Paying for the Environment in China: The Growing Role of the Market

Healthy natural ecosystems such as forests, rivers, coral reefs, and wetlands can be viewed as “natural capital,” because they in effect provide “goods and services” that are fundamental to human wellbeing. However, the benefits of these ecosystems largely fall outside of formal markets and are therefore undervalued. Thus, mobilizing financial capital to conserve and sustain such natural capital is difficult and is a growing global challenge. Worldwide, the conservation challenge is increasingly being met by innovations in financial mechanisms and products. One particularly effective innovation has been the application of the beneficiaryor polluter-must-pay principle (hereafter, polluter-pays principle) that has allowed for an expanded role of market-based mechanisms in the provision of environmental goods and services (Daily et al. 2000; Scherr and Martin 2000). Openness to such market-based mechanisms has spurred the development of a new generation of financial instruments specifically suited for conservation projects. Some notable examples include debt-for-nature swaps, environmental venture capital funds, royalties for genetic resources extraction, user and resources extraction fees, conservation trust funds, commercial markets for ecosystem services, green bonds, as well as credits for carbon, wetland, sulfur dioxide and biodiversity preservation. Many developed and developing countries have gone beyond experimenting with these tools and have created green funds, eco-tourism businesses, and other public-private partnership arrangements to promote environmental financing and investment (Cohen 2000; Rubino 2000; Best and Jenkins 1999; Environmental Financial Advisory Board 1999). As China has moved from a centrally planned to a more market-based economy, Chinese policymakers have begun to acknowledge the utility of such market-based mechanisms to finance environmental protection projects and activities. The growing awareness of the increasing cost of environmental protection also is pushing Chinese policymakers to look for alternative funding sources. This article will introduce the expanding Chinese market for environmental goods and services, as well as describe some new instruments for environmental financing in China. In addition, this article will outline some of the challenges that face Chinese policymakers and investors as they move to create new finance mechanisms. The article closes with a number of policy recommendations and a proposal for a green investment fund to attract green businesses and to promote conservation activities in China.