A Market-Based Payment Study for Forest Water Purification Service in Loess Plateau of Yellow River Basin, China

Abstract

Freshwater scarcity is increasingly threatening social development and human survival, and more effective watershed environmental management measures are yet to be developed. Market-based payment is an innovative tool to coordinate the relationship between ecosystem services’ supply and demand sides in watersheds, emphasizing the market (rather than government intervention) as the main means to regulate and control the behavior of interest-related subjects. We proposed a marked-based plan for forestry water purification service and stimulate the potential benefits of this plan under the zero transaction cost assumption. We applied and demonstrated the approach in the Loess Plateau of the Yellow River Basin (LPB) in China. By constructing the relationship between the higher reaches of annual forestry investment and the corresponding lower reaches of sediment concentration, we established forestry water purification service supply function (R2 = 0.956). Then, connecting the agents’ cost function of water treatment plants in the lower reaches with the forest water purification service, we obtained the forestry water purification service demand function (R2 = 0.943). Combining both the service supply and demand functions, we stimulated the market equilibrium state. The results show that higher reaches will provide 13.164 kg/m3 of water purification service by afforestation, and lower reaches can save RMB 2.131 billion annually via this service. This study suggests that marked-based payment between areas is feasible for a watershed ecosystem service, and promoting the establishment of watershed compensation market is a rewarding development direction. All of these insights provide a valuable reference point for Chinese horizontal ecological compensation practice.