China Policy Journal Volume 1, Number 1, Fall 2018 | Page 71

China Policy Journal
ary section of the river with its upstream
neighbors is better or worse than the
targeted level Class II. In general, we
believe a worse quality of the water (signifying
a higher Q i
motivates a higher
WTP of the population in city i for the
achievement of the water quality improvement
target; therefore, we expect
a positive relationship between Q i
and
W i
. This WTP for a better water quality
target is also negatively affected by the
existence of negative externality caused
by transboundary water pollution because
a worse transboundary pollution
level signifies more difficulties in realizing
the targeted water quality improvement.
We therefore expect a negative
relationship between W i
and the water
quality of the transboundary section of
city i with its upstream neighbor i−1, Q , when Q i-
is found to be worse than
1,i i-1,i
Class II level. Because this reduction
of the WTP of people living in city i is
directly related to the transboundary
pollution caused by upstream city i−1,
we propose to use this part of the WTP
reduction as a valid base to set the payment
standard for the PES mechanism.
To distinguish the related PES
transfers between cities, we further
decompose the transboundary pollution-related
responsibility among the
cities, which corresponds to the last
part of the equations to the right of the
last equal sign. Simple manipulation
provides an interesting responsibility
sharing regime among cities according
to the water quality of the transboundary
sections between them. Take the
spatial transboundary pollution allocation
pattern given in Figure 4 as an
example:
City A is not a transboundary
pollution victim since it is located at
the beginning part of the river; this is
also revealed in its WTP determination
function W A
=w(Q A
), which does not
include a WTP reduction term related
to the transboundary section pollution
level.
For city B, as its upstream city A
maintains Q AB
=II, the reduction of the
WTP of city B due to transboundary
pollution is equal to zero, which means
a zero transfer from A to B.
For city C, because its transboundary
section pollution with B is
at class III, higher than that between A
and B at class II, we have Q BC
-Q AB
>0,
and C should receive a compensation
from city B whose amount equals the
reduction of WTP, which is –W D
(Q BC
-
Q AB
). However, city C should not be
compensated by city A since A keeps
the water quality to the targeted Class II
level, therefore W D
(Q AB
-II)=0.
The situation of city D is that its
upstream neighbor city C manages to
restore the water quality in the transboundary
section back to class II (Q C-
=II)from class III (Q =III). Therefore,
D BC
city C does not need to compensate city
D. However, this does not mean that
there is no money transfer between city
C and city D, which can be seen from
the decomposition part of the equation,
where Q CD
-II is further decomposed
into three parts: (Q AB
-Q BC
)<0, (Q CD
-
Q BC
)<0, (Q BC
-Q AB
)>0 and (Q AB
-II)=0.
Associating these terms with the negative
correlation factors of w D
, we know
that w D
(Q CD
-Q BC
)>0, which signifies
an increase of the welfare of people in
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