Chinese practices of ecological compensation and payments for ecological and environmental services and its policies in river basins

46923 Chinese Practices of Ecological Compensation and Payments for Ecological and Environmental Services and its Policies in River Basins Submitted to the World Bank By Haixia Zheng1, 2 (1. College of management, Beijing Union University; 2. Center for Human and Economics Development Studies, Peking University Lubiao Zhang (Department of International Cooperation, Chinese Academy of Agricultural Sciences) August, 2006 Corresponding author: E-mail address: haixiazheng@gmail.com,haixiazheng@hotmail.com 1  1. Introduction................................................................................................................4 2. Methodologies............................................................................................................5 3 The review of Chinese practices of ecological compensation and payments for ecological and environmental services ..........................................................................6 3.1 The Background, concept and scope of PES...................................................6 3.1.1 Theoretical basis and background of PES in China..............................6 3.1.2 The concept and scope of PES in China...............................................7 3.1.3 The feasibility of PES and its development phase in China.................8 3.2 Payment for Watershed Services (PWS) in China...........................................9 3.2.1 State payment based on large projects................................................12 3.2.2 Local governmental Payment .............................................................13 3.2.3 Voluntary transaction mode: market-oriented compensation..............19 3.2.4 Water right trade..................................................................................20 3.2.5 Water charges (PES based on quantity): payment between water Power Company and Water User.................................................................22 4. Case study on PES in Miyun Reservoir...................................................................24 4.1 Characteristics of the Study Region...............................................................24 4.2 Principles of PWS..........................................................................................25 4.3 Feasibility analysis.........................................................................................27 4.4 Analysis on the benefits and loss of supply and demand sides in the payment ..............................................................................................................................28 4.5 Payment mechanism and institutional arrangements.....................................30 4.6 The analysis on the effectiveness of PWS: Drivers and obstacles.................31 4.7 Evaluation and lessons...................................................................................33 5. Case study on Thousand Islands Lake PES.............................................................35 5.1 Feasibility analysis.........................................................................................35 5.2 Analysis on the benefits and loss of supply and demand sides in the payment ..............................................................................................................................36 5.3 Payment mechanism and institutional arrangements.....................................37 5.4 The analysis on the effectiveness of PWS: Drivers and obstacles.................39 5.5 Implementation evaluation and lessons.........................................................40 6. Water quality control and PES mechanism in Jinjiang River and Luoyang River..40 6.1 Feasibility analysis.........................................................................................41 6.2 Analysis on the benefits and loss of supply and demand sides in the payment ..............................................................................................................................41 6.3 Payment mechanism and institutional arrangements.....................................42 6.4 Drives and obstacles ......................................................................................43 2  6.5 Implementation evaluation and lessons.........................................................44 7. Water right trade between Dongyang and Yiwu in the Jinghua River.....................46 7.1 Feasibility analysis.........................................................................................46 7.2 Analysis on the benefits and loss of supply and demand sides in the payment ..............................................................................................................................47 7.3 PES mechanism and institutional arrangement..............................................48 7.4 Drives and obstacles ......................................................................................48 7.5 Evaluation and experiences............................................................................49 8. Key funding and Policy Recommendations.............................................................49 9. Remarks and Discussion..........................................................................................54 Reference.....................................................................................................................55 3  1. Introduction The study on ecological services has developed from its primary concept and meaning into service types, mechanism and evaluation approaches, etc. Daily (1997), Costanza (1997), Gairns (1997) and MA (2003) have classified the functions of ecosystem services respectively. The watershed service functions mainly include water adjustment, water supply, biodiversity protection, cleaning, food production, culture, entertainment, water and soil conservation, water source conservation, wood production, and carbon deposit from forests in a watershed. Generally, these can be grouped into four functions: products supply (freshwater, water products, wood products, carbon storage, etc.), control (water adjustment, water and soil conservation, water source conservation, cleaning, etc.), biodiversity protection (provides living environment), and information (culture, entertainment, etc). When the traditional patterns of constructing and maintaining the watershed through government investments receive more and more pressure, the role of the market emerges. Financial deficit and government failure make many stakeholders take action, which lead to more and more people willing to pay for the environmental services. At the same time, many private companies, individuals, the NGOs and communities, driven by the benefits of cost reduction, new returns, public relations improvement, decreased risks of natural disaster and the protection of the existing welfare, are all getting involved, and the market is becoming the most effective means of maintaining the watershed eco-services and reducing poverty in the upstream. In China, the government has been managing of the watersheds for the past 20 years. There is enormous pressure on natural resources and the health of the ecological environment is threatened. This has subsequently created pressure on the Chinese government to meet the public and the environmental needs. Since the government is the only main `player' in this responsibility, the environmental upgrade is quite low. In the late 1990's, stimulated by a series of factors such as grassland degradation, decrease of forests, natural disasters like floods and droughts, increasing environmental understanding and care, etc., the government began to explore more effective ways of protecting the environment. The concept of Payment for Environmental Services (PES) was rapidly introduced and accepted. PES is gradually taking root in Chinese society and increasingly private funds are being invested in watershed management. The market for PES has been primarily developed, and various PES modes have been put into practice. However, lacking capacity in watershed management, the transaction cost in PES is very high. It is difficult to define the main suppliers, buyers and scope of watershed payment; to evaluate the services of hydrology and water resources, or to determine the criteria of payment. This system has been initiated in some watersheds in China and such pilot projects should be studied to identify the problems the implementers are facing, their successes and opportunities to exploit before embarking on further projects in other