEP accounting to evaluate the be introduced for detailed calculation of compensation and benefit change in WESs in the acceptor area and TCA to evaluate the total for each stakeholder (Liu et al., 2006). cost of water diversion and ecological protection (Fig. 2). This study focused on the BEC framework for cross-regional water supply for the greater Beijing area. The Sanggan river rises 2.2. Framework of BEC standard valuation upstream of Xinzhou city in Shanxi province, northern China, and from there runs on through Hebei province to Beijing. The Daqing The framework of BEC standard valuation comprised four main river, which also originates in Shanxi province, is the main water stages (Fig. 3): source for Xiong’an new area (XNA) in Hebei province, which was created in 2017 to take over non-capital functions from Beijing and (1) Compensation content, determined by (i) literature and case ease its urban crisis. Thus Shanxi province is an important water reviews to identify typical frameworks for eco-compensation source for these cities (Wang, H. et al., 2009) and it has been (Table 1) and (ii) expert consultation with government Z. Fang et al. / Journal of Cleaner Production 279 (2021) 123630 3

Fig. 1. Location of the study area in northern China, the Sanggan and Daqing rivers and the cities of Beijing and Xiong’an New Area (XNA).

Fig. 2. Flow graph of the basin eco-compensation framework in (a) Sanggan river basin and (b) Daqing river basin, with gross ecosystem product (GEP) accounting used to evaluate changes in water-related ecosystem services (WESs) in the acceptor area (Shanxi province) and total cost accounting to evaluate the total cost of water diversion and ecological protection. 4 Z. Fang et al. / Journal of Cleaner Production 279 (2021) 123630

Fig. 3. Framework for basin eco-compensation standard valuation.

officials, leaders of the cross-regional water supply project vegetation restoration and water and soil conservation, Crspr is the and residents (see part 1 in Supplementary Information (SI) cost of river source protection and resettlement, Cwpcp is the cost of for details). This revealed that stakeholders were most con- water pollution control project, and CYRBwt is the cost of water cerned about the sustainability of the water supply, so BEC transferring from YRB. Data on the cost of water diversion and content in this study included YRB water diversion project, ecological protection were taken from official reports. ESs evolution, and ecological protection. (4) Eco-compensation standard valuation. The BEC standard is the where V is total value of all ecosystem services that need to be sum of net GEP and the costs of water transfer and ecological calculated, ESi is material quality of the ithecosystem service, and protection. We assumed the benefits resulting from the pi is the substitution value of the ithecosystem service. The cost of cross-regional water supply project to be shared, based on water retention was measured as cost per unit of reservoir and the water withdrawals by payer and accepter areas. We used fi cost of water puri cation as the cost of N/P removal. allocation coefficient (Rws) to determine the associated dis- According to investment budgets for the ecological protection count to payers in the BEC standard: projects provided by the Water Resources Department of Shanxi province, seven costs were included in the TCA. The accounting runoff water supply standard conformed to the national ecological protection engi- Rws ¼ (3) neering cost accounting principle (see Part 2 in SI for detailed ac- runoff counting results): where water supply is average annual water withdrawal in the acceptor area. ¼ þ þ þ þ þ þ þ VTCA Cwra Cws Crsr Cgsp Cvrwsc Crspr Cwpcp CYRBwt The post-discount compensation price P , is then the final BEC (2) standard: where Cwra is the cost of water resources allocation, Cws is the cost ¼ð þ Þ P VGEP VTCA Rws (4) of water saving, Crsr is the cost of river system regulation, Cgsp is the cost of groundwater and spring protection, Cvrwsc is the cost of

Table 1 Eco-compensation frameworks described in the literature. (2) Data acquisition. BEC standard valuation requires the following data: (i) data on water flow obtained from hydrological stations along the diversion routine, (ii) cost data on ecological protection measures, and (iii) landscape, topography, meteorology, emissions, and ESs price data for use in the Integrated Valuation of Ecosystem Services and Tradeoffs (InVEST) model in GEP accounting (Table 2).

