Chinese Jourmal of Populatin, Resources and Environment Vol.8 No.4 December 2010Negotiation System of Ecological Compensation ofWater Source AreasGe Yanxiang', Liu Shuyan2, Wu Feifei', Liang Ljuan'1. School of Economics and Management, Shandong Agricultural University, Tai"an Shandong 271018, China;2. Shandong Communication Media College, Jinan Shandong 250200, ChinaAbstract: In view of no generally acepted ecological compen- between water source areas and the downstream regions ofsation standards and metbods at present, this paper discusses the river basins, the standards and methods of compensationintroduction of the negotiation system to the process of ecologi- can be fixed. In this way, the stakeholders are motivated tocal compensation for water source areas. Tbat is, tbe govenneat extensively participate so that the compensation mechanismin water source areas and the downstream regions of river basins could run more efficiently, democratically and transpar-should confirm their respective rights and obligations and then es- ently.tablish their compensation standards through negotiations accord-ing t0 he dferet purposes of waler use. The amoun ofcompep 2 Extenalities of ecological benefts and eco-sation should be determined in the comprehensive considerationlogical compensation in water source areasof the quality, quantity and compensation price of water. Throughopen and fair negotiations, an institutional arangement will be setThe development, usage and protection of the ecologicalup, which can make the waler soure areas and the downsteam resources in water source areas will produce exteralitie.regions of river basins fully express their true preferences and theirThe existence of externality easily causes market failure.independent choices on the ecological environmentIn accordance with the views of economist Pigou (1952),Key words: water resource, cological compensation,n negoiation the government should pay compensation with financialsystem, extemalityrevenue for the positive extermalities, and impose a fine forthe negative extemalties, so that the private cost of the ex-1 Introductiontermnality producer is equal to social cost, in such a case thesocial welfare is enhanced.Ecological compensation, an economic measure to pro-tect the ecological environment of the downstream regions2.1 Extermality of ecologlcal compensation In waterof river basins, is the syntbesis of interest-driven, incentivesource areasand coordination mechanism that can promote ecologicalWater source areas will produce positive externality toprotection of the upstream areas. In the existing researchsoil and water conservation, watershed protection and waterand practice of ecological compenstion for water soure quality improvement when it protects and constructs theareas, the focuses and difculties are the determination ofecological environment resources. The positive extemnalitycompensation standards. Both the goverment compensa- makes the downstream gain profts more than the upstream,tion and the market compensation are the most controversialand the difference would constitute the positive external-issues in the eco-compensation. Ecological compensation ity of the ecological management (Ge, 2009). Accordinginvolves multiple main bodies, and there are no generally to extemnality theory, either the positive extermality or theaccepted standards and methods of compensation at pres- negative externality needs to achieve internalization. Theent. The implementation of current ecological or contingentimplementation of ecological compensation system, an ef-valuation method for water resources is dificult, and the act fective measure to achieve intermalization of economic ex-bodies are difficult to reach an agreement.ternalities, can correct the market failure which is caused byIn order to reduce transaction costs, a negotiation system economic extermalities in the field of ecological protectioncan be introduced into the process of ecological compensa- (Li, 2006), and achieve the optimal alcaion of ecologicaltion in the water source areas. Through the consultations resour中國煤化工Received 26 April 2010; acepted 17 July 2010TYHCNMHGCorresponding autbo: Ge Yanrxiang (geyarxiang@126.com)l9Chinese Joumal of Population, Resources and Emironment Vol.8 No.4 December 2010For the act body of the ecological construction, if the ex- areas and the downstream regions can be seen as“smalltermal cost cannot get compensation, they will certainly pro- pig”" and“big pig" in the process of the game. The optionsduce enough amount in accordance with their own needs (at for two sides are as fllows: option one, the downstream in-the intersection of the marginal private cost curve and the vests two units solely, the water source areas do not invest.marginal individual beneft curve) instead of social needs, At a result, the water source areas can obtain four units'thus causing supply shortage.benefits, while downstream gets four units' (10-4-4=4);For those who obtain external benefts without bearing option two, the water source areas invest two units solely,the extermal cost, they would further expand the invisiblethe downstream does not invest. The downstream can obtaindemand. At this time, there is a certain gap between the nine units' benefts, while the water source gets -1 unit (10quantity that the main body of the ecological construction-9-2=-1); option three, both the upstream and the down-is willing to produce and