watersheds. Hence, we need to study the typical cases of payment for watershed 4  services (PWS) in China, analyze their successful experiences, existing problems, and payment mechanism and provide solutions, as references to the establishment of PWS in other similar watersheds. This paper firstly review the situations of PWS in China, analyzes 4 typical cases in China, studies on their feasibility, mechanism and institutional arrangements, the efficiency and effectiveness of the implementation, and puts forward relevant policies and suggestions. The paper covers the following 9 parts: 1. Introduction 2. Methodologies 3. PES in China 4. PWS in Miyun Reservoir 5. PWS in the Thousand Islands Lake 6. Water quality control and PWS in Jinjiang River 7. Water right trading between Yiwu and Dongyang 8. Findings and policy suggestions 9. Remarks and discussions 2. Methodologies The methodologies in this research include literature and data collection and analysis, interviews with key stakeholders, and field surveys and questionnaire surveys on households and farmers. The interviews were taken mainly by a half-structural way, and the basic topics were divided into many secondary topics, which interviews were carried out based on the secondary topics step by step. Interviews and investigations were carried out in the 4 cases. Second-hand data collection March 2006 is the phase of second-hand data collection. During this time, we collected the information on payment modes, fund sources and distribution, institutional arrangements, implementation polices, at all levels throughout the country. Field surveys We investigated the Jinhua River for Yiwu-Dongyang Water Rights Trade, PWS in Miyun reservoir, Thousand Island Lake and Jinjiang River respectively in March, June, July andAugust, 2006. Questionnaire surveys on households and interviews with key persons The interviewees are mainly the leading officials from the forest, water resource, environmental and financial sectors in Pan'an County, Dongyang city, Yiwu city, Miyun County, Fengning County, Chun'an County and Quanzhou city, as well as the related persons from the administrative departments of Miyun and Xin'an River reservoirs. Farmers were interviewed in random in terms of questionnaire surveys. 5  3 The review on the processes and practices of ecological compensation and PES in China 3.1 The background, concept and scope of PES 3.1.1 Theoretical basis and background of PES in China The theoretical basis of PES includes the Value of Environmental Services, Environmental Externalities, Ecosystems, Ecological Assets, Public Goods, etc. As public goods, environmental services have the features of externality. The international community defines it as the Payment for Environmental Services (PES), a payment from enterprises, households or government for environmental services, which is based on the clear property right and low transaction cost. PES was introduced into China due to the deterioration of our ecosystems, so the legal and political structures support the ideas in China. Due to the deterioration of environment and increasing incidents of watershed conflicts and appeals, the questions on the equity, environment and development in the watershed is increasingly emerging, which have drawn broad attention from the society, and there are many proposals on establishing PES mechanism in every conference of the National People's Congress (NPC) and the Chinese People's Political Consultative Conference (CPPCC). Therefore, the establishment of the PES scheme has a broad social basis. PES has drawn great attention from the Central Committee of the Communist Party of China (CCCPC) and the State Council. In a series of CCCPC documents, such as "The Outline of the Eleventh Five-Year Program for the Economic and Social Development", "Decision on Implementing the Scientific Concept of Development and Strengthening Environmental Protection by the State Council" and "Key Points of the Work of State Council in 2006", all these policies call for action to be taken to reform the payment system for environmental utilization. It was suggested that the payment (compensation) mechanism for environmental services must be established at an earlier stage, and relevant reform measures must be put forward in fields of finance, pricing, taxation, credit, trade, etc. On April 17, 2006, at the 6th Conference on Environmental Protection, Primer Wen Jiabao clearly stated that the policy and mechanism of PES must be established and improved based on the following principles: "Users should protect, destroyers should restore, beneficiaries should pay, and polluters should be charged fees". Meanwhile, in order to coordinate the development and environment in the entire region and reduce poverty in the upstream, the central and local governments increase payment transfers to the key ecological function zones and the upstream poverty-stricken areas; encouraged the development of ecological industries in the upstream; adopted various means such as "development in another site"; for migration to downhill or downstream for poverty alleviation; supports and cooperation between downstream and upstream; etc., so as to protect environment and compensate the loss of development rights limitation in the upstream, reaching double goals of poverty reduction and headwaters protection, which is also an important drive for PWS. Because the upstream areas are generally poor, and at the same time these areas are 6  also planned to be limited development areas or prohibited development areas, there was an increase in the discrepancy and inequity of regional development, and that may further affect the sustainable development for the entire region. In order to compensate these areas, payment transfer is increased. For example, payment transfer from province to county takes place in Zhejiang province, and the poor counties receive higher payment than the richer counties. In the provisions of Decision on Implementing the Scientific Concept of Development and Strengthening Environmental Protection by the State Council, two goals will be achieved in the 11th Five Year plan through PES, i.e. environmental improvement and rural development. In addition, environment control funds and projects will be increased in the poor counties and cities. Due to the remote location and little industries, the upstream can provide ecological services at lower costs. The implementation of the compensation for environmental protection of the upstream can arrive at the goals of improving the farmer livelihood in the upper reach, reducing poverty, protecting headwaters with the win-win of environment and economy, which becomes the main drive of PWS. The economic development and increase in central and local financial revenues also provides the economic basis for PES. Meanwhile, people have a much higher demand for environmental quality. In the developed provinces like Zhejiang, Fujian and Guangdong, there are voluntary practices of PES such as the Water Right Trade. Although the legislation on PWS has not yet been established, there are certain Resources Acts and Environment Protection Acts that have terms or clauses on PES such as the Forest Law, Grassland Law, Environment Protection Law, Sand Control Law, etc., Special Rules by State Council including Ordinance of Basic Farmland Protection, Ordinance of Grain-for-Green, Ordinance of Nature Reserve, etc., that further promote the PES policy. On basis of economy, society, politics and law, the situations of the confusion of environmental property right and duty, shortage of resources, environmental degradation and the imbalance of regional development have caused serious social and economic problems, which have negative impacts on scientific development and sustainable development. Therefore, PES has become one of the important strategies of China's environmental and economic policy, and it is an inevitable choice when society, the economy and environment enter into a certain phase as in China. 