Can Horizontal Ecological Compensation Improve the Water Environment in Cross-Provincial Watersheds?

Horizontal ecological compensation is an important institutional innovation to promote ecological civilization and is the main functional area strategy in China under the current management mechanism. In this paper, we use contract theory to analyze the advantages of horizontal ecological compensation in cross-provincial watershed governance issues based on the basis of the case of Xin’anjiang River Basin, which is the first pilot horizontal ecological compensation in cross-provincial watersheds in China. We select panel data from 2004 to 2020 and use the synthetic control method (SCM) from the perspective of the water environment to assess the horizontal ecological compensation on the intensity of water pollution in the Xin’anjiang River basin. It is found that: (1) The horizontal ecological compensation can effectively respond to the failure of traditional ecological compensation methods in cross-provincial watershed governance, and, to some extent, solve the problem of lacking of incentives for upstream and downstream governments to participate; (2) The horizontal ecological compensation can reduce the water pollution intensity and improve the water environment in the Xin’anjiang River Basin; (3) However, the impact on the upstream is significantly lower than that of the downstream, and the policy effect on the upstream tends to be zero after the central government removes the subsidies to the upstream in 2018; and (4) The policy shows an expected effect two years ahead of the implementation. The findings of this paper have important implications for the promotion of the horizontal ecological compensation policy and the management of the water environment in cross-provincial watersheds.