China needs cross-regional transfer payments to reconcile growth with clean air: policy brief
Environmental gains are a public good. The costs should be shared by all who benefit, not pushed onto the weakest groups.
Our last newsletter mapped out China's three-track (heating) subsidy system, which re-emerge in the public discourse on the heels of Hebei's winter heating crisis.
Today's issue turns to a set of academic policy recommendations on the state's high-pressure, campaign-style environmental crackdowns.
Simply put, China's "campaign-style" crackdowns against pollution are fiscally and administratively unsustainable. If Beijing wants cleaner air as long as possible, scholars say, it needs a durable mechanism — cross-regional environmental transfer payments — to fund maintenance and compliance over the long haul.
At a deeper level, this case exposes a persistent gap in how China shares the costs of environmental governance. Cleaner air is a public good, and its bill should be shared by all beneficiaries. Yet in the "coal-to-gas" conversion push, a disproportionate burden has often fallen on rural households with the weakest ability to absorb shocks, creating a fairness gap that policy has yet to fix.
The following analysis was published in 2018 as Policy Brief of the National Academy of Development and Strategy, Renmin University of China (Issue 2, 2018). It is led by Nie Huihua, then Deputy Dean and Professor at the Academy.
Prof. Nie has spent many years studying China's primary-level government. He earned his degrees in China and completed a year of postdoctoral research at Harvard University under Nobel laureate Oliver Hart.
The co-authors are Li Jing, a PhD candidate at Renmin’s School of Economics, and Zou Jingxian, a researcher and lecturer at the National Academy of Development and Strategy, Renmin University of China.
Below is my English translation of the piece, shared with kind permission from Prof. Nie.
解决河北冬季取暖难题的根本举措是建立跨区转移支付机制
A fundamental solution to Hebei's winter heating dilemma is to establish a cross-regional fiscal transfer payment mechanism
Policy Brief of the National Academy of Development and Strategy, Renmin University of China, Issue 2, 2018
Authors:
Nie Huihua聂辉华, Deputy Dean and Professor, National Academy of Development and Strategy, Renmin University of China
Li Jing李靖, PhD Candidate, School of Economics, Renmin University of China
Zou Jingxian邹静娴, Researcher and Lecturer, National Academy of Development and Strategy, Renmin University of China
Editor's note: Recently, Hebei's winter heating crisis has once again drawn broad public attention. In early 2018, our team published an article arguing that high-pressure, campaign-style environmental crackdowns are unsustainable, and that cross-regional environmental transfer payments should be introduced to support the long-term maintenance of air quality. We are republishing that article today. Please note that the authors' affiliations and titles reflect their positions as of 2017. — Nie Huihua, January 7, 2026
Abstract
In 2017, an “environmental clean-up campaign” across the Beijing-Tianjin-Hebei region and its surrounding areas produced notable results but also brought to light several problems — foremost among them a severe shortage of funding for environmental upgrades.
Preliminary calculations suggest that the cost of these upgrades may reach 10%–30% of the GDP of the areas surrounding Beijing. Such a burden will inevitably slow economic growth in the short run and affect employment and social stability. Given these pressures, local governments alone cannot realistically complete the required upgrades within a short time-frame. We argue that the solution lies in establishing a cross-regional environmental transfer payment mechanism, through which economically developed regions would compensate less developed areas for undertaking environmental protection efforts.
Two principles underpin such a mechanism: "the beneficiary pays" (those who benefit should bear the cost) and "the polluter pays" (those who pollute should assume responsibility). This type of transfer payment arrangement complies with current legal provisions and is supported by successful domestic and international experience. This article discusses potential operational models, likely challenges, and necessary supporting measures.
I. Funding constraints are the key bottleneck in tackling the Beijing–Tianjin–Hebei environmental challenge
In 2013, the State Council issued the Air Pollution Prevention and Control Action Plan, which required that by 2017 overall national air quality should improve, and the concentration of fine particulate matter in the Beijing-Tianjin-Hebei region should fall by roughly 25%.
To ensure these targets were met, in 2017, the former Ministry of Environmental Protection deployed more than 5,000 enforcement officers nationwide in 2017 to carry out stringent air-pollution inspections in the "2+26" cities located along the Beijing–Tianjin–Hebei air-pollution transmission corridor, including Beijing, Tianjin and other 26 surrounding cities.
These inspections delivered clear results: in 2017, Beijing recorded its highest number of "blue-sky days" in a decade. Yet the unprecedented "environmental clean-up campaign" also created several problems.