3.1.2 The concept and scope of PES in China In China, the concept of PES has experienced a process from natural to human, from ecological construction and management to environmental economy policies. of At the same time, PES mode is developed from initial subsidies of environmental protection to the current compensation for the limitation of development rights and payments for ecological services. Different scholars hold different understandings to the concept of PES (Wang D. H, 2006; Wang J. N, 2005; Feng D.F, 2006; Zhang H. Y, 2006), among which the key difference is whether pollution control and pollution 7  charges should be included in PES. The definition of PES that Wang Jinnan give were widely accepted, Wang thinks the PES includes 5 aspects: 1) Payment for Ecological Services, i.e. payment for those who provide ecological services; 2) Resource based Ecological Compensation (EC), i.e. "Equivalent occupancy and compensation" mode in the natural resource use; 3) Damage-Based EC, i.e. an economic punishment for destroying environment by individuals or enterprises; 4) Development Based EC, i.e. a compensation for those who protect the environment or give up development opportunities for protecting environment, a compensation for development right limitation; and, 5) Conservation Based EC, i.e. an protective investment in the regions or objects with important ecological value. The scope of PES includes: the compensation for residents migration near the water sources or reservoir, subsidies for the construction of sewage treatment plants, investment in sanitation facilities, compensation for forestry sectors in the upstream including subsidy for non-commercial forests, sealing hillsides for afforestation, the subsidy of Sloping Land Conversion Program (SLCP), compensation for regional development limitation, payment of farmers suffering from production loss for controlling non-point pollution and the use of fertilizers and pesticides, etc. At present, the priority fields of PES in China are key ecological function zones, river basins, payments in exploitation of natural resources, issues left over from history at the period of economic transition. PWS is one of the priority areas, and its process and mechanism include the definition of payment scope, payers and payees, payment criteria, payment modes, and payment type etc. 3.1.3 The feasibility of PES and its development phase in China Internationally, the market for ecological services originated from watershed management. Take the watershed management planning of Tennessee for example, the 1986 conservation area plan in the US provided payment for the land owners of the cropland around watershed and marginal grassland in order to reduce soil erosion. From the aspects of theoretic study and practical exploration, Costa Rica started carrying on the payment schemes of environmental services early in 1995, and became the global pioneer of PES schemes. In 1995-1999, Costa Rica developed 11 schemes to increase carbon storage, with 158 million dollars invested in 5 forest management schemes, 135 million dollars in 5 energy schemes and 1 million dollars in 1 agricultural scheme. The US adopts pollution credit transactions in order to reduce eutrophication in rivers and improve water quality. Australia adopts evaporation credits to reduce soil salinization due to deforestation. At present, the framework of watershed services has been established in many nations, such as the US, Costa Rica, Ecuador, Columbia, Mexico, Brazil, etc. Internationally, the main types of PES are water conservation and water and soil adjustment. A typical PES mode is the subsidy from the Costa Rica water-power company for upstream afforestation, or payment from the Columbia Irrigation Association of Kakao River for river flow regulation, which is both a payment for water and soil adjustment 8  through the use of afforestation and vegetation to regulate water flow. The bottled water companies in France pay for environmental services through compensating upstream households for the reduction of agricultural production and for afforestation. Is the current policy in China on PWS rational and feasible? How can PES be setup and implented in China? Because property rights of natural resources and lands are owned by the state, the distinction of property rights and the relevant environmental property rights become key barriers to the PWS implementation. Meanwhile, the PWS faces a great deal of problems due to the lack of relevant legislations and appropriate institutional arrangements, and it is still in a phase of theoretical research and exploration. However, there is an increasing demand for environmental services thanks to the rapid development of China's economy, which makes PES, as an idea of protecting environment and coordinating the development between the up and down streams, widely accepted by government sectors, enterprises and individuals. In China, as people gradually understand the value and importance of watershed services, more and more individuals, water companies, local governments and organizations are willing to be involved in and pay for this activity, in order to reduce the loss from the degradation of watershed ecological services. At the same time, people (the owners of forests in the upstream watershed) who maintain the services are also looking for buyers and users to cover conservation costs. Therefore, the PES in China is driven by the supply and demand at different levels. However, throughout the country, PES still heavily relies on government's involvement. So, the international PES mode is not feasible in China at present, since the PES in China is in a primary stage, and we need some time to reform relevant policies and institutions. Now, the government is still the main purchaser and facilitator, and the market plays a supplementary role mainly in the medium and small watersheds where the relationship of stakeholders' rights, duties, losses and benefits is simple and clear. At present, PES pilots are in some relatively rich provinces like Zhejiang, Fujian, Guangdong, etc, and the key fields focus on ecological function zones, river basins, payment in exploitation of natural resources, issues left over from history at the period of economic transition. 3.2 Payment for Watershed Services (PWS) in China The practices of PWS in China, before the theoretical research, are carried out in different levels from province to province, from city to city, from town to town, from village to village, and from watershed to watershed. Since the water resource rights are owned by the state, the protection of watersheds, water resource is mainly supported from the government's budget. From the 1990's, the central government has invested a large amount of money into the large PWS projects to pay for watershed services in order to restore the environment in the main river basins in response to the worsening conditions of the watersheds all over the country. The large national PES projects include Natural Forest Protection Project (NFPP), Sloping Land Conversion Program (SLCP), Forest Ecological Compensation Project (FECP), etc. 9  Meanwhile, the local government also realizes the importance of watersheds; therefore, in some developed provinces such as Zhejiang, Fujian, Guangdong, etc, the PWS between the upper and lower reaches was done through provincial financial transfers or negotiation between cities. There are several PWS modes such as water rights trade, develop off site, charges for water resources, etc. There are 5 types of PWS in China: national ecological compensation programs, local government-dominated ecological compensation programs, voluntary trade market in the small watershed, water right trade, and ecological compensation from water charges (See Table 1). However, the current PES in China mainly relies on governmental payments or administrative arrangements, and it is intersected with different sector regulations and activities, which often cause problems like non-effective payments, high transaction costs, unlinking between beneficiaries and suppliers of environmental services, who really should get the payments, disconnection between watershed services and watershed protection, etc. The establishment and improvement of PWS schemes require more stakeholder involvement, comprehensive decision-making, public participation and reform on relevant policies and institutions. 10  ni is omfr ers y & t alcgioolcE ges arhc gesarhc m city ehtni on ility farm y mpany nois ficial ne y fro unto re ond abd co ntemn ymena an nsation teraw reta to Cg wat waterer W compe untoCoa entm electri directl lystom pacts eroil be im ver p base & Pay pp ay.p 1. 