Literatures and cases Eco-compensation framework

Guan et al. (2016) Chemical Oxygen Demand purification Yin et al. (2018) Hydropower generation (Martin and Mazzotta, 2018; Sheng et al., 2017; Xiong and Li, 2019; Zhou et al., 2019) Typical ecosystem services (Provision, Regulating, Cultural, Supporting services) Vaissierea et al. (2013) Maintenance costs of ecosystem He et al. (2018) Forest biomass carbon storage Pei et al. (2019) Forest water conservation Z. Fang et al. / Journal of Cleaner Production 279 (2021) 123630 5

2.3. InVEST model and improvements During the period 2010e2017, total cumulative nitrogen purifi- cation in SGB was 39,095,021 kg, and total cumulative phosphorus InVEST is an integrated model for assessment of ESs that has purification was 979,200 kg. In DQB, total cumulative nitrogen been widely used in various countries and regions based on bio- purification was 4,524,856 kg and total cumulative phosphorus physical processes (Bai et al., 2020; Fisher et al., 2011; Goldstein purification was 244,540 kg in DQB (Table 4). et al., 2012; Nelson et al., 2009), which makes it possible to keep Based on similar studies (Geng et al., 2018; Jin, 2012; Li et al., 2012; climate factors as constant variables and measure the impacts of Li et al., 2016; Wang,J.etal.,2009), the price of water retention was human activities on promotion of WESs (Bai et al., 2019; Chen and setat9.1e11.38 yuan/m3, that of nitrogen purification at 1.5e17.5 Unsworth, 2019; Fang et al., 2020). yuan/t, and that of phosphorus purification at 2.5e41.6 yuan/t. These The two representative ESs selected for study (water retention ranges were in accordance with levels set in “China’sForest and water purification) were directly related to BEC through expert Ecosystem Service Function Valuation Specification (LY/T consultation (Part 1 in SI). Part 4 in SI provides a detailed descrip- 1721e2008)”. In order to maximize the value of water resources and tion of the calculation process. Important input parameters WESs, the maximum value in all the ranges was used in this (Tables S6eS8) for the InVEST model and the results obtained for all assessment, resulting in a value of water retention of 1.27 billion yuan ESs were validated using the relevant literature and measured hy- in SGB and 140 million yuan in DQB. The total water purification drological data (Part 5 in SI). The basic calculation models for the value was 61.09 million yuan in SGB and 89.35 million yuan in DQB. selected ESs were as follows: The results showed that water retention and water purification Water retention: Water retention service, i.e., ability of ecosys- services in the study improved even under urbanization, an tems to retain water resources from rainfall, can be quantitatively improvement closely associated with the increase in forest and described as annual water yield. In InVEST, the annual water yield grassland (Qi et al., 2019). The expansion in forest and grassland (WY) for each pixel is estimated based on average annual precipi- area also improved water conservation capacity (Qi et al., 2019). tation and the Budyko curve (Sharp et al., 2016). Since the InVEST The reduction in cultivated land was positive for water purification, water yield model cannot determine the amount of water that is because it sharply reduced the use of chemical fertilizer in the area retained by ecosystems, we used an extended model here to (Wang et al., 2019). calculate water retention (Part 3 in SI). Based on the water balance equation, the amount of water retention can be calculated by 3.3. Total cost accounting of water diversion and ecological subtracting evapotranspiration and runoff from precipitation. Pre- protection cipitation minus evapotranspiration, also called water yield, was modeled in InVEST. We obtained the investment budgets for the water diversion Water purification: The NDR submodule in InVEST maps nutrient project and for ecological protection projects from the Water Re- sources from watersheds and nutrient transport to streams (Sharp sources Department of Shanxi province (Table 5). The total in- et al., 2016). Although there are multiple potentially significant vestment in ecological protection was 49.28 billion yuan in SGB and impairments of water quality, this study focused on total N and 4.47 billion yuan in DQB. All funding came from the fiscal budget of total P export as a reflection of water purification (Bai et al., 2019; Shanxi province. Chen et al., 2019). The input data for the water purification sub- In addition, the SGB has relied on the Yellow River diversion module include maps of land cover and land use, DEMs, and rain- project to ensure an adequate water supply for Beijing since 2013, fall, along with biophysical attributes related to the nutrient and the total volume of water transferred in this way was 0.29 loading and retention efficiency for each land use and land cover billion m3 in the period 2013e2017. The cost of transferring this class. Using observation data from hydrological stations, we added water is 3.86 yuan/m3, according to the report “Ecological resto- the river self-purification values of nitrogen and phosphorus to ration and protection planning in SGB”. Thus, the total cost of inter- make up for shortcomings of the InVEST model in this regard. basin water transfer in SGB was set at 1.11 billion yuan.