For example, the "coal-to-gas" conversion program in Hebei and elsewhere ran into serious difficulties, with natural-gas supplies falling short by about one-third. Some localities saw considerable public complaints, and media criticism was not uncommon, all of which affected the government's public image and credibility to some extent. Although insufficient planning by higher-level authorities, crude implementation by primary-level officials, and slow shifts in public attitudes were all contributing factors, the fundamental cause was a shortage of funds for environmental transformation and upgrading. This funding gap has long been the principal constraint on environmental upgrading across the Beijing–Tianjin–Hebei region and its surrounding areas.
First, at the household level, environmental upgrading represents a substantial additional expense for rural families and noticeably reduces their disposable income.
In past years, some farmers in the areas surrounding Beijing "preferred to risk detention rather than stop burning straw" because the cost of recycling straw exceeded that of burning it — by roughly 50–100 yuan per mu. For a farmer with an annual per capita net income of 10,000 yuan, the added cost of recycling straw on 10 mu of land amounts to 5%–10% of yearly net income.
Consider also the "coal-to-gas" conversion program. Previously, a rural household could heat its home throughout the winter by burning coal at a cost of about 2,000 yuan. Under the new system, the initial installation fee for each household was 5,000 yuan, with the government subsidizing 3,000 yuan and the household paying the remaining 2,000 yuan. Even after receiving the subsidy, households switching to gas, at about 6,000 yuan for the season, still pay 2,000 yuan more than before. In total, compared with the original coal-based system, the "coal-to-gas" conversion increases a typical household's annual heating expenditure by about 4,000 yuan, which amounts to more than 30% of its annual net income. For many elderly or impoverished households with already low incomes, an added cost of 4,000 yuan is by no means insignificant.
Second, at the enterprise level, environmental upgrading often means a doubling of costs and even thinner profit margins.
In our field research, we examined a soda ash manufacturer in the Beijing metropolitan area. When the firm previously used coal, its production cost was about 2,000 yuan per tonne. After switching to straw as fuel, the cost doubled to 4,000 yuan per tonne. If it were to comply fully with national requirements and shift to gas or electricity, production costs would soar to 10,000 yuan per tonne.
Local officials told us that for most firms, strictly adhering to national emission standards would generally result in a doubling of production costs — and this does not include the one-off capital investment needed to replace production equipment. In an environment of weak demand, such cost increases amount to an additional shock for a large portion of the manufacturing sector.
Third, at the local government level, environmental upgrading brings an immediate decline in tax revenue, a rise in unemployment, and higher fiscal expenditures.
To meet ex-post air-quality targets, local governments often impose additional ex-ante requirements and continually tighten environmental standards. While this creates enormous pressure for enterprises, it also generates significant economic strain for the governments themselves. Numerous small and medium-sized enterprises have been shut down or forced to suspend operations, directly reducing local tax revenue and GDP, increasing unemployment, and heightening pressures related to social stability.
Some localities have also ordered large, labor-intensive enterprises to relocate or halt production; when financial subsidies are provided to facilitate these adjustments, the fiscal burden can be substantial. Under such conditions, many local governments simply lack the financial capacity to offer adequate subsidies for the environmental upgrading required of farmers and enterprises.
Preliminary calculations suggest that the cost of these upgrades may reach 10%–30% of the GDP of the areas surrounding Beijing. Such a burden will inevitably slow economic growth in the short run and affect employment and social stability. Relying solely on local governments makes it hard to complete the upgrades smoothly in the near term, and may also undermine long-term growth and structural upgrading.
II. Cross-regional transfer payments as a new approach
Environmental protection concerns not only the building of a modern economic system but also the well-being of generations to come. Addressing it therefore calls for institutional and governance innovation.
We propose that the funding shortfall for environmental upgrading can be addressed by establishing a cross-regional transfer payment mechanism through which economically developed regions provide financial compensation to less developed areas. Such a mechanism would enable regions to advance environmental upgrading together and collectively achieve the shared goal of clear blue skies.
First, a cross-regional environmental transfer payment mechanism is fully consistent with basic economic principles.
According to the well-known Coase Theorem, when property rights are clearly defined and transaction costs are low, polluters and those harmed by pollution can, through bargaining and price mechanisms, reach an outcome that maximizes total output while minimizing pollution.
