Environmental and Economic Effect of the Ecological Compensation Mechanism: Evidence from Dongjiang River, China

The Watershed Ecological Compensation Mechanism (ECM) is an innovative policy tool to deal with environmental challenges in the context of the coordinated development of environment and economy. In this study, we utilize a difference-in-differences method to examine the impact of the ECM in Dongjiang River Basin. We collect the law enforcement monitoring data of key environmental supervision units from the Jiangxi Provincial Department of Ecology and Environment, and quantify the impact of the ECM on the sewage discharge of key polluting enterprises. The results show that the implementation of the Ecological Compensation Mechanism in Dongjiang River Basin reduces the concentration of biochemical oxygen demand (about 12.48 mg/L) and suspended solids (about 6.07 mg/L) in the wastewater discharged by polluting enterprises. There is significant heterogeneity in the effect of this policy in areas with different population sizes. The implementation of the policy has a more significant effect on the pollution reduction in low-population areas. This study provides a reference for the government to optimize the formulation of compensation standards and compensation forms, and to enhance the enthusiasm of enterprises to participate through incentive measures, so as to promote the ecological governance of the Dongjiang River Basin and realize the coordinated development of economy and ecological environment.