Managing non-point source pollution in China making the market work

This study explores the incentive instrument to avoid overuse of nitrogen, which causes Non-point source pollution (NPS), and discusses what the mechanism that results in this nitrogen over-use is. It asks how to introduce market tools that would provide the right incentives to stop its overuse. The paper compares the current water pollution management systems in the Chesapeake Bay, USA, where payments for capital costs at the farm and abatement programs of agricultural measures have been undertaken, with the current systems of Dianchi Lake in China. The methodology used involves a comprehensive review of the relevant definitions of terms used in Payment for Ecosystem Services (PES) by the Chinese and the international community, and discusses implementation of PES for managing farmers’ use of fertilizer in China. The review of PES also includes the steps needed to determine compensation. It involves uses interviews conducted with farmers in Yunnan Province and an economic analysis of current subsidy policies, taxes, and grants used domestically and internationally. The main PES schemes that have been implemented in China for NPS processing are also discussed and reviewed in order to show how to successfully achieve PES projects that ensure poverty alleviation. The findings suggest that one of the main ways to reduce overuse of nitrogen and to reduce run-off pollution is to change the Chinese subsidy programs by creating new direct subsidies that will promote and reward behavior change. This will give incentives to farmers to curb their overuse of chemical fertilizers.