3. Results 3.4. Eco-compensation standard valuation

3.1. Land use change under ecological protection measures Based on water supply data for SGB and DQB in the period 2010e2017 (Table S8), mean annual water retention in SGB is 514.4 Land use in SGB and DQB (as a whole) showed several changes million m3 and mean annual water supply within SGB is 301.9 3 from 2010 to 2017 (Fig. 4). million m . Therefore, the value of allocation coefficient Rws for SGB Table 3 reveals conversion balance between different land uses is 0.414 according to equation (1.2). Mean annual water retention in in SGB and DQB from 2010 to 2017. The area of cultivated land was DQB is 82.3 million m3 and mean annual water supply with DQB is 2 3 greatly reduced, by 636.5 km , and mostly converted to developed 14.8 million m , so the value of Rws for DQB is 0.821. land, grassland, and wetland. The forest and grassland area in SGB On applying a discount according to Rws, the payers in the SGB and DQB increased by 111.64 km2 and 113.74 km2, respectively. An downstream areas (Hebei, Beijing) should compensate the up- area of 10.03 km2 was converted to barren, while the area of stream area (Shanxi) with 21.69 billion yuan, and the payers in the wetland increased by 159.24 km2. Due to continuous economic DQB downstream area (Hebei, XNA) should compensate the up- development and population growth, the area of developed land stream area (Shanxi) with 3.86 billion yuan (Fig. 5). Applying the increased greatly, by 568.42 km2. discount reduced the cost to be paid by Hebei and Beijing from 52.38 billion yuan and the cost to be paid by Hebei and XNA in DQB 3.2. Net GEP accounting in acceptor area from 4.69 billion yuan. The cost composition of the BEC standard for SGB and DQB basins is shown in Fig. 5. The cost of ecological Spatio-temporal changes in water retention service and water restoration projects accounted for the vast majority, more than 94%, purification service were identified by the InVEST model. Overall, while other items were no more than 3% of the total cost. water retention in SGB was 980 million m3 in 2010 and 1.09 billion The proportion of compensation for water retention services in m3 in 2017, while water retention in DQB was 160 million m3 in the BEC standard is larger than that for water purification services, 2010 and 172.29 million m3 in 2017. which is reasonable for the water-scarce study area in northern 6 Z. Fang et al. / Journal of Cleaner Production 279 (2021) 123630

Table 2 Data requirement for the InVEST model and gross ecosystem product (GEP) accounting (WY ¼ water yield model; NDR ¼ nutrient delivery ratio model). (3) Valuation and verification. Two WESs closely related to transfer of water were selected for GEP accounting for 2010 and 2017. These were: water retention, defined as ability of ecosystems to retain water resources from rainfall, and water purification, defined as ability to remove nutrients from water. We assessed water retention based on the ‘Water yield’ submodule in the InVEST model. For water purification, we combined the nitrogen (N) and phosphorus (P) amounts purified by both landscapes and water area by combining the nutrient delivery ratio (NDR) submodule in InVEST with measured concentration data to assess N/P purification. In order to highlight the impacts of landscape changes in ESs brought about by ecological protection, the topography, meteorology, emissions, and ES price data were kept at the 2017 level (Bai et al., 2019). The value of ESs was set according to China’s forest ESs function valuation specification (LY/T 1721e2008) and related literature (Ouyang and Jin, 2018). Net GEP represented the difference in ESs values between 2010 and 2017. X ¼ VGEP ESi pi (1) i