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W No Sh. veri W Paym cent fr go go fu pr su Directly go of s etk roles Case mar Features The government and  3.2.1 National ecological compensation programs National purchase of watershed services is one of the main modes of PWS in China, and it is mainly carried out through large national ecological compensation and construction projects, including 6 large key forest projects, i.e. Sloping Land Conversion Project (SLCP), Natural Forest Protection Project (NFPP), Sand Control in Beijing and Tianjin Project (SCBTP), Key Shelter Forest in Three-North and Upstream of Yangtze River Project (KSFP), Wildlife Protection and Natural Reserve Construction Project (WPNRCP) and Construction of Fast Growth and Fruitful Forest Base in Key Areas Project (FGFFBP). In the 1998 Amendment of Forest Act, the regulations clearly read: the state will set up a fund for Forest Ecological Compensation Project (FECP), and FECP is national payment for ecological non-commercial forests. SLCP pays farmers for grain seeds, seedlings and management who convert cropland to forest land in the sloping land. It is the broadest ecological project with the highest rate of public participation all over the country, initiated in 1999 and started in 2002. Until the time of this report, it has extended to 25 provinces (regions or municipalities) and 1897 counties. The total central financial fund invested in SLCP is up to 14.15 billion dollars from 2001 to 2005 (Tao W.D., Ai C.Y, Zhang S. Q., et al, 2006). The amount of the subsidy is 6.67-10 kg corn per ha and 38.2 dollar per ha in cash. For the past 5 years, the total area of SLCP land is 1.5 billion ha (0.72 billion ha for afforestation in sloping cropping lands and 0.83 billion ha for afforestation in barren hills). According to the Program for SLCP issued by the State Forestry Administration (SFA), the total area of SLCP will be 14.67 million ha, and the total budget will reach 42.1 billion dollars by 2010 (Xu J.T., Tao R, Xu Z.G., 2004). Thus, it is unprecedented ecological project worldwide with such a large scale and huge budget, and it is the first time that China will spend such large amounts for environmental services and protection. At present, it is the hot issue to study the cost-efficiency, economic and ecological sustainability, impacts on farmer's income and the environmental goals of SLCP (Xu J.T., Tao R, Xu Z.G., Tao W.D.,Ai C. Y., Zhang S.Q., et al, 2006). NFPP extends to 17 provinces (regions or municipalities) within the upstream of Yangtze River, the mid-upper reaches of Yellow River and North-east Inner Mongolia, and includes 734 counties and 167 national forestry bureaus in the key national forest areas1. The deforestation of natural forests along the above mentioned rivers is prohibited with a large decrease of timber production by 199.1 million m3 in North-east and Inner Mongolia. The local government is supposed to protect the other 94.2 million m3 of natural forest. The fostering of forest must be quickened, 8.66 million m3 of forest and 6 million m3 of grassland will be planted along the two rivers, and the forest coverage in these areas will reach 3.72%. The amount of the subsidy is 9 dollar per ha per year, 90% of which will be paid by the central government. 1 The 6 key forestry projects, http://www.forestry.gov.cn/SHTGC/02.htm 12  FECP aims at protecting forests through an economic incentive of paying for ecological non-commercial forests. This is the first time that China transfers national finance to protecting forests. As a new institutional innovation, FECP has passed its experiment in 11 provinces and met the goal of protecting forests through economic means. The payments are mainly used for collectives and individuals, who manage the shelter forests and special forests, and the amount of payments is about 9 dollar per ha per year, among which 30% is used for regional management, and the local and provincial governments are encouraged to provide supportive funds. In 2001, the Ministry of Finance (MOF) transferred 120 million dollars to 11 provinces for trial, covering 685 counties (enterprises) and 24 national reserve forests, up to 13.33 million ha. Guangdong, Fujian, Zhejiang and other provincial governments have transferred their parts of funds to their locals for pilots. In December, 2004, the Central Funding System for Ecological Compensation was initiated and in full operation throughout the country, the payment scope under the Fund includes the key state-owned non-commercial forest, scattered woodland and shrubbery land in areas of the dissertation and soil erosion. The central government paid 250 million dollars in advance on the 27 million ha of non-commercial forests for ecological benefits. There are some existing problems in the FECP, such as low payments, incomplete payments, unclear accepters & suppliers of the payments, high transaction costs, imperfect market and competitive mechanism, etc. Water Transfer from South to North Project (WTSNP) is also a national mode of payment for cross-regional watershed resources. WTSNP comprises three sub-projects, i.e. the East Line, West Line and Middle Line, among which the Middle Line is the fast project. That is because water resources restrict the development of the Beijing municipality, so the state invested 11.5 billion dollars in the Middle Line to ease the water crisis in Beijing and Tianjin areas. Since 1991, the Beijing municipality has increased the water rate several times, and the water rate, besides including the supply cost of the water project, tap water supply cost and sewage treatment cost, it also includes the water fee added in 2002, i.e. charged water users including organizations and individuals, and the added fee is used for fund collection for the WTSNP. Due to the national limited ability to pay, there are more and more stakeholders like the local governments, water companies, water users, etc, together contributing to the fund sources, which makes up of the important factors of PWS in China. Based on the payment bodies and means, the PWS cases can be sorted into the 4 types, i.e. local governmental payment, voluntary transaction, water fee and water right trade. 3.2.2 Local government-dominated ecological compensation programs Due to the limitation of the central governmental fund which mainly targets the key water source areas, key ecological function zones, natural reserves zone and ecological fragile areas, local governments organize the up and down reaches to discuss, negotiate and sign agreements to pay for watershed services, in order to improve watershed environmentand provide clean and sufficient water. This means 13  of payment led by local government becomes the main PWS in China and include the following for example the compensation from Beijing municipality to the water source areas in Miyun reservoir and Guanting reservoir, compensation from upstream of Xiaoshun River to Tangpu reservoir in Zhejiang province, payment transfer to Dongjiang headwaters and water & electricity charges for compensation in the river, PES in Thousand islands Lake, the mode of development off site between Jinhua and Pan'an in Zhejiang province, and subsidies from downstream to upstream in Fujian province, etc. (See Table 1). Miyun reservoir is the main source of drinking water for Beijing, providing 80% of the domestic water, among which 56% is from Chao River and Bai River, which originate from Chengteh and Zhangjiakou of Hebei province. In order to reduce the sedimentation and pollution that the reservoir is facing, the Beijing and Tianjin municipalities directly negotiated with Fengning County of Chengteh city, the water conservation forest area, and reached an agreement, i.e. a Fund for ecological non-commercial forest will be set up, to which Beijing and Tianjin will transfer an annual payment of 125,000 and 50,000 dollars respectively. Meanwhile, the Beijing municipality also invested 1.875 billion dollars including subsidy of 875 million dollars from the central government to the Capital Program for Sustainable Water Utilization in Early 21st Century (2001-2005), in the projects of environment construction and pollution control in the upstream and in Miyun and Guanting reservoirs, so as to increase forest coverage rate, and reduce point and non-point pollution. In order to solve the domestic and industrial water use problems, Shaoxing city of Zhejiang province invested 262.5 million dollars in the construction of Xiaoshun River in 1996. Tangpu reservoir, as the only fresh water source, located at the boundary of the mountainous areas between Shaoxing County and Shangxu city. The compensation is paid by water fee and cross-regional water trade, and other measures are taken such as garbage collection, sewage treatment. Firstly, 0.12 cent per ton is collected from a water charge into the special fund of reservoir environment protection. Secondly, Shaoxing city and Cixi city signed an agreement on water supply, Cixi will pay 87.5 million dollars from 2005 to 2022, and Shaoxing supplies 150 million m3 of water to Cixi, and the citizens of Cixi and Shaoxi share the same water resource with the same price (See Box1). A mixed mode of transfer payment and water & electricity charges in Dongjiang River is a successful case of cross-region payment in China. The water source areas, originating from Xunwu County of Ganzhou city, Jiangxi province, includes Xunxu, Anyuan and Dingnan counties, and are very important to supply clean water for the Zhujiang Delta including Guangzhou, Shenzhen, Dongguan and Hong Kong. Guangdong province adopts a payment transfer and PES fund collected from a water power station to ensure water quality in Dongjiang River by compensating the water source areas (See Box2). 