the quantities of the social needs, stream invest the same units to protect the basin ecologicaland this gap is just the shortage of the ecological construc-environment, the downstream gets six units' profits, andtion products. In this case, market mechanism has lost its only two units' profits are left to the water source areas; op-function, and inadequate supply of ecological construction tion four, neither the upstream nor the downstream invests,will result in the loss of social benefts.in this case, both sides get zero from the environment. Thepayoff matrix of two sides is shown Fig. I.2.2 Game analysls of ecological compensation in watersource areasWater soureFor a long time, ecological compensation for waterGovermNot govemsource areas is based mainly on govemment compensationin China, which is carried out through financial transfer.Govem(6, 2)(4, 4)This compensation has suffered a lot of criticism in the as-Downstreampect of the strength and the certainty of compensation, andNot govern(9. 1)(0, 0)it is difficult to arouse the initiative of water source areasfor ecological protection. Therefore, academics begin to ex-Fig 1 "Clever pig game" matrisx of upstream and downstreamplore direct compensation from the downstream regions tothe water source areas, and form the game between the gov-“Clever pig game" model is a typical model of Nashermment in the downstream regions and in the water sourceequilibrium, which integrates individual rationality andareas in terms of ecological compensation.overall rationality perfectly when introduced into the eco-In China, generall, the economic situation of the gov- nomic decision-making. In this model, assuming that theemment in the downstream regions of river basins is better. upstream and the downstream in the game are both rationalthan that in the water source areas. If ecological protectionwhen choosing the option, however, in the present circum-is carried out in the water source areas and ecological com- stances, the major interest of both parties to maximize thepensation is carried out in the downstream regions, both program can not coexist. Meanwhile, the benefts of thesides can get relevant benefits (for example, the upstream water source areas will be damaged when the downstreamobtain ecological compensation funds, and the downstream wants to maximize theirs. The most favorable option for theobtain clean water and good basin ecology). Generally water source areas is the secondary favorable option for thespeaking, high-income groups beneft more from good eco- downstream. Both parties will have no benefits without anylogical environment as the levels of economic developmentmanagement.differ a lot between the upstream and the downstream re-The above matrix suggests that whether the high-incomegions, and the benefits obtained from the ecological protec- downsteam chooses to govem or not, the low-income watertion are also dfferent (Yu, 2007).source areas' optional strategy is not to govem. The NashWith the“clever pig game" model, assuming that the im- equilibrium of the game is that the high-income down-provement of the river basin needs two units' cost of input, stream areas govern the environment, but the low-incomethe whole basin will produce 10 units' ecological profits. water中國煤化工rwise, the upstreamBecause of different economic strength, the water source can gdownstream mayMHCNMHG50Chinese Journal of Population, Resources and Envlronment Vol.8 No.4 December 2010give the appropriate compensation. Therefore, as a rational gotiations.“teconomic man' , environmental protection in water sourceNegotiation system reflects the process of democraticareas will not last long without compensation.consultation, through which local govemments within thebasin on behalf of the public interest achieve the compensa-3 Maln body and Idea of ecologlcal compensa-tion from the ecological beneft to the ecological contribu-tlon negotiation system in water source areastors in the sequence from the upstream to the downstream.Democratic consultation is a new paradigm of dermocraticEcological compensation negotiation system in watertheory advocated by the westerm political circles in thesource areas is an institutional arangement, which helps the end of the twentieth century. In the political community,governments in the water source areas and the downstream the liberal and equal citizens embody the legislation andregions of river basins negotiate openly and equally ondecision legitimacy and achieve the ideals of rational leg-ecological compensation program, compensation standards islation, political participation and cil autonomy throughand compensation methods in order to form the institutionalthe public consultation. As ecological compensation in theenvironment on which the downstream can give compensa- water source areas, the goverment of the water source ar-tion to the water source areas, and both can express their eas on behalf of ecological suppliers and the government oftrue preferences and independent choices. Through the the downstream regions on behalf of beneficiaries conductestablishment and operation of this system, the conceptnegotiations and consultations through negotiation system,of weak right on ecological products existing in the water which can easily establish a combined contract with com-source areas and the downstream can gradually be changed,mon compliance, self-restraint and mutual supervision onand the phenomenon