By Jian XIE Hong LAN Guoqian WANG Zhong MA

1. Policy Solutions for Sand Storms and Other Regional Air Quality Problems in Northern China? An Introduction to Market-Based Instruments By Jian XIE Hong LAN Guoqian WANG Zhong MA

2. About the authors Jian XIE, Senior Environmental Specialist, Environment and Social Sector Unit, East Asia and Pacific Region, the World Bank; Hong LAN, Lecturer, School of Environment, Renmin University, Beijing, China; Guoqian WANG, Junior Professional Associate, the World Bank Institute, the World Bank; Zhong MA, Professor and Executive Vice Dean, School of Environment, Renmin University, Beijing, China. Email correspondance: jxie@worldbank.org

3. The paper is a work in progress. It reviews the situation and causes of land degradation and sand storms in northern China and existing government efforts. It introduces a few market-based instruments, aiming to improve these efforts.

4. Desertification and Land Degradation in Northern China • The total area affected by desertification in China is 2.6 million km2, of which 1.6 million km2 is caused by wind erosion and 0.2 million km2 by water erosion, equivalent to over 1/4 of total land area of the nation and widely spread in 13 provinces in northern and northwestern regions. • About 20,000 km2 of China’s land is being degraded each year due to desertification, soil erosion, salinization and other factors • Desert areas are expanding 2460 km2 a year at an accelerated rate of expansion

5. Consequences • Sand storms frequently occurred • 7.7 million hectare of farm lands threatened by desertification • 105 million hectare of steppe, desert steppe and pasture lands seriously degraded • 430,000 km2 on the Loess Plateau suffer water erosion • Water conservation facilities and systems malfunctioned • Houses, machines, road systems and other infrastructure damaged • Disease spreading and more…

6. Number of Major Dust Storms in China, by Decade, 1950–99, with Projection to 2009 Decade Number 1950–59 5 1960–69 8 1970–79 13 1980–89 14 1990–99 23 2000–09* 100 * Preliminary estimate for decade based on more than 20 storms during 2000 and 2001. Source: China Meteorological Administration, cited in “Grapes of Wrath in Inner Mongolia,” report from the U.S. Embassy in Beijing, May 2001.

7. A Recent Dust Storm • A huge sand storm occurred on March 18-21, 2004. • Covered 1.7 million square kilometers in over 10 provinces in northern China. • Affected a population of 150 million.

8. Human factors are becoming a major cause • Deterioration of vegetative cover due to overgrazing, wood cutting and burning • Wind and water erosion resulting from improper land management, and • Salinization due to improper use of water

9. Underlying Reasons • Population growth • The pressure from economic development • Poor awareness of ecosystem function • Inadequate institutional arrangements for protecting fragile land from overuse and degradation, such as • insecure property rights • inadequate compensation system • weak implementation, monitoring and enforcement

10. Example: Market and Policy Failures in Grassland Areas • Property rights unclear (state or community ownership), longer-term right of use not guaranteed to householders, adjusting land allocation among households based on the change in the number of household members • Competing uses of land (grain production) • Marginal benefit of overgrazing > Marginal share of cost, if increasing usage => Tragedy of the Commons: depleting common pool resources

11. Major Government Interventions for Conservation (I) • “Grain for Green” project in northern and western China – i.e., the conversion of agricultural land into forests or grasslands • Launched in 1999, plan within 10 years to convert 5.3 million mu (about ¼ hectare a mu) agricultural land into forestry land，reforest 8 million mu, control soil erosion areas of 36 million mu，and control desertified area of 70 million mu. • Subsidize local governments and farmers with grain • Natural forests preservation • Launched in 1998 with logging ban; plan to invest 106 billion Yuan RMB (about USD12 billion) in 10 years to protect the forest areas in upper reaches of Yellow and Yangtze River. • Subsidize local government and logging industry