14  The Thousand islands Lake is also called Xin'an River, originating from Huangshan Mountains in Anhui province, belonging to the Qiantang River system, a sub-branch of the Yangtze River. 97% of the water area of the lake is in Chun'an County, 0.3% in Jiande County, and 2.7% in the upstream, Anhui. It is the important tap water source for Huangzhou city and the downstream. The water quality from Huangshan mountain is class , and it is classfrom Thousand islands Lake to the downstream. The main PES in Thousand islands Lake is the investment in ecological protection and construction in Chun'an County, and the PES fund comes from tourism revenue from Thousand Islands Lake as well as state, provincial and urban project funds for sewage treatment, garbage refloat, noncommercial forest, sealing hillside for afforestation, forestation, etc. The PES mode that Jinhua city adopts to compensate the Jinhua river headwaters is a "hematogenous type" of payment, so called "Development off site". In 1996, in order to alleviate the poverty in Pan'an and protect the headwaters environment, Jinhua city built an industrial park called Jin-Pan Economic and Technological Development Zone within the city. The revenue gained from the Development Zone returns to Pan'an, as compensation for its efforts in waterhead protection and the limitation of development right. Consequently, Pan'an does no longer approve polluting enterprises, and ensures the outflow water quality better than class . Fujian province is also exploring the mechanism of PES, and set up a good fund mechanism to protect the key watersheds. From 2003 to 2007, Xiamen city, Longyan city and provincial Environmental Protection Bureau respectively provide annual payments of 1,250,000, 625,000 dollars and 550,000 dollars, especially used for Jiujiang river protection; 2005-2010, each, provincial Development and Reform Committee and Environmental Protection Bureau from Fuzhou city, Sanming and Naping cities respectively provide 1,250,000, 625,000 and 1,875,000 1,875,000 dollars, especially used for Minjiang river protection. From June 1st, 2006, Quanzhou city started Temporary Provision for Special Payment for the Protection of upstream of Jinjiang River and Luoyangjiang River. The downstream cities (counties) provide an annual 2.5 million dollars (12.5 billion dollars in total for 5 years) to compensate the upstream for water pollution control. The special fund is collected from the city financial investment at a fixed rate and the downstream beneficial counties (regions) according to the ratio of water use quantity. This mechanism is effective in fathering watershed, and 89.4% of monitoring data of the intersectant boundary show that the water quality in 12 of the water systems has reached and even outreached class , obviously higher than the national average level and that rivers in nearby provinces. PES also took place in Zhujiang River. In March 2006, Political Consultative Conference chairmen from Yun'nan, Guizhou, Guangxi and Guangzhou provinces together proposed the Proposal on Establishing PES Mechanism in Zhujiang River: paid by Guangdong to Yun'nan and Guangxi to the Committee of CPPCC. Aiming at 15  solving the grim salt tide in down reaches of the Zhujiang River Delta, the proposal suggests setting up a special fund by Guangdong finance. The fund is mainly used for protecting and constructing water reservation forests in the mid-up reaches of Zhujiang River and building water conservancy facilities. The fund is collected from the local tax at a rate of 3/10,000 in the developed Zhujiang Delta. A system on regular PES meeting will be set up soon through coordinating with the local governments in Sichuan, and the measures and criteria of payment will be implemented so as to define the duties of each party. The main measures taken are to improve water quality, increase water quantity and reduce the salt tide on the Zhujiang River. 16  Box 1: PES mode in upstream of Xiaoshun River In order to solve domestic and industrial water use problems in Shaoshun Plain, Shaoxing city invested 262.5 million dollars into the construction of Xiaoshun River project in 1996. The project consists of 3 parts: the water source project, water transportation project and water purifying plant. Tangpu dam, the riverhead, locates at the mountainous areas between Shaoxing county and Shangxu city, with a total storage capacity of 235 million m3 and the maximum water supply capacity of 1 million tons/day (400,000 tons/day at 1st period). It is the only tap water source to Shaoshun Plain. In November 1998, Xiaoshun River closure was completed. In October 1999, people were emigrated from the dam area. In April 2000, Tangpu dam closed sluice to store water, and the water quality reaches the national surface water standard of class , successfully solving domestic and industrial water use problems for 1.3 million people in Shaoshun Plain. The 3 main streams of Nanxi, Beixi and Wanghuaxi and over 20 sub-streams are the main water sources of Tangpu dam. The 3 streams originate from Chitougang of Zhuxi county of Chengzhou city, Wangtan and Jidong towns of Shaoxing county, and runs into Cao'e River. The watershed area of Tangpu dam is 4.6 million km2, including 2 regions: the 1st grade core reservation region around the dam with a total area of 520,00 km2 and the 2nd reservation region where the 20 sub streams pass at the upstream of Xiaoshun River protected area. A mixed PES mode of water fee and water resource trade 1. In January 2004, Shaoxing city initiated the Interim provision on the special fund of waterhead protection, which read that from July 1st, 0.002 dollar/ ton will be collected from the water fee, and the total collected money will be transferred to the special fund account by every end of the year. The fund will be specifically used for domestic garbage and sewage treatment, rural non-point pollution control, natural ecological rehabilitation, environmental protection, etc. According to the present scale of water use, 250,000 dollars can be collected a year, which will greatly support the construction of infrastructures and environmental protection in all villages and towns along Xiaoshun River, which also is consistent with the principle of "the beneficiary shall protect". This trial mode can be viewed as a "blood transfusion" type of PES. 2. A water supply agreement was signed between Tangpu Dam Co. Ltd. of Shaoxing city and Tap Water Company of Cixi city. According to the agreement, Cixi will provide 87.5 million dollars, Shaoxin will supply 1.2 billion m3 of water to Cixi from 2005 to 2022, and citizens of the two cities will share the same water with the same rate. The total budget of the project is 64.25 million dollars, and the water pipe network will be funded, constructed and managed by Cixi Tap Water Company. Moreover, Cixi city has to pay Shaoxing city 20 million dollars of dam construction fee at one time. Protective measures, costs and losses 1. The Shaoxing city government has made relevant policies to compensate the crowd around the dam, including Several opinions on the treatment of mountain forest above the submerge line of Tangpu dam, Minutes of the coordinative meeting on issues of polluting enterprises in the protected waterhead Tangpu dam area, Methods on protection of waterhead environment in Tangpu dam, etc. 2. To ensure the dam construction and water quality, people living around the dam paid a great deal of the construction costs. Especially, a total number of 15,623 farmers from 5,406 households of 19 villages in Shaoxing county and Shangxu city were moved out. An area of 2,427 ha of cash crops such as bamboo, tea and orchards was flooded, and 7 polluting enterprises were shut down and moved out. 3. Industrial, domestic, agricultural and livestock pollutions are the 4 main factors determining the water quality in the upstream of Xiaoshun River. Although Shaoxing has had the most polluting plants moved outside after the dam was done, however, there are still 31 industries and a daily 22 tons of domestic garbage generated by 112,000 people in the upstream. 