Data Type Data source Related model

Digital Elevation Model (DEM) Raster Geospatial Data Cloud, http://www.gscloud.cn NDR Annual average precipitation Raster China Meteorological Data Center, http://data.cma.cn/ WY, NDR Reference evapotranspiration Raster MODIS Global Evapotranspiration Project (MOD16) http://www.ntsg.umt.edu/project/mod16 WY Soil data Raster Environmental and Ecological Science Data Center for West China, http://westdc.westgis.ac.cn/ WY Land use/land cover Raster Resource and environment data cloud platform, WY, Chinese Academy of Sciences, http://www.resdc.cn/ NDR Depth to root restricting layer Raster Environmental and Ecological Science Data Center for West China, http://westdc.westgis.ac.cn/ WY Watersheds Shapefile Geospatial Data Cloud, http://www.gscloud.cn WY, NDR Biophysical data .CSV file Literatures, InVEST user’s guide (Sharp et al., 2016)WY, NDR ES price Txt China’s forest ecosystem service function valuation specification (LY/T 1721e2008) and related WY, literatures Hydrological station data Txt Shuozhou hydrological station (Part 4 in SI) NDR Ecological protection & restoration Paper Ecological restoration and protection planning in SGB and DQB. WY, investment documents Field Investigation and expert consultation meeting (Part 1 in SI) NDR

Fig. 4. Land use map of Sanggan river basin (SGB) and Daqing river basin (DQB) in 2010 and 2017.

Table 3 Conversion balance between different land uses in Sanggan river basin (SGB) and Daqing river basin (DQB) (as a whole) from 2010 to 2017.

Area, km2 Change from 2010 to 2017 Net loss of areab

Cultivated Forest Grassland Wetland Developed Barren

From 2010 Cultivated e 52.53 107.61 99.73 362.46 14.18 636.50 Forest eee26.15 42.91 e 69.06 Grassland e 56.68 e 32.42 153.16 e 242.26 Wetland eeeee 10.03 10.03 Developed eee0.94 ee0.94 Barren e 2.43 6.13 e 9.90 e 18.46 Net gain of area a 0.00 111.64 113.74 159.24 568.42 24.21 977.25

a Net gain represents the area of this land type in 2017 converted from other land uses in 2010. b Net loss represents the area of this land type in 2010 converted to other land uses in 2017. Z. Fang et al. / Journal of Cleaner Production 279 (2021) 123630 7

Table 4 Cumulative nitrogen and phosphorus purification in the Sanggan river basin (SGB) and Daqing river basin (DQB), 2010e2017.

Amount of purification, kg From 2010 to 2017

SGB DQB

Nitrogen Loss reduction 386,321 108,789 River self-purification 38,708,700 4,416,068 Total 39,095,021 4,524,856 Phosphorus Loss reduction 55,848 6609 River self-purification 923,352 237,932 Total 979,200 244,540

Table 5 the final ecological compensation price, we used the results for SGB Investment budget for ecological restoration projects in Sanggan river basin (SGB) as an example. We used the total amount of SGB water supply and and Daqing river basin (DQB). water use per 10,000 yuan of Beijing’s GDP to estimate the potential Project Investment loss in 2010e2017 caused by a hypothetical water supply inter- budget (billion ruption (for specific information, see Table 6). The data are derived yuan) from Beijing Water Resources Bulletin (2010e2017) and Social and SGB DQB Economic Development Bulletin (2010e2017). Water resources allocation 5.19 0.83 If SGB were completely unable to provide water resources, the Water saving 6.02 e total GDP loss to Beijing in the period 2010e2017 would have been River system regulation 12.91 1.45 554.8 billion yuan, which is far greater (around 25-fold higher) than Groundwater and spring protection 0.89 0.45 our estimated compensation of 21.69 billion yuan in BEC. Note also Vegetation restoration and water and soil conservation 12.14 1.59 River source protection and resettlement 5.91 e that: (1) Our estimate of 21.69 billion yuan did not take into account Water pollution control project 6.22 0.15 the amount apportioned in Hebei province, so the actual amount Total 49.28 4.47 paid by Beijing would be less; (2) In this study, we only accounted for potential losses 2010e2017, and not the benefits of further improvements in water supply services and ecosystem services to China. From meetings with local government, we learned that the Beijing. All of these points mean that Beijing can spend less on demand for water resources in downstream areas is extremely ecological compensation for the upstream area to obtain even more urgent in both SGB and DQB, which was also the main reason for economic development benefits, which is cost-effective for Beijing. diverting water from the Yellow River to SGB. Thus, water retention service plays a more significant role than other WESs, as directly reflected in the BEC standard (Fig. 5). 4. Discussion

