Eco-compensation – A Way Forward?

By Mark Harper 8 March, 2013

China is already a global leader in investing in watershed protection but also plans to be the most innovative

Water management has traditionally focused on investment in what is often termed as “grey” infrastructure such as dams, reservoirs and water treatment systems. However a 2009 UN report¹ highlighted that protecting and maintaining watersheds “green infrastructure” i.e. forests and wetlands can also improve water quality and supply, and is far more cost effective in some cases then the traditional grey solutions.

For example, Investment in green infrastructure to ensure water quality in New York City, saved around US$ 9 billion compared to human-engineered solutions². The city of New York have since the 1990’s been purchasing land and compensating upstream landowners in the Catskill Watershed to carry out riparian restoration activities etc. The city has protected over 35% of the watershed and as a result they have been able to avoid the cost of building expensive water treatment facilities. This is a classic example of what is termed as a Watershed Payment or Eco-compensation programme.

China leading the world in watershed payment schemes

The “State of Watershed Payments 2012” report⁴, released earlier this year Ecosystem Marketplace, found the total value of IWS payments in 2011 was around US$8.17 billion. This makes it the second largest environmental market, albeit dwarfed by the size of the carbon market. However, IWS programmes have nearly doubled in number and geographic spread over the last four years.

After a slow start, the number of watershed payment programmes in China has grown massively from only five in 2000 to 61 by 2011 (see chart 1), accounting for 91% of the global transactions by this time.

China currently leads the way in this space, and is becoming a global hub of environmental experimentation.

Financing payments for the long term

So how is this financed? After all watershed protection still requires someone to pay and invest in the management of a resource we have traditionally thought of as free.

When Ecosystem Marketplace analysed the payments globally, they were found to be overwhelmingly initiated by public good payers such as governments or NGOs as opposed to payment by i) beneficiaries such as a downstream city that benefits from the water shed protection and/or ii) polluters of a resource However, this is largely a result of massive spending by government programmes in China. When China is set aside, beneficiary-pays programmes (account for nearly a third of payments; and polluter-pays programmes about three percent (see charts 2 and 3 below).

This is not surprising considering all of the government’s interest in watershed management. In 2011 the No.1 Central Document, explicitly targeted water conservancy and watershed management, and indicated planned expenditure of RMB4 trillion through to 2020.  It also urged local governments to set aside 10% of their revenue from land sales for use in agricultural water conservancy and irrigation work. Eco-compensation programmes of which IWS is one example, were also identified as a key component in China’s 12^th Five Year Plan.

$60 million annual fee paid by Beijing municipality

Provinces with already established IWS programmes, are starting to expand them. One such scheme, referenced by the Asian Development Bank (ADB)⁵, was to protect the upper watershed of the Miyun Reservoir (Beijing’s main water supply), involves Beijing Municipality paying upstream counties in Hebei Province: almost US$60 million is transferred each year as incentive payments to fund land conversion from irrigated rice fields to rain-fed farming, water pollution control, afforestation/forest management etc.

Fujian Province is expanding on the successful schemes for the Min, Jin and Jiulong rivers by piloting a system of mandatory “green insurance” for polluting companies, with companies paying annual premiums up to RMB 240,000 (US$38,470), depending on the company size and potential environmental risk. The concept of ‘green insurance’ was initially proposed by the Ministry of Environmental Protection and the China Insurance Regulatory Commission. It is designed to protect businesses from bankruptcy due to environmental accidents, facilitate quick compensation to the individuals and communities affected by environmental accidents, and to drive improvements in environmental performance with punitive annual premiums for high risk businesses. Similar schemes are being set up in Hunan, Hebei, Jaingsu, Yunan and Fujian provinces.

In another scheme, the government provides health insurance benefits to 108,000 people upstream of the southern city of Zhuhai in exchange for managing their land in a way that will improve drinking water for the region.