4. With the help of special PES fund, Wangtan town has set up facilities of garbage compression, clean and transportation; while Jidong town was equipped with incinerator treating 5 tons of garbage one day; Wanghua block of Pinghshui town centralized collect and bury garbage from 5 villages; and Gulai town has installed domestic sewage treatment equipment with a capacity of 5 tons/day. 5. In 2005, Shaoxin city made another plan for environmental pollution control in the upstream of Xiaoshun River to expand the scale of domestic garbage treatment, and 3 small animal breeding farms were shut down. Meanwhile, the of water & soil conservation trial in the Tangpu dam project was activated. 6. 23 maintenance sites were set up 38 km2 deep in forests around the dam, and local farmers were employed to work at the sites, in charge of the cleaning of water surface refloatation, and curbing activities such as logging and hunting in the dam area. 7. To avoid the impact on water quality caused by soil erosion, the Dam Administration also newly grew 187 ha ecological forest around the dam, resulting in a nearly 100% of forest coverage ratio and a plentitude of water reservation in the dam area. 8. Base on the idea of "fish breeding in water, and tree planting ashore", more than 2 million filter-feeding fish were set free in 14 km2 of dam water by Tangpu Dam Administration, so as to avoid eutrophication. 17  Box 2: PES mode in Dongjiang headwaters Dongjiang River is the important water source to Guangzhou, Shenzhen, Donguan and Hong Kong, and the Pearl River Delta regions. It originates from Xunwu county of Guangzhou city in Jiangxi province, and the riverhead areas include Xuwu, An'yuan and Dingnan counties. The upstream is also called Xunwu River, and becomes Dongjiang when it meets with Hehe dam and Anyuan River in Guangdong province. It runs through Heyuan, Huizhou and Dongguan into Pearl River in Dongguan. The length of the Gongjiang main rivers is 562 km, with a total watershed area of 35,340 km2. The length across Jiangxi province is 127 km, with a watershed area of 3,502 km2. The average surface run-off of Dongjiang River (for many years) is 29.7 billion m3, among which about 3.2 billion m3 of run-off is from Jiangxi and 2.9 billion m3 runs into Guangdong province. This region belongs to the sub-tropic monsoon humid climate, with an annual average precipitation of 1,650 mm, and the rivers are densely distributed, with an average density of 0.72 km/km2. 90% of the areas are mountains with a forest coverage ratio of 75.3% in 2003. There are 300 national forest parks and many provincial nature reserves, with rich bio diversity including 661 plant varieties and over 400 species of wild animals. The general environment quality in the riverhead is good, water qualities of most rivers reach or even outreach the national surface water standard of class II, and water qualities of outflow province are kept above class II. The total population of the 3 counties in the Dongjiang Riverhead areas is 810,000, including 700,000 agricultural populations. The farmer's income per capita is 190 dollars, accounting for 71.36% of the average level, 40.41% of that in Guangdong (the lower reach of Dongjiang River), and 6.3% of the level in Pearl River Delta (3000 dollars in 1999). In 2000, the poor people accounted for 42% of the total provincial population. The PES mode adopted by Dongjiang riverhead areas A PES mechanism through payment transfer to local finances in the mid-upper reaches of Dongjiang River and power fee collected from the water power companies has been basically established in Guangdong province. Its specific measurements are as follows: 1. Since 1999, an annual 1.25 million dollars of special fund has been allocated from the provincial finance into the stand improvement of water reservation forests in Dongjiang River. 2. From 1999 to 2007, a total of 78.27 million dollars of payment will be input into the compensation of non-commercial forests. So far, 54.98 million dollars has been invested, equivalent to 15 dollars/ha. 3. Since 1992, an annual 5 million dollars of special fund has been arranged by the provincial finance for the protection of water quality in Dongjiang River systems. 4. Since 1995, 2.5 million dollars has been annually transferred to the economic development special fund in Heyuan city, as an adequate compensation from Guangdong province to Heyuan city for its contribution to water quality protection, and the payment has been increased to 3.75 million dollars from 2002. 5. From 1999 to 2004, over 500 million dollars payment was transferred from the provincial finance to Heyuan city and it reached 125 million dollars in 2004. 6. From 1994, 0.06 cent/Kws (250,000 dollars per year) has been collected by Maple-dam Water Power Company, used for poverty reduction in remote regions and water & soil conservation around the dam. In 2003, the fee was increased to 0.12 cent/kws. Ecological protection measures taken by Dongjiang Riverhead areas 1. The Resolution on strengthening the protection and construction of eco-environment in Dongjiang Riverhead areas was passed and acquired full legal force. The Jiangxi province and Ganzhou city released the Implementing plan for strengthening the protection and construction of eco-environment in Dongjiang Riverhead areas, focusing on the following 8 projects: (1) Ecological forest construction, giving priority to sealing hillsides for forestation, Grain for Green and Shelter forest construction in Pearl River; (2) Water protection project: integrated control of small watersheds; (3) Ecological rehabilitation in mines: fathering of mining ruins and tailings; (4) Ecological rural project: biogas project; (5) Flood control and drinking water: obstacle clearing in river channel and tap water sanitation; (6) Integrated agricultural and rural non-point pollution control; (7) Ecological tourism; (8) Ecological transmigrant. 2. Bio measures (Natural forest protection, shelter forest in Pearl River, Grain for Green, SHR) and engineering works (hill pond building, level trench and interception ditch digging, bench terrace construction, etc.), ecological agriculture development and soil erosion control. From 2001, 5,000 ha of shelter forest have been built in the Pearl River, and 10,000 ha of croplands have been cancelled for forest growing. The national key ecological non commercial forest management project was also started, covering an area of 83,000 ha. 8 nature reserves were established, covering an area of 37,147 ha. At present, the forest coverage ratio in Dongjiang Riverhead areas reached 72.2%, making the Dongjiang River a base of water reservation. 3. Wood related industries are banned in the riverhead areas, and more than 20 paper-making and 300 rare-earth enterprises have been shut down. In the above PWS modes, the local government plays a key role in negotiation and making payment planning, and the fund is mainly from provincial financial transfer 18  payment, resource tax & charges and other subsidies. In most cases, the more developed downstream compensates the upstream headwaters or reservoir areas for the costs of environmental protection, the loss of farmers' income and the loss of development right limitation. Because the property rights of natural resources such as water, forestry and land is state-owned in China, the payment mode takes the major position in the PWS cases. However, due to the absence of the involvement of private sectors and NGOs, it is very high in transaction costs, and low in efficiency. The protection of watershed and the payment received does not match, and the payments can not cover the costs and losses. 