4.1. Establishing the BEC standard by combining GEP and TCA under 3.5. Feasibility analysis of pricing cost: taking SGB (Beijing) as an the guidance of government example The BEC accepter often sacrifices economic development op- In order to explore the feasibility and practical significance of portunities to improve ecological conditions by protection or

Fig. 5. Proportion of various basin eco-compensation costs in Sanggan river basin (SGB) and Daqing river basin (DQB). 8 Z. Fang et al. / Journal of Cleaner Production 279 (2021) 123630

Table 6 Water supply from Sanggan river basin (SGB) and gross domestic product (GDP) water shortage losses in Beijing, 2010e2017.

Year SGB water supply (billion m3) Water use per 10,000 yuan of Beijing’s GDP (m3) Potential GDP loss (billion yuan)

2010 0.102 24.942 40.9 2011 0.072 21.660 33.2 2012 0.057 19.774 28.3 2013 0.227 18.400 121.7 2014 0.082 17.056 46.7 2015 0.133 16.323 80 2016 0.161 15.342 103.3 2017 0.142 13.861 100.7 Total 554.8 restoration actions, so as to achieve a sustainable water supply for 4.2. Promoting BEC multi-agent joint bargaining by information the BEC payer (Young and de Bakker, 2014). Engineering ecological sharing protection measures need large amounts of capital investment (about 55 billion yuan in our study region). If there is no BEC The principle “those who benefit pay” was included in China’s mechanism to realize cost sharing, Shanxi province would have no ecological compensation policy from the very beginning, in order to ability or willingness to bear the cost, which is not conducive to make up for economic losses in upstream areas, which is also the coordinated development of the whole basin. Moreover, Beijing key principle in the nationwide ecological compensation policy and XNA have higher political and economic priority in China, (MNRC, 2019). However, the ecological protection projects and resulting in lack of bargaining power in the upstream area WESs improvements not only benefited the downstream area, but (acceptor) if there is no BEC compensation standard. To solve the also the upstream area itself. To consider water retention in the above problems, we applied GEP and TCP accounting in BEC provincial boundary area of the basin and water consumption in valuations. the upstream area, we introduced the allocation coefficient (Rws)to The results showed that Beijing and Hebei should pay in total refine the ecological compensation for SGB and DQB (Fig. 5). It 21.69 billion yuan to Shanxi, while XNA and Hebei should pay in shared the pre-discount high cost between upstream and down- total 3.86 billion yuan to Shanxi (Fig. 5). However, WESs accounted stream areas, which reduced the huge compensation total for for a minor proportion (<3%) of the compensation amounts in the downstream areas. BEC standard, while the cost of ecological protection accounted for Due to lack of measured hydrological data for Hebei province, it the vast majority (Fig. 5). This is mainly because of lack of a specific was impossible to carry out detailed compensation sharing for all WESs assessment system (Guan et al., 2016; Yang et al., 2014). The multi-stakeholders related to the BEC in this study. Therefore, we valuation specification LY/T 1721e2008, which we referenced, is just considered the final recipient areas (Beijing and XNA) as the only official technical guide available, but it was published in combined payers. From multi-year hydrological observations, the 2005 and does not reflect the current price level. In 2019, the water allocation coefficient (Rws) for SGB and DQB was calculated to Ministry of Natural Resources of China (MNRC) united with other be 0.414 and 0.821, respectively. As Rws directly determines the final eight state sectors to issue an ‘Implementation Plan for Establishing price, it is very important to calculate it accurately, which requires a Market-oriented Ecological Compensation Mechanism’ (MNRC, complete dataset on observed long-term hydrological parameters. 2019), which highlighted the problems involved in the current Ideally, a more detailed multi-stakeholder analysis through water compensation mechanism, such as standard scarcity, immature resource allocation data should be conducted. In fact, water sup- technology, etc. However, the latest policies issued by provincial plies several cities in Hebei province during cross-regional water government were still too macro to be implemented, while the supply from the two rivers (Sanggan and Daqing) to the recipient implementation plan for cities at prefecture level (or county level) areas (Beijing and XNA). These consumers of both WESs and water only involved some simple indicators of water quality and quantity resources along water flows should pay reasonable compensation that completely ignored the value of WESs (Meng, 2020). for the indirect benefits from the water supply (Shen et al., 2010). It Therefore, publication of an authoritative guide to WESs should cover all consuming agents in each riparian city, such as assessment is a key requirement for more reasonable BEC, to agricultural agents, industrial agents, urban and rural residents, etc. complement the conventional TCA method which only considers The government should coordinate and manage these stakeholders economic benefits (Probstl-Haider,€ 2015; Quintas-Soriano et al., and pay more attention to the externalities (e.g., ecological losses), 2016; Xu et al., 2019). This guide should reflect the material flow which are easily ignored by consumers (Schomers and Matzdorf, process (water flow, nitrogen and phosphorus export) of the basin 2013). Thus, a multi-agent joint bargaining approach involving all ecosystem with ecological compensation, and measure WESs value payers is urgently needed to balance compensation and benefits through GEP accounting (Bai et al., 2019; Chen et al., 2019). Gov- among all stakeholders, essentially through construction of an ernment has always played a leading role in formulation of information-sharing mechanism (Karner et al., 2019). compensation standards for BEC in China, especially in northern Due to the relative scarcity of water resources in northern China, water shortage regions such as the Ziya river basin in Hebei prov- there is an urgent demand for BEC. Some regions have begun to ince (Wang, J. et al., 2011), Haihe river basin in Henan province promote implementation of BEC through construction of (Wang, Y. et al., 2011), basin in Guizhou province, information-sharing mechanisms and multi-agent negotiation and Weihe river basin in Shaanxi province (Wang, 2010). This is platforms. In 2019, Hebei Provincial Departments of Finance (HDF), very helpful in securing the participation of BEC participants and Ecological Environment (HDEE), and Water Resources (HDWR) forming effective consensus. However, this implementation jointly issued management measures for the Horizontal Ecological approach lacks consultation with resource users in the basin and Protection Compensation Fund of Miyun Reservoir (another with non-governmental organizations (NGOs) and other in- important water source for Beijing). In addition to the general rules, termediaries (Feng et al., 2018), so construction of a multi-agent the measures state that ‘the data related to fund allocation should joint bargaining mechanism is needed. be shared’ (HDF, 2019). At present, an effective funds allocation of Z. Fang et al. / Journal of Cleaner Production 279 (2021) 123630 9