of free supply and free consumption that basis of equitable participation, mutual compromiseon ecological products can be eliminated.and mutual concessions of basin stakeholders.3.1 Maln body of ecologlcal compensatlon negotiation3.2 General Idea of negotiation systemsystem In water source areassource areas aims at the specific content of ecologicalsource areas is proposed for the market-based cormpensationcompensation programs on bilateral and multilateral con-of water resources. In the market-oriented compensation,sultations and negotiations with constant modification andnot all the main water use bodies can be clearly defined (suchimprovement of the compensation project. The main bodiesas for ecological purposes, etC.). It is difficult to constructof negotiation are local governments, which have tbe samethe model of diret negotiations between the water source charactrstis as the river basins. But if each govenmentareas and the downstream water users, even if we managenegotiates with one another, it is not only time-consuming,to establish it, the transaction cost is too high to implement,but also hard to achieve the ideal outcome of the negotia-Due to the convergence of the interests of such water, insti-tions. Therefore, combined with the mobility and directivitytutions or interest groups will be selected as public interestof the river basins, the first thing is to determine whetherrepresentatives. As the main body of negoiation sysem of the region is an ecologcal beneit area or an ecological con-ecological compensation, they represent the public interesttribution one.to participate in the negotiations. From the actual situationIn a watershed, except the water source, the downstreamof the river basins, it is relatively reasonable for local govregions are all the ecological beneft areas. To simplify, as-ernments in the basins to be on behalf of specific beneficia-suming that the river basin consists of only three regions,ries (compensation suiject) and contributors (the subjet repetively they are Water soure A, Downstream B andwhich accepts reimbursement). Negotiation system is suchC. Water source A provides good ecological services toa system that the local goverments, as the representativesDownstream B and C, so it has the right to obtain ecologi-of the public interest, considering their economic bearingcal compensation from Downstream B and C. Meanwhile,capacity and combining the quantity and quality standardsDownstream B provides ecological services to Downstreamof water, manage to achieve the compensation from the C, so [中國煤化工igh to get ecologi-ecological benefit to the ecological contributors through ne- cal corand DownstreamYHCNMHG51Chinese Journal of Population, Resources and Environment Vol.8 No.4 December 2010c also has obligations to compensate the Water source Astream and the water source areas includes the followingwhich provides good ecological services. Downstream C aspects: determining the basis, principle, procedure, sub-has merely obligated to compensate Water source A and ject, object, scope, duration for ecological compensation,Downstream B. When building the construction of water and achieving the overall goal of the river basin ecologysources' ecological compensation mechanism, we simply through ecological compensation; ascertaining differentconsider the negotiations between adjacent upstream and regions' rights and obligations of ecological compensation,downstream. In this way, it can reduce the number and the clearing guideposts of water quality; forming the ecologi-cost of the negotiations. As a whole, the water sources' eco-cal compensation programs after the analysis, comparisonlogical compensation can follow the“successive negotia- and judgment on various combinations; discussing andtions" from the downstream to the upstream (counter flow)consulting monitoring measures to be taken on the imple-or from the upstream to the downstream (parallel flow) inmentation phase of watershed ecological compensation andorder to complete the ecological compensation negotiations the responsibility for protection; by relevant legislations,(Fig. 2).discussing and consulting the process of regional ecologicalcompensation rights and obligations of the establishment,Ecologicalalteration, transfer, termination, and etc. In the above con-SrVcesservices| Water sourceDowntents, there are two central contents: one is the rights andstream Bstream CFcologica!duties for ecology; the other is the standard (price) of eco-compensationlogical compensation with different purposes of water use.Fig.2 Frame of sccesstve negotiation of eco-compensation4.1 Establlshment of ecological compensation limitsThe idea of a veil of ignorance mentioned in a book ti-In the process of ecological compensation for watertled“A Theory of Justice by John Rawls" is introduced into source areas, the first thing is to determine the separatethe process of negotiation. The main bodies of the negotia- rights and obligations of the downstream regions and thetion are placed behind the veil of ignorance, and specific water source areas. The determination of this ise dependsecological compensation under a variety of standards is on the establishment of the compensation boundaries. Thatestablished. The veil of ignorance is rflected in the process is, unless the water quality of the upstream reaches a cer-of negotiations, the main bodies of the negotiation cannot tain standard, compensation will