3.2.3 Voluntary trade market in the small watershed There occur various modes of voluntary compensative transactions in the medium and small watersheds, due to the limitation of funds, and management and regional problems in the PES mode dominated by the government. The successful cases include the long term effective PES mechanism in Deqing County of Zhejiang province, the payment transaction between Yuandong town and Fucun village of Jindong district, Jinhua city aiming at solving non-point pollution in the small watershed, water purchase agreement in Xiaozhizihe and water charges from Subo River Water Power Company in Yun'nan province, etc. The long-term effective PES mechanism was established in Deqing County, Zhejiang province, according to "the beneficiaries should pay". Deqing County's successful experiences are: first, to make relevant policies, identify responsibility and rights; and second, to fix the fund source and usage, collect funds from multi-channels and to set up a payment financial system as compensation for financial loss in the western area through payment transfer (See Box 3). The PES cases of payment transaction between Yuandong town and Fucun village of Jindong district, Jinhua city aims at solving non-point pollution in the small watershed. This payment transaction both in Jinhua city and Xiaozhizihe's water purchase agreement in Yun'nan province is the result of voluntary consultation in the village and township level (World Agroforestry Center, 2006). The payment agreement in Jindong district is mainly to control non-point pollution by restricting the development of livestock breeding industry in the upstream villages, while Xiaozhizihe's water purchase agreement is mainly to increase water supply to the downstream areas based on water quality and quantity. Their same characteristic is that the transaction is taken place through agreement, and the amount of payment is much less, reflecting imperfect market and low ability to pay. However, it can work well in the less developed and serious water shortage villages and towns. The payment for water ecological services in Subo River is through negotiation between the government and the Hydrodynamic Company, Yunnan province. The company will pay the fund gap between the subsidy of Grain-for-Green and the payment of the central government for the upstream which supplies water and power 19  for the company, through which to father soil erosion reduction in the watershed because it is also possible to reduce the costs of the company (Lv Xing, Fu Baohong, Li Hetong, 2006). This mode shows that various environmental projects and multi-channel fund sources can effectively protect and father small watersheds. The above PES cases are driven by the demand and supply in the market, and also by the willingness to pay (WTP), willingness to accept (WTA) and protective perception of the government, households and enterprises. It becomes one of the market-oriented PES modes in the small watersheds, and is a beneficial exploration and an important complementarity to PES in China. However, the mode often can not be durable, largely because there is an absence of PES mechanisms and relevant regulations of payment criteria and implementation methods, which are suitable for different watershed types at the national level, plus the difficulty in PES evaluation and the low ability to pay. It is very difficult to form the compensation mechanisms to satisfy all stakeholders. It is necessary for the government to set up the relative policy to guide the PES implementation, and it is likely to succeed if it links the financial and industrial policies within a watershed. Box 3 A long-term effective PES mechanism in Deqing county of Zhejiang province Deqing county of Huzhou city in Zhejiang province was named the 2004 national ecological demonstration area by the State Environmental Protection Administration (SEPA). The western area of the county is for water conservation and ecological forests, and the Duihekou dam located in Fatou town is the tap water source of the whole county. For many years, towns such as Moganshan and Fatou have taken the responsibility of protecting environment. Based on investigations and surveys, Deqing County put forward the establishment of a long-term effective PES mechanism according to the principles of "the beneficiaries shall pay", multi-channel fund collection and oriented payment. In February 2005, the county government imitated the Opinions on the establishment of PES mechanism in western towns, where it makes clear the PES principles, scope, fund collection and utilization, etc. Also, the Leading Group Office of Ecological Construction in Deqing County released the Notice of methods on the collection and management of PES fund in western towns of Deqing County. The PES fund is mainly collected from the following 3 aspects: 1) the establishment of Ecological Non-commercial Forest Compensation Fund. For the state and provincial non-commercial forests, an annual payment of 15 dollars/ha will be offered, and 7.5 dollars/ha to other non-commercial forests; 2) the establishment of township financial institutions, providing financial guarantee to Mogan and Fatou towns; 3) the establishment of PES for the entire county. The channels are: 125,000 dollars from the county financial budget, 10% from the water resource fee all over the county, 1.25 cent/ton increased in the water fee from Duihekou dam, yearly 1% from the land rental in the county, 10% from pollutant discharge fee and 5% from the Agricultural Development Fund. The above PES fund will be brought under the county special account, specifically used for the protection and construction of eco-environment in western areas. The main purposes of the PES fund are: compensation and maintenance of ecological non commercial forests, investment in daily domestic garbage treatment, construction of environmental protection infrastructures in the western areas, protection of Duihekou dam riverheads, payment to enterprises shut down or moved outside for the sake of environment, and payment for the environmental protection activities approved by the county government. 3.2.4 Water right trade The definition of water right is the precondition to water resource management (Sun 20  Xuntao, 2005). According to Ordinance on Water Use Permission and Water Resource fee (Ordinance in abbr.) newly initiated in April 2006, water use from watershed will be supervised. At present, The Ministry of Water Resource is now making Temporal Regulations of Water Distribution (Regulation in abbr.); a unified criterion will be made on water distribution within a watershed. The Regulation is also for better implementation of the Ordinance to control total water use. According to the Ordinance, the Permission Credit of water use will be examined grade by grade from high water management sector to local one. The Regulation focuses on the control of total water use within a watershed for each province by the watershed management institutions, while the Ordinance pays more attention to the Permission Credit of water use and water charges from water users, administrated by the local water sector who sets quota based on the control of total water resource, and the total goal is to make true a water resource management system linking a watershed to the region of the whole river basin. With the improvement of the system and policy of water right, there will be more and more cases of water right trade and the efficiency of water utilization will be largely advanced through the market mechanism. Water right trade is one of the most important PES modes. The first one occurred between Dongyang and Yiwu cities successfully. The Ministry of Water Resource guides and recognizes water right trade in the newly initiated regulations of Decisions on Water Right Transfer by the Ministry of Water Resource. Consequently, various cases of Water right trade develop in China. ShaoXing and Cixi signed an agreement on water supply, Cixi will pay 87.5 million dollars from 2005 to 2022, and Shaoxing supplies 150 million cubic meter of water to Cixi, and the citizens of Cixi and Shaoxi share the same water with the same price. In order to save the vanishing E'ji'na oasis and increase water flux, Gansu province carries out water right certificate system in Heihe River, aiming at building a water-saving society based on government control, market orientation and public participation in managemment system and operative mechanism. Water right is distributed according to the number of livestock and farmland area per household, the water user can purchase irrigation water from water organization that controls the total water volume and ensures a sound water fee. Water users are encouraged to save and sell water at a market regulated price and under government guidance. The surplus water in the transaction will be repurchased by the water management organization (the suppliers) at 120 percent of the base price, so as to encourage water-saving. Through water right trade, the households have the concept of commercial water, and their perception of water-saving, so a restructure of the rural economy is greatly stimulated as well. The mode of "Investment for water-saving, water right transfer" in Ningxia and Inner Mongolia is a successful case of cross-industry water right trade. The contradictory situation of water scarcity and water-wasting existed in the two districts of Ningxia and Inner Mongolia at one time. In addition, the distribution of water resource among 21  different industries is also very unbalanced, the agricultural use water account for from percent 90 to percent 96 of the total, the coefficient of water utilization of the aqueducts system is only 0.4, and more than half of the water is