12. Major Government Interventions (II) • Grassland conservation Targeting 1/4 of total grassland; the government subsidized local people grain and forage for their stopping breeding livestock on the grassland • Forest green belt development in northern China to control sand storms The project duration is 73 years and it involves an area of 4 million square kilometers • Controlling sandstorm source areas around Beijing and Tianjin

13. Need for Government Financial Supports: The Case of Sichuan • Since the logging ban in Sichuan Province in 1998, the provincial revenues from timber industry reduced 740 million Yuan RMB, about 5.2% of total revenue. • Affected farmers lost on average 200 Yuan per person in their annual income (equivalent to 13% net income). • For those farmers whose agricultural land were converted into forests, their average lost of grain production is 48 kilogram per capita.

14. Sources of the Funding 1. Government Budget In the period of 1998-2001, the central government alone spent 42 billion Yuan RMB (about 5 billion USD) of government revenue income on these projects. 2. National Bond From 1998 to 2002, the central government issued 1 billion Yuan RMB of national bond for environmental protection. 3. Transfers of the central government The central government returns part of its tax revenue to local government for conservation purpose.

15. Effectiveness of the Governmental Interventions • The worsening trends of desertification and soil erosion have not been reversed, however. • Frequency of sand storms keeps rising. • Although the achievement of controlling deserts and soil erosion has been observed in some demonstrative areas, the long-term effect of the programs is still too early to tell and may not be very promising.

16. Need for effective and comprehensive policy and legal framework to address the cause of land degradation and sand storms Although the “polluters pay” principle, which has been explicitly interpreted as “whoever cause damage to eco-systems must compensate and whoever benefit from ecological services should pay for” in the area of natural conservation, has been widely endorsed by the government, real implementation rarely exist, especially at the community and individual levels.

17. Possible Instruments • Well-defined property rights • Users’ fees and eco-compensation deposit • Establishment of markets – tradable permits • Payments for environmental services • Government transfers

18. Property Rights • Well-defined environmental property right itself can be a policy instrument • Remedy the “tragedy of the commons” • The economy of scale and sustainability still questionable • Designing issues • Perfection may not be possible, but designing should be as close as possible • Quality • Quality of the title • Transferability

19. Types of Property Rights In most cases, people confuse “open access” with “common property rights.”

20. Quality of the Property Right

21. Quality of the Property Right

22. China: Now and Future Trends • Clarifying property rights • “Desertification Prevention and Control Law” • Lengthen the maximum tenure years • Imposing further duties onto landholders • Eliminating open access • Contracting public land to individual households • Encouraging self-governing association of households that share common lands • improve the scale of economy

23. Market-Based Policy Instruments (2)—Establishing a Market • Tradable Permits (for use of public land) • Clearly defining property rights is a prerequisite • Limit of trading • Retirable? • U.S. retiring grazing permits on federal land • Potential pitfalls • High transaction cost • Ill-defined or enforced ownership • Uncertainty and asymmetric information

24. Market-Based Policy Instruments (3)—Payments for Environmental Services Source: Pagiola, S., World Bank, 2002

25. Market-Based Policy Instruments (3)—Payments for Environmental Services • Prerequisites • Clearly defined property rights • Established market • Supporting legal and institutional systems • Costa Rican Experience and its Implications • Sound valuation of environmental goods and services

26. Government Transfers for Ecological and Environmental Services • A popular approach, well-received and used by government fiscal planning and budgeting agencies • Easily implemented at low transaction cost • Need to have the amount of transfers well based on market values of environmental services or costs

27. Implication to China • Property rights • Further secure land ownership or the right of use, not limited to privatization , need to be flexible and cost-effective, improving the economy of scale • Government transfers to finance eco-protection • Still an important means, need to scale up, based on market value, with fair mechanism and monitoring system • Establishing markets for environmental goods and services • Tradable permit for use of public land to improve efficiency • Payments for environmental services • An emerging tool, can be tested in some areas with mature land ownership