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Effects of basin ecological compensation policies in China: Insights from policy design differences

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  • Zhou, Lei
  • Hong, Shaoxin
  • Su, Siyan

Abstract

There are two types of Basin Ecological Compensation Policies (BECP) in China: a formal policy initiated by the central government in the Xin'an River Basin and an informal policy organized by local governments in the Wei River Basin. We use a difference-in-differences (DID) approach to identify and compare the effects of these two policy types. We find that the BECP in the Xin'an River Basin significantly reduces enterprises' water pollutant emissions but also decreases Total Factor Productivity (TFP), whereas the BECP in the Wei River Basin has no significant effect. In addition, enterprises in the Xin'an River Basin experience reduced output and increased investment in cleaner production practices, which serve as the main channels through which water pollutant emissions decline. We further show that the economic losses borne by upstream regions exceed the compensation they receive, indicating that the compensation funds are insufficient. Finally, heterogeneity analyses reveal that the effectiveness of the BECP depends on factors such as adjacency to provincial boundaries, river length within a county, the number of industrial enterprises, and enterprise tax levels. These findings provide useful insights for the broader application of BECPs and for negotiations over compensation funding.

Suggested Citation

  • Zhou, Lei & Hong, Shaoxin & Su, Siyan, 2026. "Effects of basin ecological compensation policies in China: Insights from policy design differences," Energy Economics, Elsevier, vol. 154(C).
    • Handle: RePEc:eee:eneeco:v:154:y:2026:i:c:s0140988326000101
    DOI: 10.1016/j.eneco.2026.109132
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