Current systems such as emission rights trading and carbon trading are practical applications of the Coase Theorem, and a cross-regional transfer payment mechanism for environmental protection is likewise an extension of this principle.
Second, a cross-regional transfer payment mechanism for environmental protection aligns with the basic principle that "those who benefit should pay."
Because both environmental pollution and economic development generate externalities, pollution control cannot rely solely on the rule that “polluters should pay.” Every region has the right to pursue economic development and improve people's livelihoods; it is therefore unreasonable to expect regions that generate pollution to eliminate it at any cost.
In reality, the areas surrounding Beijing are, on the whole, economically less developed. Their industrial growth has provided substantial employment and made important contributions to maintaining social stability, particularly the stability of the capital's surrounding region.
For reasons of externality correction and social equity, the principle that "beneficiaries should pay" should in fact take precedence over the principle that "polluters should pay." This implies that the Capital region should offer necessary and appropriate compensation to neighboring regions for their environmental governance efforts, while those regions should also shoulder part of the cost. Such an arrangement would help address the long-standing problem of uneven regional development.
Third, a cross-regional transfer payment mechanism is consistent with current legal requirements and is supported by successful practical experience both within China and abroad.
Article 31 of the Environmental Protection Law stipulates: The state shall guide the people's governments of beneficiary regions and ecological protection regions to conduct ecological protection compensation through consultation or according to market rules. Currently, more than a dozen provinces such as Zhejiang, Jiangsu, Liaoning, and Henan have issued local regulations for intra-provincial watershed ecological compensation and have achieved preliminary results.
For example, Zhejiang Province issued the Opinions of the People's Government of Zhejiang Province on Further Improving the Ecological Compensation Mechanism as early as 2005.
There have also been successful cases in cross-provincial ecological compensation. One well-known example is the Xin’an River. The river's upper reaches lie in Anhui Province and the lower reaches in Zhejiang Province; pollution used to be severe.
In 2010, the Ministry of Finance, the Ministry of Environmental Protection, and the two provinces signed a pilot scheme for ecological compensation. Under the agreement, the central government allocated 300 million yuan to Anhui for Xin'an River management, and Anhui provided an additional 100 million yuan of matching funds for ecological compensation in its upstream areas. During the monitoring year, water quality at the Anhui–Zhejiang provincial boundary served as the basis for evaluation: if Anhui’s upstream water quality exceeded the baseline standard, Zhejiang would compensate Anhhui 100 million yuan; if the quality fell below the baseline, Anhui would compensate Zhejiang 100 million yuan.
A classic example of cross-national pollution governance is the Rhine River. Stretching 1,320 kilometers, it flows through nine countries — Austria, Switzerland, Liechtenstein, Italy, Germany, France, Luxembourg, Belgium, and the Netherlands. Before the 1950s, pollution was severe, and fish and shrimp had nearly disappeared. In response, the nine countries negotiated an international agreement for the river’s daily management, established the International Commission for the Protection of the Rhine, set up dozens of monitoring stations along the river and hundreds of registered notifiers, and appointed a Dutch national (from the downstream) as Secretary-General. Because downstream countries are the principal victims of pollution, they also have the strongest incentive to enforce the agreement effectively.
III. Operating model and supporting measures
The operational model of the "Circum-Beijing-Tianjin-Hebei" environmental cross-regional transfer payment mechanism we envision is as follows:
(I) Stakeholders. Any provincial- or prefecture-level unit involved in environmental protection, as well as relevant central ministries and commissions, may be included as stakeholders.
The "2+26" cities in the Beijing-Tianjin-Hebei region and surrounding transmission corridor — a total of 28 provincial or prefecture-level units — together with the Ministry of Environmental Protection and the Ministry of Finance, form a group of 30 potenrial stakeholders in a "Circum-Beijing-Tianjin-Hebei" environmental cross-regional transfer payment mechanism. These actors would participate in negotiations and the implementation of transfer payments.
In practice, negotiations could proceed in two steps. Step one: The central government, the Beijing municipal government, and the Tianjin municipal government would conduct high-level consultations with the governments of Hebei, Henan, Shandong, and Shanxi to reach a preliminary transfer payment arrangement. Step two: Hebei, Henan, Shandong, and Shanxi would then allocate secondary transfer payments among the relevant cities within their respective jurisdictions.
(II) Direction of payments. Under the principle of "those who benefit should pay", the capital region should provide necessary compensation for environmental upgrading in surrounding areas. In other words, this means that the central government and the Beijing municipal government should serve as the primary payers.