wasted in the course of transportation. Under the coordination of Yellow River Conservancy Commission water-saving reconstruction was done in the Hexi, Hedong irrigation districts, Qingtongxia City, Ningxia and Dengkouyang irrigation district, Inner Mongolia (the name changed into Hangjin irrigation district later), and the saved water was transferred to the newly built power plant for getting a payment. The trade mode ensures enough water resource for the plant with opportunities of development, on the other hand, expands channels of financing for the improvement of the irrigation regions, avoids waste of water, and optimizes the water use and water allocation. This means also protects the farmers' legal right to use water, promotes regional economic development, and improves water utilization efficiency through water saving investment and construction. It is first time that water right market optimized the distribution of water resource through cross-industry water right transfer in such a scale so as to improve water utilization efficiency (Yuan Jinlin, 2005). Cross-province water transfer took place in Zhanghe River through water price agreement. In the spring of 2001, Northern China suffered from continuous severe drought and little rainfall, and there was a demand from Yuejinqu irrigation region of Henan province for water to the Zhangze reservoir of Shanxi province. The Upstream of Zhanghe River Administration Bureau actively coordinated the two stakeholders, and it was agreed that water would be supplied from Zhanghe reservoir to the downstream, and the Yuejinqu irrigation region would pay. According to the agreement, the price was 0.3 cent per cubic meter, and 30 million cubic meter of water from 5 reservoirs in Shanxi was transferred to Yuejinqu irrigation region, and from there it went to Anyang city, solving the water crisis for 13,333 ha of crop land in Hongqiqu irrigation region, 66,667 ha in Yuejinqu irrigation region, 300,000 people and 40,000 livestock. Water right trade is the most direct means of water resource transaction based on water quality and quantity, both sides reach an agreement through negotiation, and obligations and duties of each side are quite clear, making it easy to fulfill. Whereas, the clear water right is preconditioned. Due to the ambiguous primary water rights, the transaction cost is much higher. This mode is suitable for the regions with scarce water, clear distinctions in or settled primary water rights, or developed regions with high ability to pay and high water value. The transfer of water right is mainly taken from a less developed to a more developed region or from low value-added sectors or industries to high value-added sectors or industries. 3.2.5 Ecological compensation from water charges This payment is through charging a water fee to collect the compensation and payment fund, often with other payment modes mixed together, making up of the whole of the payment system. For instances, the water sector and water and soil 22  conservation sector in Yao County collect an annual 10% of the water resource tax to pay the forestry sector for the protection and management of ecological forests in the headwaters. In Qujiang County, Guangdong province, the government charges a fee from the water and power companies to pay the farmers who protect the watershed source, 0.125 cent per ton from the drinking water company and 0.0625 cent per KWH from the water power station. The payment mode is directly based on water quantity, and is easy to be adopted because the water power company is closely connected with soil erosion in the watershed and it is easy to define the beneficial region and the compensation region. However, there is still an equity issue when implementing it, largely because it is difficult to distinguish the water users and water suppliers when the water resource is charged. 3.3 Summary of the cases As seen from the above cases, PWS in China is a system of public payment mainly oftransfering payment from the central or local governmental (See Figure 1). In the above 17 cases (excluding the national ecological compensation programs), the local government-dominated ecological compensation programs accounts for 43%, water right trade accounts for 25%, voluntary trade market in the small watersheds accounts for 19%, while the mode of Ecological compensation from water is the least percentage. The four PWS cases vary at the different scale: province, city, town or village. They are mutually complementary, and together with national ecological compensation programs, are the structural elements of the PWS scheme in China. 13% 43% 25% 19% Local governmental payment transfer Voluntary payment mode WRT payment mode Water fee based on quantity Figure1 PWS cases in China The first level is national payment, the largest PES programs where the fund is from the central government, and used for environmental protection and ecological 23  compensation in the key watersheds like Yangtze River and Yellow River, important ecological functioning zones and the headwaters from the national perspective. The second level is provincial payment, and the fund is mainly from provincial financial revenue, used for the protection of important tap water sources and rivers within or cross province. The third level is the PES mode in the medium size watersheds, and the fund is from county local revenue and water fee collected from water power companies and water users, usually gets facilitated by the local governments. The fourth level is the payment from village and township in medium and small watersheds, often driven by water demands. Due to the low ability to pay at this level, PES usually occurs in a situation where there is an urgent demand for water. The funding is from village and township collective income, water fee and power charges from downstream farmers and water power companies. Seen from the above 4 levels, PES in China is still in a primary stage due to funding limitations. At present, PES should be developed in the key areas on principles of "from easiness to hardness, and from the key areas to the common areas". The key areas of PES in China are key ecological functioning zones, 3 big headwaters (of the Yangtze River, Yellow River and Lantsang), mid-small watersheds, 661 city water sources, payment in development of natural resources, issues left over from history at the period of economic transition, etc. (China Council for International Cooperation on Environment and Development (CCICED), PES Group, 2006) As we can see, PWS in China is mainly based on the central or local governmental payment, and various markets for PWS develop in medium and small watersheds. Governmental and economic sectors such as the water power companies attach great importance to PWS because they see it as an effective tool of integrative watershed management. The market for PWS has developed rapidly in various modes as it has bee. However, there are some problems with many aspects of PWS such as imperfect market rules, lack of payment criteria and regulations, low-efficiency implementation, etc. Therefore, the market for PWS is still in primary stage. The government still plays a key role in watershed management by providing a good environment for the mechanism, system, culture and law for the further development of markets for PWS. 4. Case study on PES in Miyun Reservoir 4.1 Characteristics of the Study Region Miyun Reservoir is located in the mountainous areas, bestriding the main paths of Chao River and Bai River with a total storage of 4.375 billion m3. The watershed area of Chao River and Bai River is 6,960.59 km2 and 8,827.41 km2 respectively, out of which 88%, i.e. 15,788 km2, is controlled by Miyun reservoir. The Chao river system originates from Halawan, Liangui town, Fengning County, Hebei province, and runs 24  through Fengning, Luanping, Chengteh and Gubeikou of Miyun County into Miyun reservoir, Beijing. The main system of Bai River originates from the mountainous range of Guyuan County and Chongli County of Zhangjiakou city, Hebei province. It runs through Guyuan, Chongli and Chicheng counties in Zhangjiakou city, Xuanhua district, Yanqing County, Huairou district and Shihetang town in Beijing into Miyun reservoir. Two-thirds of the watershed areas controlled by the reservoir are within the regions of Chengteh and Zhangjiakou cities of Hebei province, and 1/3 is under the administrative region of Beijing municipality. In the total 11406.33 km2 watershed area in Hebei (Dong W.F., 2006), the upstream Chicheng County occupies 46.4%, while Fengning occupies 36.7% (See Figure 2). At present, the daily water intake from Miyun reservoir is 1.17