not be talked about. Forassert the character of compensation - whether it is the instance, in the general basin, the water quality standard ofmandatory requirement that the downstream compensates Grade II can be chosen as a reference of compensation, iffor the water source areas, or the compulsory obligations of the upstream areas can maintain water quality better thanecological service that water source areas should provide Grade II and reach the standard of Grade II or even Gradefor the downstream regions. In the negotiating process, the 1, the upstream areas should be compensated by the down-govenment of water source areas has the need of ecologi- stream areas; conversely, if the water in the upstream areacal compensation, and the tendency to escape from the pro- flows to the downstream and the water quality gets belowvision of ecological services, while the government in the Grade II, this area should have the responsibility to com-downstream has the need of ecological services and the ten- pensate for the downstream areas.dency to escape from the ecological compensation. There-In order to make the ecological compensation easily,fore, with regard to these considerations, the main bodies of the water quality monitoring points can be set in the junc-negotiations will set the quota of ecological compensation ture by the environmental protection departments in theneither too high nor too low, and finally the ecological com- downstream regions, or by the environmental monitoringpensation will be at a reasonable amount.bodies settled in the neighborhood of the two sides, or bythe environmental monitoring agency assigned by environ-4 Main content of water sources' ecologlcal mental protection departments of superior govemment ofcompensation negotiation systemthe two sides. The monitor can be carried out depending onthe sta中國煤化工andthedatafromThe main content of negotiations between the dowD- waterYHC N M H Gonitoring means is52Chinese Journal of Populatlon, Resources and Environment Vol.8 No.4 December 2010to fix the automatic monitoring equipment of water qualityof compensation between the upstream and the down-in line with national regulations and the monitoring datastream, the final amount of compensation will be calcu-can be taken as the basis of tbe assess for water quality (Yu, lated. Ecological compensation amount of an area based on2007).water quality should include water qualty's longitudinalIn general, we take the investigation on the changes of and lateral variations of the upstream and the downstreamwater quality in the basin boundary section in two aspects:in a certain year. Its accounting methods can cover threeone is vertical change. That is, comparison between pres- elements, which are water quality, water quantity and theent water quality which is monitored by each section waterprice, calculated through the following formulaquality monitoring points and tbe average historical waterE: SPxQxc+SP,xQxCzquality for many years; the other is horizontal change,namely, comparison in the water quality of the monitor-In the formula, “I”represents the ith river basin area,ing points between the downstream and the upstream.j=1,2,3, respectively denotes the water for production, forSimulancously the mechanism for public participation management and for ecology; Ee is the total amount of eco-can be introduced, and the water quality of the river sec-logical compensation; P, means the price ofj kind of watertions across administrative areas is announced to public byecological compensation in region i; Qv is the quantity ofrelevant departments to accept the supervision of the localj kind of water in region i; C and C; mean discriminantresidents. Through the comparison of these two aspects, itcoefficients judging to compensation, C is the result of thecan be clear whether the water quality in monitoring pointswater quality's longitudinal comparison. If water qualitychanges or not, and then compensation or repay can be de-does not change, C=0. If the water quality changes better,termined between the upstream and the downstream.C=1 (Zheng et al, 2006); C2 is the result of the water4.2 Ecologlcal compensation standards of differentquality's lateral comparison. If the water quality does notchange; C;=0. If water quality changes btter, C=1.purposes of water useIn order to calculate the ecological compensation amountAccording to tbe purposes of water use, the basin watermore accurately that the downstream pays for the upstream,resource can be divided into three types: one is water useda further subdivision can be made on water for produc-for the production (livelibood), mainly referring to industry, tion, management and ecology through the above formulas,agriculture, tertiary industry and domestic water, which iswhich rflects the diferences in the diverse ecological com-characterized as a kind of essential factor for productionpensation standards of water use. Therefore, the compensa-(liveliood), and in the process of water use, the water bodytion amount based on water quality and quantity shows thehas been shifed; another is water for management use, re- rights and obligations clearly between the downstream andferring to water for power, tourism, aquaculture, entertain-the upstream.ment, transportation and so on. Water for management useis taken as production environment, in the using process,5 Maintenance of the results of ecological com-the water body is not shifted; the