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Journal Article

Internalizing externalities through ecological compensation: Evidence from trans-boundary water pollution in China

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Wang,  Xiaoxi       
Potsdam Institute for Climate Impact Research;

Xu,  Meng
External Organizations;

Chen,  Kevin
External Organizations;

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Citation

Wang, X., Xu, M., Chen, K. (2025): Internalizing externalities through ecological compensation: Evidence from trans-boundary water pollution in China. - Journal of Environmental Economics and Management, 133, 103200.
https://doi.org/10.1016/j.jeem.2025.103200


Cite as: https://publications.pik-potsdam.de/pubman/item/item_32815
Abstract
This study examines the effects of China's cross-provincial ecological compensation scheme (CpECS) on trans-boundary water pollution. Using a staggered difference-in-differences method, we find that the CpECS significantly reduces water pollution in terms of ammonia nitrogen (NH3-N) concentrations by 33.4 %. By linking water quality with point-source and nonpoint-source pollution control practices, we find that these improvements result from reductions in industrial wastewater discharge and pig production, and improvement in municipal sewage treatment capacity. However, the scheme does not yield a significant reduction in chemical oxygen demand (COD) concentrations, likely due to a lack of incentives to exceed contractual targets in policy areas once those targets are met.