400 million yuan has been agreed, on the condition of sharing in- 2019), and the WTP of the downstream area is maintained by formation. Inner Mongolia (in northern China) has also tried to continuous access to clean water. incorporate ecological compensation cost into its water resources This mode can be conveniently extended to the BEC framework trading mechanism. In 2013, under the guidance of the Inner proposed in this study. Through multi-agent joint bargaining to Mongolia Autonomous Region Government (IMARG), a water rights determine WESs and water quality (quantity) standard, the effect of collection and storage transfer center was established to provide ecological protection in the upstream area can be assessed. Stake- open and fast information transfer and benefit negotiation services holders in each basin can negotiate the payment method of the (IMARG, 2013), so as to enable rapid matching between buyers and fund according to their own interests. For example, the payers and sellers of water resources (Di et al., 2020). At present, 120 million the acceptor can negotiate to implement the phased compensation cubic meters of water resources trading have been secured and plan with the guarantee of the BEC fund (Liu, G. et al., 2011). The implementation of ecological compensation funds has been BEC fund can be dedicated to water ecological governance and completed. protection, ecological emergency compensation, investment in However, there are still many difficulties in practice. At present, water-related industries and other project expenditures. It can also the openness of information and data availability vary among local determine whether a project can be implemented by measuring the governments in China (Gao et al., 2020), which is a major challenge rate of return on investment and social public benefits, so as to to constructing the BEC framework. Data acquisition is relatively achieve duel benefits for economy and ecology. difficult, and disclosure of data mostly depends on the precision of field investigations and cooperation with local government (Mol et al., 2011). This leads to high costs for information acquisition. It 4.4. Limitations and future research is also difficult to obtain uniform and accurate data due to differ- ences in administrative management structure, statistical ability Due to the lack of empirical hydrological data for Hebei prov- and measurement capability in various regions (Mol et al., 2011). In ince, it was impossible to carry out detailed cost-sharing for multi- order to ensure implementation of sustainable BEC, it is necessary stakeholders among the compensators. Thus in this study, all to form a system for data collection, sharing and analysis for river downstream regions were considered as a whole when carrying out basins. However, BEC participants are unlikely to share data total compensation cost accounting. When more data become spontaneously, as it has no obvious benefits for them and may bring available, in future studies we plan to estimate the specific cost- some costs. In order to deal with market failure, upper-level gov- sharing among Hebei, Beijing, and Xiong’an, so as to build a ernment should take responsibility for coordinating the hydrolog- further compensation cost-sharing mechanism. We will also carry ical units and water resources management departments of out relevant research in other basins in order to verify our con- upstream and downstream governments, for overall sustainable jectures on the value preference for W-ESs in other regions, so as to development of the basin (Li and Jin, 2007). A special feature of the better design accounting methods for different regions. Due to the case examined in this study is that the central government is lack of specific data on XNA, the feasibility of cost estimation for located in Beijing, and is thus also a user of WESs and water re- DQB was not analyzed in this study. We also suggest that local sources, giving it legitimate coordinating responsibilities in BEC. governments strengthen communication and build information- Through coordination of upper-level government (central govern- sharing platforms to supply the data currently lacking for further ment or basin commission), data interconnection and unified refining compensation costs among various BEC payers. measurements can be established among local governments (Galappaththi et al., 2016).