During the "environmental clean-up campaign," many enterprises were shut down or forced to suspend operations; the localities where these enterprises are located should be the compensation recipients. Likewise, if certain areas around Beijing are themselves affected by pollution originating elsewhere, they too may qualify as compensation recipients.
(III) Recipients. Recipients fall into three groups: local governments, enterprises, and residents. Once a high-level cross-provincial transfer agreement is reached, provincial governments would conduct secondary redistribution.
For point-source pollution, where sources are readily identifiable, provincial or municipal governments may compensate firms or residents directly. For example, households that burn straw could receive compensation directly from provincial or municipal governments according to specified criteria.
For diffuse pollution, where sources are harder to pinpoint, provincial or municipal governments may pool and deploy compensation funds for environmental upgrading of infrastructure, transport equipment, emissions-control facilities, and related investments.
(IV) Amounts. All stakeholders would determine payment amounts on the basis of environmental upgrading costs, following a cost-compensation principle. The amounts would also depend on environmental benefits, primarily air quality at present.
Where interprovincial governments disagree over assessments, professional data provided by the Ministry of Environmental Protection or third-party evaluation results can serve as key decision-making inputs.
There are three major challenges in advancing cross-regional transfer payments:
First, identifying the sources of pollution. Pollutants, viewed through the lens of negative externalities, can be grouped into three broad categories:
Soil pollution, which is primarily local in nature and generates minimal negative externalities;
Water pollution, which is still largely local but carries stronger externalities (movable solid-waste pollution also falls under this category);
Air pollution, which remains locally generated but produces very large externalities across regions.
Across jurisdictions, causal chains for soil pollution are relatively weak, for water pollution relatively strong, and for air pollution the most difficult to trace. In practice, therefore, pollutants must be handled and assessed by category. When disputes arise over pollution sources, designated third-party assessment agencies or relevant institutions under the Ministry of Environmental Protection can be relied upon to determine responsibility and carry out the necessary calculations.
Second, verifying the payment amount. Regarding cost compensation, subsidies for enterprises and rural households can be divided into two parts: one part is for the cost of upgrading environmental equipment or production equipment, and the other part is a subsidy for the increased cost of adopting clean energy.
As an institutional innovation, what matters is not the precise amount of compensation — specific figures can be refined gradually during the reform process — but rather the introduction of a new conceptual framework: an environmental compensation mechanism.
Third, arranging funding sources. Compensation should be shared among three parties: the central government, the beneficiaries of improved environmental quality, and the polluters.
More specifically, for localized pollution sources such as soil contamination, compensation should fall primarily on local governments. For air pollution, which generates strong negative externalities, costs could be split evenly, with beneficiaries covering half and local governments the other half.
To implement an environmental transfer payment mechanism effectively, additional supporting measures are needed.
First, relevant provisions of the Environmental Protection Law should be revised to make environmental compensation requirements mandatory.
Under the current Environmental Protection Law, Article 31 — which states that “the state shall guide the people's governments of beneficiary areas and ecological protection areas to conduct ecological protection compensation through consultation or in accordance with market rules” — is phrased as guidance rather than a binding obligation.
More importantly, Article 6 stipulates that people's governments at all local levels shall be responsible for the environmental quality within their administrative areas. This formulation is not conducive to implementing a cross-regional compensation mechanism. We recommend revising Article 6 as follows: "people's governments at all local levels shall be responsible for the environmental quality within their administrative areas; where their actions cause environmental impacts on other areas, they shall provide appropriate compensation."
Second, strengthen the vertical management system for environmental authorities and ensure that precise, authoritative environmental-quality data serve as a key basis for determining environmental transfer payments.
Currently, both environmental monitoring and environmental law enforcement below the provincial level operate under a vertical management structure. The next step is to further improve the accuracy and credibility of environmental data, while encouraging residents and enterprises to make use of their advantages as grassroots monitors.
Third, strengthen cross-regional information sharing and joint enforcement. The Beijing–Tianjin–Hebei region and its surrounding areas could establish a cross-regional joint conference mechanism for environmental upgrading in order to build consensus, share information, and carry out coordinated enforcement actions.
Fourth, moderately relax short-term economic growth assessment requirements for the areas surrounding Beijing. In the near term, there is an inherent trade-off between economic growth and environmental protection. When evaluating economic performance in these regions, the central government or higher-level authorities could moderately ease growth targets so as to reduce incentives for data manipulation. Enditem