In addition to government funded programmes, Ecosystem Marketplace also found several initiatives being driven by international NGO’s, for example:

• WWF and the Asian Development Bank are part of a public private partnership developing a compensation mechanism in the Chishui River Basin
• WRI Government partnership in Anhui Province is evaluating the potential for agricultural nutrient trading in Chao Lake

Major opportunities for private sector to become sellers’ of eco-services

For companies with large land holdings such as those in the extractive industries, opportunities exist to become ‘sellers’ of environmental services, turning liabilities into assets while deriving new revenue, Companies that are water intensive can become ‘buyers’ of environmental services, using cost effective ‘green infrastructure’ to solve water related issues.

Unfortunately as we mentioned in our article Sink or Swim, there has been little movement from the private sector in tackling their water related risk. Of the 205 programmes identified by Ecosystem Market Place, only 53 used some form of private sector funding. This speaks to an opportunity for more private sector action. But also better engagement of the private sector by government – this would mean better policy and regulatory frameworks and stronger enforcement to make IWS an effective mechanism for corporate water management.

“some adventurous corporate leaders are already dipping their toes in the IWS markets, namely Chevron and Nestlé Waters have engaged in land use based IWS payments”

That being said some adventurous corporate leaders are already dipping their toes in the IWS markets, namely Chevron⁶ and Nestlé Waters⁷ have engaged in land use based IWS payments. Nestlé Waters financed upstream farmers to change their farming practices and technology in order to reduce the amount of nitrates leaching into the aquifer where they sourced their product. Chevron turned a tapped out 7,100 acre property in Louisiana into $150 million in wetland mitigation credits through the US Wetland Mitigation Banking scheme. In China some corporations are already calling for upstream ecosystem protection in order to improve the quantity and quality of downstream water supplies.

Government funding of IWS in China, means ethical questions on privatising nature do not apply

“Putting a ‘price on nature’ will create more enclosures whereby the public benefits derived from ecosystems will be seized by corporations and other private interests.”

Tony Juniper, Former Director Friends of the Earth, 10 Aug 2012

Detractors to schemes such as IWS point to a “risk of a progressive “privatisation” of nature, and argue that society should appreciate nature for its own sake. Putting a ‘price on nature’ will create more enclosures whereby the public benefits derived from ecosystems will be seized by corporations and other private interests.” says Tony Juniper, Former Director Friends of the Earth⁸. Essentially, as recognized by the UN Human Rights Council, water is a human right not a privilege. But this isn’t the case in China where these IWS schemes are by and large funded by the state using public money.

To the detractors, it is important to recognize that market based mechanisms such as payment for watershed services can be a means to sustainably finance watershed management. They can serve as essential platforms for stakeholder engagement and also provide wider socio-economic co-benefits. Of the 54 eco-compensation projects that reported explicit social objectives, nearly half were based in China, and were part of a rural welfare support programme to more evenly distribute the benefits of economic growth to poorer regions (see table 1 below).

China is currently leading the world in these watershed investment schemes and as mentioned by Dr. Sun in his article Watershed Services in China, the legislative framework to support the development of these programmes is evolving, so we can only expect to see their numbers grow. The degree to which these programme are successful, is not only essential to China, but could have major economic ramifications globally, impacting food, commodity markets and value chains.

¹ Water security and ecosystem service: the Critical Connection, UNEP (2009)

² Tread lightly. Biodiversity and ecosystem services risk and opportunity management within the extractive industry, Natural Value Initiative (2011)

³ Managing Water, Potential Contributions of Investments in Watershed Services and Linkages to Poverty Reduction, Forest Trends (2012)

⁴ Charting New Waters. State of Watershed Payments, Forest Trends (2012)

⁵ Eco-Compensation for Watershed Services in the People’s Republic of China, Asian Development Bank (2011)

⁶ Chevron Opens Mitigation Bank in Paradis(e), Ecosystem Marketplace (2006)

⁷ The Vittel payments for environmental services: a “perfect” PES case? International Institute for Environment and Development (2006)

⁸ We must put a price on nature if we are going to save it, Tony Juniper in The Guardian 10/8/2012