4.3. Willingness to pay (WTP) as a factor in implementation of BEC 5. Conclusions

The willingness to pay (WTP) of each stakeholder is an impor- This study proposes a BEC standard valuation framework that tant driving force for effective participation in BEC (Xiong and Kong, combines GEP accounting and TCA. Focusing on the case of a BEC 2017). However, the benefits of ecological protection cannot be mechanism for Shanxi province, Hebei province and Beijing and realized in a short time, which may lead to low WTP for BEC (Pei XNA city, we evaluated WESs, the cost of ecological protection and et al., 2019). Moreover, combining GEP accounting with TCA to the cost of water diversion, and combined these in the BEC. Based consider ecological protection and water diversion in the BEC on water quantity and water quality issues raised by various standard could pose huge economic pressure on payers. These stakeholders in the BEC, the focus was on two closely related WESs, factors may have negative impacts on WTP. water retention and water purification. The improved InVEST In establishing a reasonable BEC standard, a fund operation model was used to measure improvements in WESs brought about mode can be an approach to activate stakeholder WTP. The core by protection, with climate factors set to remain unchanged in the idea is to guide social capital investment through leverage of gov- model. Runoff coefficient was used to share the total cost between ernment finance. In fact, China has carried out such practices with upstream and downstream areas and apportion the ecological cost great effect, such as the ‘Three Gorges Fund’ (Xu et al., 2020), ‘South in the basin. The final BEC standard was obtained by combining net to North Water Transfer Fund’ (Pohlner, 2016) and the ‘Xin’anjiang GEP with the total cost of ecological protection and water diversion. Basin Fund’ (Jia and Meng, 2014). Xin’anjiang Basin has a ‘water The results showed that the SGB downstream area (Hebei, Bei- quality’ funding agreement starting every three years from 2012. In jing) should compensate the upstream area (Shanxi) with 21.69 each period, the central government establishes a special fund to billion yuan, and the DQB downstream area (Hebei, XNA) should attract governments in upstream and downstream areas to compensate the upstream area (Shanxi) with 3.86 billion yuan. participate in related negotiation and investment (Jia and Meng, However, the cost of ecological protection projects accounted for 2014). If water quality is below the standard, downstream areas the vast majority of the total cost of compensation (94%), indicating pay ecological protection costs to upstream area. If not, upstream underestimation of WESs value in the BEC standard. This indicates a areas use the fund to avoid economic losses and pollution treat- need for an effective information-sharing mechanism among ment in downstream areas. This encourages the upstream region to multi-stakeholders and measures to improve their WTP to pay protect the basin ecosystem and control water pollution (Pei et al., through manipulating the BEC operation mechanism. 10 Z. Fang et al. / Journal of Cleaner Production 279 (2021) 123630

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