Semi Market-Oriented Environmental Incentives and Ecological Restoration: Evidence from Horizontal Ecological Compensation in the Xin’an River Basin

【Authors】

LV Wei, FAN Panlai & WANG Weitong

【WorkUnit】

Dongbei University of Finance and Economics, 116025.

【Abstract】

Due to the widespread information asymmetry between central and local governments, local authorities often engage in strategic behaviors that dilute environmental protection efforts while trying to balance the needs of economic development and ecological conservation. In some cases, this even leads to the deliberate embellishment of environmental governance performance, ultimately distorting the original intent of central government policies. These phenomena raise critical questions: How can local governments be effectively incentivized to strengthen their commitment to environmental protection? And does the enhancement of such incentives contribute to regional ecological restoration?
With the introduction of the Xin’an River Basin Horizontal Ecological Compensation Policy in 2011 as a quasi-natural experiment, this study employs a Difference-in-Differences （DID） approach at the township level to examine the policy’s impact on regional ecological quality. The findings indicate that the policy significantly improved ecological outcomes in upstream compensation areas, accounting for approximately 22.42% of the observed improvement in ecological quality on average. This suggests that enhanced environmental incentives for local governments can effectively facilitate regional ecological restoration. This finding remains robust across a series of sensitivity and robustness checks. Mechanism analysis reveals that the improvement in ecological quality stems from multiple channels, including vegetation restoration, industrial structure adjustment, and reduced enterprise-level pollutant emissions. Heterogeneity analysis indicates that the policy’s effectiveness varies depending on the density of the Xin’an River network and the township’s distance from the upstream section, but it is not influenced by local economic growth. These results underscore the importance of spatial environmental governance design and demonstrate that targeted ecological compensation policies can effectively align local government incentives with broader ecological goals.
This study makes three key contributions. First, by using the Horizontal Ecological Compensation Policy in the Xin’an River Basin as a case study, it investigates the feasible pathways through which semi-market-based environmental incentives can promote regional ecological restoration. The findings provide valuable insights for advancing market-based pricing of ecological services and fostering healthy intergovernmental competition in environmental governance. Second, adopting a holistic, systematic, and integrated governance perspective, this study examines the policy’s role in promoting comprehensive protection and systemic restoration of the ecological environment in upstream compensation areas at the township level. Mechanism analysis further investigates the specific restoration measures taken by upstream regions from a multidimensional and multi-actor perspective, enriching the literature on the evaluation of the Xin’an River Basin ecological compensation policy. Third, the study combines high-resolution satellite remote sensing data with multi-source geo-economic data containing precise spatial coordinates to conduct township-level empirical analysis, providing a solid data foundation for future research. By examining the heterogeneous effects of the policy across townships with different geographic and ecological characteristics, the study captures the critical role of town-level governments in implementing local environmental regulatory programs and offers practical insights for more effective allocation of compensation funds to maximize ecological returns.

JEL: Q53, Q57, H11

【KeyWords】

Semi Market-Oriented Environmental Incentives, Ecological-Environmental Quality, Xin’an River, Ecological Compensation