last is the ecological waterpensation negotiations on water source areasuse, such as water regulation, soil and water conservation,waste water purification and other ecological water uses.After several discussions and negotiations between theIt is of obvious characteristics of public goods, and it isupstrear and the downstream, an ecological compensationdificult to define the main beneficiary clearly. During theresponsibility agreement will be finally reached, it is bul-process of the negotiations, the upstream and the down-letined to the members of the basin and promulgated to thestream will bold negotiations and consultations on the basispublic within the basin. After public notification, the mem-of compensation and compensation standards for differentbers sign to confirm to format a binding document. Thewater uses.responsibility agreement defines the responsibilities, rightsand benefts of the upstream and the downstream, the means4.3 Calculatlon on compensation amountof ecological compensation payments, such as by cash, orby con中國煤化工e commencementAfer negotations on water quality and water standards date anClity agreement andHCNMHG53Chinese Journal of Population, Resources and Environment Vol.8 No.4 December 2010the responsibilities of breaking the agreement etc., which sation can follow the“successive negotiations" from thecan achieve the balance among responsibilities, rights and downstream to the upstream or from the upstream to thebenefits of the ecological compensation and between the downstream in order to complete the ecological compensa-ecological value of services (Zhang et al, 2005).tion negotiations.If the downstream areas with obligations are reluctant(2) In the negotiating process, the basin water resourceto compensate or can not compensate, the system such as can be divided into three types: the water for production,ecological compensation deposit and liability insurance can for management and for ecology, the upstream and thebe established to eliminate that apprehension (Qian, 2005).downstream will hold negotiations and consultations on theIn other words, before the downstream areas use the eco- basis of compensation and compensation standards for dif-logical resources, they should pay a certain amount of basin ferent water useecological compensation deposit in order to prevent the(3) Calculation on ecological compensation amountbasin ecological compensation from not being got. Liabil- can be referred to three elements, which are water quality,ity insurance can transfer policyholder's economic lsses water quantity and the price，the fllwing formoula can becaused by ecological compensation to insurance compa- used to calculate: E: SP*Q;*C+SP.*Q*C, C, C2 whichnies, and then economice losses will be taserred to the means discriminant coficient can be used to adjust the im-potential units or individual with ecological compensationpact of water quality on the amount of compensation.responsibility. By making basin ecological compensation li-ability int the scope of compulsory lability insurance, the Acknowledgements: This research was sppored by the Nationalproblem can be solved, ensuring the stability of ecological Natural Science Foundation of China (Grant no.70873077).compensation payment.An agrement through negotiations is reached, butitis Referencesnecessary to design a certain institutional arrangement toprotect from default risk and remedy the consequences forGe Q Y, 2009. Yellow River water source ecology compensation gam-the breach of contract. The responsibility agreement forbling analysis - by Gannan Ma Quwei example. Lanzhou Univer-ecological compensation can be reported to superior gov-sity, jourmal (Social Scence), (5): 106-110emment who supervises the implementation of the compen- Li K G, 2006. China's cocompesstion poliey Ecologial compe-sation, which can control the breach of the upstream and thesation mechanism and policy design International Symposium.downstream. In addition, once the downstream governmentBejing:; China Environmental Science Press, 25 -31defaults, the upstream can itiate legal poceedings on the Pigcu AC, 1952. The Ecnomies of Welfare (Fourth Eitio), Lon-negotiation agreement to seek a legal remedy. Because ofdon: Macmilanthe difcultyt in the court inquisite at the government withQian s M, 2005. Constructs by the basin ecology conmpensatin's sys-the same level, the water upstream govemment should havetem. Chinese Geology University journal (Social Sciences), (5):the right to bring an accusation against defaulting govern-80-84ment to superior court, so that the govemnment's generalTom Tietenberg, 2005. Environment and Natural Resource Economicsadministration is brought into the scope of the proceedings.(Sixth Editio). Beijing; Tsinghua PressYu X, 2007. Establishes the neighborhood water ecology compensa-6 Concluslonstion mechanism discussion. Environmental Protection, (IB): 61-62The main conclusions of this paper are as follows:Zhang Yx, Kong D B, 2005. Diferent develops the ecology compen-(1) In order to reduce the cost of the water sources' eco-sation the golden pan experience to discuss. Zhejiang Journal, (4):logical compensation negotiation system, we can simply223- 225.consider the negotiations between adjacent upstream and Zheng H X, Zhang L B, 2006. The basin ecologydownstream. That is, the water sources' ecological compen-tion quota standard studies. Environnental Protection, (1): 42- 46.中國煤化工MYHCNMHG54